International Trade and Race to the Bottom

"Should other states be concerned about your environmental protection choice?" This is a fundamental question in trade policy and regulation which is asked almost everywhere to set the stage for starting the debate about international trade regulation and our class in Economics of International Law was no exception. Most of the answers offered to justify the governments' intervention in the international trade policy are based on the externalities (jobs displacement, protection of the infant industries), strategic trade theory and race to the bottom argument. What I will be talking about is the last argument offered for having restrictions on international trade.

What constitutes the core idea in the race to the bottom argument for restricting the international trade and perceived to be the strongest argument for a hidden protectionism is the race to the bottom. It is argued that the free international trade will be in favor of the countries with less restrictive labor, environmental and human rights measures and will be detrimental to the countries with higher standards with regard to the above mentioned standards, so trading with those countries not only puts the countries with higher standards in comparative disadvantage, but also makes the acute problems of the environment and human rights worse, so there should be either no trade with countries with low standards or there should be some restriction on trading with them.

I my view there are problems with this argument.
1. In terms of economics, since the advent of the marginalist revolution based on the modern theory of economic value, no sound economist could be found to be thinking that there should be no trade at all. One of the fundamental methods of thinking like an economist is thinking marginally. It means that most of the times, we are not dealing with the problems involving either/or, but problems of different degrees or levels taking account of other available alternatives at disposal. Marginalism should be understood as part of the fundamentals of the theory of the microeconomics dealing with the optimal allocation of the limited resources to the unlimited wants and desires. It implies that most of the choices we are making in our life is not about whether we want something or not, but how much of something we want in combination of how much of some other things. So, when the question is not about all or none, but about how much, the answer should be about how much trade with those countries and how much restrictions should be put on those trades.

2. Second and more logically based argument against the race to the bottom is about the fallacy/problem of equivocation lying in the context of the debates on the international trade. The repeated use of the race to the bottom argument makes economists to take it as granted. I think the question we should ask should concern with the meaning and implications of the word "bottom". We should come up with an idea of what this bottom means and after setting the reference/anchor points in the definition of the bottom, proceed to make use of this argument against international trade. Someone sitting in the developed country may see a situation as bottom while the other one in an underdeveloped / undeveloped / emerging market sees it as top. This fallacious argument arising from the improper use of the language and ambiguity in the meaning of the words is called equivocation. If we want to resolve this problem, the parties to an argument should first agree about the meaning of the concept or the conception of the particular concept they have in their minds in that particular context.

The other days, I was watching an interview with an ex-Chinese teacher who was working in a factory at that moment, he was telling to the interviewer that when he was a teacher he earned one hundred Yuan per month (I am not sure about the currency and the period, but sure about the numbers), while working in the factory he could earn 3.000 and despite being in a very modest situation he was very happy. What developed world sees a bottom, to him it was top.

There is a nice and almost untranslatable verse in Persian which best describes this problem with a very palpable analogy. It goes as follows:
حوران بهشتی را دوزخ بود اعراف
از دوزخیان پرس که اعراف بهشت است
A'raf is a place located in between the heaven and hell. The verse says that for the angels of heaven, A'raf is a hell, while for the residents of hell, it is a heaven. So two categories of people with two different socio-economic! standings, see one thing differently and consequently if these two with the above specifications argue about the a'raf, they have two distinct conceptions in their minds and cannot come to a proper conclusion on that.

It appears that in the race to the bottom argument convergence on the word "bottom" has yet to be achieved. Though this "bottom" concept could be roughly taken as granted when we are talking about one domestic legal system, we should not hastily and unthinkingly borrow the concepts from the domestic legal or economic system and apply it to a different legal structure.

Another important argument against restricting the trade with countries with looser standards is that it will prevent the evolutionary process of divergence of the conception of the concept of the "bottom" which trade with those countries can bring about. As the basic principles of economics imply, no trade/ voluntary exchange can occur unless it is beneficial to both parties, when we see that one enters into a voluntary exchange of goods or services, it is appropriate to assume it is in the interest of both parties to engage in that particular trade. Having this in mind, it will become clear that imposing restrictions on the trade with these countries will wipe out both producer and consumer surpluses and will be detrimental to both parties, especially it will make barriers for developing countries to reap the profits of the trade and will leave them in their regrettable status quo, i.e., poverty and starvation, while having trade can fill the gap between those countries and more developed ones to a considerable degree and pushes the "bottom" up.

3. I personally believe that the main reason behind this kind of argument is nothing more than a hidden filthy protectionism formulated and propagated by the more organized producers to the detriment of the non-organized consumers and society trapped in the collective action problem unable to further their interests.

The last point I want to make is that we cannot judge and evaluate the arguments in vacuum, when we want to assess the implications of particular policies we are supposed to look at the alternatives we have at hand. There seems to be two alternatives for having trade with countries with looser standards, first having no trade with them and sanctioning their products, second having limited trade imposing higher tariffs and quotas on their product. I think both of these arguments are doomed to fail. Why? The first one is quite obvious, it will end up in huge losses in the forgone gains of trade and both parties to the trade will lose. The second one will result in a huge deadweight loss arising from the restrictions on the trade. Though less detrimental than the first one, it will bring more restrictive measures to the trade in favor of the organized interest groups which will endure even after the change in circumstances. After an institution is established, it will be very hard to unravel it. On the other hand, this institution will generate public officials and bureaucrats seeking their interest to the detriment of the society as a whole.
So it seems appropriate to ask whether a free trade with emerging markets even with looser human rights, environmental or labor standards will result in the race to the bottom or race to efficiency.