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.

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.

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:

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.

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.

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!)

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?

First a quick note on the opposition. The Commission consists of 13 conservatives, 8 liberals and 6 social-democrats. But support for Reding is not divided along party lines. She herself is affiliated with the conservative faction, while Lady Ashton (who opposes) is a member of the Labour Party. On the other side, the men who are in favour include some high-profile Commissioners with economic portfolios, including Olli Rehn and Michel Barnier (both conservatives).

What strikes me most is the flip-flopping of Dutch commissioner Neelie Kroes. In 2010 she was awarded the Aletta Jacobs Prize, the most important award in the Netherlands for female emancipation. The jury report stated: “She is a firm proponent of extra chances for women in the job market. Quota for women are no luxury but a necessary tool in achieving a better male-female ratio in the workplace.” Kroes supported quota for women in cabinet positions, and has expressed that she is comfortable with the fact that one of the reasons that she is a Commissioner is that Barroso pushed EU member states to propose female candidates. Romnesia appears to be contagious though, as Kroes suffers a reversed version, making her more conservative in her policies than in public speech.

Currently 13.7% of board members at EU based corporations are women. The draft directive states that: “Progress in the share of women on company boards is very slow, with an average annual increase of just 0.6 percentage points over the past years.” Without legislative action, it would take until 2056 to reach the 40% target. So far, 11 EU member states have adopted some form of legislation: Belgium, France, Italy, the Netherlands, Spain, Portugal, Denmark, Finland, Greece, Austria and Slovenia.

There are three basic tools used to achieve a change in the composition of boards. First, governments may express their support for increasing the number of women on corporate boards. This has been the traditional approach with regard to all policy issues that touch upon social or environmental aspects of corporate behavior. The government makes a normative statement about the desirability of supply chain transparency, cradle-to-cradle recycling or more female board members, but refuses to use its legal toolbox. The second option, representing the other end of the spectrum, is a legal requirement accompanied by sanctions. Thirdly, it is possible to introduce “comply-or-explain” legislation. In recent years this has become a popular way to influence corporate governance in-between mere aspirational statements and hard-law.

Reding now proposes option 2. Every large company (i.e. >250 employees or >50 million euro revenue) that doesn’t have 40% women on its board faces administrative fines or will be barred from state aid and contracts. (In fact, the proposal refers to “under-represented sex,” hence a company with less than 40% men on its board will face the same penalties.)

The opposition to her proposal is far from univocal. The weakest argument, in my eyes, against European legislation is that it should be an issue for the member states to regulate. Corporations are not constrained by borders. There are many examples of corporate nationality shopping (or “nationality management” as they like to call it) to be better protected when investing abroad or to avoid taxes. Hence corporate governance should be a supranational issue, including all aspects of it. That leaves the laissez-faire and the tokenism-argument. Companies themselves, as well as liberal politicians, would argue that no government should interfere with the composition of corporate boards. It may force them to appoint people not on the basis of qualifications, which may harm the company’s performance.

Reding herself also uses economic arguments to justify board quotas. This is unfortunate from my perspective and has the effect of weakening her argument. If you have read my article about the Economist and equality last week, you know that I’m not a major fan of economic justifications for social justice problems. In a recent speech she gave three main reasons for legislative action: (1) the business case, (2) the macro-economic case, and (3) the internal market distortion case. If we would assess Reding’s proposal on the basis of economic arguments, we should first assess what the benchmarks are. Reding enthusiastically refers to research by McKinsey, the Boston Consulting Group and Credit Suisse, who all argue that more women on corporate boards is beneficial for companies and the economy as a whole. But what if other studies qualify or reject these results? What is left of Reding’s argumentation if a study finds that there is a negative net-effect on company performance? Sorry women, never mind, we don’t need you anymore!! The economic narrative also strengthens the opposition. If more women on boards is good for the company, it will happen automatically and legislation is not necessary. Laissez-faire and everything will be fine.

Then the tokenism-argument. The reason that most female EU Commissioner’s oppose the proposal is that it wouldn’t take women seriously. When a company has to reach its quota, and you as a woman are appointed to the board, you are not selected for your qualities but because you are a woman. This arguments resonates in particular with Catherine Ashton, who comes from a modest background and climbed up the ladder on her own.

The reality is, however, that the glass ceiling still exists despite the fact that women are increasingly better qualified than men. Admittedly, women are more inclined to work part-time than their male colleagues, which isn’t helpful if one aspires to become a CEO. But this doesn’t account for the major difference between female university graduates (>60%) and corporate board members (13,7%) or CEOs (2,5%) in Europe.

Without some form of outside pressure, it is unlikely that corporations will pick up the gauntlet. I do not fully support Reding’s economic rationale for legislative action, nor am I convinced that a hard-law requirement is a better solution than a comply-or-explain model. But if the European Commission refuses to take any steps, equality in economic decision-making will not be reached within decades.

Conference on Labor and Development
An Assessment of the World Bank’s World Development Report 2013

This two-day conference will focus on major labor issues in developing countries, contrasting the official approach of the World Bank and member governments with those of independent academic and policy experts. The World Bank team will make an official presentation and participate in the discussion. The Center on Global Economic Governance, in collaboration with Cornell University, will bring together independent academic and policy experts to discuss the Report and offer alternative views. Panelists include Nobel laureates Edmund Phelps and Joseph Stiglitz, distinguished academics, policymakers, and practitioners.

Find the full Conference Program here.

Thursday, October 25 – Friday, October 26, 2012

Columbia University, International Affairs Building, Room 1501

Registration required. To register for this event: Session I, Session II, Session III

 Organized in collaboration with Cornell University and the World Bank.

So the Economist says they’re worried about inequality, but let’s dig a little deeper to find what they’re really worried about. First let’s consider the question of why the Economist is worried. The magazine argues that “some measure of inequality is good for an economy.  It sharpens the incentives to work hard and take risks; it rewards the talented innovators who drive economic progress.” But the root of the Economist’s concern soon becomes clear: “inequality has reached a stage where it can be inefficient and bad for growth.”

Oh, so now you’re worried about inequality, Mr Economist? Now that there’s an impact on your precious ‘growth’? My main problem with the Economist’s analysis is exactly this paradigm; the idea that we should only do something about inequality when it hurts economic growth. This paradigm sees equality as a tool to be used in the service of growth, rather than growth as a tool to be used in the service of a more just, fair and equitable society.

Is there inherent value in promoting equality, regardless of its effect on growth? A 2009 study by Todd Landman and Marco Larizza found a strong correlation between inequality and human rights abuses. Among their significant findings was this: “Income inequality and land inequality have negative and significant effects on human rights protection. Of the two, income inequality has a stronger correlation.” Isn’t decreasing economic inequality a worthy goal on this basis alone?

Further, Richard Wilkinson has demonstrated the link between inequality of income and inequality of life outcomes: specifically in relation to health, lifespan, crime, obesity, and teen pregnancy. Obesity in itself might not constitute a violation of human rights, but statistics show that it is a social problem faced disproportionately by the poor, especially in unequal societies. Isn’t this a problem that society should do something about, regardless of inequality’s effect on ‘growth’?

How we frame economic and social problems has an effect on how we address them. The Economist’s narrow focus on economic growth has an effect on the policy prescriptions they endorse. The basic neo-liberal argument is that a country should focus on equality of opportunity instead of on opportunity of outcome. The recipe to strengthen the former is comfortable for economists: investing in education, breaking-up monopolies and reforming taxes. At the service of growth, the Economist advocates closing the gap between tax rates and on capital and labour, which would result in higher average tax rates for richer people. But then they go further than that: “Getting rid of distortions, such as labour laws in Europe [would] make a huge difference.”

The growth at all costs mantra is thus set in stark relief. Equality is not actually the concern. Reducing labour protections for the vulnerable – removing equalizing measures – is seen as the solution to the problem of inequality. Make sense? No? I didn’t think so. Unfortunately the Economist does not substantiate this point and does not offer any specifics of which labour laws should be abolished.

Finally, growth and the vehicle through which it occurs are important in reducing inequality. The Landman/Larizza study talks about growth in a nuanced way; one of their recommendations was “[the promotion of] economic growth and development that emphasises equitable distribution of national wealth to prevent resource disparities.” This is, clearly, not something the Economist is losing sleep over.

So go on, Economist, worry about growth. But don’t pretend you’re worried about inequality.