International Investment Agreements (IIA) play an important role in the protection and liberalization of global capital flows. Attracting foreign direct investment (FDI) is often seen as a prerequisite for the economic growth of developing countries. It strengthens a state’s balance of payments and is presumed to have positive spill-over effects on local economies. But the liberalization and protection of FDI may also carry risks. The best-known one is that IIAs could induce a 'race to the bottom' in domestic labour standards. Many empirical studies however conclude that such a race is non-existent. Therefore there would be no need to include minimum labour standards in IIAs. In my view, the race to the bottom paradigm should not be the main evaluative criterion for this normative debate. Instead, the debate should focus on two different problems.
First, even if there is no macro trend that points to a race to the bottom, there are concrete cases in which states lower domestic labour standards. Recorded instances range from the 'Hobbit labour laws' in New Zealand, where film industry workers were reclassified from employees to 'independent contractors' in order to deny them union contracts, to the prohibition of trade unions in Bangladeshi export processing zones, which was demanded by Japan and South Korea on behalf of their own investors. Such derogations artificially modify a state’s competitive advantage, and puts undue pressure on other states to also derogate in order to retain investments within their jurisdiction, or become more attractive to new investors. This may not escalate into a 'race' but still leads to a net deterioration of labour standards that could, from a normative perspective, be qualified as unfair and warrant the inclusion of minimum norms in IIAs below which states are not allowed to compete for FDI.
The second potential justification for the inclusion of labour standards in IIAs can be sought in concerns about the potentially restraining effects of IIAs on host states’ ‘policy space’. The threat of arbitration might make host states hesitant to implement measures in the pursuit of social policy objectives, such as the improvement of labour standards, out of fear that by doing so it might violate the standards of treatment prescribed by an investment agreement. From an empirical point of view, it is difficult to assess the validity of these claims, as they require counter-factual evidence. It may well be, as some have argued, that there is nothing in the nature of IIAs that would confirm the regulatory chill hypothesis. But the latter should not be dismissed too quickly, as threats are cheap and investors can make claims even when these may have little chance of success. Foreign investors have already demonstrated their readiness to use IIAs as a way to challenge undesirable legislative and administrative measures adopted by host states in pursuance of public policy objectives, such as those aimed at the promotion of public health or the protection of the environment. As long as IIAs are perceived as being one-sidedly focused on the rights of foreign investors without balancing these rights against the rights of host states to regulate social issues, the inclusion of labour standards in IIAs could shield domestic labour regulations from investor claims.
Each of these two concerns could thus legitimize international policy coordination in the form of including labour provisions in IIAs. Only when IIAs are designed in a way to not cause regulatory derogations or chill effects do they truly contribute to the development of their signatory states. The race to the bottom paradigm is, from a normative point of view, nothing more than a distraction.
This blog post is a summary of a longer paper that I co-authored with Vid Prislan, who is also a PhD Candidate at the Grotius Centre for International Legal Studies. It is freely available on SSRN.