August 27, 2002

On labour standards and free trade

Beperking vrijhandel slechte oplossing voor ontwikkelingslanden

Press release
Internationale handel bevordert de economische groei in ontwikkelingslanden. Het effect op de arbeidsomstandigheden in deze landen is minder eenduidig. Enerzijds heeft vrijhandel vaak een negatief direct effect op arbeidsomstandigheden door de sterkere internationale concurrentie.

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The authors investigate the effectiveness and efficiency of alternative measures to increase standards in low-income countries.

They do this in a two-country framework where (a) trade and standards in low-income countries are negatively related, and (b) free trade is no longer optimal for the high-income country due to a negative psychological externality that low standards in low-income countries exert.

We find that any uncoordinated, unilateral action by the high-income country to decrease the psychological externality is dominated by coordinated action; both with respect to the psychological externality as with respect to the welfare consequences for both countries.

Since any increase in the standard in the low-income country decreases their welfare, co-ordination is not always a feasible solution. Only when incorporated in the framework of the WTO, co-ordination can be made incentive compatible and gives rise to a situation where free trade again works to the advantage of both countries.

Authors

Mayke Kok
Richard Nahuis
A. de Vaal

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