Labour Standards in Exports and Developing Countries

This paper investigates the impact labour regulation, as defined by labour standards, have on the international trade regime. After providing a description of the debate's landscape, the paper focuses on the questions: Could the adoption of a domestic labour standard improve welfare for an industrial country through the policy's effect on the international market? And, once such a policy is instituted what possible gains are there in encouraging the establishment of standards abroad? By allowing for strategic interaction between two countries, the paper shows that when an industrial country implements a labour standard domestically its optimal tariff on labour-intensive imports increases, forcing a decline in its trading partner's optimal import tariffs.The second part of the paper goes on to investigate why industrial countries would then encourage labour standards adoption among developing countries as well. The key insight here is that if industrial countries are constrained explicitly on the tariff front from gaining an advantage in trade, by multilateral trade agreements for example, they will resort to 'second- best' policy options-demanding labour standard policies for their trading partners. The successful implementation of a labour standard in developing countries acts as a substitute for higher tariffs in the industrial countries, by partially alleviating the distortion caused by the industrial country's labour standard. Other authors, Brander and Spencer (1985), Eaton and Grossman (1986), have found an analogous result in which intervention into imperfect product markets, rather than imperfect factor markets, can lead to a similar improvement in a country's welfare.