Fin(d)ing Our Way on Trade and Labor Standards?

Kimberly Ann Elliott is a research fellow at the Institute for International Economics. She is the editor of Corruption and the Global Economy (1997), and a coauthor of Economic Sanctions Reconsidered, 3rd Edition (forthcoming 2003).

[See Related Brief: 00-6]

With the impasse over whether and how to link labor standards and trade agreements stretching into its eighth year, attention has turned to "monetary assessments," or fines, as alternatives to trade sanctions. In testimony before the House Ways and Means Committee in early March 2001, US Trade Representative Robert Zoellick suggested that fines would be worth considering.¹ Both the North American Agreement on Labor Cooperation (NAALC) under the North American Free Trade Agreement (NAFTA) and a similar agreement accompanying the Canada-Chile free trade agreement provide for fines to address a "persistent pattern of failure" by a member country to enforce its own labor laws.

Fines have the advantage of adding "teeth" to agreements on labor standards without impeding trade and, based on Mexican and Chilean acceptance of the idea, may be more palatable to developing countries than trade measures. Fines may therefore at least partially solve the impasse created by the trade-labor linkage debate. Unless such mechanisms are carefully designed, however, they may do little to improve working conditions. This policy brief tries to illuminate the issues involved in designing an effective system of fines to promote adequate enforcement of labor laws. It first summarizes the two existing agreements, and then analyzes the likely effects of various alternative approaches, beginning with three key questions:

• Who will pay the fine (and who really pays-i.e., what is the incidence of the fine)?
• What happens with the revenue collected? If devoted to improved enforcement, who administers it? Should it be the agency that previously failed to adequately enforce the law?
• How is collection ultimately enforced? By suspension of trade benefits, as for the United States and Mexico under the NAFTA agreement? By national courts, as under the Canada-Chile side agreement?

Regardless of whether fines or trade sanctions are used, however, two prior questions must be answered: (1) whether international enforcement measures will address all or only trade-related failures in national enforcement; and (2) whether the relevant standards will be based on national or international law. The first guiding principle in making these decisions should be recognition of the International Labor Organization's (ILO) core competence to enforce labor standards in general. Therefore, it is appropriate for trade agreements to focus narrowly on trade-related violations of labor standards while governments simultaneously strengthen the ILO's ability to promote and enforce international labor standards more generally.

Second, efforts to strengthen the global regime should be based on internationally recognized labor standards. In regional or bilateral negotiations, the question of whether standards should reach some minimum level-either set by the ILO or negotiated by the parties to the agreement-likely will be determined case by case. At a minimum, however, each party's laws should be at least broadly consistent with the ILO's "Declaration on Fundamental Principles and Rights at Work," which defines the core labor standards as freedom of association, freedom from forced labor, abolition of child labor, and nondiscrimination. It would be inappropriate to agree on stronger enforcement of laws that are clearly inconsistent with international norms (e.g., China's law establishing a trade union monopoly, which infringes freedom of association). Moreover, agreeing to more vigorous enforcement of substandard laws could discourage future improvements of those laws.

The NAALC and Canada-Chile Precedents

These agreements have two broad goals: (1) to encourage improved working conditions in the region through cooperative activities; and (2) to provide a mechanism for mediating disputes over these issues.² The focus here is on the dispute resolution mechanisms and, except for ultimate enforcement, these agreements are nearly identical in their approaches. First, they allow challenges based only on:

• a "persistent pattern," not a single instance, of failure to enforce labor laws;
• "mutually recognized" national labor laws, not international standards;
• violations in trade-related sectors or workplaces.
  In other words, these agreements respect national sovereignty in the setting of national labor laws and do not require that they either be consistent with ILO standards or reach some other minimum agreed level. The agreements also emphasize cooperation and consultation, with arbitral panels only as a last resort.

While the set of standards addressed in the agreements is broader than the core labor standards identified by the ILO, the level of enforcement that applies to each differs (see table 1). The first level, which applies to all 11 categories, allows citizens of one party to report to that country's National Administrative Office (NAO) alleged enforcement problems in one of the other parties. If the NAO agrees there is a potential problem, it contacts the NAO in the partner country and if those consultations do not resolve the problem it may request ministerial consultations. If that is still not sufficient, an experts' committee may be appointed to evaluate problems in certain areas and, if appropriate, to offer "practical recommendations" to be considered by the joint Commission for Labor Cooperation (CLC).

If the dispute is still not resolved after ministerial consultations and an expert evaluation, an arbitral panel may be appointed to determine whether a persistent failure to enforce designated labor laws exists and, if necessary, to review implementation of remedial actions and to impose a "monetary enforcement assessment."³ Under the NAALC, fines are capped at 0.007 percent of total trade in goods between the parties to the dispute, which in 2000 would have been fines of just under $20 million for the United States and Mexico and nearly $30 million for the United States and Canada. In the Canada-Chile agreement, fines are capped at US$10 million. The assessments are supposed to consider the pervasiveness and duration of the failure to enforce labor laws , the resource constraints, and the efforts by the party to remedy the problem since the final report was issued. The fines "shall be paid in the currency of the Party complained against into a fund established [by the CLC] and shall be expended at the direction of the Council to improve or enhance the labor law enforcement in the Party complained against, consistent with its law." The agreements do not say who should administer these expenditures to ensure that improvements follow.

Finally, as noted above, a failure by either Mexico or the United States to pay fines levied under this mechanism could lead to suspension of preferential tariff cuts under the NAFTA agreement, but only to the extent necessary to collect the value of the monetary assessment levied by the arbitral panel. Canada adamantly opposed trade sanctions to enforce the side agreements on both labor and environment (despite broadly agreeing with the objectives of the agreements) and complaints can only be enforced through the courts, not via the suspension of benefits. The provisions for judicial enforcement were extended to Chile in the bilateral agreement.⁴

Of the eleven categories of labor law listed in the agreements, in only three cases-involving minimum wages, child labor, and occupational health and safety-can fines be imposed. Of these, only the eventual elimination of child labor is a "core" labor standard; the fundamental rights of freedom from forced labor and nondiscrimination are subject only to evaluation by an experts' committee. Enforcement of the most important "enabling standards"-freedom of association and the right to bargain collectively-are not even subject to evaluation by an expert committee. Despite that, restrictions on freedom of association have been the most common reason for submissions to the US NAO, usually against Mexico, but also twice against Canada. Three of five submissions to the Mexican NAO have addressed problems in the United States with respect to treatment of migrant labor, one of which was also raised in Canada. Several joint technical seminars on labor law have been held between Canada and Chile under their bilateral agreement but there have as yet been no submissions to either National Secretariat (the equivalent of the NAOs under the NAFTA) complaining of inadequate enforcement.

In sum, the approaches taken under the North American and Canada-Chile labor cooperation agreements are modestly useful but limited in their reach, underscoring the political sensitivity of these issues. They do not require that national laws be consistent with broadly accepted core labor standards. Concrete penalties for poor enforcement are restricted to areas where problems are either unlikely to occur or where superficial improvements can be relatively easily implemented. For example, most research suggests that wages in export industries and firms tend to be higher than local minimum wages, though failure to pay overtime may be more common. Child labor is also not thought to be a major problem in Latin America, though underage girls are repeatedly found in apparel sweatshops. And compliance with occupational health and safety laws, such as inadequate lighting or ventilation, can often be achieved relatively easily, at least for as long as the spotlight is on a firm. In the absence of better worker-management relations, however, improvements are likely to be fragile.

Evaluating the Options for Enforcing Labor Standards Agreements
with Fines

Fines can contribute to improved working conditions in two ways: (1) by deterring or punishing violators and thereby changing behavior; or (2) by redirecting resources to address enforcement problems. The two agreements summarized above attempt to do both but are unclear on exactly how the latter objective would be achieved. Various alternatives are summarized in table 2. Depending on the circumstances and which of the two broad objectives is emphasized, the options in each column could be mixed and matched in a Chinese menu approach to building an incentives mechanism to improve compliance with labor standards. Alternatives applied to date by the two existing agreements are summarized in table 3.

A punitive approach is most appropriate when violations are due to a lack of will rather than a lack of capacity. But inadequate capacity to enforce labor laws is often at least part of the problem and imposing fines subtracts resources from a process that is likely to be already inadequately funded and supported. Both to avoid this problem and to target the penalty on the guilty party, there have been proposals that require the country's government to ensure that the fine is passed on to the firm found to be violating the law. But punishing violators is the role of the national enforcing agency. A complaints process could be useful in bringing violations to the attention of the national government, but if there is "adequate governmental enforcement" the application of penalties against the firm should follow from national law and an international fine should not be necessary.⁵

Moreover, note that the NAFTA and Canada-Chile agreements address only a "persistent pattern" of failure to enforce labor laws. This is an appropriate standard for transnational agreements, which neither can nor should try to replace national enforcement case by case. In these cases, it is appropriate to target the government for its failure to enforce its laws as agreed and to impose a fine that would be larger than what would typically be imposed against a single firm.

If the fine is assessed against the relevant administering agency, it could directly exacerbate an existing resource constraint. The money could be redirected to a particular enforcement problem but this would not result in a net increase in resources and therefore, enforcement problems are likely to arise in other areas. In that case, the ultimate cost of the fine is borne by workers in other, probably nontrade sectors, who will experience less enforcement and worse conditions. If the failure to enforce is because of lack of interest at the top of government, a large enough fine could be useful to induce increased effort in labor law enforcement. Requiring the national government to pay the fine out of general revenues and then transfer it to the relevant agency with oversight by an transnational body could provide a useful boost in resources, though only temporarily unless a broader budget realignment results. This could lead to a net gain in national welfare if excess military or other unproductive spending is reduced to pay for the increase in labor law enforcement.

Often, however, inadequate budgets are compounded by a broader lack of capacity or, worse, by corruption in the relevant agency. Simply transferring funds to an agency that is already not doing its job adequately may not do much good. Involving the ILO could provide a more effective solution, ensuring that the money is directed to training and technical assistance that could improve labor standards enforcement more generally and for more workers. This proposal is consistent with Article 10 of the ILO Constitution, which requires the International Labor Office to "accord to governments at their request all appropriate assistance within its power to improve labor law and its administration." ILO involvement, however, obviously depends on the law in question being at least broadly consistent with international standards. If adapted widely, this proposal would also likely require additional resources and strengthened capacity in the ILO.

Some have also suggested that arbitral panels like those authorized by the NAALC should be "set up in the ILO."⁶ But the ILO has only limited authority to review compliance with standards unless the country in question has ratified the relevant convention. Moreover, the ILO already has elaborate procedures for monitoring and enforcing labor standards, which need to be streamlined and better supported, and it is not clear that creating a parallel process to enforce labor agreements linked to trade agreements would be a wise use of resources.⁷ The relevant question is whether fines would be a useful tool to add to the existing ILO toolbox.

Finally, there is the question of how to enforce collection of the fines. Relying on domestic courts, as in the Canada-Chile agreement, assumes that parties to the agreement have well-functioning judicial systems. Unfortunately, that is not currently the case in many developing countries. One reason that countries prefer trade measures to enforce trade and other international agreements is that they retain ultimate control. When it is left entirely in the hands of the government against which a complaint is brought, enforcement ultimately depends on the goodwill and commitment of the parties to the agreement.

Conclusions and Recommendations

In sum, internationally agreed fines could be useful in bolstering enforcement of labor standards if appropriately designed. Increased scrutiny and international consultation procedures, combined with the threat of a fine is likely to be sufficient in most cases to trigger stronger national enforcement, including fines against scofflaw firms as provided under national labor laws. If the threat is not sufficient, the actual imposition of fines should serve as a mechanism to redirect resources to strengthen national capacity to enforce labor laws. The analysis here suggests that trade agreements incorporating such fines, without any link to trade measures, would be most appropriate when:

• the labor laws of the parties are broadly consistent with international norms,
• the parties have well-functioning judicial systems, and
• the ILO can be brought in to provide training and assistance.

As noted, it might also be useful to encourage the ILO to consider the use of fines to strengthen enforcement of ILO conventions. But the problems of ensuring payment and resource constraints in poor countries would obviously have to be addressed.

Table 1: Standards and levels of enforcement in the North American and Canada-Chile labor cooperation agreements

Table 2: Options for imposing fines to enforce labor standards

Table 3: Application of the alternatives to date

Notes

1. It has since been reported that Ambassador Zoellick is also interested in replacing trade sanctions in commercial disputes with fines (Financial Times, April 3, 2001, p. 6; The New York Times, April 3, 2001, A25). Since no details are yet available and it is not clear whether the proposal applies just to the US-Jordan Free Trade Agreement, or to all bilateral and regional trade agreements, or even in WTO disputes, it is not examined here.

2. For more details, see Jacqueline McFadyen, "NAFTA Supplemental Agreements: Four Year Review," Working Paper 98-4, Washington, DC: Institute for International Economics, 1998.

3. This process is very different from that in the US-Jordan FTA, where reports and recommendations by dispute settlement panels are not binding and parties are authorized to "take any appropriate and commensurate measure" if disputes cannot otherwise be resolved, including disputes over the enforcement of labor and environmental laws. Note, however, that the measures authorized cannot be inconsistent with either party's WTO obligations and are, therefore, limited to suspension of preferential benefits under the FTA.

4. Because of the division of responsibility for labor law between the federal government and the provinces, complaints against Canada are limited in practice because the agreement must be ratified by individual provinces before it applies to areas of labor law under their jurisdiction.

5. Carnegie Endowment for International Peace and Inter-American Dialogue, "Breaking the Labor-Trade Deadlock," Carnegie Endowment Working Papers Number 17, Washington, February 2001, p. 7.

6. Sidney Weintraub, "Trade Policy Suggestions For the Quebec Summit," Issues In International Political Economy, Center for Strategic and International Studies, February 2001, Number 14.

7. On the ILO supervisory process, see Kimberly Ann Elliott, "Getting Beyond No…! Promoting Worker Rights and Trade," in Jeffrey J. Schott, ed., The WTO after Seattle; and Elliott, "The ILO and Enforcement of Core Labor Standards," Policy Brief No. 00-6, both published by the Institute for International Economics.