ILO Evaluates Trade Impact of Labor Provisions in Free Trade Agreements

labor provision

The International Labor Organization (ILO) releases a new study, which looks at how the increasing number of labor provisions in free trade agreements are impacting the world of work. According to the study:

Labor provisions in free trade agreements take into consideration any standard which addresses labor relations or minimum working terms or conditions, mechanisms for monitoring or promoting compliance, and/or a framework for cooperation.  (See appendix: evolution of labor provisions in US free trade agreements).

As of December 2015, there were 76 trade agreements in place (covering 135 economies) that include labor provisions, nearly half of which came into existence after 2008. This represents more than one-quarter (28 percent) of the trade agreements which the World Trade Organization (WTO) has been notified of, and which are currently in force. Over 80 percent of agreements that came into force since 2013 contain such provisions. Countries most active in promoting labor provisions in free trade agreements include: Canada, the European Union, the United States, Chile, New Zealand and Switzerland. Some South-South free trade agreements also include labor provisions.

The study finds that there is NO evidence to support the claim that implementation and enforcement of labor standards leads to reduced trade. The findings show that trade agreements, with or without labor provisions, boost trade between members of the agreement to a similar extent. For country-partner pairs that have a trade agreement with labor provisions in force, bilateral trade is estimated to be on average 28 percent greater than what would be expected without such an agreement.

Results further show that, on average, trade agreements that contain labor provisions impact positively on labor force participation rates, bringing larger proportions of male and female working-age populations into the labor force and, particularly, increasing the female labor force. The study assumes that labor provisions in trade agreements can raise people’s expectations of better working conditions, which in turn increases their willingness to enter the labor force.

However, the study found NO statistically significant relationship between labor provisions and labor market outcomes such as wages, share of vulnerable employment or gender gaps at the aggregate level (i.e. consider all countries). On the one hand, this implies that labor provisions at least do not lead to the deterioration of other labor standards in a country. On the other hand, it indicates that labor provisions in free trade agreements have limited impact on the outcomes of the labor market.

Additionally, the study stresses that interaction among stakeholders, capacity-building and monitoring mechanisms – with the support of social dialogue are critical to achieve positive outcomes in the labor market. In a case study on the Cambodia–US Textile Agreement specifically, the report finds strong firm-level intervention, such as monitoring and compliance, improved wages at the firm level, including a notable reduction of the gender wage gap. In another case study, it is found that capacity-building measures brought to Bangladesh after the Rana Plaza tragedy have resulted in some visible improvements with respect to the number of trade unions, building safety and amendments in labor law in the country.

Appendix: Evolution of labor provisions in US free trade agreements

labor provisions