Achieving Ethical Trade through Social Tariffs: The SITS Regime

In the 1990s many heterodox economists joined labor, human rights and environmental advocates in calling for the inclusion of binding labor and environmental standards in trade agreements, along with other measures to ensure that deepening economic integration would serve the goals of promoting human development. Neoclassical trade theorists universally opposed these measures, arguing that countries’ choices over standards represented an entirely legitimate source of comparative advantage. In the end, the free traders prevailed. Over the past five years several mainstream trade theorists have reversed course, and begun to call for fair trade. In this context, fair trade is back on the policy agenda. This paper explores the fair trade proposals that emerged in the 1990s, and counterpoises the multilateral Social Index Tariff Structure (SITS) as an alternative fair trade regime. A SITS regime seeks to protect high standards in those countries where they prevail, while providing both the incentives and means for countries that perform poorly in this regard to improve their standards over time. This working paper explores the construction of a hypothetical SITS regime; estimates the effects of the regime on bilateral trade flows; and generates estimates of the development funds that SITS would make available to promote human development in low-income countries. The authors find that a global system of social tariffs that are very small in magnitude would generate new, substantial and stable flows of development funds while incentivizing a race to the top in labor and environmental standards.