ECONOMIC VIEW: Leave moral judgements out of international trade

Refusing to buy products of prisoners' labour will make prison conditions worse; Economic factors are the real source of political pressures for action
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The Uruguay Round of international trade negotiations, concluded in 1994, leaves an agenda of unresolved issues. One of the most important is how the trade system should deal with labour standards. The US (supported by some European countries, notably France) seeks to restrict access to our markets by countries that have unacceptable policies on issues such as trade union rights, child labour and prisoners' labour.

Although, at first, this looks like a valuable attempt to improve the conditions of some of the most disadvantaged citizens of the world, we should be very cautious about imposing our moral judgements on other countries.

The effects may be the opposite of what we want. We would prefer children in the Indian subcontinent to be in school rather than in sweatshops, but refusing to buy the products of sweatshops is more likely to pitch children on to the streets than into school. Refusing to buy the products of prisoners' labour will make prison conditions worse, not better.

A system which lets us impose our moral judgements on other countries must also help them impose their judgements on us. I deplore discrimination against women in Saudi Arabia, but I would rather leave that problem for the Saudi people to sort out in their own way than to give the present Saudi government any influence on the economic prospects of my daughters.

Once we put national policies on the international agenda it is very difficult to draw the line. There is a "moral majority" in the US who feel very strongly that abortion is evil. They surely see the rights of unborn children as much more important than the rights of workers to join unions. If we put workers' rights on the international agenda, why should others not appeal to the rights of the unborn child, and even seek economic sanctions on countries with liberal abortion laws?

The problems of competing "rights" are difficult enough for national political systems to cope with. Bringing them into the international economic system is a recipe for sharp and unproductive conflict.

We should be concerned about young children sewing footballs in Pakistan or shirts in Bangladesh, about human rights in China, and about environmental quality in Poland. But political pressures to respond to these problems are much more motivated by our self-interest than by morality.

Ralph Waldo Emerson wrote: "The louder he talked of his honour, the faster we counted the spoons." The louder that politicians talk of the moral case for imposing our standards on others, the more carefully we need to count the economic spoons.

Economic factors are the real source of the political pressures for action on labour standards. The two charts illustrate how labour market conditions have become much tougher for unskilled workers in developed countries.

Different labour markets have reacted in different ways to labour market pressures. Unskilled workers in much of Europe have been reluctant to accept wage cuts and unemployment rates have risen. In the more flexible labour market of the US, cuts in wages have kept down unemployment.

The British labour market response lies somewhere between the American and the European. The common experience is increased competitive pressure and increased economic insecurity for the less skilled.

These changes have happened at a time when international trade with developing countries has been growing rapidly. Increased competition with low-paid workers in developing countries is seen by many as the cause of falling American wages and falling European employment. The continuing growth of trade with China and other developing countries seems to imply that life is going to get even harder for unskilled workers in advanced countries.

But trade is not the whole story: even with no changes in international trade, less skilled workers would have a harder time in the world of the word-processor, the computer-driven machine tool and the Internet than in the world of the typewriter, the lathe and the telephone.

The political climate matters too. Increasing inequality in the US goes right to the top of the income distribution, and changing social and political attitudes matter more than globalisation in explaining why chief executives' pay has risen faster than that of senior managers.

Even if trade with poor countries did explain a large part of the labour market troubles of the unskilled, it would not follow that using the world trading system to try to impose higher labour standards on the developing world was a sensible policy response.

Developing countries can let their exchange rates depreciate to compensate for any effects that labour standards have on their international competitiveness. The overall effect on the competitive pressures in our labour markets would be negligible.

To say that labour standards should be kept out of the international trading system is not to say that increased inequality does not matter, or that nothing can be done about it. On the contrary, much could be done. The Japanese education system gives serious attention to developing skills across the full ability range and the Japanese economy has survived the last 15 years with much less labour market disruption than the economies of Europe and North America.

Supporting the income levels of the poor both in and out of work would reduce the poverty trap. But effective measures to reform education and the social security system to tackle the real issues of inequality and social cohesion in our societies would be expensive. Maybe we lack the political will to give tackling inequality a higher priority in public expenditure. But if we are unwilling to impose open taxes to fund an effective attack on inequality and insecurity, we should not instead make the futile gesture of imposing covert taxes on trade and employment in poor countries.

The same issues are on the European agenda in a different guise. The European Commission's 1995 White Paper on the preparation of the central and eastern European countries for accession to the European Union implies that these countries should adopt much of the social, labour and environmental regulation of the EU prior to membership of the union.

The rhetoric is that equal membership of the European club requires the same set of rules to apply to all; the reality is that once again richer countries seek to impose their standards on poorer countries as a pre- condition for market access.

Again self-interest is not far below the surface: producers in western Europe are concerned about competition from low-paid Czech and Polish workers. Inappropriate regulation of the eastern European economies would be bad for them, without actually giving much protection to western producers.

There are good reasons for the UK government to speak out in favour of a more flexible European Union, but one of the unfortunate by-products of the current state of relations between Britain and our European partners is that they have understandably lost interest in hearing the views of the present government on the development of the union.

Alasdair Smith is a Professor of Economics at the University of Sussex and a Research Fellow of the Centre for Economic Policy Research. Regulatory convergence in Europe is discussed by Alasdair Smith and others in "The European Union and Central and Eastern Europe: Pre-Accession Strategies", Sussex European Institute, Brighton BN1 9QN.