The EU and U.S. approaches to social standards in trade An overview

Following the resistance of many developing countries to the linkage between trade and social issues in the WTO, social standards have become a recurring feature of EU and U.S. trade agreements. Every EU and U.S. PTA signed in the past decade contains both labor and environmental provisions. However, the exact institutional design of these provisions has varied significantly across time. Thus, understanding the evolution in the institutional design is critical for the analysis of its determinants. This chapter provides an overview of social standards linkage in EU and U.S. trade policies, laying out the basis for further comparison and empirical examination. It will trace the evolution of social standards in EU and U.S. trade agreements over time, sketch out the substance of European and American approaches, and establish the criteria for their comparison.

The evolution of social standards in U.S. PTAs

The first U.S. PTAs with Israel and Canada, signed in 1985 and 1988 respectively, did not include either labor or environmental provisions, focusing solely on tariff reduction. The North American Free Trade Agreement (NAFTA), formed in 1994, is the first U.S. PTA to address labor and environmental issues within the scope of a trade agreement. The NAFTA was the first North-South trade agreement signed by the U.S. with a developing country with significantly weaker labor and environmental regulations and a low-cost production advantage, which opened up the possibility for exploiting these differences, with the potential to create a race to the bottom effect.1 Therefore, in addition to the main text devoted to trade issues, two side agreements with social provisions were signed: the North American Agreement on Labor Cooperation (NAALC) and the North American Agreement on Environmental Cooperation (NAAEC). The parties to these agreements - that is, the U.S., Mexico, and Canada - were expected to enforce their existing labor and environmental laws and not derogate from them to secure a competitive advantage in trade. Both NAALC and NAAEC are legally binding but are not subject to the dispute settlement procedure of the main agreement, which envisions sanctions for non-compliance. Under the NAALC, the only enforceable provision is the “persistent pattern of failure ... to effectively enforce its occupational safety and health, child labor or minimum wage technical standards”

(Article 29). The failure needs to be trade-related and covered by mutually recognized laws (Bolle 2008). Non-compliance is also addressed through monetary enforcement assessments, and the suspension of benefits is only envisaged after then failure. The NAAEC applies the same mechanism toward environmental provisions, stipulating monetary enforcement assessments and the suspension of benefits as the last resort measure.

The early American approach, focused on keeping labor and environmental standards in side agreements, has been criticized heavily by the advocates of stronger social provisions in trade agreements, including labor unions, environmentalists, and like-minded Congress members. Thus, in response to then criticism, trade executives - in the face of the president and the Office of the U.S. Trade Representative (USTR) - ensured that the next generation of U.S. PTAs advanced the link between trade and social standards much further, locating them in the mam text and not consigning them to side agreements. The U.S.-Jordan PTA became the first agreement of such kind. It included separate legally binding labor and environmental chapters (Articles 6 and 5 respectively) whose scope had been significantly expanded; however, it still only referred to the parties’ respective domestic laws. These provisions have the same enforcement procedure as commercial matters; however, the USTR and the Jordanian ambassador exchanged letters making commitments to resolve labor disputes without resorting to sanctions (Bolle 2008).

Despite the improvement over the NAFTA side agreements, the U.S.-Jordan PTA was criticized heavily by both organized labor and environmentalists for the perceived weakness of its social clauses. The next generation of U.S. PTAs signed after the passage of the Trade Policy Act by the U.S. Congress in 2002, which gave the president authority to fast-track the negotiations of trade deals (also taiown as the Trade Promotion Authority [TPA]), contain more substantive social standards. These agreements were signed with Australia, Chile, Singapore, Morocco, Bahrain, Oman, and the six countries in Central America and the Caribbean (CAFTA-DR). Labor chapters in these agreements included an enforceable commitment to maintain and enforce existing domestic laws, defined as the parties’ statutes and regulations related to the U.S. and internationally recognized labor rights (Bolle 2008). There was also a stipulation for the creation of the Labor Affairs Council. Likewise, the environmental chapters referred to the parties’ domestic laws and stipulated then maintenance and non-derogation for trade purposes. They also envisioned monetary fines but capped them at $15 million with the suspension of trade preferences as the last resort. The chapters also included provisions for capacity-building and cooperation under the auspices of the Enviromnental Affairs Council (Lattanzio and Fergussou 2015).

The most recent generation of U.S. PTAs was signed after the U.S. Congress passed the Bipartisan Trade Deal in 2007, extending the TPA. These agreements, including those that were pending at the time (Pem, Colombia, Panama, and South Korea), contain even more comprehensive social standards, both in terms of the scope and enforcement. First, they make references not only to domestic laws and regulations of the parties but also include core labor standards enshrined in the International Labor Organization (ILO) Declaration on Fundamental Rights and Principles at Work. These include 1) freedom of association and the right of collective bargaming; 2) elimination of all forms of forced and compulsory labor; 3) abolition of child labor; and 4) elimination of discrimination in respect of employment and occupation. There is also a hilly enforceable stipulation that prohibits lowering social regulations and removes the limits on the prosecutorial discretion over enforcement, meaning countries can no longer defend not enforcing their commitments because of the lack of resources or other enforcement issues. Second, they also refer to seven multilateral environmental agreements (MEAs) the parties have signed and lay out the expectation that they will ratify and enforce them. There is a change of language from “strive to” to “shall” concerning the parties’ obligations. Tire monetary' fines are no longer capped, and the sanctions approach remains unchanged, as both labor and environmental clauses are srrbject to the same dispirte settlement mechanism as commercial provisions (Bolle 2008; Lattanzio and Fergusson 2015).

The most recent PTA negotiated by the U.S. with 11 countries in Asia-Pacific, the Trans-Pacific Partnership Agreement (TPP), was signed in early 2016 and was envisioned to become the next generation agreement in regard to social standards. It contained much stricter labor and environmental chapters, which were sitpposed to become models for future PTAs. For example, it included new environmental provisions on wildlife trafficking, illegal logging, and fishing and made the agreement ratification conditional on the ratification of the Convention on International Trade in Endangered Species (CITES). Considering labor issues, the TPP goes much further than previous agreements and makes more far-reaching references to labor issues, including human trafficking and workers’ conditions in exportprocessing zones. The U.S. also signed side agreements with partner countries with the worst labor rights records - Vietnam. Malaysia, and Brunei - requiring them to reform and improve then domestic labor laws as part of the TPP ratification process (USTR 2015). Eventually, the U.S. withdrew from the agreement under the presidency of Donald Trump in 2017.

In sum, social standards in U.S. PTAs have evolved to be more comprehensive and stringent. They are fully legally binding, make references to not only domestic but also international laws, and are frilly enforceable through sanctions, thus acquiring the same status as commercial issues in trade agreements. Notably, there has been a continuing preference of U.S. negotiators to rely on the coercive means of enforcement through either monetary fines or sanctions, which remained invariable. This contrasts sharply with the EU’s approach detailed in the following section.

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