Labour standards in trade agreements

LABOUR STANDARDS IN
TRADE AGREEMENTS
Christian Viegelahn
ILO Research Department
Coimbra, 26 April 2018

This seminar
 ILO’s mandate on trade
 Trade policy, firms and workers in the age of globalized
production: what are the effects?
Viegelahn, C. (2017), “How trade policy affects firms and workers in global supply chains:
an overview”, Chapter 13, in: Handbook on Assessment of Labour Provisions in Trade and
Investment Arrangements, Geneva: International Labour Office.
Kühn, S. and Viegelahn C. (Forthcoming), “Foreign trade barriers and jobs in global supply
chains”, International Labour Review.
 Labour provisions in trade and investment arrangements
ILO (2016), Assessment of Labour Provisions in Trade and Investment Arrangements,
Geneva: International Labour Office.

Introduction:
ILO’s mandate on trade

ILO Instrument Link to Trade
Philadelphia Declaration (1944) In order to achieve lasting peace and social justice it is the
responsibility of the Organization to examine and consider all
international economic and financial policies and measures in
light of this fundamental objective.
Declaration on Fundamental
Principles and Rights at Work
(1998)
Commits ILO members to respect and enforce the core labour
standards as human rights regardless of whether or not they
have ratified the relevant ILO Conventions.
In addition the Declaration stresses:
i. These standards should not be used for protectionist trade
purposes
ii. The comparative advantage of any country should in no
way be called into question
Declaration on Social Justice for a
Fair Globalization (2008)
Reaffirms ILO mandate in an era of globalization and
comprehensively linked labour, economic and trade policies.
i. It reaffirms commitment (i) above and adds:
ii. Violation of FPRW cannot be invoked or used as a
legitimate comparative advantage
iii. Upon request ILO can provide assistance to Members, who
aim to enhance decent work in the framework of bilateral
or multilateral agreements
DirectandindirectreferencestotradeinILO documents

LabourstandardsandtheWTO
Labour standards are not subject of WTO committees or WTO treaties
1996: WTO Ministerial Conference in Singapore
• Commitment to adhere to internationally recognized labour standards
• Naming of ILO as institution responsible for those labour standards
• Rejection of the use of labour standards for protectionist purposes
• Noting to continue the existing collaboration between WTO and ILO
2001: WTO Ministerial Conference in Doha
• Confirmation of Singapore agreements with regard to labour standards

Part I
Trade policy, firms and workers in
the age of globalized production:
what are the effects?

Overview:trendsintradepolicyoverthepastyears
 There has been a standstill in multilateral trade negotiations
 Trade liberalization in recent years has occurred through the
conclusion of bilateral and multilateral trade agreements
 Global decline in average import tariffs: from 14% in 1995 to
5.5% in 2014
 Trade protection still takes place in the form of non-tariff
measures (NTMs), e.g. contingent trade protection, technical
barriers to trade etc.

Moreandmoretradeagreementshavecomeintoforce
Source: ILO Research Department based on WTO.
Global number of trade agreements (TAs) concluded, 1995-2016
0
50
100
150
200
250
300
NumberofTAs(cumulative)
North-North North-South South-South

“Traditional” import tariffs have gone down
0
2
4
6
8
10
12
14
16
1995 2014
Source: ILO calculations based on World Bank’s WITS database.
Global average import tariff (%), 1995 and 2014

The number of non-tariff barriers has gone up
0
2,000
4,000
6,000
8,000
10,000
12,000
Source: WTO I-TIP goods database.
Global number of NTBs in force, 1995-2016

Key questions
• How does the removal/introduction of
trade barriers affect existing jobs in
GSCs?
• Does it stimulate the creation of new jobs
in GSCs? What quality do these jobs
have?

Trade barriers – how do they impact firms?
Firm A
…produces
same input as
foreign Firm
C
Firm B
…imports
input from
foreign Firm
C
Firm C
…exports
input to Firm
B
Supplier firms
Supplier firm
Country BCountry A Border

Firm A
…produces
same input as
foreign Firm
C
Firm B
…imports
input from
foreign Firm
C
Firm C
…produces
and exports
input to Firm
B
Supplier firms
Supplier firm
Country BCountry A Border

Firm A
…produces
same input as
foreign Firm
C
Firm B
…imports
input from
foreign Firm
C
Firm C
…produces
and exports
input to Firm
B
Supplier firms
Supplier firm
Country BCountry A Trade barrier
?
?

Firm A
…produces
same input as
foreign Firm
C
Firm B
…imports
input from
foreign firm C
Firm C
…produces
and exports
input to Firm
B
Supplier firms
Supplier firm
Country BCountry A Trade barrier
?
?
+ + +
+
-
-
-
- -
-
-
-
-
-
-

Tradeliberalizationis likelyto adverselyaffect(at least
some)import-competingfirmsandtheirsuppliers
 The removal of trade barriers exposes domestic import-
competing firms to increased foreign import competition
 This may in some cases cause the market exit of firms with
related job dismissals; only the strongest companies will
survive
 The effects on suppliers of import-competing firms will be
similar
Literature: e.g. Acemoglu et al. (2016)
Example: a decrease of the US import tariff on German cars would expose US
car companies to increased import competition from Germany

Tradeliberalizationis likelyto havepositiveeffectson
domesticimportersandtheirsuppliers
 Trade liberalization provides firms with increased access to
foreign inputs
 Access to foreign inputs is a key determinant of firm
performance:
o Opportunites to learn from new technologies
o Access to higher quality inputs
o Access to a wider variety of inputs
 Also workers typically benefit
Literature: e.g. Amiti and Davis (2012)
Example: US car companies that import car parts from Mexico would benefit
from a lower US import tariff on Mexican car parts

Tradeliberalizationis likelyto benefitforeignexporters
andtheirsuppliers(I)
 Removal of trade barriers provides foreign firms with
increased export opportunities
 The exported good becomes cheaper, which will increase
demand
 This can increase the number of jobs that are dependent
on these exports
Example: US car companies that export their cars to Europe would benefit
from a lower EU import tariff on US cars

Tradeliberalizationis likelyto benefitforeignexporters
andtheirsuppliers(II)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Manufacturing Services
Notes: The estimated impacts shown in the figure are statistically significant at the
1-%-level.
Source: Kühn and Viegelahn (Forthcoming in ILR). More details…
Estimated impact of a 1 percentage point reduction of the average
goods tariff on jobs related to the affected trade flow, by sector (%)

Firm A
…produces same input
as foreign Firm C
Country BCountry A
Barrier
Trade agreements and jobs in global supply chains

Firm A
as foreign Firm C
Country BCountry A
Border
Firm or
factory
supplying
inputs for
Firm A
Firm or
factory
doing final
assembly
for Firm A
sets up
sets up

Firm A
as foreign Firm C
Country BCountry A
Border
Firm or
factory
supplying
inputs for
Firm A
Firm or
factory
doing final
assembly
for Firm A
Poor quality jobs?
Decent jobs?

Tradeliberalizationcanimpacton howandwherefirms
setuptheirglobalproductionnetworks
 Jobs created in foreign countries through these global
production networks can play an important role for countries’
development
 These jobs provide livelihood for millions of workers
 But: cases of failures within global supply chains, where basic
labour standards are being violated (e.g. poor safety
conditions, low wages, excessive and volatile working hours
etc.)

What are the factors that may impact the quality of jobs
in global supply chains?
• Bargaining power of supplier firms
 Complexity of task?
 Number of buyers?
 Types of buyers? Flexibility requirements?
• Implementation of labour standards
• Quality of labour inspection systems
• Functioning of social dialogue
• CSR initiatives
• Role of labour market policies and institutions

Recent global policy initiatives
• Vision Zero Fund (VZF) initiative
 G7-initiated multilateral fund, endorsed by G20
 Contributions from governments, international
organizations, NGOs or private sources
 Set up to prevent work-related deaths, injuries and
diseases in global supply chains
• Resolution concerning decent work in GSCs,
International Labour Conference, June 2016
• Revised MNE Declaration, March 2017

Howtomake tradesustainableandinclusiveforworkers?
There are winners and losers of trade. How to compensate the losers and
help them to become winners?
How to make sure that workers participate in gains from trade?
t

Howtomake tradesustainableandinclusiveforworkers?
There are winners and losers of trade. How to compensate the losers and
help them to become winners?
 Employment protection
 Minimum wage
 Social protection floors and systems
 Training
How to make sure that workers participate in gains from trade?
 Collective bargaining
 Freedom of association
 Social dialogue
Labour provisions in trade and investment arrangements can potentially
provide an entry point for stakeholders to discuss these issues

Part II
Labour provisions in trade and
investment arrangements

Definition:Whatare labourprovisions?
Labour provisions can be defined as:
‘any standard which addresses labour relations or minimum
working terms or conditions, mechanisms for monitoring or
promoting compliance, and/or a framework for cooperation’
This definition groups together a broad range of labour
provisions.

What the definition includes
Reference in preamble:
• E.g. EFTA-Ukraine: … reaffirming their commitment to economic
and social development, the protection of health and safety, and the
respect for the fundamental rights of workers, including the principles
set out in the relevant International Labour Organisation (ILO)
Conventions;
Non-lowering or non-derogation:
• E.g. Japan - Switzerland (Article 63) ... limited to : The Parties
recognise that it is inappropriate to encourage investment activities by
relaxing domestic health, safety or environmental measures or
lowering labour standards. To this effect, each Party should not
waive or otherwise derogate from such measures and standards
as an encouragement for establishment, acquisition or expansion of
investments in its Area.

What the definition does not include
The reference to the free movement of labour– because it
only deals with labour as a tradeable good, not the
conditions of work, terms of employment or the rights of
workers.
• e.g Japan - Peru: … this Chapter reflects the preferential trading
relationship between the Parties, the mutual desire of the Parties to
facilitate entry and temporary stay of nationals for business
purposes on a reciprocal basis in accordance with Annex 8, the
need to establish transparent criteria and procedures for entry and
temporary stay …

Dual focus of trade-related labour provisions
• Labour
Standards
• Compliance
Mechanisms
• Cooperative
activities
• Dialogue
• Monitoring of
labour issues
• Reference to
labour
commitments
• Compliance
mechanisms
Governance Cooperation

Point 1.
Labour provisions have become
increasingly more common and
comprehensive

Numberof tradeagreementsnotifiedtotheWTOthat
enteredintoforce,byyear
Source: ILO Research Department based on WTO.
0
10
20
30
40
50
60
70
80
90
100
0
2
4
6
8
10
12
14
16
18
20
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
PercentageoftotalTAs(%)
NumberofTAs(Total)
TAs with LPs TAs without LPs Percentage of TAs with LPs

Referenceto labourstandardsin TAs since2009
Instruments EU US Canada
ILO 1998 Declaration
FPRW
X X X
Effective implementation
of nat’ labour laws
X X X
Access to nat’l tribunals
Acceptable conditions of
work
- X X
Migrant workers Peru and Colombia - X
Effective implementation
of ILO Conventions
Central America,
Colombia and Peru
and Korea
- -
Decent Work Agenda X - Honduras, Peru,
Colombia,
Jordan, Panama

Reference to the ILO instruments in trade
agreements, as of 2016
1.3
1.3
5.2
9.1
11.7
13.0
18.2
64.9
0 20 40 60 80
ILO priority Conventions
Pertinent ILO standards
ILO Conventions
ILO fundamental Conventions
Social Justice Declaration
Decent Work Agenda
Convention 182
1998 Declaration
Share of total number of labour provisions (%)

Point 2.
Labour provisions in trade agreements
ease labour market access, particularly for
working age women.

Labourprovisionsare associatedwithhigherlabourforce
participationratesandnarrowergendergaps.
Estimated impact of labour provisions
Source: ILO Research Department.
1.60 1.56 1.58
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Total North South
Percentagepointchanges
-1.09
-1.24
-1.41
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
Total North South
Percentagepointchanges
Panel A: Labour force participation rate Panel B: Gender gap in labour force participation rate

Percentageof tradeagreementswithgenderreference

Point 3
There is country-evidence of the impact of
labour provisions on the narrowing of the
gender wage gap.

TradeagreementswithLPs canreducegenderdiscrimination
– whenan accompanyingpolicymix is in place

Point 4.
Labour provisions in trade agreements do
not divert or decrease trade flows

Bothtradeagreementswithandwithoutlabourprovisions
boosttradetoa similar extent
Estimated impact of trade agreements
with and without labour provisions on
trade (selected time periods, in %)

Point 5.
The key mechanism through which LPs
have an impact is through labour market
institutions, supported by stakeholder
involvement.

Country/
Case
Agreement Implementation Actions Effects
CAFTA-DR FTA with US
(2004)
• Pre-ratification
• Capacity building to
improve implementation
gaps
• Stakeholder involvement
• Monitoring & progress
reports
• Some ratifications (El Salvador) &
legislative changes (EPZs)
• ILO Verification project: Increased MOL
budget by 20%; inspectorates by 55%;
Increased number of judges
Cambodia Bilateral
Textile
Agreement
with US
(1999-2004)
• Pre-ratification
• Monitoring & progress
reports
• Positive incentives
• Strengthened freedom of association
• Decrease in gender wage gaps
Republic of
Korea
FTA with EU • Stakeholder involvement
• Monitoring
• ILO conventions: 1 ratification and follow-
up of others
• Initiatives for cooperation in CSR and
non-discrimination
Bangladesh Unilateral
trade
agreement
• Capacity building
• Monitoring
• More frequent and improved inspections
• Amendments to the Bangladesh Labour
Act
Labourprovisions:importanceof stakeholderinvolvement

Stakeholder
involvement:
whathasbeen
effective?
 Synergy:
labour
advocates
combine
different
mechanisms
 Cross-border
coalitions of
civil society
organizations
are important

Emerging issues: CSR clauses in TAs and BITs
• Establish obligations for states (with few exceptions)
• Express an expected behaviour from enterprises (not
mandatory)
• Different from labour provisions but sometimes overlap
• Present in agreements of proponents of labour provisions
(e.g. Canada, EFTA, EU, US, Chile, and more recently
Chile, Colombia)

Figure 1: CSR clauses in trade and investment agreements
Note: Since 2014 the BITs trend has been mainly driven by Canada with five BITs signed or in force in
2014 and four in 2015.
Trends: CSR clauses in TAs and BITs

Why CSR clauses in trade and investment
agreements?
• Respond to CS demands (Aaronson, 2007; EC,
2015)
• Foster coherence in CSR initiatives (UNEP,
2011)
• Rebalance investors’ rights with right to regulate
and social aspects (UNCTAD, 2015; Waleson,
2015)
• Make CSR “harder” (Wawryk, 2003; Footer,
2009)
• Promotion of responsible investments (Mann,
2013; UNCTAD, 2015operate) wherever
enterprises
• Potential benefits of agreements as a “lever” for
sustainable development (EESC, 2015)

Thank you
http://www.ilo.org/research
viegelahn@ilo.org

Research question and motivation
What is the external impact of one country’s trade policy on the number of
jobs located in another country?
Literature that uses Computable General Equilibrium Models:
 Ex-ante evaluation of trade policy; takes into account cross-border and cross-sector effects
 But: high sensitivity to modelling assumptions and parameter choice (see e.g. Valenzuela
et al., 2008), especially when investigating trade barriers other than tarifffs (Fugazza and
Maur, 2008)
Empirical trade literature:
 Ex-post evaluation of trade policy; uses firm-level data, but focus is on domestic firms
 Only Vandenbussche and Zarnic (2008), Rovegno (2013) look at impact on foreign firms,
but they do not take into account the impact on upstream suppliers

Hypotheses (derived from a theoretical model)
1. 𝑡 𝑚 𝑖 → 𝑗 ↓ ⇒ 𝐽𝑜𝑏𝑠 𝑚 𝑗𝑖 ↑
𝑡 𝑠 𝑖 → 𝑗 ↓ ⇒ 𝐽𝑜𝑏𝑠𝑠 𝑗𝑖 ↑ (own-sector effect)
2. 𝑡 𝑚 𝑖 → 𝑗 ↓ ⇒ 𝐽𝑜𝑏𝑠𝑠 𝑗𝑖 ↑
𝑡 𝑠 𝑖 → 𝑗 ↓ ⇒ 𝐽𝑜𝑏𝑠 𝑚 𝑗𝑖 ↑ (cross-sector effect)
3. cross-sector effect < own-sector effect
4. ratio of cross-sector effect to own-sector effect smaller when 𝑡 𝑠 𝑖 → 𝑗 ↓
(as opposed to 𝑡 𝑚 𝑖 → 𝑗 ↓ )
3. cross-sector effect has become larger over time
Notation:
𝑡 𝑚 𝑖 → 𝑗 - trade barrier of country i on manufactures from country j
𝑡 𝑠 𝑖 → 𝑗 - trade barrier of country i on services from country j
𝐽𝑜𝑏𝑠 𝑚 𝑗𝑖 - jobs in the manufacturing sector of country j dependent on exports to country i
𝐽𝑜𝑏𝑠𝑠 𝑗𝑖 - jobs in the services sector of country j dependent on exports to country i

Estimation methodology and data
OLS regressions on pooled sample and samples of particular years
Dependent variables: 𝐽𝑜𝑏𝑠 𝑚 𝑗𝑖 , 𝐽𝑜𝑏𝑠 𝑚 𝑗 (ILO estimates of jobs in GSCs from ILO
(2015) and Kizu, Kühn and Viegelahn (2016))
Main explanatory variables of interest: 𝑡 𝑚 𝑖 → 𝑗 , 𝑡 𝑠 𝑖 → 𝑗 (World Bank: WITS
database, Services trade restrictiveness, Doing Business)
Control variables:
• Working-age population (UN Population Division)
• Sectoral employment (WIOD’s Socio-Economic Accounts database)
• Sectoral value added (World Bank: World Development Indicators)
• GDP (World Bank: World Development Indicators)
• European Union
• Common border, common language, geographic distance (Mayer and Zignago, 2011)
• GSC jobs concentration (ILO estimates of jobs in GSCs)
• Relative wage (WIOD’s Socio-Economic Accounts database)
• Inward FDI (World Bank: World Development Indicators)
• Trade openness (World Bank: World Development Indicators)

Results
Back…
1. 𝑡 𝑚 𝑖 → 𝑗 ↓ ⇒ 𝐽𝑜𝑏𝑠 𝑚 𝑗𝑖 ↑
𝑡 𝑠 𝑖 → 𝑗 ↓ ⇒ 𝐽𝑜𝑏𝑠𝑠 𝑗𝑖 ↑ (own-sector effect)
2. 𝑡 𝑚 𝑖 → 𝑗 ↓ ⇒ 𝐽𝑜𝑏𝑠𝑠 𝑗 ↑
𝑡 𝑠 𝑖 → 𝑗 ↓ ⇒ 𝐽𝑜𝑏𝑠 𝑚 𝑗 ↑ (cross-sector effect)
3. cross-sector effect < own-sector effect
4. ratio of cross-sector effect to own-sector effect smaller when 𝑡 𝑠 𝑖 → 𝑗 ↓
(as opposed to 𝑡 𝑚 𝑖 → 𝑗 ↓ )
3. cross-sector effect has become larger over time
Notation:
𝑡 𝑚 𝑖 → 𝑗 - trade barrier of country i on manufactures from country j
𝑡 𝑠 𝑖 → 𝑗 - trade barrier of country i on services from country j
𝐽𝑜𝑏𝑠 𝑚 𝑗𝑖 - jobs in the manufacturing sector of country j dependent on manufacturing exports to country i
𝐽𝑜𝑏𝑠𝑠 𝑗𝑖 - jobs in the services sector of country j dependent on services exports to country i
(but for 𝑡 𝑠 𝑖 → 𝑗 only)

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