The issue of trade and core labour standards stems from the concern that trade liberalisation will create incentives for countries to suppress labour standards in order to make exported products more price competitive in foreign markets.
The traditional position among parties to the GATT and subsequently the WTO was that labour matters should be left mainly to the International Labour Organisation (ILO). One of the main motives behind the founding of the ILO in 1919 was the felt need for a common set of minimum labour standards to establish an even playing field among trading nations. Article 20(e) of GATT 1947 does allow states to derogate from GATT/WTO standards in relation to the products of prison labour, this is the only labour-related provision in the existing WTO regime.
A formal linkage between trade and labour standards at the WTO is strongly opposed by most representatives of developing country governments who argue that labour standards would be used for protectionist purposes. The enforcement of labour standards through trade sanctions is seen as an illegitimate encroachment upon national sovereignty and internal affairs. It is further argued that the comparative advantage of low-wage developing countries should not be compromised by inappropriate labour standards.
If labour is not brought onto the WTO agenda, the effects of continued trade liberalisation following from the Uruguay Round commitments may expose developed countries to competition from goods produced by exploitative labour practices. Assuming that the ILO does not make a greater impact in the area of core labour standards, it is possible that cheaper imports may result in the loss of markets and unemployment. Although neo-classical economic theory would suggest that the unemployed would find more economically efficient employment over time, it is possible that stickiness in labour markets would result in significant unemployment.
A range of measures to improve ILO effectiveness coupled with a set of positive incentives to improve labour standards in low-wage countries are likely to ameliorate the negative effects of trade liberalisation. Yet it is likely that the labour practices in a large number of countries will remain unaffected. Many developing countries will remain unable or unwilling to enforce ILO core standards while the GSP incentives will be most likely to reward those states that would have improved labour standards even without incentives.
The ability to impose trade barriers against states with poor labour practices would afford considerable protection to the EU. Yet it is unlikely that the EU would be willing or even able to impose trade barriers against all goods produced with sub-minimal labour standards. It should also be noted that the imposition of trade barriers may result in higher-price goods for consumers, including workers.
Unimpeded by a labour clause, low-wage countries will continue to have the same level of access to developed markets. Access may be improved by continued liberalisation in other areas, thus facilitating economic growth, net capital formation and employment. However average real income may decline if labour standards are pushed lower without an increase in overall national income per capita. The pressures of increased globalisation may promote more exploitative labour practices, at least in the short run, thus having a negative impact on the social areas of poverty, education, health, and gender inequality. Lower labour standards may reduce the power of trade unions to demand sanitary and healthy working conditions thus having a negative impact on certain environmental media such as air and water.
Since some degree of enhanced effectiveness on the part of the ILO is anticipated, it is possible that developing and least developed states may come under greater pressure to adopt and implement ILO core labour standards. To the extent that such standards are implemented, there may be negative economic impacts in the short run resulting from a loss of global market share. This could result in unemployment, declining levels of real income, and lower net fixed capital formation. It is also possible that higher labour standards may act to deter certain types of inward foreign investment. Yet these negative economic impacts may be offset in part by GSP incentives and improved technical assistance on labour matters from bilateral and multilateral donors. Although the social impact would be positive for those in employment, (with a likelihood of improved equity, improved health and education for workers, and improved gender equality) this positive impact may be offset to some extent by the negative impact resulting from any loss of employment.
It is likely that improved effectiveness of the International Labour Organisation and positive incentives to foster higher labour standards would result in an small aggregate improvement of global labour standards. In the long run this would have positive impacts at the economic, social, and environmental levels.
However, a punitive approach to labour standards based on a system of trade barriers would be likely to exacerbate inequalities between the developed and developing states. At a global level this may well have a negative impact on employment, equity and poverty, health, education, gender inequality, and the environment.
With the incorporation of a labour clause in the WTO regime it is likely that trade barriers would be applied to least developed countries that lack the economic and technical capacity to improve labour standards. Unless such countries were given extensive technical and economic support, they would be unable to respond to the policy signal sent by the imposition of trade barriers. In such circumstances, barriers imposed on least developed countries could easily become permanent.
The strongest opposition to labour standards comes from the leaders of developing countries, including a lot of developing countries who have left-wing governments, not right-wing governments, who believe that this is a strategy by the American labor movement to keep them down and keep them poor and keep them from selling products that they'd otherwise be highly competitive in in the American market. It certainly could be used that way.