Free trade = more regulation?

In the context of a domestic economy, a call for “free markets” or “free-market solutions” is often a plea not to regulate markets. But international agreements for free trade are by their very nature attempts to regulate international markets. As a deliberately adversarial institution, a free-trade agreement between two or more countries forbids various sharp competitive strategies that any given country can use to create a competitive advantage for itself (e.g. tactics that would allow its goods to be exported while it restricted imports from trading partners). The whole point is to solve a collective action problem between rival countries: when each country is allowed to pursue protectionist policies, say, they will all end up worse off. That is more or  less the point of Adam Smith’s Wealth of Nations. (It was not this point.)

But in today’s New York Times there’s an op-ed pointing out another interesting way to think of international free trade as involving more, not less, regulation. Layna Mosley, a political scientist at UNC-Chapel Hill, has study the way free-trade agreements between developed and less-developed countries seem to generate a regulatory “race-to-the-top” on labor standards.

There is…a more general way in which trade agreements — and the economic ties they generate — benefit workers in developing nations. As Colombia and Panama expand their trade relationships with the United States, workers stand to gain more than just the job creation and higher wages that often come with expanded trade. Research I conducted over the last several years with the political scientists Brian Greenhill and Aseem Prakash suggests that trade with developed nations helps developing countries expand labor rights themselves.

Why? International trade gives producers incentives to meet the standards of their export markets. When developing nations export more to countries with better labor standards, their labor rights laws and practices tend to improve.

With a shout-out to David Vogel’s “California effect” explanation of the way in which the state of California raises environmental standards for other states in the US, she continues:

This California effect works in two ways, both based on global producers’ own calculations of self-interest.

First, multinational companies often carry their management and production technologies with them when they produce goods abroad because, like automakers selling to California’s consumers, they find it efficient to standardize their practices in plants, regardless of location. Those practices — including rules for the appropriate treatment of workers — then set an example for other employers throughout the host economy.

Second, the multinational company knows that many consumers, activists and shareholders in its home country will judge its imported products on whether they were produced in ways that reflect the firm’s public commitment to corporate social responsibility. This spurs multinational firms and importers to press locally owned companies in their supply chains for working conditions that meet internationally recognized labor standards.

So not all unforeseen consequences of regulating contests (in this case, the contest between national economies in international trade) turn out to be perverse consequences. Not all races involving more- and less-regulated economies are races to the bottom.

[Note: click on the “race to the bottom” category link, in the right-hand column, for more posts on this general topic, mostly by star students in my Adversarial Ethics class at Duke in the spring of 2011.]