The Best "Anti-Sweatshop" Policy: Expanding U.S. Trade with Developing Countries

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Testimony by Daniel Griswold
The Cato Institute

Before the Trade, Tourism, and Economic Development Subcommittee of the Senate Commerce, Science, and Transportation Committee

Hearing on "Overseas Sweatshop Abuses, Their Impact on U.S. Workers, and the Need for Anti-Sweatshop Legislation"

February 14, 2007

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Mr. Griswold: Chairman Dorgan and members of the subcommittee, thank you for inviting the Cato Institute to testify today on global working conditions.

First, we should reject any notion that American workers are pitted in zero-sum competition with workers in poor countries. There is no race to the bottom in labor standards. Global incomes and working conditions can rise for workers in all countries that participate in the global economy. As America has become more globalized in the last 25 years, American workers and their families have enjoyed significant increases in real compensation, disposable incomes, and wealth.

Nor has trade with developed countries undermined America's manufacturing base. Output of America's factories last year was more than 50 percent higher than it was in the early 1990s, before we joined NAFTA and the World Trade Organization. American factories are producing more aircraft and pharmaceuticals, more sophisticated machinery and semiconductors, more chemicals, and even passenger vehicles and parts, than 15 years ago. We can produce more with fewer workers because manufacturing productivity has been growing so rapidly.

When U.S. multinational companies invest abroad, their primary motivation is not a search for low wages and low standards. More than low costs, they seek wealthy consumers, skilled workers, an infrastructure that works, the rule of law, political stability, and the freedom to trade and repatriate profits. That is why more than 80 percent of U.S. outward manufacturing direct investment flows to other high-income, high-standard economies, such as the European Union, Canada, and Australia.

Trade and globalization are lifting wages and working conditions for hundreds of millions of people in developing countries. The pay and working conditions in foreign-owned factories and export industries are usually much better than in the local domestic economy. Those jobs offer poor workers, especially young women, their best opportunity at financial independence and the simple pleasures and dignities of life that we take for granted.

According to the World Bank, the share of the world's population living in absolute poverty has been cut in half since 1981, from 40 percent to 19 percent, and poverty has fallen most rapidly in those areas of the world that have embraced globalization the most aggressively, including China. By raising incomes in poor countries, free trade and globalization have helped pull millions of kids out of the workforce and helped them enroll in school, where they belong.

The International Labor Organization recently reported that the number of children in the world, ages 10 to 14, who are working rather than attending school, has dropped by 11 percent since their previous report in 2002. There are 20 million fewer Halimas today than there were just 4 or 5 years ago. And it's not because of a legislative billy-club, it's because of trade and growth in developing countries. The number working in the most hazardous jobs has dropped even more steeply, by 26 percent.

Parents in poor countries love their children just as much as we love our own. When they rise above a subsistence income, the first thing they do is remove their children from the workforce and put them in school. Studies confirm that labor-force participation rates by children decline sharply with rising per capita GNP.

The overwhelming majority of child laborers toiling in poor countries work in sectors far removed from the global economy. More than 80 percent work without pay, usually for their family, and typically on subsistence farming. I notice we don't have any representative [at the hearing today] from a rural farming area, where most poor people live in the world, and most child laborers toil. Most others work for small-scale domestic enterprises, typically nontraded services, such as shoe-shining, newspaper delivery, and domestic service.

So-called sweat shop conditions persist in poor countries today, not because of globalization, which is a relatively new phenomenon, but because of poverty, poverty perpetuated by their own governments' failed policies of protectionism, inflation, corruption, hostility to foreign investment, and lack of legally defined property rights. Globalization is not the cause of bad working conditions, but the best hope for improving them.

Withholding trade benefits because of alleged sweatshops would, in effect, punish poor countries for being poor. Trade sanctions would eliminate the very export-oriented jobs that are pulling standards upwards, forcing workers into informal domestic sectors, where wages and working conditions and labor-rights protections are worse. Lower wages paid to parents would make it more difficult for families on marginal incomes to keep their children in school and out of factories or fields.

If Members of Congress want to encourage higher labor standards abroad, they should support free trade and investment flows so that less-developed countries can grow more rapidly and make more progress against poverty. Congress should seek a more robust International Labor Organization that could systematically monitor and report on enforcement of labor rights in member countries. Civil-society organizations can wage campaigns of education and put a spotlight on abusive situations, while importers can cater to consumer preferences for higher standards through labeling and other promotions.

If members of this committee want to see fewer sweatshops and child workers in the world -- and I believe you do -- then I recommend you support more open trade and investment ties with workers in developing countries.

Thank you very much, and I look forward to your questions.

Senator Dorgan: Mr. Griswold, thank you very much.

First, let me ask you, Mr. Griswold -- you have a couple of people sitting behind you that lost their jobs because they now ship Pennsylvania furniture to China. You indicated that that, generally, is not a search for cheaper labor. Do you really believe that La-Z-Boy didn't close down a Pennsylvania plant and ship those jobs to China in order to create a piece of furniture and ship the furniture back here for sale -you really believe they did that for reasons other than cheap labor?

Mr. Griswold: No, I think labor costs were an important driver there. My point is, that isn't the primary driver for most investment decisions made by U.S. companies. Eighty percent or more of our investment goes to Europe, Japan and Australia and countries like that where, if anything, the labor standards are higher. I'm just saying it's one factor of many. There are some industries where labor is particularly important, labor-intensive industries -- the apparel industry, the footwear industry. Obviously, those are going to go to less-developed countries. It's all about comparative advantage. Their comparative advantage is lower labor cost, and that is important in labor-intensive industries.

Senator Dorgan: I -- you know, I wonder if Ricardo wouldn't be rolling in his grave at your definition of their income, because of the global economy.

So, what about that group of Americans? What about American policy, when you talk about Third World workers being advantaged by at least having a job, even if it's in a sweatshop?

Mr. Griswold: Well, first, I think there's a huge amount of evidence that American workers are better off today than we were 10, 20, 30 years ago, by virtually every measure. We are living better. We are living longer. Our wealth is greater. Our disposable income is greater. And globalization has played a role in that.

Yes, some workers are put out of work because of trade. And there are some in this room. Three-hundred thousand Americans line up every week for unemployment insurance. The churn in the job market is a natural, healthy feature of a dynamic market economy like ours. Far more Americans are put out of work each year because of technology. You know, Kodak has laid off 30,000 workers because of digital cameras that you and I own. Are we going to tax digital cameras to save those jobs? No. We're going to let the marketplace sort it out. There's things we can do to help people to retrain, to offer unemployment insurance, to soften the transition. But to throw up walls and say, "We're going to stop change from happening," is not the right policy. It's going to leave America a poorer, place of legislation does.

Senator Dorgan: Mr. Griswold, in the 1930s, FDR pushed the Fair Labor Standards Act. We have since done child labor laws, safe workplaces, and so on. My guess is - I shouldn't ascribe this to it - my guess is that you might have come to testify against all of those. Certainly, American business, in most cases, took positions against all of those kinds of initiatives that raised standards in this country. I think, looking back, in most cases, they're pretty generally accepted to have done something important for America. But would you -- looking back at these things that we have done to raise American standards, would you think you would have supported them as they were proposed over the period of time, or would you have come in to say, "You know what? Let the market system decide that. This is the 'billy club' of the Federal Government trying to beat a factory into -- telling a factory, 'Here is -- here are the records you have to keep, here is where you have to pay overtime, ". and so on? Give me your -- give me where that extension of your philosophy might lead.

Mr. Griswold: I don't know how I would have testified back then. It was a different time, a different era. I do know that our overall living standards have risen, not because of legislation Congress has passed, but because of rising productivity in our economy, because we have the resources. You can legislate all you want. India has labor laws that are comparable to ours, in terms of controlling the ability of employers to fire workers, and setting minimum wages, and all that; and yet, they're still a very poor country. And so, laws themselves do not lift people out of poverty; they're lifted out of poverty by increasing production and wealth.

The other difference is, we didn't have some foreign power waving that billy club over us. It was a decision we made about our own laws. Here you are trying to dictate and legislate conditions in other countries. And I think that creates resentment at a time when American policies are creating enough resentment around the world the way it is.

Senator Dogan: The -- well, the legislation is not an attempt to do anything to other countries: it is an attempt to say to companies that want to produce in foreign sweatshops, "You can't sell that product in America, because it doesn't meet the basic standards of fairness and decency and humanity that we have spent a century building." So, we're not in the business of enforcing something in foreign countries. We are talking about the conditions under which those products could be sold to the United States.

I might mention one other issue. The - recently -- oh, I guess it's been about a year or 2 now -- the President of the Philippines announced she thought there should be an increase in the minimum wage in the Philippines. And a well-known American corporation that is doing business in the Philippines by hiring people in the Philippines immediately, the very next day, said, "You. increase the minimum wage in the Philippines, we are gone." My point is, the same naysayers in this country, over a century, when we built the standards -- and, by most accounts, have dramatically improved standards of work in this country -- the same naysayers who opposed that every step of the way do the same with respect to conditions in China, conditions in the Philippines and elsewhere. By and large, I think that they are there to access cheap labor. And anything that would in any way dramatically increase, or incrementally increase, labor costs abroad, they will resist. Do you disagree with that?

Mr. Griswold: I guess we disagree on how humans progress. I think it's through --largely through markets and rising creation of wealth, and that allows these standards to rise. But let's just look at the example of China. There are 400 million fewer people living in absolute poverty in China today than 25 years ago. Is it because of legislation that this committee, or Congress, passed? Is it because of legislative labor laws passed by the Chinese Government? No. It's because of rising trade, globalization, and markets being allowed to work. Yes, you need a framework of the rule of law. Yes, there needs to be laws against abusive child labor and slave labor and that sort of thing. I'm all for those. But I'm afraid that some of the ideas being talked about in Congress would interfere with those forces that are bringing about these advantages that I talked about in declining global poverty and child labor.

Senator Dorgan: At least a part of the experience you describe in China, with about - is it 1.3 billion people? - so 400 million would leave another 900 million in a different situation - at least part of their progress, I suppose, are jobs that are producing Huffy bicycles, Radio Flyer little red wagons, Pennsylvania House furniture, Levis, Fruit of the Loom, among many others. And I could go on for about 20 minutes. It might well be nice that the Chinese have those jobs. It would be much nicer, in my judgment, if those jobs were in Trenton, New Jersey, and Philadelphia, and places in this country.

But, having said all that, that's a different discussion, whether the global economy, which produced, last year, an $832 billion trade deficit with this country, is beneficial to this country. I think free trade is not much more than a chant. I think fair trade is an essential ingredient for the way we should view trade agreements. Trade agreements should be mutually beneficial between us and those with whom we have agreements. And, in my ... Mr. Griswold?

Mr. Griswold: Just two quick --

Senator Dorgan: Yes.

Mr. Griswold: -- points, Senator.

First, this isn't a choice of whether we have a manufacturing base in this. country or not, it's about what we manufacture. And I will be the first to point out that we're producing less furniture and fewer shoes and T-shirts and that they're producing more in China. But our overall manufacturing output is up 50 percent. Our manufacturing capacity has continued to increase because of rising productivity. We are producing more semiconductors, chemicals, sophisticated machinery, pharmaceuticals, even passenger vehicles and parts. This is trade in action. We're specializing in the higher-end parts.

Let me make one other point. This is also a consumer issue. You know, my friend to the right here, he pointed out that the State of New Jersey is happy to pay a 20-percent premium [to buy domestically]. And that's fine. The State of New Jersey can just pass the costs on to the taxpayers, and they may not even know. But if you're a middle-class or poor family in North Dakota, a 20~percent-higher bill for your expenses is real money, and that translates into lower real wages and a lower standard of living.

Senator Dorgan: Since you raised it, Mr. Griswold, let me ask you, as a consumer: if you knew that a product that was coming from the work of an l1-year-old working 11 to 14 hours a day, 7 days a week, in a sweatshop -- if you knew that, would you prefer to pay a premium for a product -- identical product that was produced in circumstances that were not coming from a sweatshop from an 11-year-old child?

Mr. Griswold: Well--

Senator Dorgan: Would you make that choice, as a consumer?

Mr. Griswold: I would ask myself, Would that child, would her family be better off if I did not buy that product? And I'm not sure. You know, we had an experience in the early 1990s when Congress was considering quite stringent legislation aimed at child labor abroad. In Bangladesh, they laid off 50,000 child workers, rapidly, to avoid coming under that law. It never became law, but just the threat of it displaced 50,000 workers. The ILO, UNICEF, and Bangladeshi labor activists went and investigated, and they found that most of those 50,000 kids did not go to school, they either were unemployed and their families were worse off, or many of them ended up in occupations that were even less acceptable than a garment factory -- stone crushing, street hustling, some of them even ended up in prostitution. So, I buy products from poor workers in poor countries, and I make no apologies.

Senator Dorgan: There's been a separate study since that time that debunks the study you described, so we can put both studies in the record.