Posted by Sarah McLeish

Labour clauses in trade agreements – how do they operate and what can be improved?

Labour clauses have increasingly become a basic component of Foreign Trade Agreements (FTAs) in many major economies, particularly in agreements concluded by the US, EU, Chile, and Canada. Labour clauses are defined as any binding commitments relating to labour issues, either within a trade agreement itself or as part of a side-agreement. Most commonly they include a commitment to the ILO core labour standards and to uphold existing domestic labour laws, and sometimes contain reference to additional areas such as occupational safety and health, working hours and wages. Overall, according to research by the ILO, 80% of new trade agreements which have entered into force since 2013 contain a clause relating to respect for labour standards and 136 countries worldwide are signatory to at least one trade agreement with labour standards provisions.

But for all this flurry of activity, evidence for their effectiveness and impact is thin on the ground. Instead, most research has tended to focus on the question of why labour clauses are included in trade agreements – to level the playing field? to protect workers and enterprises (in developed countries) from competition? as a moral obligation? to appease particular domestic interest groups? – or else compare the institutional design of different types of labour clauses, in particular whether agreements contain ‘conditional’ provisions which make non-compliance subject to sanctions, or are based instead on ‘promotional’ provisions such as dialogue and technical cooperation.

The meatier (and more difficult to answer) questions around whether labour clauses are effective at bringing about real improvements in working conditions and labour market outcomes have been the subject of less focus.

Intention and outcome

Up to now, the strongest and most direct evidence for the efficacy of labour clauses relates to the impact of pre-ratification bargaining and negotiations. There are numerous examples of institutional and legal changes to strengthen core labour standards being enacted as part of negotiations, often, particularly in the case of US-led negotiations, as a prerequisite for a trade agreement being signed. For example, as part of the (now stalled) Trans-Pacific Partnership negotiations, the US and Vietnam signed a comprehensive plan relating to Vietnam’s labour law and practice, including agreeing to several specific areas of labour reform.

However, untangling what happens after an agreement has been signed is more problematic. First, the link between pre-ratification institutional changes such as labour law reform or the ratification of ILO Conventions and actual improvements to working conditions at the firm level or to overall labour market outcomes is contested. Outcomes at the firm level are particularly difficult to quantify due to challenges in accessing and collecting the necessary data. In terms of broader labour market outcomes, the few empirical studies which have been carried out on the subject have identified some modest benefits; for example, a recent ILO study found that trade agreements with labour provisions boost labour force participation rates by 1.6 percentage points more than agreements without labour provision, and reduce the gender gap in labour force participation rates by 1.1 percentage points. But even here, the mechanisms by which these changes occurred, or even whether they directly relate to the labour clauses, is a matter of some debate.

A further problem is that conditional provisions are rarely enforced in practice, despite the fact that around 20% of labour clauses provide for the possibility of sanctions in the case of violations, making it difficult to collect evidence on their effectiveness in practice. So far, key players have shown a marked preference for engaging in promotional approaches such as building stakeholder capacity, firm-level capacity and the capacity of public authorities rather than regulation and enforcement. According to the ILO, such approaches can have positive results but the nature of such interventions makes hard evidence difficult to come by and more detailed analyses of specific agreements have found that dialogue and cooperation activities have uneven outcomes.

What can be improved?

Given these issues, new ideas are beginning to be put forward on how the promotion of labour standards and decent work might be achieved.

Some have called for strengthening the enforceability of labour clauses in trade agreements and giving labour and sustainable development provisions equal weight to those covering commercial, technical or tariff issues. However, the way that enforcement mechanisms have been used in practice, suggests that enforcement mechanisms are only utilised in a relatively narrow range of situations. For example, in the recent case of Guatemala under the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR), despite irrefutable evidence of violations of core labour standards, the dispute was not upheld because violations were not found to be  directly linked with trade.

Another solution could be to make better use of promotional provisions and to strengthen cooperative and capacity-building activities. This potentially offers a more durable outcome, and one that could help strengthen the application of core labour standards in a broader range of countries and situations, rather than rather than just dealing with the most egregious trade-related violations.  In terms of tangible improvements in this direction, two approaches are worth noting.

One is to improve information flows to monitor and assess the application of core labour standards and to use this information to develop the most relevant cooperative activities. This means making full use of existing monitoring mechanisms, chief of which is the ILO Supervisory System, but also supplementing this information with additional real-time monitoring, for example facilitated by social partners and civil society organisations.

The other potential area for improvement is to build a stronger evidence base on the impact of labour clauses and promotional activities, to help determine which types of activities work best in which situation, and to improve synergies and alignments between the various actors working in the field.  Together, better information on the application of core labour standards in trade-partner countries, combined with a stronger evidence base on what types of intervention are most effective and when, could help to identify more innovative and far-reaching approaches that improve the efficacy of labour clauses in bringing about real improvements in working conditions and labour market outcomes.