D+C Newsletter

Dear visitors,

do you know our newsletter? It’ll keep you briefed on what we publish. Please register, and you will get it every month.

Thanks and best wishes,
the editorial team


No “race to the bottom”

Though various lobby groups influence the making of trade policy in the EU and the US, the dominant trade powers do not primarily protect the interests of the biggest Western corporations. On the contrary, globalisation also offers opportunities to companies from emerging markets. Governments must provide an appropriate legal environment, and pressure from labour unions and civil society can promote that aim. [ Interview with Matthias Busse ]

Are multinational firms the driving force behind globalisation?
They are one, but not the only driving force. They transfer capital overseas, and they step up trade. A large part of global trade actually takes place within corporations, with one division supplying goods or services to another. But the political will behind globalisation also matters, and so does technological change – consider the use of containers for sea cargo in the 1950s or the global spread of the Internet in recent years.

Globalisation skeptics would object that it is corporations that drive technological change, and that governments all too often only act on behalf of corporate interests.

What came first – the chicken or the egg? Relatively free global trade is certainly in the interest of multinationals. But it also provides great benefits to everyone else involved, not just a handful of large enterprises. Globalisation is a multi-faceted process that takes place at various levels, so it is hard to distinguish causes and effects. Containers and communications technology have reduced the costs of trade, thereby facilitating it – whether governments wanted that to happen or not. Multinational business did not reach a significant level until the mid and late 1980s. Up to then, cross-border investments were only made in a few sectors, mainly commodities.

So multinationals’ challenged reputation stems from the relatively brutal practices typical of extractive industries?

That is hard to say. There is, no doubt, a relatively clear trend towards abuses in the resources sector. One reason is that companies in this sector cannot simply go shopping among countries for the business partner of their choice. Only four or five countries have significant copper reserves. If you want to mine for copper, you have to deal with them, according to their rules. In contrast, if you want to open a sneaker factory, you have a much wider choice. Moreover, the higher developed a product is, the more skilled staff will matter. This is especially true of the service sector, where a lot has happened in the past few years. Disgruntled employees are a nightmare for banks and insurance firms. For a copper company, on the other hand, it hardly matters whether miners are happy or not.

So the image of multinationals is sector-specific?

There is a second factor. Western corporations used to misbehave more than they do today. Campaigns conducted by governments as well as by civil-society organisations have made them become more careful. I am not saying that everything is okay. But brand-name companies like Nike and Adidas have a high visibility, and they are keen on making sure that labour conditions at their facilities are basically acceptable. They have an image to protect. Of course, they can always simply pass on dirty work to suppliers. But there is clearly an international trend towards enforcing the International Labour Organisation’s (ILO) core labour standards, such as the right to form a labour union, the ban on child labour and compulsive labour, and any form of discrimination. Moreover, companies that serve end-consumers are increasingly under pressure to track their value chains all the way downstream.

And yet, the textile industry quickly relocates to even cheaper countries once labour standards – and hence labour costs – start to rise at production sites.

And that is perfectly compatible with the idea of a sensible global division of labour. If labour costs increase as a country develops, that country loses comparative advantages for producing labour-intensive goods. Therefore, it makes sense to move to places where wages are lower. That does not have to detrimentally affect countries that are progressing, however. Often, they make technological leaps that enable them to manufacture goods of higher quality with greater productivity and better income opportunities.

But are countries not pitted against one another?

At least not in the sense of any global race to the bottom. Empirically, no such race can be demonstrated.

Nonetheless, we keep hearing that free trade threatens jobs in the textile sectors of Mexico and Bangladesh because labour is even cheaper in China. And labour unions in rich countries complain about the sweatshop conditions people have to work under in the special economic zones of poor countries. Aren’t we looking at wicked capitalist exploitation?

That depends on your perspective. If you are looking through the glasses of German metalworkers’ union IG-Metall, you will find normal six weeks of vacation, a 35-hour working week, relatively good pay and great job security; and anything else will seem a disaster. But for most people in the countries we are talking about, hard work is better than none at all. That is certainly not true in every case, as some businesses are indeed so horrible they should be closed immediately. But in the countries you mentioned, Mexico and Bangladesh, industries have developed positively in a number of ways over the past few years. For instance, Mexican exports to the USA are booming. Moreover, multinational companies are not the decisive factor to determine whether developmental success is sustained. National governments play a role, and so do local authorities. They have to ensure that capacities are built, and that the overall environment is conducive to long-term achievements.

You are probably thinking of education and infrastructure.

Yes, but also of antitrust laws, property rights – the entire set of state activities. If the legal framework does not make sense, the poor will never benefit from development.

Which social services must the state offer – pensions for the elderly along with unemployed benefits and health care as Bismarck introduced in 19th century Germany?

Every country makes social progress in its own way. They may go in our direction fast, or in a completely different one. The ILO is right to emphasise the core labour standards, which I mentioned before, without specifying any details for national social policy. Countries should really be allowed to choose their own path in line with these standards, as long as they do not hamper the development of other countries.

While there is compulsory labour in China, there are no free trade unions. Isn’t the People’s Republic unfair competition for other countries?

That is not easy to tell. Some studies show that China does indeed hamper exports from other countries at a similar stage of development. You have already mentioned the example of the textile industry. But are comparative disadvantages in Sri Lanka or Bangladesh really the result of forced labour in China? Or are they the result of the sheer mass of inexpensive, unskilled workers there? The World Trade Organisation (WTO) allows for sanctions to be imposed in cases of compulsory labour. But in practice, proving such abuse is very difficult. Moreover, it cannot be empirically demonstrated that competition with China is only making things worse in Sri Lanka and Bangladesh. Some businesses are moving up into production lines of higher quality, and thus continuing their positive development.

We also know structural problems in rich countries. Not much is left of the textile industry in Germany’s Southwest, and Europe’s once proud coal and steel regions have high unemployment rates today. Are we doing something wrong?

Yes, we are, if we do not manage to adapt to the structural changes that globalisation imposes upon us. In such regions, we should be able to develop sectors where globalisation still offers opportunities. Economic and labour-market policy should reallocate resources made redundant in industrial sectors that are no longer competitive. Doing so should facilitate new growth in other sectors. The less we manage to achieve that, the less prosperity we will enjoy. If laid-off textile workers, for instance, remain unemployed rather than find jobs in a healthy engineering sector, society in general will be worse off. The better we adapt to change and the more efficiently we reallocate resources, the more we will benefit from international trade.

Globalisation has left some regions behind altogether. I am thinking of northern England, the former “Motor City” of Detroit or perhaps the Saar region in western Germany.

There are two options. Either we implement an intelligent economic and financial policy to create a healthy business climate for new growth, or we leave entire regions behind. Germany typically takes the former approach – with mixed results. Americans have a different mentality; they are more likely to give up entire regions. But, once again, what matters is education, infrastructure, sensible regulations et cetera.

You say there is no race to the bottom in terms of social standards, but what about environmental protection?

In general, there is no race to the bottom. Admittedly, there are some rotten apples in “dirty” industries like paper, copper or certain chemical production lines. In areas like these, it has happened that problematic activities were outsourced to countries with less stringent environmental laws. Overall, however, the standards of the advanced nations are increasingly being enforced worldwide. After all, it does not really cost that much to comply with these rules – and certainly not enough to compensate for other relevant factors when choosing a site for a production facility. Those who invest a lot of capital in chemicals plants, steel mills or aluminium smelters will want to be sure that those investments pay over the long term. Trust-inspiring business environments matter much more than an opportunity to get around one or another environmental regulation.

In India, it is said that subsidiaries of German chemicals corporations uphold the same environmental standards as they do at home, but that they are outsourcing dangerous activities to suppliers.

That would be in line with the strategy of many multinationals. They behave themselves and boast of what they are doing in their reports, but they also outsource less pleasant tasks. Whenever that happens, it is important to take a close look. But doing so is not really the job of the company itself. National governments have to make sure that standards and regulations are met. And international campaigns by NGOs can certainly help.

Aren’t domestic civil society and labour unions more important?

Wherever they can play a major role, certainly. Unfortunately, the freedoms of speech and association are not respected everywhere. And in some places, it is dangerous to join trade unions that are legally permitted. In Colombia, for instance, dozens of union leaders die of unnatural causes every year.

Who makes sure that companies fulfil their pledges of corporate social responsibility?

I do not trust fancy brochures in which companies congratulate themselves. Fortunately, certification can be provided by external auditors. To be sure, there are not nearly enough of them for all of the companies with such reports. And when auditors announce that they will be coming by to inspect, you can easily imagine what happens at the plant beforehand. So there is a lot of room for improvement. But it is certainly a good thing that consumers are increasingly showing an interest in these issues.

You have mentioned several times that the state has to provide a sound legal environment. Are you implying that the US and the EU are right to emphasise the so-called Singapore Issues in trade talks? Governments from newly industrialising and developing countries generally do not want to negotiate international rules for competition, state tenders, investor rights and so on. But the US and the EU insist on doing so.

There are many ways of looking at the Singapore Issues. This is not an homogenous agenda that could be judged as entirely positive or negative. For instance, when it comes to competition and investor protection, it is quite hard to tell who would benefit. Multinational giants are not especially interested in regulating these issues at the international level. Indeed, in small markets, which they already dominate, competition rules would only bother them. In big markets, by contrast, they want to know what the rules are. At the same time, giants like Shell and Exxon know how to make themselves heard if need be. The US and the EU are calling for international rules of competition mainly to protect the interests of small and midsize enterprises that, on their own, are not strong enough to protect their interests – including legal ones – in foreign countries.

You describe conflicts of interests inside rich countries. Why then do governments of newly industrialising and developing countries oppose talks on the Singapore Issues?

One reason is certainly the bad experience they had with the Treaty on Trade-Related Aspects of Intellectual Property Rights (TRIPS) when the WTO was founded. Back then, a lot of them agreed to rules that they did not quite understand; and they had to live with the consequences later. They don’t want to go through something like that again. For instance, inexpensive copies of patented pharmaceuticals from rich nations could suddenly no longer be manufactured.

And distrust only grew because the spirit of the original treaty, which allowed patents to be breached for the sake of public health, was only implemented after re-stating it at Doha in 2001?

Indeed, and that is why so many worry about things turning out that way again. On the other hand, it is really hard to tell objectively just how internationally binding rules concerning competition or investor rights would impact on any given country. You can’t tell what the effects will be in detail. However, it is obvious that countries that want to catch up economically need a certain amount of leeway to draft rules that promote their development. At the same time, it also obvious that a number of poor countries, especially in Africa, will not attract any investors unless they enforce some credible set of rules. As long as governance does not improve, international firms will simply avoid those countries.

The US and the EU were not able to keep the Singapore Issues on the WTO agenda, with the exception of trade facilitation. What do you think of them negotiating these matters in bilateral talks?

That is quite unfortunate. In bilateral negotiations, the US and the EU are in a much stronger position than in the multilateral WTO setting. As a result, lobby groups with much clout in the US or the EU stand a better chance of seeing their interests prevail in bilateral talks.

Nonetheless, you would not say that diplomats from the EU or the US are acting on behalf of multinational corporations in these negotiations.

That is another confusingly complex topic. In EU policymaking, it is not always clear at the outset which company, or lobby group, will get its way. There are no hidden powers that make the final decisions. On the other hand, some lobby groups are obviously very strong – just consider agriculture, for example. In the EU, moreover, special interests sometimes manage to hijack policymaking at the very last minute, even when things start out quite reasonably. In the controversial Economic Partnership Agreements that the EU wants to negotiate with ACP countries (Africa, Caribbean, and Pacific), the EU has pursued a very sensible approach to public procurement. The EU has not demanded market access for EU companies, but rather public tenders in the various regions, such as West Africa, for instance. That is a good idea – if it is consistently implemented.

Do the EU’s partners in these talks understand such issues well enough?

In some cases, I’m afraid not. Trade policy is truly very complex.

Let me summarise at the risk of oversimplification: the EU and the US proved they were not trustworthy partners in TRIPS, and now they will not regain trust easily.

That would be taking things too far. To be sure, TRIPS opened up a can of worms – or maybe I should say can of sugar or bananas. Some EU rules are so bizarre that only lobbyists understand their purpose. But other things work well. The EU’s “Everything but Arms Initiative” provided the poorest countries with market access in an almost exemplary fashion. That step really hurt EU lobbies. Let me say that the game has many layers, and some things work out better than others.

A simplistic claim of some globalisation skeptics is that free trade only serves the interests of multinationals from rich countries. However, a growing number of companies from emerging markets are now doing business globally – and quite successfully so. Samsung, Cemex, Acer and Tata come to mind.

Yes, and they are often less careful than multinational giants from Western Europe, North America or Japan. Research has shown that US-based corporations handle labour relations differently than their Chinese or Korean competitors, who tend to have more skeletons in the closet than Western firms do. It would be very interesting to take a close look at what Chinese businesses are doing in Africa in this context. So far, very little research has been done. However, I do not believe that our standards will drop just because corporations from developing and newly industrialising countries start taking over subsidiaries in our countries.

But when multinationals from emerging markets go to poor countries, progress of local labour and environment standards might slow down. Why should Indian or Chinese managers introduce rules offshore that they do not have to honour at home?

Companies from emerging markets do not face the same public pressures as those from Western Europe or North America. And their mentality is different. They think less in terms of labour rights, human rights and environmental standards. To a certain extent, it is perfectly understandable that companies in China, which is still a very poor country, want to grow first and create prosperity, before dealing with the environment and the redistribution of wealth.

So why is there all of this public pressure on western multinationals?

If you sell products to consumers, you need a good public reputation. You must make sure that your investments in establishing your brand are not wasted. In contrast, the image that consumers have of midstream products in the steel industry’s value chain is not as important. But if you are selling T-shirts with a swoosh or three stripes on them, you must be careful. It may seem ironic, but brands actually protect factory workers.

Questions by Hans Dembowski.