NCPA - National Center for Policy Analysis

Race to the Top

September 24, 2001

Trade liberalization and presidential trade promotion authority have been stymied over the issue of including labor and environmental standards, enforceable through trade sanctions.

Support for "enforceable" labor and environmental standards is based on the myth that nations are engaged in a regulatory "race to the bottom," experts say. Some opponents allege developing countries use lax standards to attract business from developed countries with low overhead, and U.S. businesses locate there to take advantage of low-cost labor.

But experts say that if the race-to-the-bottom theory were true, we would expect to see capital flow from rich, high-standard countries to poor, low-standard countries or rich countries would be lowering their standards to keep productive capital and jobs from fleeing. In fact, neither is happening.

  • According to the UN Conference on Trade and Development, of the $1.1 trillion in global Foreign Direct Investment (FDI) flows in 2000, more than 80 percent went to developed countries.
  • Only 17 percent of FDI was directed to developing countries, down from about 40 percent in the mid-1990s.
  • And nations with the highest environmental standards, as measured by the World Economic Forum's "2001 Environmental Sustainability Index," also attracted the most FDI per capita.

Low wages are no more of a magnet for foreign investment than are low standards. According to a recent study on global manufacturing investment by the consulting firm Deloitte and Touche, other high-wage countries attracted 87 percent of total U.S. manufacturing FDI outflows in 1999, up from 75 percent in 1998 and 69 percent in 1997.

In reality, openness to trade and investment promotes development and higher incomes, which enable less developed countries to raise their labor and environmental standards. That explains why nations open to the global economy enjoy the highest incomes and also maintain the highest labor and environmental standards.

Source: Daniel T. Griswold, "Trade, Labor and the Environment: How Blue and Green Sanctions Threaten Higher Standards," Trade Policy Analysis No. 15, August 2, 2001, Cato Institute, 1000 Massachusetts Avenue, N.W. , Washington D.C. 20001, (202) 842-0200.

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