Unlike its trade-counterpart, the relationship between international investment law and labor standards has neither resulted in much treaty practice nor attracted extensive scholarly attention. The 2004 US Model bilateral investment treaty (BIT) was among the first to devote a full article to labor standards (Article 13). The revised US Model BIT,1 published in May 2012, updates and expands this provision.

The 2012 Model provides that each party “shall ensure” it does not derogate from, offer to derogate from, or fail effectively to enforce its labor laws to encourage investment (Article 13(2)). The effective enforcement requirement is new compared to the 2004 Model, reflecting that the weakening of labor standards often occurs due to lack of enforcement rather than formal derogations. These obligations align with firmer commitments in recent US free trade agreements (FTAs) and depart from the aspirational language of the 2004 Model and the BITs of other states, which merely require that parties “should not” derogate from existing labor legislation or “shall strive to ensure” not to do so. The obligations in question are not limited to investments from the other party, but equally apply to the weakening of labor standards in favor of investments of third states (Article 2(1)(c)).

The 2012 Model adds (the right to) non-discrimination in respect of employment and occupation to the list of non-derogable labor rights. Compared to the 2004 Model, the list now comprises all four “core labor rights” listed as such in the ILO’s 1998 Declaration, as well the right to acceptable conditions of work, which is otherwise not found in the Declaration. In other respects, the 2012 Model is less demanding than similar clauses found in other states’ BITs, as it effectively prohibits only derogations from domestic labor laws where such derogations are “inconsistent” with non-derogable rights, and not derogations in general. Derogations relating to social security arrangements, easing of termination of employment standards or reduction of labor inspections, for example, would thus not be actionable. Furthermore, a party that currently observes labor standards below the minimum of what is required by the ILO has no express obligation to bring its legislation in conformity with those norms.

As with the 2004 Model, the labor clause of the 2012 Model remains outside the treaty’s dispute settlement provisions. This differs from BITs of other states, which provide for that possibility. It also differs from recent US FTAs, which allow for state-state arbitration of disputes concerning labor provisions. Instead, the labor clause provides a consultations procedure (Article 13(4)) that has become more detailed and extensive than that applicable under the 2004 Model. But state-state arbitrations seldom occur under BITs. Investors, on the other hand, can often pursue claims relating to the (non-) enforcement of labor obligations by relying upon other standards of treatment guaranteed by a BIT, for which arbitration remains available.

At a time when concerns are being voiced about BITs unduly restraining states’ regulatory autonomy, it is surprising that the 2012 Model does not expressly recognize the right of each party to establish its own level of domestic labor standards. This differs from the labor provisions under US FTAs, and even from the 2012 Model’s provision on environment, which expressly recognizes regulatory discretion in environmental matters (Article 12(3)). Arguably, the parties’ policy space in relation to the improvement of labor standards is nonetheless safeguarded through the preambular paragraph expressing the desire to achieve the treaty objectives “in a manner consistent with … the promotion of internationally recognized labor rights,” as well as by the new provision affirming the parties’ respective obligations as ILO members and their commitments under the ILO Declaration on Fundamental Principles and Rights at Work (Article 13(1)).

Regrettably, the 2012 Model does not follow the trend of recent investment treaties that feature provisions providing that contracting parties “should encourage” foreign investors to adhere voluntarily to internationally recognized standards of corporate social responsibility, such as those found in the OECD Guidelines for Multinational Enterprises.

The amendments to the 2012 Model represent a small but welcome step in bridging the divide between investment law and public policy concerns. The scope of applicable labor standards and the level of commitment are more demanding than in its predecessor and most other (model) BITs. But it lacks a clear obligation to adopt and maintain ILO standards as a minimum, and does not allow disputes to be submitted to arbitration. We see no legal argument that explains why there should be a difference between BITs and FTAs on this issue.

The inclusion of labor provisions in model BITs is on the rise. We hope that this trend will receive more attention from scholars and practitioners, to further the interpretation and development of such provisions.

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This article was previously published in the FDI Perspectives series of the Vale Columbia Center on Sustainable International Investment (ISSN 2158-3579) as: “Vid Prislan and Ruben Zandvliet, ‘Labor provisions in bilateral investment treaties: Does the new US Model BIT provide a template for the future?,’ Columbia FDI Perspectives, No. 92, April 1, 2013.  

International Investment Agreements (IIA) play an important role in the protection and liberalization of global capital flows. Attracting foreign direct investment (FDI) is often seen as a prerequisite for the economic growth of developing countries. It strengthens a state’s balance of payments and is presumed to have positive spill-over effects on local economies. But the liberalization and protection of FDI may also carry risks. The best-known one is that IIAs could induce a ‘race to the bottom’ in domestic labour standards. Many empirical studies however conclude that such a race is non-existent. Therefore there would be no need to include minimum labour standards in IIAs. In my view, the race to the bottom paradigm should not be the main evaluative criterion for this normative debate. Instead, the debate should focus on two different problems.

First, even if there is no macro trend that points to a race to the bottom, there are concrete cases in which states lower domestic labour standards. Recorded instances range from the ‘Hobbit labour laws’ in New Zealand, where film industry workers were reclassified from employees to ‘independent contractors’ in order to deny them union contracts, to the prohibition of trade unions in Bangladeshi export processing zones, which was demanded by Japan and South Korea on behalf of their own investors. Such derogations artificially modify a state’s competitive advantage, and puts undue pressure on other states to also derogate in order to retain investments within their jurisdiction, or become more attractive to new investors. This may not escalate into a ‘race’ but still leads to a net deterioration of labour standards that could, from a normative perspective, be qualified as unfair and warrant the inclusion of minimum norms in IIAs below which states are not allowed to compete for FDI.

The second potential justification for the inclusion of labour standards in IIAs can be sought in concerns about the potentially restraining effects of IIAs on host states’ ‘policy space’. The threat of arbitration might make host states hesitant to implement measures in the pursuit of social policy objectives, such as the improvement of labour standards, out of fear that by doing so it might violate the standards of treatment prescribed by an investment agreement. From an empirical point of view, it is difficult to assess the validity of these claims, as they require counter-factual evidence. It may well be, as some have argued, that there is nothing in the nature of IIAs that would confirm the regulatory chill hypothesis. But the latter should not be dismissed too quickly, as threats are cheap and investors can make claims even when these may have little chance of success. Foreign investors have already demonstrated their readiness to use IIAs as a way to challenge undesirable legislative and administrative measures adopted by host states in pursuance of public policy objectives, such as those aimed at the promotion of public health or the protection of the environment. As long as IIAs are perceived as being one-sidedly focused on the rights of foreign investors without balancing these rights against the rights of host states to regulate social issues, the inclusion of labour standards in IIAs could shield domestic labour regulations from investor claims.

Each of these two concerns could thus legitimize international policy coordination in the form of including labour provisions in IIAs. Only when IIAs are designed in a way to not cause regulatory derogations or chill effects do they truly contribute to the development of their signature states. The race to the bottom paradigm is, from a normative point of view, nothing more than a distraction.

This blog post was previously published at http://www.leidenlawblog.nl, and is a summary of a longer paper that I co-authored with Vid Prislan, who is also a PhD Candidate at the Grotius Centre for International Legal Studies. It is freely available on SSRN.

With the collapse of the WTO’s Doha round of trade negotiations, the EU and the US continue to expand their network of free trade agreements (FTAs). The most contentious of all has undoubtedly been the US-Colombia FTA, which entered into force last year. But the next main project in the expansion of FTAs is the proposed agreement between the European Union and the United States, the two biggest trading blocks in the world. In his State of the Union speech, Barack Obama said that:

To boost American exports, support American jobs, and level the playing field in the growing markets of Asia, we intend to complete negotiations on a Trans-Pacific Partnership. And tonight, I’m announcing that we will launch talks on a comprehensive Transatlantic Trade and Investment Partnership with the European Union, because trade that is fair and free across the Atlantic supports millions of good-paying American jobs.

The AFL-CIO is skeptical, but not completely dismissive, towards the Trans-Pacific Partnership Agreement. The list of negotiating countries includes low-wage economies like Vietnam, which undoubtedly feeds the fear that American jobs will be lost because of the trade deal. Nowhere on its website does the AFL-CIO mention the proposal to negotiate a trade deal with the EU. My assumption is that trade unions do not perceive a trade deal between two high-wage economies as a risk. As an addition assurance, an interim report that was published in June 2012 stressed that any agreement between the EU and US will include a labour clause. So what’s to worry about?

In their paper entitled “Regional Trade Agreements and domestic labour market regulation,” Christian Häberli, Marion Jansen and José-Antonio Monteiro reach the following conclusion:

The race-to-the-bottom argument is often used in conjunction with the phenomenon of North-South trade, the idea being that trade with countries having lower labour standards puts the high labour standard country under pressure to reduce its own standards.

The findings reported [...] below do not support the idea that weakening of labour market regulations in industrialized countries is driven by trade with low income countries. On the contrary: the only type of [Free Trade Agreement] for which we consistently find highly significant negative coefficients are [Free Trade Agreements] among high income countries. According to the findings reported below, it is competition among countries of a similar level of income that appears to put the highest pressure on labour market regulation in the rich world.

Apparently, American and European trade unions would be well advised to pay more attention to the US-EU trade deal. This could also open up a discussion about the stifling effect of the core labour standards paradigm in FTAs. It is nice that under the FTA, the US and EU would likely be prohibited to employ child labour, but that does not touch upon the ‘core’ of possible implications to US and EU labour markets. Any credible FTA reference to labour standards would need to be based on an analysis of potential effects of the FTA on domestic labour market regulation in the state parties, and not on four issues that happened to be the only ones that the ILO member states could reach consensus on.

 

Uruguay’s ratification of the additional protocol to the International Covenant on Economic, Social and Cultural Rights marked an important milestone in the protection of ESC rights in international law.  As ten states have now deposited their ratification instruments, the protocol will enter into force on May 5 2013, providing for an individual complaint procedure for the violation of ESC rights and the possibility of inter-state complaints. (Both are actually called ‘communications’ but there’s no need to spoil the excitement with euphemistic UN parlance).

Although from a normative point of view all human rights are universal, indivisible and of equal value, ESC rights impose a different kind of obligations upon states than their civil and political rights counterpart. Under article 2 of the ICESCR states are required:

“…to take steps, individually and through international assistance and co-operation, especially economic and technical, to the maximum of its available resources, with a view to achieving progressively the full realization of the rights recognized in the present Covenant by all appropriate means, including particularly the adoption of legislative measures.”

This notion of ‘progressive development’ does not feature in other human rights treaties. Under the International Covenant on Civil and Political Rights, for example, each state party:

” … undertakes to respect and to ensure to all individuals within its territory and subject to its jurisdiction the rights recognized in the present Covenant.”

As a result, the ICESCR is often regarded as an instrument that contains obligations of conduct rather than result, which makes it impossible to apply ESC rights in individual cases. In other words: ESC rights are not justiciable. This position can no longer be upheld. The (constitutional) courts of an increasing number of states have applied ESC rights in individual cases. (One of the most famous is the South-Afrian Grootboom case). Also the Committee on Economic, Social and Cultural Rights, which supervises compliance with the ICESCR has adopted the notion of ‘core’ obligations through its General Comments. The Committee states that:

On the basis of the extensive experience gained by the Committee, as well as by the body that preceded it, over a period of more than a decade of examining States parties’ reports the Committee is of the view that a minimum core obligation to ensure the satisfaction of, at the very least, minimum essential levels of each of the rights is incumbent upon every State party.

The entry into force of the additional protocol provides an important next step in the effective enforcement of ESC rights. Admittedly, there is still much to do, both regarding practical and political aspects as well as the (scholarly) debate on ESC rights. Only individuals that fall under the jurisdiction of one of the ten state parties to the protocol can submit complaints to the Committee. If the Committee finds in favor of the complainant, it can only issue a ‘view’ which the state party has to give ‘due consideration’ and obliges it to submit a written response. This contrasts with the judgments of the European Court of Human Rights which are legally binding, but is similar to the individual complaints procedure of the Human Rights Committee. Thus the debate on the justiciability of ESC rights should no longer focus on the question if it is at all possible to adjudicate such issues in international law (it is!) and whether there is by definition a difference in procedure with civil and political rights (there isn’t). Rather the debate should be about the quasi-judicial versus the judicial model of human rights enforcement and universal versus regional approaches. One starting point would be to reconsider the enforcement mechanisms of the European Social Charter.

The European Union issued a statement three days ago about the horrifying factory fires in Bangladesh. It was signed by Catherine Ashton, the High Representative for Foreign Affairs, and Karel de Gucht, the EU’s Trade Commissioner. The statement emphasized that the EU is Bangladesh’s biggest trading partner, and that the country benefits from the EU’s Everything but Arms scheme, which means that it has to pay little or no important tariffs at the European border. This preferential scheme is part of the EU’s generalized system of preferences (GSP), and is thus conditioned upon compliance with ILO core labour standards. If a beneficiary country commits serious and systematic violation of principles laid down in the eight conventions on freedom of association and the right to collective bargaining, the elimination of forced and compulsory labor, the abolition of child labor, and and the elimination of discrimination in the workplace, it may lose its beneficiary status.

After the adoption of the 1998 Declaration on Fundamental Principles and Rights at Work, in which the notion of core labour standards was first used, Philip Alston published several articles criticizing the ‘shrinking of the international labour code.’ The 1998 Declaration legitimizes a focus on a narrower range of rights than was previously acceptable. Admittedly, part of Alston’s critique does not apply to the EU’s GSP as the EU demands compliance with the eight core conventions (which are binding treaties) and is therefore not merely promotional in nature. But the problems of prioritization do become apparent in discrepancy between the EU GSP scheme and the way de Gucht responds to the occupational safety issues in Bangladesh. The press release states that:

” … the European Union calls upon the Bangladeshi authorities to act immediately to ensure that factories comply with international labour standards including International Labour Organisation conventions. The EU is willing and ready to assist the Bangladeshi authorities in any way it can to meet international standards.”

Ironically, Bangladesh does not have an obligation to comply with the most important ILO standards on this issue, for the simple reason that they have not ratified the relevant conventions (nos. 155, 161 and 187). The EU can do three things. First, it may assist Bangladesh in improving safety in factories without pushing for the adoption of these ILO conventions. Second, the EU may use its trade leverage to induce improvement of safety standards by customizing the GSP conditionality requirements and requiring Bangladesh to ratify the relevant conventions. This creates legally binding obligations for the country, and would enable the ILO supervisory bodies to continuously monitor compliance. Third, it is possible to combine assistance with a more legalistic approach.

The third approach would arguably be desirable. But the paradigm of core labour standards (that was not originally meant for usage in trade instruments) has silenced the debate on which labour standards should be included in preferential trade agreements or the generalized system of preferences. I see no reason why the EU should take a legalistic approach on non-discrimination but not on occupational health and safety, especially when the latter provides such an enormous problem in countries like Bangladesh.

We couldn’t let today pass without wishing our old friend, the Universal Declaration of Human Rights, a happy 64th birthday!

And to all of our friends, colleagues and comrades working to make the world a fairer, safer and more just place – a happy and productive World Human Rights Day to you.

There is still much – so much – to do.

(Sorry we’ve been quiet over here.  We’ll be back later this week with more from the world of Global Work!)

One of the most insidious aspects of the global CSR machine, ‘social standards certification,’ adds a veneer of legitimacy to a procurement system that, frankly, doesn’t even believe its own spin. It is hard to imagine a more gross, tragic, spectacular and senseless failure of this system than the recent garment factory fire in Karachi, Pakistan. On 12 September 2012 at least 259 people (over 300, according to local trade union estimates) lost their lives in one of the worst industrial accidents of our time.

And here’s the thing: this factory was certified according to the SA8000 standard by for-profit Italian auditing firm RINA just one month beforehand. According to the auditing report:

“… Fire extinguisher and fire safety buckets were available in sufficient quantity… Fire extinguishers were visible and accessible to all workers. Access to fire extinguishers and passages leading to exits was maintained free from any kind of obstruction. Primary exits and emergency exits are kept unlocked while employees are inside facility.. “

Yet, according to the Clean Clothes Campaign, “The factory was not legally registered with the Pakistan government and had failed to provide the majority of workers with employment contracts. The high death toll resulted from inadequate fire exits, blocked staircases and barred windows, preventing many workers from escaping the blaze.”

SA8000 is a ‘social accountability’ standard developed by New York-based certification firm Social Accountability International (SAI). It sets benchmarks in relation to “child labor, forced and compulsory labor, health and safety, freedom of association and right to collective bargaining, discrimination, disciplinary practices, working hours, remuneration.” SAI, a non-profit (but with significant industry funding) whose stated mission is “to advance the human rights of workers around the world,” have instigated an internal ‘investigation‘ into the incident. As far as we can gather, there are no plans to make the results of this investigation public.

So how did a factory, which was unregistered, which did not have proper hiring practices, and which violated OH&S standards so flagrantly get certified?

There are many problems with this system and here’s the first: it is built around notified inspections – Auditor: “We’ll come to the factory on Wednesday at 9am and we will be checking to make your fire exists are not obscured by piles of clothes.” Factory manager: *better move those piles of clothes* – and interviewing people about work conditions at their place of work where, let’s face it, people are unlikely to raise serious complaints for fear of losing their jobs.

Just make sure the place looks ok and folks keep quiet while the inspector’s hanging around, and you’ll get the certificate. Not every factory treats certification like this, but the point is that it’s a very easy system to take advantage of. Yet it’s held out as so much more. And because of that, it’s a morally and logically corrupt model, which in this context, as the Karachi fire so tragically demonstrates, it’s downright dangerous.

The factory was owned and operated by local manufacturing company Ali Enterprises. A chilling detail from the New York Times report on the fire: “Instead of letting the workers escape.., plant managers forced them to stay in order to save the company’s stock: piles of stonewashed jeans, destined for Europe. “

The jeans were being produced for export to German budget clothing retailer Kik, German newspaper Der Spiegel reported this week, to be sold in Germany for €15.99. Yet again, we see the high price of cheap clothing.

Here’s another problem with the certification system: it creates an additional layer of supply chain responsibility dissipation – upper level supply chain actors rely on the fact that supplier factories have been ‘certified’ to an official sounding standard to argue that their legal responsibility stops there. Buyer company *waving certification in the air*: “Not our fault, we had these other guys go in and write us this fancy note that says everything was in top shape!”

The garment supply chain is very different from the electronics supply chain I wrote about last week. For one thing, we consumers have power in this sector, through being informed (reading labels about where products are sourced, for example), through boycotts & substitutions (substituting Kik’s products with second-hand jeans or those of brands with a proven commitment to ethical sourcing), and also through exercising common sense. If you see never-worn jeans selling for less than €20 (or even €50!), that should set off alarm bells that should, at the very least, prompt you to make supply chain inquiries.

We’ll follow the investigations into what happened in Karachi and keep you updated as more details emerge. But what might we learn from it at this stage?

We must be skeptical about private certifications. This is particularly so where ‘audits’ are conducted on a ‘prior warning’ basis by for-profit firms operating under standards set, and accreditation given, by private standards bodies, no matter how ‘human rights friendly’ they appear. Certifications obtained through such a structure must not be used as get out of jail free card for buyer companies whose supply chains are implicated in human rights violations.

Above all, that we need to demand transparency and accountability in the social certification industry. What is the relationship among Western companies (like Kik), overseas suppliers (like Ali Enterprises), auditors (like RINA) and standards developers (like SAI)? Who pays for their services? What are their terms of payment? What is involved in the accreditation process? How are site audits conducted? By whom are they conducted?

Can we really allow companies to rely on private, for-profit actors to independently and accurately report on local work conditions?

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