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Social Clauses in Trade Agreements

Implications and Action Points for the Private Sector in Developing Countries

Clinic: Graduate Institute, Fall 2020

Beneficiary: International Organisation of Employers (IOE)

Executive Summary

Read the Full Report here

This report supports the beneficiary – the International Organisation of Employers – in providing practical guidance to employers and businesses faced with free trade agreements (FTAs) containing social clauses.

It does so by taking the diverse array of actors, the tensions within, and the opportunities set forth by free trade agreements and elaborating upon them using three case studies.

The report begins with an analysis of the types of social clauses that currently exist.

The report looks into the various functions that social clauses serve under free trade agreements and how these provisions can act to supplement the ILO Supervisory Mechanism for the implementation of labour standards. It also provides an overview of social clauses through time and the various commitments to labour rights that were made from 1919 with the Covenant of the League of Nations, to the 1996 Ministerial Declaration in Singapore that supported the use of trade to promote labour standards.

The report finds that states entering into free trade agreements will conventionally commit to labour standards in one of two ways. They may commit to uphold and ratify ILO fundamental principles and rights, or they may commit to implement (as well as not waiver from) their own national labour laws. In many cases, states commit to both. Understanding commitments under FTAs can help businesses understand their obligations in terms of compliance, and their avenues for advocacy and participation during negotiation. Social clauses can also have monitoring and cooperation provisions, where countries help each other, that can be used to the advantage of businesses. This includes provisions for technical assistance and training, as well as the creation of mechanisms for tripartite stakeholder participation. Finally, labour provisions can include dispute settlement provisions as well as the possibility of sanctions, which can have different implications for businesses based on the specificities of the trade agreement concerned.

The report then moves to three FTA case studies regarding the implementation of labour standards at the domestic level. When examining the CAFTA-DR, the EU-Korea FTA, and the USMCA, the report especially focuses on the effects that social clauses may have on the developing country parties, and the private sector in particular.

A historic moment came in the form of the 2011-2017 labour dispute between Guatemala and the United States because it was the first time that labour violations were invoked in a free trade agreement and brought before an arbitration panel. Guatemala was accused by the United States mainly for failing to enforce its own domestic laws. The Panel used two specific thresholds to measure the Guatemalan Government's alleged violations. It ultimately found that Guatemala was not in breach of the CAFTA-DR because Guatemala’s alleged violations were not recurring violations and they did not affect trade. Following on this decision, the report analyses how the government of Guatemala was reformed since the panel decision, especially in respect to the level of efficiency and enforcement in its domestic legal system.

More recently, the introduction of the USMCA marked a milestone in the process of legal enforcement mechanisms of labour clauses. The enforcement tool, referred to as the 'facility-specific rapid response labour mechanism', marked a shift from conventional state-to-state enforcement tools under free trade agreements. The rapid response mechanism can hold individual firms accountable for violating specific labour standards, whereas the older-generation free trade agreements only can hold governments accountable for not upholding their laws. Entering into force in 2020, this mechanism is the most enforceable tool for labour violations ever agreed to by the United States. Despite the challenges presented by the USMCA, this report shows how the FTA can be used to the advantage of employers - focusing specifically on Mexican employers - and how it can create avenues for closer collaboration between governments and employers.

In contrast to the United States, the European Union uses a cooperation-based model for holding its free trade partners accountable to their labour standards. In 2020, when this report was being written, an EU labour complaint under the EU-Korea FTA was being viewed by a panel of experts. The dispute is based on South Korea's alleged failure to make sustained efforts to ratify the ILO’s fundamental conventions, specifically, Conventions No. 87 and 98 concerning freedom of association, and Conventions No. 29 and 105 concerning forced labour.

The final chapter of this report elaborates upon lessons learned from the private sectors of Guatemala, Mexico, and Korea when they were navigating through the economic and social effects of their respective situations. Furthermore, this chapter provides best practices and recommendations. The list of concrete action points was consolidated from interviews conducted with various developing country representatives for businesses and employers.

The key recommendations in this section were as follows:

  1. Active engagement between employers and its respective employer organization ensures that the employer and business perspective is given substantial formal representation.

  2. Employers and employer organizations should apply and participate within domestic advisory groups (DAG) or other civil society mechanisms

  3. Businesses are encouraged to refer to fundamental ILO conventions in their code of practice and increase awareness of their practices in line with ILO fundamental conventions.

  4. Employers and employer organizations must use their avenues to formally influence the process of negotiating and drafting free trade agreements.

  5. Employer organizations must request opportunities from the IOE for ‘horizontal’ cooperation between employers of both developed and developing countries.

  6. Employer organizations must request and make full use of their tripartite schemes, guaranteed by the ILO and by respective free trade agreements.

These examples can represent wider lessons for how employers may build capacity and ensure compliance in an efficient way. With this practical guidance regarding labour standards in free trade agreements, employers may be able to continue fulfilling the vision of the beneficiary: to promote free enterprise that is fair and beneficial to both business and society.

Full Report Here