European Union Supply Chains & Trade: Improving Worker Rights?

  1. Q: While introducing the panel, you noted a discrepancy between the economic theory and the reality of distribution of the gains of globalization. Could you provide an example of this?
  2. Q: During the presentation from Genevieve LeBaron, it was noted that the focus on forced labor is typically only present in global supply chains. What does this mean for workers who only interact with domestic firms/supply chains? Does equity in the global market entail domestic equity?
Decorative image of a map in blue and brown paint

In the late spring of 2021, CES partnered with Dr. Layna Mosley of Princeton University to organize an expert panel, entitled “European Union Supply Chains & Trade: Improving Worker Rights?” As a follow-up to the panel, which can be watched on the CES YouTube page, several EURO majors compiled questions, which are answered by Dr. Mosley below.

Q: While introducing the panel, you noted a discrepancy between the economic theory and the reality of distribution of the gains of globalization. Could you provide an example of this?

A: Classical trade theory, which is based on the logic of comparative advantage, as well as the notion that countries have different factor endowments (where “factors” are capital, skilled labor, land and the link) suggests that all countries benefit from trade, at the aggregate national level. Countries will have a trade advantage in the production of goods that use the relatively abundant factor intensively, so the owners of those factors ought to benefit from trade. (And, conversely, the owners of relatively scarce factors will be harmed by import competition — even as trade is beneficial in the aggregate).

So, this suggests that countries that are relatively labor-abundant will have a comparative advantage in the production of labor-intensive goods, such as apparel. And it means that workers (the “factor” of labor) in many Global South countries ought to capture the benefits from trade (while capital owners are harmed from trade, given the relative scarcity of capital).

But that’s often not the case: in many developing countries, we see that manufacturing workers may earn higher wages than they would in the rural sector (for instance); but they nonetheless are subject to hazardous working conditions, to forced overtime or to limits on their ability to act collectively. This is the reality to which I was referring: economic theory doesn’t say anything about the political system inside countries, but that political system is key to the distribution of gains from trade. And if scarce factors — like factory owners in Bangladesh — have political voice, while abundant factors — like apparel sector workers in Bangladesh — do not, then those gains do not accrue to the workers. Rather, factory owners might support government policies which make it difficult for workers to exercise their collective voice, or they might lobby the government to engage in other policies which repress workers’ compensation and benefits.

[There’s also another idea here, which is the assumption that governments take their factor endowments and the related comparative advantages as given, rather than intervening to try to shift those advantages. In reality, many governments have attempted to create comparative advantages — for instance, to shift from a focus on agriculture or on labor-intensive products to a focus on higher-technology, capital intensive products. This is the foundation of much industrial policy, whether it’s in the Global North or the Global South].

Q: During the presentation from Genevieve LeBaron, it was noted that the focus on forced labor is typically only present in global supply chains. What does this mean for workers who only interact with domestic firms/supply chains? Does equity in the global market entail domestic equity?

A: We know that forced labor — and other violations of labor and human rights — happen in many countries, and in many parts of the economies. The attention paid to the links between the global economy and worker rights means that our awareness — especially in the Global North — of violations is often limited to those occurring in the context of global supply chains. NGOs and other activists shine a spotlight on violations in supply chains, because they hope to be able to generate pressure — from consumers in Global North countries; from shareholders; or from multinational corporations’ home governments — to address those violations.

That doesn’t mean that violations do not happen elsewhere in a country’s economy, of course. It is more that the focus of transnational activists has been on certain types of firms (and often, in certain types of industries, such as textiles and apparel, footwear, cotton, flowers, chocolate and the like). These activists have limited resources, and they are strategic: so they think about where they are most likely to effect change. For instance, we might see more attention to violations in Apple or Nike’s supplier factories than to violations in factories that supply mass-market or less well-known retailers.

But this also means that many transnational activists are not shining a spotlight in parts of domestic economies that aren’t linked to global supply chains. Sometimes, this also is because it’s difficult — given political repression — for activists to get access to information, or for domestic activists to share their concerns with an international audience.

And indeed, we have some evidence that workers in developing countries who are employed directly by foreign multinational firms are paid higher wages than their counterparts who do the same jobs in domestically-owned firms. (It’s complicated to make these comparisons, admittedly). So we might think that those who work in global supply chains have the best prospects for experiencing improved conditions. This is great, in some ways, but it also means that another set of people — those working for domestic firms, sometimes in less formal employment settings — are left out.

One might hope that, to the extent improvements occur for workers connected to global supply chains, these improvements will diffuse elsewhere in an economy. For instance, if a globally-connected firm raises its wages or shortens its working hours, then domestic firms who compete for the same workers may have to follow suit. This assumes, of course, that the labor market is competitive, and also that there is not a high level of unemployment (reducing workers’ bargaining power). And with respect to forced labor, this may be tough to achieve: eliminating forced labor also requires government commitment and effort (that is, will and capacity); some governments have incentives not to address forced labor. Other governments may want to address the problem, but lack the material resources with which to do so. (And these are arguments for creating incentives for lead global firms to address it, regardless of what host country governments do).

A related issue to consider is how the European Union or the United States might address these issues, in terms of using provisions in trade agreements to link worker rights with market access. As Peter Young mentioned during the panel, it’s been very difficult to get global (WTO) agreement on trade-labor linkages. This isn’t just because of a lack of leadership by the US (as Young mentioned, when he referenced the 1999 Seattle ministerial meeting), or because the EU and the US have had different approaches to trade and human or labor rights linkages (the EU has tended to have more of a “carrots” approach, offering additional benefits for additional compliance, while the US tends to focus on “sticks,” withdrawing benefits in response to some violations). The difficulty of addressing this on a global level also relates to a concern, long expressed by Global South countries, that wealthy countries will use labor-related issues as a veil for protectionism. That is, developing countries have competitive advantages which stem partly from their lower labor costs; imposing trade penalties in response to those costs removes the benefits of these comparative advantages. And, more broadly, developing and developed countries often have very different interests at the WTO, so creating agreement at that level is likely to be difficult (one could make a similar argument for environmental policy, although there may be a little more potential there).

This leaves the bilateral level, in which the EU as well as the US link trade (and investment) agreements with human rights and working conditions. Here, these entities use their market power — the fact that global south countries want to trade with them — to effect changes in non-trade areas. As Peter Young noted, this can be a real challenge: among other things, removing trade benefits in response to violations often means harming the same people (workers in developing countries) that the agreements are intended to benefit. And it’s also the case that there has been selective enforcement: when activists petition the US Trade Representative to remove a country’s trade benefits in response to violations, the USTR does not always elect to do so. That said, one could imagine that, when used in conjunction with other tools — for instance, multinational firms with incentives to respond to consumer, activist and shareholder preferences for improved worker rights — trade agreement-related conditions can promote improvements for Global South workers.

Q: The COVID-19 pandemic has presented serious challenges to supply chains and has altered the outlook for manufacturing for many firms. Is this shift projected to occur at a broader scale for firms in manufacturing, and what are its implications for workers in Global South countries?

A: The effects of the pandemic on global supply chains remain to be seen, but there certainly is cause to worry about what they might imply for workers in developing countries. Even before the pandemic, many multinational firms had begun to worry about whether their supply chains were too long (too many distinct stages, in which a problem at one stage could shut down production downstream) or too broad (too many suppliers at each stage, which addresses the problem of bottlenecks, but also generates more work in terms of locating suppliers and monitoring quality as well as — perhaps — labor, social and environmental practices).

The US trade war with China served to illustrate the specific risks of sourcing from a specific country: as the US imposed tariffs on a wide range of Chinese products, including many intermediate goods, US firms saw their production costs rise. Many of them shifted their directly owned factories to other countries (Vietnam especially benefitted from this), or they began to source from suppliers located outside of China.

The pandemic brought many of these concerns to the fore: to the extent that a country or set of countries experienced a production shutdown, firms’ supply chains were disrupted, and often in somewhat unpredictable ways (as the severity and length of the shutdowns could not always be anticipated). One way firms could respond to this — and to worries about other such events in the future — would be to restructure their supply chains, so that there are fewer distinctive stages of production. This does concentrate risk, of course: if there are no crises in your (shorter, narrower) supply chain, that’s great; but a crisis at any point will have big effects. Of course, the most extreme version would be to fully “on shore” (bring back to the US or to the European Union) production; but this also means giving up many of the efficiencies (in terms of lower labor or materials costs) that global production allows.

Another firm response could be automation: a factory staffed by robots won’t be affected by highly transmittable respiratory infections or by labor disputes. Nor will such factories generate negative publicity from labor activists around things like forced overtime or hazardous working conditions. But, of course, industrial robots are expensive: they require a significant capital outlay initially, and not all firms will be willing to make such investments, especially as the global economy continues to be uncertain. But automation would, of course, result in lower demand for workers, especially in manufacturing settings (and perhaps in the services sector as well). And these shifts would generate benefits for some workers — those with skill in programming and maintaining more automated production processes.

What is perhaps more likely in the near term is that firms will concentrate their supply chains in locations that have demonstrated themselves to be hospitable to foreign investors and to supply chain production — in that they have addressed the pandemic effectively, and they have a stable and secure legal environment. We may see that, among Global South countries, the successful do even better (again, Vietnam comes to mind), while those that have struggled to attract foreign direct investment and supply chain contracts may face even greater challenges.

Thank you to Dr. Mosley for your insights and expertise in organizing the panel!

More information about the event and panelists can be found on the Events page on the CES website.

This lecture is co-funded by the Erasmus+ Programme of the European Union. The event is co-sponsored by the #JMintheUS Network, the American University Transatlantic Policy Center, the University of California Berkeley Institute of European Studies, the University of Florida Center for European Studies, the University of Illinois European Union Center, and the Virginia Tech Center for European Union, Transatlantic & Trans-European Space Studies. It is organized by Professor Layna Mosley under the Jean Monnet Center of Excellence housed at the UNC Center for European Studies.

The European Commission’s support for the production of this publication does not constitute an endorsement of the contents, which reflect the views only of the authors, and the Commission cannot be held responsible for any use which may be made of the information contained therein.