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'Social Dumping' and Relocation: Is there a Case for Imposing a Social Clause?

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  • Cordella, Tito
  • Grilo, Isabel

Abstract

Public opinion in Europe seems worried about the effect of lower-wage country competition. In both newspaper articles and in policy debates, the term ‘social dumping’ is becoming more and more popular. In many countries, trade unions worried by the effect of what they call ‘unfair competition’, propose the adoption of a ‘social clause’ protecting domestic markets from commodities produced in countries were minimal labour conditions are not met. We analyse the effects of such a policy in the framework of a vertically differentiated Bertrand duopoly. In particular, we study the effects of such a policy on the relocation decisions of the firms and perform a welfare analysis. The welfare analysis takes explicitly into account the unemployment situation in the domestic country by accounting for the workers’ welfare losses due to job reductions following the relocation of firms. We characterize the optimal social clause policy both under domestic welfare maximization and from an efficiency point of view. We show that, on domestic welfare grounds, the case for a social clause policy is weaker the higher the domestic wage and the lower the foreign wage.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1931.

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Date of creation: Jul 1998
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Handle: RePEc:cpr:ceprdp:1931

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Keywords: Production Relocation; social clause; vertical differentiation;

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References

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  1. Barros, Pedro P & Cabral, Luis, 2000. "Competing for Foreign Direct Investment," Review of International Economics, Wiley Blackwell, vol. 8(2), pages 360-71, May.
  2. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  3. Motta, Massimo & Thisse, Jacques-Francois, 1994. "Does environmental dumping lead to delocation?," European Economic Review, Elsevier, vol. 38(3-4), pages 563-576, April.
  4. Isabel Grilo & Tito Cordella, 1998. "Globalization and Relocation in a Vertically Differentiated Industry," IMF Working Papers 98/48, International Monetary Fund.
  5. Brander, James A. & Spencer, Barbara J., 1987. "Foreign direct investment with unemployment and endogenous taxes and tariffs," Journal of International Economics, Elsevier, vol. 22(3-4), pages 257-279, May.
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Cited by:
  1. Willem Molle, 2002. "Globalization, Regionalism and Labour Markets: Should We Recast the Foundations of the EU Regime in Matters of Regional (Rural and Urban) Development?," Regional Studies, Taylor & Francis Journals, vol. 36(2), pages 161-172.
  2. Jesús F. Lampón & Pablo Cabanelas-Lorenzo & Santiago Lago-Peñas, 2013. "Why firms relocate their production overseas? The answer lies inside: corporate, logistic and technological determinants," Working Papers 2013/3, Institut d'Economia de Barcelona (IEB).
  3. Collie, D. & Vandenbussche, H., 1999. "Trade, FDI and Unions," Discussion Paper 1999-42, Tilburg University, Center for Economic Research.

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