1. Lecture 23 Environment, Labor Standards, and Trade Econ 340

2. News: Apr 13-19 Fast track trade legislation introduced -- WSJ: 4/17 | Proquest | NYT: 4/17 | Proquest | WP: 4/17 | ST&R: 4/174/17Proquest4/17Proquest4/17 –Senators Hatch (R-Utah) and Wyden (D-Ore) introduced fast track legislation that, if passed, will allow Obama to submit trade agreements for up-or-down votes without amendment. The bill is considered crucial to completion of the negotiations on the Trans- Pacific Partnership with eleven other Asia-Pacific countries. –Many Democrats oppose this legislation, formally called Trade Promotion Authority, on the grounds that previous trade agreements -- especially NAFTA -- have undermined labor standards and worker rights. Obama insists that the TPP, as it is being negotiated, will do the opposite. –Wyden fought for and got a provision allowing the Senate to cancel fast-track authority if certain conditions on the negotiations are not met. These include greater transparency and protections for workers, the environment, and human rights. Not included is anything about currency manipulation, which will be left to other legislation. IMF lowers its forecast for global economic growth -- WSJ: 4/15 | Proquest | NYT: 4/15 | Proquest | FT: 4/13 | CTools4/15Proquest4/15Proquest4/13CTools –Global economic growth will improve this year, but less than had been expected, as emerging markets are growing more slowly, according to a report from the International Monetary Fund. China's growth has slowed; Brazil is contracting; and Russia is in steep decline. An exception is India, where growth is 7.5%, up from 6.3% last year. –Global GDP is expected to expand by 3.5% in 2015, just 0.1% faster than last year. This is not enough to undo the legacies of high unemployment and high debt that resulted from the 2008 financial crisis. –IMF officials, meeting in Washington, are encouraging easy-money policies in Europe and Japan. EU files formal anti-trust charges against Google -- WSJ: 4/16 | Proquest | NYT: 4/16 | Proquest | FT: 4/16 | CTools4/16Proquest4/16Proquest4/16CTools –The EU competition commissioner, Margrethe Vestager, filed formal charges against Google, alleging that it steers searches for specific products toward it own in-house shopping sites. There is also a separate charge against Google's Android mobile platform. –The US FTC investigated Google two years ago and did not choose to file charges after Google agreed to voluntary changes. EU law, unlike US law, protects competitors as well as consumers. –Google dominates web search in Europe, with 90% there compared to only 65% in the US. The case recalls the EU case against Microsoft, which led to changes in the firm's behavior and a €2.2 billion fine. Econ 340, Deardorff, Lecture 23: Environment, Labor 2

3. News: Apr 13-19 Fast track trade legislation introduced –Senators Hatch (R-Utah) and Wyden (D-Ore) introduced fast track legislation that, if passed, will allow Obama to submit trade agreements for up-or-down votes without amendment. The bill is considered crucial to completion of the negotiations on the Trans-Pacific Partnership with eleven other Asia-Pacific countries. –Many Democrats oppose this legislation, formally called Trade Promotion Authority, on the grounds that previous trade agreements -- especially NAFTA -- have undermined labor standards and worker rights. Obama insists that the TPP, as it is being negotiated, will do the opposite. –Wyden fought for and got a provision allowing the Senate to cancel fast- track authority if certain conditions on the negotiations are not met. These include greater transparency and protections for workers, the environment, and human rights. Not included is anything about currency manipulation, which will be left to other legislation. Econ 340, Deardorff, Lecture 23: Environment, Labor 3

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7. News: Apr 13-19 IMF lowers its forecast for global economic growth –Global economic growth will improve this year, but less than had been expected, as emerging markets are growing more slowly, according to a report from the International Monetary Fund. China's growth has slowed; Brazil is contracting; and Russia is in steep decline. An exception is India, where growth is 7.5%, up from 6.3% last year. –Global GDP is expected to expand by 3.5% in 2015, just 0.1% faster than last year. This is not enough to undo the legacies of high unemployment and high debt that resulted from the 2008 financial crisis. –IMF officials, meeting in Washington, are encouraging easy- money policies in Europe and Japan. Econ 340, Deardorff, Lecture 23: Environment, Labor 7

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9. News: Apr 13-19 EU files formal anti-trust charges against Google –The EU competition commissioner, Margrethe Vestager, filed formal charges against Google, alleging that it steers searches for specific products toward it own in-house shopping sites. There is also a separate charge against Google's Android mobile platform. –The US FTC investigated Google two years ago and did not choose to file charges after Google agreed to voluntary changes. EU law, unlike US law, protects competitors as well as consumers. –Google dominates web search in Europe, with 90% there compared to only 65% in the US. The case recalls the EU case against Microsoft, which led to changes in the firm's behavior and a €2.2 billion fine. Econ 340, Deardorff, Lecture 23: Environment, Labor 9

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13. Econ 340, Deardorff, Lecture 23: Environment, Labor 13 Outline: Environment, Labor Standards, and Trade The Issues Environment –Examples –Policies –International Problems –Role of the WTO Labor Standards –Fundamental ILO Conventions –United States Role –Issues

14. Econ 340, Deardorff, Lecture 23: Environment, Labor 14 The Issues Environment –Does trade hurt the environment? –Does international competition weaken environmental laws? Labor Standards –Does trade hurt workers? –Does international competition weaken labor standards? Role of the WTO in both –Do WTO rules Limit countries’ abilities to raise standards? Or lead them to reduce standards (“race to the bottom”)? –Should trade policy be used to improve standards? –Should trade policy be used if countries’ standards or policies differ?

15. Econ 340, Deardorff, Lecture 23: Environment, Labor 15 Outline: Environment, Labor Standards, and Trade The Issues Environment –Examples –Policies –International Problems –Role of the WTO Labor Standards –Fundamental ILO Conventions –United States Role –Issues

16. Econ 340, Deardorff, Lecture 23: Environment, Labor 16 Environment The problem: Externalities –Externality is: Cost or benefit of an activity that is not borne by the actor. –Examples: Pollution, global warming, destruction of species The issues: –How should externalities be dealt with? –Is doing this made harder or easier by trade and trade policy, or by the WTO?

17. Econ 340, Deardorff, Lecture 23: Environment, Labor 17 Outline: Environment, Labor Standards, and Trade The Issues Environment –Examples –Policies –International Problems –Role of the WTO Labor Standards –Fundamental ILO Conventions –United States Role –Issues

18. Econ 340, Deardorff, Lecture 23: Environment, Labor 18 Environment: Examples Pollution along the Mexican border –Caused by production, for export to U.S. –Stimulated by Maquiladoras (Firms given special tariff treatment on processing for U.S. firms) NAFTA U.S. laws struck down by GATT / WTO –Tuna-dolphin case –Shrimp-turtle case Fishing for these… … hurts these US laws banned imports Struck Down by GATT/WTO!

19. Econ 340, Deardorff, Lecture 23: Environment, Labor 19 Outline: Environment, Labor Standards, and Trade The Issues Environment –Examples –Policies –International Problems –Role of the WTO Labor Standards –Fundamental ILO Conventions –United States Role –Issues

20. Econ 340, Deardorff, Lecture 23: Environment, Labor 20 Environment: Policies How to deal with a negative externality –Regulate: Prohibit or limit activity –Tax: Make activity more costly By setting tax equal to cost to others, we “internalize” the externality. –Hybrid: Tradable licenses Number of licenses set by regulation Market determines who uses licenses = “cap and trade”

21. Econ 340, Deardorff, Lecture 23: Environment, Labor 21 Environment: Policies What is the “Optimal” level of a negative externality? –It is not zero! –It is found by equating marginal benefit (of reducing externality) to marginal cost (of reducing externality)

22. Econ 340, Deardorff, Lecture 23: Environment, Labor 22 Environment: Policies What is the “Optimal” level of a negative externality? $ Zero pollution Optimal pollution Marginal benefit … Marginal cost … … of reducing pollution

23. Econ 340, Deardorff, Lecture 23: Environment, Labor 23 Environment: More Examples Air pollution Water pollution Acid rain CO 2 emission (global warming) Destruction of rain forest Destruction of species –Endangered (sea turtles) –Favored (dolphin) Overuse of natural resources (over-fishing)

24. Econ 340, Deardorff, Lecture 23: Environment, Labor 24 Outline: Environment, Labor Standards, and Trade The Issues Environment –Examples –Policies –International Problems –Role of the WTO Labor Standards –Fundamental ILO Conventions –United States Role –Issues

25. Econ 340, Deardorff, Lecture 23: Environment, Labor 25 Environment: International Problems Cross-border Externalities –Contrast with local externalities Local government has ability and incentive to act –Cross-border: No incentive to incur a local cost in order to limit harm to foreigners. –Need international agreement –Example: CFCs (Chloroflorocarbons) that caused the hole in the ozone. Dealt with by Montreal Protocol (1987)

26. Econ 340, Deardorff, Lecture 23: Environment, Labor 26 Environment: International Problems Effects on Competitiveness –Pollution tax raises costs of Exporters Import-competitors –If foreign firms are not taxed, this is viewed as unfair –Countries with weak regulations become “pollution havens” But Jones says there is little evidence that this happens – it’s not worth it –“Race to the bottom”: Countries compete by lowering their environmental standards –Solution (?): International agreement for all to tax equally Called “harmonization”

27. Econ 340, Deardorff, Lecture 23: Environment, Labor 27 Environment: International Problems Differences in Optimal Policy –Optimal policy may depend on a country’s income –Poor countries can’t afford strict regulations –The environment is “income elastic” or a “superior good” – that is, countries demand more of it as their incomes rise. –Thus taxes on local pollution should not be the same

28. Econ 340, Deardorff, Lecture 23: Environment, Labor 28 Environment: International Problems Example: Internal memo by Larry Summers when at World Bank: [He goes on to give several reasons.] “ ‘Dirty’ Industries: Just between you and me, shouldn’t the World Bank be encouraging MORE migration of the dirty industries to LDCs?”

29. Econ 340, Deardorff, Lecture 23: Environment, Labor 29 Outline: Environment, Labor Standards, and Trade The Issues Environment –Examples –Policies –International Problems –Role of the WTO Labor Standards –Fundamental ILO Conventions –United States Role –Issues

30. Econ 340, Deardorff, Lecture 23: Environment, Labor 30 Environment: Role of the WTO Does WTO permit limits on imports for environmental reasons? –Yes, if the imports themselves would do damage inside importing country. –No, for damage done abroad. –Any policy must not discriminate. –May not limit imports based on process by which they were produced.

31. Econ 340, Deardorff, Lecture 23: Environment, Labor 31 Policy Options Use WTO (These options are not in fact permitted, and they are not good ideas) –Treat environmental violations as trade violations Some environmentalists would like this, because the WTO has “teeth” –Define environmentally harmful production of exported goods as unfair, and permit AD & CVD

32. Econ 340, Deardorff, Lecture 23: Environment, Labor 32 Policy Options Carbon Tariff –If some but not all countries use carbon tax or cap-and-trade to raise price of carbon to fight global climate change –Then many would advocate a carbon tariff on exports of goods from non-participating countries –Problem: Benefits (to world) of reducing carbon may be the same But the costs (to the country) are not

33. Econ 340, Deardorff, Lecture 23: Environment, Labor 33 Policy Options Carbon Tariff: Arguments for and against –Krugman is for Failure to use them will cause consumer substitution toward cheaper products made in countries that do not tax or restrict carbon emissions Should be legal under WTO, as “border tax adjustments” used when countries taxation systems differ –China (per Reuters) is against Calls carbon tariffs “protectionist” Predicts use of carbon tariffs would cause trade war Says not legal under WTO

34. Econ 340, Deardorff, Lecture 23: Environment, Labor 34 Outline: Environment, Labor Standards, and Trade The Issues Environment –Examples –Policies –International Problems –Role of the WTO Labor Standards –Fundamental ILO Conventions –United States Role –Issues

35. Econ 340, Deardorff, Lecture 23: Environment, Labor 35 Labor Standards What are they? –Formal list of “conventions” (189) and “recommendations” (203) regarding treatment and conditions of labor, established by The ILO = International Labour Organization These include 8 “Fundamental ILO Conventions” –Numbers in parentheses below: numbers of countries that have ratified the conventions (as of 4/16/2015) out of 185 members

36. Econ 340, Deardorff, Lecture 23: Environment, Labor 36 Labor Standards: Fundamental ILO Conventions 1.Freedom of Association a.Right to Organize (153) b.Right to Collective Bargaining (164) 2.Abolition of Forced Labor a.Forced Labor (177) b.Abolition of Forced Labor (174*)

37. Econ 340, Deardorff, Lecture 23: Environment, Labor 37 Labor Standards: Fundamental ILO Conventions 3.Equality a.Discrimination (172) b.Equal Remuneration (171) 4.Elimination of Child Labor a.Minimum Age (167) b.Worst Forms of Child Labor (179*)

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39. Econ 340, Deardorff, Lecture 23: Environment, Labor 39 Outline: Environment, Labor Standards, and Trade The Issues Environment –Examples –Policies –International Problems –Role of the WTO Labor Standards –Fundamental ILO Conventions –United States Role –Issues

40. Econ 340, Deardorff, Lecture 23: Environment, Labor 40 Labor Standards: Fundamental ILO Conventions *Fundamental Conventions ratified by U.S.: only –Abolition of Forced Labor –Worst Forms of Child Labor

41. Econ 340, Deardorff, Lecture 23: Environment, Labor 41 Labor Standards: Fundamental ILO Conventions United States –Has not ratified many of the conventions –But… in spite of that, US enforces many labor standards through its trade laws

42. Econ 340, Deardorff, Lecture 23: Environment, Labor 42 Labor Standards: Found in U.S. Trade Law Freedom of Association Right to Organize and Bargain Collectively Forced Labor Minimum Age for Employment Acceptable Conditions of Work (not “Fundamental” in ILO) –Minimum wage –Hours of work –Safety and Health –Enforcement

43. Econ 340, Deardorff, Lecture 23: Environment, Labor 43 Outline: Environment, Labor Standards, and Trade The Issues Environment –Examples –Policies –International Problems –Role of the WTO Labor Standards –Fundamental ILO Conventions –United States Role –Issues

44. Econ 340, Deardorff, Lecture 23: Environment, Labor 44 Labor Standards: Issues Should labor standards be promoted? Of course? Yes, but only if it will help the people involved What if the true purpose is to help workers in rich countries?

45. Econ 340, Deardorff, Lecture 23: Environment, Labor 45 Labor Standards: Issues Effect of labor standards: D S L = labor w = wage

46. Econ 340, Deardorff, Lecture 23: Environment, Labor 46 Labor Standards: Issues Effect of labor standards: Minimum wage D S L w Raises wage But lowers employment And creates unemployment

47. Econ 340, Deardorff, Lecture 23: Environment, Labor 47 Labor Standards: Issues Effect of labor standards: Legislating Better conditions D S L w Lowers wage And lowers employment D′D′ Raises costs of employers, thus lowers the benefit of hiring labor. Thus shifts demand curve down

48. Econ 340, Deardorff, Lecture 23: Environment, Labor 48 Labor Standards: Issues Should trade policies be used for labor standards? NO, say –Trade economists –Trade lawyers –Developing countries (even some of their labor unions) –MNEs –Most Republicans

49. Econ 340, Deardorff, Lecture 23: Environment, Labor 49 Labor Standards: Issues Should trade policies be used for labor standards? YES, say –Most Democrats –US unions –Many NGOs (NGO=non-governmental organization)

50. Econ 340, Deardorff, Lecture 23: Environment, Labor 50 Labor Standards: Issues Should trade policies be used for labor standards? PRO (assuming standards themselves are good): –Trade is the only tool we have (ILO is “toothless”) –WTO already does this in TRIPs –It is wrong to benefit from abuse of labor

51. Econ 340, Deardorff, Lecture 23: Environment, Labor 51 Labor Standards: Issues Should trade policies be used for labor standards? CON: –Slippery slope to enforcing harmful labor standards –Trade restrictions make countries poorer, hurting their workers –Trade restrictions cost everybody –Incentive for protectionist claims of low labor standards

52. Econ 340, Deardorff, Lecture 23: Environment, Labor 52 Labor Standards: Issues Are trade policies used to enforce labor standards? No, not in the WTO in the way some would like (by limiting imports from weak- standard places) But US is including them in FTAs.

53. Econ 340, Deardorff, Lecture 23: Environment, Labor 53 Labor Standards: Issues What to do when labor standards are violated Example: Fires in garment factories in Bangladesh and Pakistan (see Narlikar) Stop buying the brands who manufactured there? –No. That just destroys the jobs of poor-country garment workers. Hold local governments responsible? –Yes. They need pressure to enforce labor standards.

54. Econ 340, Deardorff, Lecture 23: Environment, Labor 54 Labor Standards: Issues UM response to Bangladesh fire (from University Record, 4/12/14) : –President Mary Sue Coleman announced Tuesday that U-M will adopt the recommendation of the President's Advisory Committee on Labor Standards and Human Rights that all U-M licensees either sign and abide by a worker safety initiative called the Accord on Fire and Building Safety in Bangladesh or demonstrate that they have an equivalent safety plan. –Accord on Fire and Building Safety in Bangladesh calls for public reporting, independent fire and building safety inspectors at factories, and a commitment to workers in improving factory safety practices.

55. Econ 340, Deardorff, Lecture 23: Environment, Labor 55 Next Time Exam: Thu, Apr 30, 8:00-10:00 AM