Synthesis/Regeneration 9   (Winter 1996)

A Search for Trade Standards to Protect Labor and the Environment

by William McGaughey, Jr., Minnesota Fair Trade Coalition

For more than a decade, trade access to the lucrative US market has been linked to a nation's willingness to observe internationally recognized worker rights. Such a requirement was written into the Trade Act of 1974 (as renewed in 1983), the Caribbean Basin Economic Recovery Act of 1983, and the Omnibus Trade and Competitiveness Act of 1988.

The NAFTA debate brought the issue to public attention. During the 1992 Presidential campaign, Bill Clinton conditioned his support of NAFTA upon negotiation of supplemental agreements with Mexico and Canada to ensure adequate protection of labor and the environment. Negotiations took place, and the result was the US-Mexico Border Environmental Cooperation Commission (BECC) and the National Administrative Office (NAO), established under the North American Agreement on Labor Cooperation and administered by the US Department of Labor.

Labor and environmental activists have not been happy with their initial experience of these programs. While promising an "unprecedented" degree of public participation and transparency, the BECC soon adopted procedural rules that defeated this objective. The rules allowed the BECC's Board of Directors to meet behind closed doors, limit public participation to "open sessions" of the Board, and expand confidential standards for documents well beyond the original intent.

In 1994, the NAO rejected a complaint brought against General Electric by the United Electrical, Radio and Machine Workers of America regarding the company's firing of workers involved in a union drive at its maquiladora operations in Juarez, Mexico. It also rejected a complaint brought by the Teamsters against Honeywell regarding a similar situation in Chihuahua. In both cases, the basis of the ruling was the fact that the maquiladora workers, out of economic necessity, had accepted company offers of severance pay for agreeing to termination of their employment and suspension of union activity.

While the trade-related structures created by government have proved disappointing, a new vehicle for attacking substandard labor and environmental practices has emerged in corporate codes of conduct adopted by major US retailers which pledge that the retailing firms will not purchase goods from manufacturers that mistreat workers. In today's economy, the power has generally shifted from manufacturers of brand-name products to the retailer because retailers control access to customers. The more successful retailers tend to sell products at a low-profit margin and depend upon a favorable public image to draw customers to their stores. Customers tend to look with disfavor upon retailers linked to sweatshop production. Thus, an unfavorable public image with respect to labor standards becomes a point of leverage in convincing retailers to discriminate against suppliers who exploit labor. Their discrimination comes in the form of refusing to purchase goods from such suppliers and of canceling contracts when violations come to light.

Thus, an unfavorable public image with respect to labor standards becomes a point of leverage in convincing retailers to discriminate against suppliers who exploit labor.

When US immigration officials raided a garment factory in El Monte, California, on August 3, 1995, they discovered a group of 70 immigrant women from Thailand who were forced to work up to 17 hours per day for 69 cents an hour under prison-like conditions to pay for their passage to the United States. Labor Secretary Reich held a meeting with representatives of the major retailers to discuss labor standards on September 12. Few retailers went on record against the crackdown per se. Objections, instead, took the form of complaining that, despite good intentions, the retailers simply lacked the resources to police all their suppliers.

Gail Dorn, vice president of Dayton Hudson Corp., looked to the US Department of Labor to take the initiative in controlling sweatshop labor. "A retailer cannot legally take actions against a supplier based on rumors," she wrote. "There needs to be a finding upon which we can base actions...However, when the Labor Department identifies a violator, retailers can take quick action."

Such an argument overlooks the fact that a significant percentage of the merchandise sold by major retailers is produced outside the United States where, presumably, a US government agency has little or no authority to investigate work conditions. A way to overcome this limitation would be for the primary suppliers of goods sold to the retailers to undertake their own audits of compliance with minimal labor standards by firms that contract with them. Levi Strauss, for instance, employs about 100 auditors to monitor compliance with labor and environmental standards. They inspect conditions at more than 650 plants worldwide that produce for Levi Strauss.

Any system that links commercial favor to labor and environmental concerns will include structures having the following elements:

1. They would set standards of permissible business or trade practice.

2. They would inspect for compliance with the standards.

3. They would enforce compliance by assessing penalties for noncompliance.

I will focus discussion upon the second aspect, the means of ascertaining whether or not a producer of goods has met acceptable standards.

Those who favor strong enforcement of labor or environmental standards usually envision what one might call a "legal" model of regulation. Its basic elements are these: The standards are enforced through a process of bringing complaints against alleged violators. The regulatory body conducts hearings that are a trial-like presentation of arguments between two adversaries. The hearings relate the facts of the case to a body of law. Attorneys may assist the two parties in presenting arguments. At the conclusion of the hearings, a panel of judges renders a decision which may involve penalties. In the context of trade disputes, national governments typically represent corporations, industries, or other interested parties within their jurisdiction.

This model has certain defects. First, legal proceedings are expensive. The high cost of bringing cases before a court may inhibit the filing of complaints, so that enforcement of standards would occur on a sporadic basis. Second, the adversarial structure of judicial proceedings is ill-suited to trade disputes involving nations. Such an arrangement has the potential to inflame nationalistic passions. Having won favorable settlements in 47% of its cases brought before the dispute-resolution panel of GATT, the United States has gained a reputation for getting its way by playing legal hardball. We have the legal resources and experience to win cases in international tribunals which smaller nations may lack.

In fact, those who violate labor and environmental standards would generally not be governments but business firms which produce the goods and services exchanged in world trade. They are the ones who employ labor and dispose of industrial waste. It is unfair to condemn an entire nation for violating standards when particular firms-multinational corporations, at that-are actually at fault. But, if the standards are to be applied to specific employers, there would have to be an extensive system of inspection. There would have to be penalties customized to the offense.

Therefore, a better method of regulating trade to ensure compliance with labor and environmental standards might follow, instead, the "accounting model" of regulation. Here a non-adversarial evaluation of business practices takes place. Typically, a business firm engages the services of independent auditors, or CPAs, who review its practices and then render an opinion regarding compliance with generally accepted accounting principles. The enforcement aspect lies in the fact that a favorable opinion from the auditors is often required for a firm to be able to sell shares of stock or obtain bank loans. While CPA firms render decisions on financial reporting by businesses, there is no reason why the same techniques of evaluation could not be applied to other aspects of the firms' activities.

In fact, there is a precedent for this in world trade. In order to ensure product quality, the European Community now requires that companies wishing to sell certain kinds of products in Europe become certified for compliance with the "ISO 9000" set of international quality standards. Independent registrars review the quality-control practices of business firms that have engaged their services. Thousands of firms in Europe have been certified for ISO compliance. Because European exports are important to many non-European businesses, "an international business chain reaction" to seek ISO-9000 certification has occurred among exporters of products to Europe and also among their suppliers.

If financial reporting and quality-control procedures are deemed important enough to require checking by regular audits, one would think that compliance with labor and environmental standards would rate high enough up on the list of public concerns to receive somewhat similar attention. Would any investor be satisfied to let corporate management get by with issuing unaudited statements, trusting that "whistleblowers" within the firm would go public with financial irregularities? Of course not.

If labor and environmental standards were taken seriously, then employees, communities, and others would require attention to standards affecting their interests. That means that labor and environmental standards need to be compiled in a clear, specific, and easily interpreted way. Following the accounting model, a profession needs to be developed which would formulate and enunciate principles of acceptable procedure and would train inspectors in interpreting practice. The inspectors would spend time on site in the plants checking records, observing practices, and questioning employees, as financial and quality-control auditors presently do. They would issue reports Those reports would become a basis for confidence that corporate management could be trusted to observe acceptable standards of labor and environmental treatment.

The accounting model is a relatively benign form of regulation, from corporate management's standpoint, because corporate management chooses who will do the inspecting. That should make this approach more acceptable to business and, hence, more practicable. The disadvantage, of course, is that the inspector has, at least, a mild conflict of interest regarding the client who has employed him. That makes it important that clear standards be set for the profession such that overly lax inspection and judgment might become grounds for decertification.

It now appears that this kind of enforcement will be applied to environmental protection before it is extended to enforcement of labor standards. The International Organization for Standardization in Geneva plans to establish guidelines for environmental management by 1996. Called ISO-14000, the proposed system would create an international set of minimum requirements for environmental practices of businesses selling in the world market. A survey of mid-sized manufacturers by Grant Thornton found that 60% believed that such standards would be useful.

Enforcement of worker rights would likely meet with greater employer resistance. Big business in league with pro-business governments in the Third World will argue strenuously that worker rights are an extension of Western values to societies where they do not apply. Yet, if the concept wins acceptance, it would be of great benefit to laboring people around the world. I would foresee that "labor-standards auditors," stationed abroad, might service a variety of customers knowledgeably and efficiently. Employee hotlines to their local offices, which, in turn, have access to international publicity, might prevent the murder of union organizers. The development of this new profession would contribute immensely to the advancement of human rights in the years ahead.

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