Preferences for Workers? Worker Rights and the US Generalized System of Preference

I would like to thank James Griffith, who compiled the GSP case studies and without whom the paper would not have been possible. I would also like to thank the participants in the Globalization seminar for helpful comments. Finally, I am grateful to the Ford Foundation for its support of the broader project on international labor standards of which this paper is a part.

Worker rights have become an important issue in the globalization debate. The International Confederation of Free Trade Unions (ICFTU), human rights groups, and others have called on the World Trade Organization (WTO) to adopt a "social clause" that would add teeth to the enforcement of universal worker rights similar to that currently accorded to intellectual property rights under the WTO. The AFL-CIO and their supporters in the US Congress have insisted that US trade agreements should include worker rights as a fundamental obligation equal in weight to all others. Disagreement over this issue is a major reason the US Congress has been unable to pass fast-track legislation authorizing the president to negotiate trade agreements and requiring Congress to vote on them on an expedited basis. Similar disagreements over worker rights and environmental protection also contributed to postponement in April 1998 of a proposed Multilateral Agreement on Investment (MAI) and were one of many factors contributing to the failure of the WTO ministerial meeting in Seattle in late 1999.

The most visceral differences in the debate over linking worker rights to trade boil down to a question of protection for:

• workers in poor developing countries, who may be exploited and their attempts to organize and bargain collectively repressed; or
• workers in rich industrialized countries, who want to use trade sanctions to protect themselves from labor-intensive import competition.

Opponents, especially the governments of developing countries, argue that the push to enforce international labor standards with trade sanctions is, at best, a misguided effort to impose inappropriate "Northern" standards on the "South" or, at worst, simple protectionism in disguise. They believe that the worker rights issue is a ruse to protect workers in rich, industrialized countries at the expense of those in poor countries.

Proponents argue that firms and governments that engage or acquiesce in exploitative labor practices create an unfair competitive advantage for themselves. This unfair competition, in turn, puts downward pressure on labor standards in other countries struggling to compete with the unfair trader's exports and thus justifies the use of trade remedies to prevent a race to the bottom. Therefore, most proponents of a trade-labor linkage believe that internationally enforced worker rights are needed to protect workers in both developed and developing countries.

This paper examines one program that explicitly links trade to worker rights-the US Generalized System of Preferences (GSP)-to see whether it sheds light on this debate. Although the worker rights conditionality in the GSP program differs significantly from how a "social clause" in the WTO might be expected to operate, the evidence does not suggest that unions and other advocates of worker rights are interested only in blocking developing country exports. Nor does it suggest that the US government would enthusiastically wield a social clause to protect US producers from foreign competition. The paper begins with a description of the GSP program and the statutory process for reviewing beneficiary countries' compliance with worker rights criteria. It then presents basic data on the operation of the program and the application of the worker rights conditionality.

Development of the US Generalized System of Preferences

The idea of trade preferences for developing countries was originally proposed by the UN Committee for Trade and Development in the 1960s. It was expected that preferential treatment for developing country exports would encourage foreign direct investment, as well as promote exports, and thereby contribute to economic development. Because such preferences would violate the most-favored-nation, nondiscrimination rule that has been a central plank of the postwar trading system, the parties to the General Agreement on Tariffs and Trade (GATT) approved a 10-year waiver for the idea in 1971. This derogation from the international trade rules was made permanent in the so-called "enabling clause" adopted during the Tokyo Round of multilateral trade negotiations in the 1970s.

No detailed rules for these preferences were negotiated, either in the GATT or the UN. Rather, the GATT waiver allowed industrialized countries to provide such preferences subject to three broad principles. According to a General Accounting Report (1994, 19) these were:

• GSP should be "generalized," meaning that all "donor" countries that grant GSP benefits should implement basically the same program;
• GSP should be "nonreciprocal," with donor countries exacting no concessions from beneficiary countries in return for tariff preferences; and
• GSP should be "nondiscriminatory," meaning that every eligible developing country would enjoy the same benefits as every other eligible developing country.

These principles have not been closely followed, however, with the major countries each choosing to implement their own programs with no little or no coordination and with important differences in design. For example, the US program provides duty-free status for all eligible products while both the EU and Japanese programs vary the amount of duty reduction on different product categories (GAO 1994, 19). Some of the programs, particularly the US one, have been criticized for being neither nonreciprocal nor nondiscriminatory.

The US GSP program was originally authorized for 10 years in the Trade Act of 1974 and was implemented on January 1, 1976. It waives import duties on eligible products for "beneficiary developing countries" (BDCs), subject to both competitive limits and political conditions. The program was re-authorized in the Trade and Tariff Act of 1984 for a period of 8 years but with new conditions tying eligibility to respect for worker rights and protection of intellectual property rights. Since that authorization expired in July 1993, there have been several lapses in the program, though it has been revived and applied retroactively each time. The "pay-as-you-go" requirements of the 1990 Budget Act have made it difficult to reauthorize the program on a long-term basis because offsets must be found for the forgone tariff revenues. In 1999, more than 140 countries were eligible for GSP benefits on more than 4,400 individual items, about half the total number of tariff lines in the 8-digit harmonized tariff system. Another nearly 2,000 products can be imported duty-free from least-developed beneficiary countries.

Commercial limits and political conditions in the GSP program

When GSP was re-authorized in 1984, Congress added language noting that the program was intended to "provide trade and development opportunities for BDCs without adversely affecting US producers and workers" (emphasis added, GAO 1994, 24). This is achieved through a number of exclusions from eligibility based on import-sensitivity and judgments about the competitiveness of certain exports. The limits on benefits include the following:

• Import-sensitive products, including most textiles and apparel, are excluded;
• Eligible products must also be shipped directly from the BDC and must meet rules of origin (35 percent of the appraised value of the product, including the direct costs of processing, must have originated in the beneficiary country);
• Particular products from particular BDCs may be "graduated"-that is permanently excluded-from the program if the beneficiary country is determined to be "sufficiently competitive" in the export of that product that it no longer needs preferential treatment; and,
• Particular exports from particular beneficiaries may also be temporarily excluded if they hit pre-designated "competitive need limits" (CNLs), based on the dollar value of exports or the exporter's import market share. In 1992, according to the GAO report (1994, 53) the competitive need limits were $101 million or a 50 import market share; since the dollar value increases each year with US GNP growth, the competitive need limit was probably around $170 million in 1997.

Table 1 summarizes these various limits and shows that about half the potentially eligible imports were excluded for various reasons in 1992. Table 2 shows the top ten US imports that received duty-free treatment under GSP in 1998. One thing to note is that the statutory tariffs being waived on these products are rather small.

Finally, whole countries can be "graduated" from the program once they hit a per capita income ceiling or if they are determined to be competitive exporters. Hong Kong, Korea, Singapore, and Taiwan were graduated first, on January 1, 1989; Malaysia was removed in 1997; and Mexico was removed when NAFTA came into force at the beginning of 1994. Israel and The Bahamas were graduated in 1995 because they were over the per capita income ceiling.

In addition to the competitive limitations on GSP benefits, the 1974 Trade Act also excluded communist countries, OPEC members (later eased), and countries that expropriate US-owned property without compensation. Despite the GATT principle of nonreciprocity, Congress also provided discretionary authority to exclude countries that fail to provide "equitable and reasonable" market access for US exporters. When Congress re-authorized GSP in 1984, it tightened the eligibility conditions, providing a specific per capita ceiling for country graduation and also introducing "country practice" standards relating to worker rights and intellectual property protection.

Worker rights in the GSP program

When determining country eligibility for GSP benefits, the administration is supposed to consider "whether or not such country has taken or is taking steps to afford to workers in that country (including any designated zone in that country) internationally-recognized worker rights" (US House of Representatives 1997, 254). The law defines internationally-recognized worker rights as including:

• freedom of association;
• the right to organize and bargain collectively;
• freedom from coerced labor;
• a minimum age for the employment of children;
• acceptable conditions of work, including minimum wages, hours of work, and occupational health and safety.

While the statute refers to "internationally-recognized" worker rights, it is notable that there is no reference to the International Labor Organization or any of its conventions. Nor is this the same as the list of "core" labor standards enumerated in the ILO's 1998 Declaration on Fundamental Principles and Rights at Work," though there is substantial overlap.¹

It is important for critics of US policy to note that the US Congress recognized that enforcement of these standards could legitimately vary with a country's level of development. The House Conference report on the 1984 Trade and Tariff Act stated,

It is the intention of the Conference that this definition of internationally-recognized worker rights be interpreted to be commensurate with the development level of the particular country…. It is not the expectation of the [House Ways and Means] Committee that developing countries come up to the prevailing labor standards in the United States and other highly-industrialized developed countries. It is recognized that acceptable minimum standards may vary from country to country. (Quoted in Lyle, 1991, 9)

The 1984 trade bill also required the administration to conduct a "general review" of the program and then to conduct annual reviews thereafter. The new procedures also included provisions allowing private sector groups to petition the US Trade Representative (USTR) to revoke the eligibility of countries they do not believe meet the worker rights or IPR standards. While USTR takes the lead and is the chair, an interagency committee comprising representatives from the Departments of Agriculture, Commerce, the Interior, Labor, State and the Treasury conducts the reviews and prepares decisions regarding eligibility, which are then presented to the USTR who forwards them to the president.

When these country practice reviews for worker rights and intellectual property were added to the program in 1984, they were simply appended to the existing process for determining product eligibility. Under that process, petitions must be filed by June 1 of each year, with a decision whether to accept or reject them due by July 1. Final decisions on the merits of the petition are announced the following April and must be implemented by July 1. Once a decision has been made to accept a petition, public hearings are held and comments solicited from the public. Advocates of worker rights complain that the administrative process for reviews is too rigid. They argue that worker rights cases, which involve negotiations with the beneficiary country to change its policies, are fundamentally different from the product eligibility cases where the decision-making process is internal to the US government. In worker rights cases, the inflexible annual cycle may result in long lags between the time when violations occur and when they are reviewed.² In addition, this process has been disrupted in recent years because of the lapses in authority. Thus, 1997 was the first year since 1993 that new worker rights petitions were considered. During 1994-96, ongoing reviews were continued or acted upon as appropriate.

Does worker rights conditionality protect American workers?

If protection from labor-intensive imports was the only motivation behind the push for a trade-labor linkage, one might expect to observe one of two responses to the worker rights conditionality in GSP:

• Because the program is relatively small after all the exclusions, it might not attract much attention from unions or other "disguised protectionists."
• To the extent there is activity on this issue, one would expect a protectionist motivation to result in disproportionate targeting of the largest and heaviest users of the program.

The numerous limitations on access to GSP benefits are intended to reduce the impact on import-sensitive sectors in the United States and this no doubt helps dissipate potential protectionist pressures. In the 1990s, total imports from BDCs as a share of total US imports averaged only around 15 percent while duty-free imports under GSP were only 2-3 percent (table 3). Thus, the impact of GSP on the US economy is quite small, thereby reducing motives to manipulate the worker rights conditionality for protectionist purposes.

Despite the relatively small size of the program, the first hypothesis, expecting low levels of activity, is not supported. There have been more than 100 petitions in the decade since worker rights conditionality was added to the GSP program. As shown in table 4, as of 1998, 47 of these petitions were accepted for review while 35 were rejected. The remainder resulted in the continuation of previously initiated reviews. Moreover, this relatively high level of activity can be contrasted with the low number of petitions accepted to remove products from eligibility for competitive reasons: 0 in 1989; 9 in 1990; and 4 in 1991 (GAO 1994, 77).³ In those same years, a total of 246 petitions to add products to the eligible list were accepted for consideration (Ibid).

It might make sense to file petitions even with small expected benefits if the costs of filing were smaller yet. This hypothesis is questionable, however, given the fact that 23 labor and human rights groups went through the trouble and expense of filing a suit against the Bush administration in 1990 complaining that it had failed to enforce the worker rights provisions.⁴ They also unsuccessfully appealed the case when the US District Court for the District of Columbia dismissed it on technical grounds that the group did not have legal standing to bring the case.

Although these relatively high levels of activity suggest a genuine commitment to raising labor standards regardless of the trade effects, possible support for a protectionist explanation may be found in the fact that more than 73 percent of the petitions summarized in table 4 were submitted by unions, usually the AFL-CIO. Also, around half the petitions alleged violations of the "minimum conditions" of work, including lack of or inadequate minimum wages. One of the most prominent arguments of the opponents of international labor standards has been that proponents want to deprive labor-intensive developing countries of their comparative advantage by establishing a global minimum wage. The primary focus of most of the petitions, however, are the core rights of freedom of association and freedom to organize and bargain collectively. Every single one of the petitions filed alleged violations of one or the other of these rights and usually both.

Countering the allegations of simple protectionism, however, is evidence that petitioners, including the unions, have not just focused their efforts on the largest targets sending the most exports to the United States. On average, countries targeted in petitions involving unions exported 40 percent less in the year the petition was filed than countries targeted in petitions having no union involvement ($2.4 billion versus $4.1 billion). Table 5 also shows that only three of the top ten BDCs in 1998 had been the subject of worker rights reviews and the other seven have never even been the subject of a petition.

Implementation of the program by the Reagan, Bush, and Clinton administrations also does not suggest that it has been captured by protectionist interests. As shown in table 4, unions are more likely to have their petitions accepted for review than human rights groups. But this may have more to do with the political sensitivity of the issues often raised by the human rights groups, especially mistreatment of union activists, than with a desire to placate union interests. Table 4 also shows that, while the majority of countries that have been the subject of a petition are classified as "partly free" by the New York-based nonprofit Freedom House, nearly a third of those selected for review are classified as not free. These are the cases where one would expect violations of internationally-recognized worker rights to be the worst and where the defense of legitimate diversity in the level of standards would be least applicable.

Evidence on the imposition of sanctions also does not support the allegation that the program has been captured by protectionist interests. As shown in table 6, only 12 countries out of the 47 reviewed have had their GSP eligibility terminated or suspended and benefits have been restored in five of those cases.⁵ Most of these cases-Nicaragua, Romania, Burma, Chile, Liberia, Sudan, and Syria-also involved broader economic sanctions resulting from foreign policy interests far beyond worker rights and so suspension cannot be attributed to protectionist pressures. Restoration of GSP benefits usually followed a change of regime or broader political opening that contributed to improved human rights generally. Overall, the countries that have lost GSP benefits as a result of inadequate protection of worker rights are significantly smaller and poorer than the average beneficiary country, again undermining the assertion that the primary motivation of those making the decisions is protection of US workers. The size and income gap is even larger between countries sanctioned and those that have never been the subject of a petition, much less a review.

Finally, it should also be noted that several of the worker rights advocacy groups have recommended changing the process so that partial GSP eligibility withdrawal is an alternative to complete suspension from the program, which they regard as too blunt. The Clinton administration did this for the first time when it suspended Pakistan's eligibility for exports of hand-knitted and woven carpets, sporting goods, and surgical instruments-industries in which abusive child labor has allegedly been a problem (International Trade Reporter, November 8, 1995, 1853).

But if the pattern in tables 4 to 6 does not suggest that worker rights advocates are interested only in protecting workers in the United States, neither does it mean that the program is necessarily doing much for workers in beneficiary countries, the question to which I now turn.

Does conditionality improve worker rights in beneficiary countries?

Ferreting out the effects of GSP conditionality on worker rights in beneficiary countries is even more difficult than trying to discern the motivations of the petitioners in these cases. Assessments of the results in these cases require going through a two-stage process: first, determining whether there has been any change in conditions in the target country; and, second, trying to attribute that change to various potential influences, including US pressure.

Although it is possible that a petition rejected for review could nevertheless have some influence in the target country, the causal link to US trade pressures would be even more tenuous and those cases are put aside for purposes of this analysis. That leaves the 47 petitions that were accepted for review. Of those, 12 resulted in suspension or termination of GSP eligibility and 35 resulted in a finding that the beneficiary "had taken" or "was taking steps" to protect "internationally-recognized worker rights." Seven of the cases in the latter category were excluded because the administration in office found the countries in compliance without making any demands for change. Of the 40 remaining cases, respect for worker rights appears to have improved in 58 percent.⁶ For purposes of examining the utility of GSP conditionality, however, another eight cases are excluded because the improvement in worker rights that occurred cannot reasonably be attributed to threats to withdraw GSP. The improvement in these cases followed a regime change or other political opening that resulted in improved respect for human rights generally. In some of these cases, the political change might be due in part to broader sanctions imposed by the United States for other foreign policy reasons, but the specific linkage between GSP and improved worker rights is difficult to discern.

It should be noted that, while many petitioners complain that the "taking steps" standard has been applied in too loose a manner, we found only two cases where we concluded that, despite a positive administration finding, the target had taken no steps at all that were responsive to the petition.⁷ There were another eight cases, however, where we concluded that the target was unable or unwilling to implement or enforce commitments to improve respect for worker rights.

The bottomline is summarized in table 7. The 32 cases analyzed are almost evenly divided between success (15) and failure (17), with the failures also being nearly evenly divided between those where there was no discernible change in protection of worker rights and those where promised changes were not made. This success rate is comparable to that for commercial trade sanctions cases under section 301 of the Trade Act of 1974, which authorizes the president to retaliate against unfair foreign trade practices, and well above the 13 percent success rate for unilateral US foreign policy sanctions over a similar period (Bayard and Elliott 1994; Hufbauer, Schott, and Elliott 1990).

The other information in table 7 suggests that GSP leverage is more likely to contribute to improved worker rights:

• when a human rights group is involved;
• when the target is relatively more politically open;
• when less politically sensitive labor standards are emphasized;
• the more dependent the target country is on the US market; and,
• the greater the capacity the target country has to implement promised changes.

Although there is a small number of cases from which to draw conclusions, the somewhat higher success rates when human rights groups are involved suggests they may bring relatively greater legitimacy to the demands for improved worker rights. The results on political openness are also suggestive rather than definitive, with the average Freedom House ranking for targets in failure cases indicating they are only slightly less free countries in successful cases. The differences are more notable, however, when the cases with no discernible change are examined separately. These countries are on average not free, with Freedom House giving the worst possible ranking to 3 of the 9; by contrast, only 2 of the 15 successes involved countries ranked not free. In addition, political conditions deteriorated in a third of the no change countries, while improving in nearly a quarter of the success cases. A final political condition that appears to affect the probability of success in these cases is the category of worker rights emphasized. The cases that failed to achieve noticeable improvements were tilted toward practices-forced and child labor-that are relatively more likely to be rooted in political, institutional, and social conditions than more technical issues, such as minimum wages and safety concerns. Union rights are also politically sensitive in many countries, but no conclusions can be drawn about the utility of GSP conditionality on that issue because all the petitions included complaints about inadequate protection for freedom of association and collective bargaining.

Differences in the economic variables suggest, not surprisingly, that the degree of leverage provided by GSP is an important variable in determining outcomes. Though the difference in the share of total target exports receiving duty-free treatment was small, targets in successful cases sent 30 percent of all their exports to the United States versus 20 percent for countries that failed to comply with US demands. It may be that threats to suspend GSP are viewed as a threat to the overall economic relationship with the United States. Also, the differences are again more striking when the cases involving little or no discernible change in policy are considered separately. The US export share for these countries is less than half of what it is in the other cases and only 8 percent of their exports receive duty-free GSP treatment. For those countries that promised to change but did not, the data in table 7 suggest that it was because they were unable to do so, not because they were unwilling. This set of countries was as vulnerable to US pressure as the countries that complied with US demands, but much poorer, with an average per capita income of just under $1,300, compared to more than $2,700 for countries that did improve protection of worker rights.

Conclusion

The US experience in applying worker rights conditionality to trade benefits under the GSP suggests that external pressure can be helpful in improving treatment of workers in developing countries and that linkage of trade and worker rights need not devolve into simple protectionism. It also suggests, however, that worker rights could be improved further if the stick of GSP suspension were coupled with carrots of financial and technical assistance to help countries who are willing to make changes but lack the capacity to implement them. The evidence further suggests that unions and other supporters of internationally enforced labor standards are concerned about foreign workers and are not just looking for an excuse to block imports from labor-intensive countries. Of course, it is also in the interest of unions to emphasize protection of union rights abroad if they believe that improves their bargaining leverage at home with relatively more mobile multinational corporations.

The small size of the program, however, raises questions about the nature of the leverage in these cases. Is it the threat of losing relatively small GSP benefits, or is it the public attention and the glare of the spotlight? Will giving the ILO review process more publicity and a higher profile-as promised in follow-up to the 1998 Declaration on Fundamental Principles and Rights at Work-achieve similar results or is the linkage to trade a necessary component? The question is important. In the short-to-medium run, US trade leverage is declining as implementation of the Uruguay Round and other trade agreements erode preference margins. At the multilateral level, no consensus exists to incorporate a social clause in the WTO. For the foreseeable future, the glare of the spotlight is the primary tool available.

Notes

1. The first three of the rights listed in the US GSP law are included in the ILO declaration, as is child labor. In order to address some of the concerns about the minimum age convention, the ILO adopted a new convention at its 1999 conference giving priority to elimination of the "worst forms" of child labor. Minimum conditions of work and wages do not generally appear on lists of "core" standards, including the ILO declaration, while nondiscrimination in employment is often included. See Elliott (1998) for a detailed discussion.

2. The General Accounting Office (1994, 106) offers the example of Sudan, where a coup d'etat occurred at the end of June 1989, bringing to power a government that abolished unions, forbade strikes, and detained and harassed union leaders. Because the period for submitting petitions had just closed, the human rights group Africa Watch and the AFL-CIO could not bring their petition for 11 months, followed by another 11 months for the review, meaning that Sudan's GSP eligibility was not suspended for nearly two years after the coup.

3. The difference in activity levels is most likely not due to a much higher rejection rate for product removal petitions than for worker rights petitions. In fact, just the opposite is likely true since a product petition will only be rejected if a petition has been submitted and denied in the previous three years. By contrast, the standards for accepting worker rights petition have been harshly criticized by advocates for being nontransparent and overly stringent.

4. The petitioners were particularly frustrated by the unwillingness of USTR and the State Department to treat as violations of worker rights the imprisonment or murder of labor leaders, treating them instead as violations of more broadly defined human rights that are not covered by the GSP conditionality. A second source of frustration was the standard for accepting petitions that requires that a re-petition of a case recently dismissed must contain "new information". Advocates complain that this prevents genuine progress when a country is found to be "taking steps" to improve worker rights but then reforms stall as soon as the GSP review is completed.

5. In Spring 2000, the administration was inviting public comment on a preliminary decision to revoke Belarus' eligibility because of inadequate protection of worker rights.

6. These assessments are based on analysis of the administration assessments, US State Department (various years), Freedom House (various years) and Harvey (undated).

7. In one of these cases, the country in question did take some action, allowing the administration to find they had "taken steps" to protect worker rights, but the action taken did not respond to the complaints raised in the petition.

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