Dress- and Auto- Makers in the “Free Trade” Arena

Even though there have been many studies on the impact of trade liberalisation on labour standards, most of the studies are at national level, and there is a lack of research at industry level. This paper examines the impact of free trade on labour standards in capital- and labour-intensive industries in a developing country. For empirical findings, I take the case of the garment industry, representing labour-intensive industry, and automotive industry, representing capital-intensive industry, in Indonesia in the face of ASEAN Free Trade Area (AFTA). Since the garment industry is a women-dominated industry, while the automotive industry is a men-dominated industry, this paper also employs a feminist perspective. As such, this paper also investigates whether free trade equally affects men and women workers. Besides free trade, other independent variables are also taken into account. Employing quantitative and qualitative methods, empirical evidence shows that there is an indication that free trade has a negative relationship with labour standards in the garment industry, whereas a positive relationships with labour standards in the automotive industry. This implies that free trade might result in decreasing labour standards in labour-intensive industry, while increasing standards in capital-intensive industry. It can also be inferred that free trade unequally affect men and women workers, in that women workers bear the brunt of free trade. The results also show that other internal and external independent variables are indicated to have relationships with labour standards in the garment and automotive industries. Therefore, these variables need to be considered in examining the extent of the impact of free trade on labour standards in labour- and capital-intensive industries.

Core Labor Rights

The working paper’s main objective is to explore the extent to which non-compliance to international labor rights is caused by global competition. From the perspective of institutional economics, compliance with core labor rights is beneficial for sustainable development. Nonetheless, violations of these rights occur on a massive scale. The violators usually blame competitive pressures. A number of studies have come to the conclusion that non-compliance does not provide for a competitive edge, thereby denying any economic rationale for non-compliance. While we sympathize with this conclusion, we find that these studies suffer from faulty assumptions in the design of their regression analyses. The assumption of perfect markets devoid of power relations is particularly unrealistic. While workers' rights promise long-term benefits, they may incur short-term production cost increases. On the supply side, the production sites with the highest amount of labor rights violations are characterized by a near perfect competitive situation. The demand side, however, is dominated by an oligopoly of brand name companies and large retailers. Facing a large pool of suppliers, these companies enjoy more bargaining power. Developing countries, the hosts to most of these suppliers, are therefore limited in their ability to raise labor standards on their own. This competitive situation, however, is the very reason why labor rights have to be negotiated internationally. Our exploration starts with an outline of the institutionalist argument of the benefits of core labor rights. Second, we briefly examine some cross-country empirical studies on the impact of trade liberalization (as a proxy for competitive pressures). Third, we develop our own argument which differentiates the impact of trade liberalization along the axes of labor- and capital-intensive production as well as low and medium skill production. Finally, we present evidence from a study on the impact of trade liberalization in Indonesia on the garment industry as an example of a low skill, laborintensive industry on the one hand, and the automobile as an example for a medium skill, capital-intensive industry on the other hand. Because the garment industry’s workforce consists mainly of women, we also discuss the gender dimension of trade liberalization.