CHAPTER 6:
LABOUR MARKET ADJUSTMENT AND STANDARDS

The question to us is not whether or not we should trade, but how to do it so that it leads to a prosperous and democratic region in which all citizens share in the benefits of economic growth and development. That's the key to the whole thing. [Dick Martin, 26:1610]

Trade liberalization undeniably generates economic benefits; however, these benefits are not distributed equally. Some interests gain while others lose. Nowhere is this more obvious than in the impact of trade on the labour market. This Chapter discusses the impact of trade liberalization on workers, especially in terms of structural unemployment. It also addresses concerns voiced by several witnesses pertaining to trade liberalization and its potential for diluting the quality of labour standards enjoyed in this country.

Labour Market Adjustment

The economic benefits of trade are becoming increasingly familiar to Canadians. National income is enhanced when countries specialize in the production of the tradable goods and services that they find relatively least costly to produce, while importing the goods and services that are relatively more expensive to produce. Such specialization also permits the firms of these countries to exploit economies of scale, something that is particularly important to a country like Canada, where the domestic market is small. Trade liberalization also attracts new investment and this, too, creates jobs. The Canadian economy has become increasingly dependent on international trade, which now accounts for almost two-fifths of gross domestic product (GDP), and, in 1998, Canada was the most trade-oriented of the G7 countries. As noted elsewhere in this Report, approximately one-third of all jobs in Canada depend on exports. In addition, it is estimated that 11,000 jobs are either sustained or created for every $1 billion in new exports.1 The Departments of Industry Canada and Foreign Affairs and International Trade estimate that, over a five-year period, an increase of $1 billion in new investment in Canada from abroad creates up to 45,000 jobs and increases GDP by some $4.5 billion. It is also thought that foreign direct investment is the impetus for one job in ten and approximately 50% of Canada's total exports.2

While trade is undeniably vital to this country's economy and its labour market, a Free Trade Area of the Americas (FTAA) would in all likelihood have a small impact on employment in Canada; the volume of two-way trade between Canada and non-NAFTA countries of the Western Hemisphere was less than 2% of total Canadian two-way trade in 1997.3 The situation is much like that prior to Canada's improved access to the Mexican market under the North American Free Trade Agreement (NAFTA). Trade liberalization with Mexico was expected to increase Canadian GDP only marginally;4 hence, the impact on employment was also expected to be quite small.

Though expected to have a relatively neutral impact on the level of employment in Canada, trade liberalization in the Western Hemisphere would very likely lead to a sectoral redistribution of jobs. In this context, jobs are expected to increase in expanding export sectors, while some jobs in the import-competing sectors of the economy will likely disappear. As indicated in Chapter 4, one attempt to estimate the impact of extending the NAFTA to include Argentina, Brazil, Chile and Colombia claimed that Canada could expect to witness a small increase in total output in 10 of the 23 tradable sectors examined, with the greatest growth predicted for electrical machinery, non-ferrous metals and miscellaneous manufacturing. An almost equal number of sectors were predicted to see decreases in output, with the most significant being in textiles and paper products. While employment effects were not directly estimated in this study, we can expect to witness a small redistribution of jobs as resources shift from the contracting to the expanding sectors. Consider the following perspective on the effects of the NAFTA on Canada's manufacturing sector:

I want to point out that during the late 1980s, leading up to the free trade agreement with the United States and then with NAFTA, there were a lot of critics of the agreement who said that Canadian manufacturing, the forefront in terms of competition here, would be out of business, that many sectors of manufacturing would be wiped out. The reality is that manufacturing production is $150 billion higher today than it was in 1989. There are 100,000 more people employed in manufacturing than in 1989. The unemployment rate in manufacturing is 5%, as opposed to 8% or 7.5% for the economy as a whole. The sectors that we thought were going to be wiped out, like furniture and wine, are actually the fastest-growing sectors in percentage terms in Canadian industry. I'm not saying that didn't happen without a lot of hard choices and a lot of restructuring - that's perfectly true - but it has been restructuring to go into higher-value products, and that's what is giving manufacturing the boost today. [Jayson Myers, 28:1705]

An FTAA could also serve to keep export-related jobs in Canada by minimizing trade-related incentives to relocate elsewhere in the Western Hemisphere. As one witness said:

We are manufacturers of activewear, predominantly T-shirts, sweatshirts, and golf shirts, and we are the fastest growing company in North America. The reason we've been very successful is because of access to the Caribbean and Central America by participating in the American bilateral agreement, known as the Caribbean Basin Initiative, that is their law 807 ... The bad news is that to participate in that bilateral agreement ... we've really had to move manufacturing facilities from Canada to the United States in order to be onside with their legislation. [Greg Chamandy, 31:1625]

As the demand for labour shifts towards export-oriented production, trade liberalization can also be expected to affect workers' earnings. In this regard, increased demand for labour and potential increases in productivity could result in higher wages in growing export sectors of the economy, but lower wages in declining import-competing sectors. Consequently, as trade liberalization permits developing countries to make greater use of their low-skilled workforces, the demand for similarly skilled workers in developed countries may experience job losses, lower wages or both. Some attribute the growing gap between the wages of low- and high-skilled workers in many developed countries to increased trade with less developed countries and the prospect of an FTAA has raised this concern. Empirical evidence, however, seems to support the view that growing wage differentials between low- and high-skilled workers in many developed countries are predominantly the result of factors other than trade. A number of studies suggest that 80% to 90% of the changes in wages and income distribution observed of late in Organization for Economic Co-operation and Development (OECD) countries is attributed to factors other than trade with developing countries (i.e. the high skills bias inherent in technological change).5

[W]e are pursuing not just the question of the trade in goods and services; we are pursuing them with specific economic outcomes that relate to issues of employment and increased income. So it is against those outcomes ... that we also have to assess our economic policies. [Gauri Screenivasan, 27:1655]

The Committee maintains that the benefits of trade liberalization under an FTAA must be shared. When workers are displaced as resources move from contracting to expanding sectors of the economy, governments have the responsibility to help them secure new jobs. This assistance is thought to be particularly necessary for older displaced workers, whose skills may be redundant and who, in the absence of help, face long periods of joblessness.

Labour Standards

Concern was also expressed during our hearings about the impact of an FTAA on Canadian labour standards. Some witnesses believe that an FTAA would provide an opportunity for governments in the Western Hemisphere to commit themselves to a stronger protection of fundamental human rights, some of which are manifest in basic labour standards. This view is based in part on the concern that, in the absence of a requirement to adopt minimum labour standards, high-standard countries like Canada will lower their labour standards in order to remain competitive. Implicit in this view is the assumption that firms not bound by minimum labour standards enjoy a competitive advantage over firms that are so bound. Moreover, it is believed that the growing competitive pressures associated with trade liberalization will serve to undermine workers' rights in countries with high labour standards. This view underpins the "race to the bottom" scenario.

I want to point out that when we are talking about standards, we're not saying that the wages and benefits in a Latin American country should be what they are in Canada or the United States. We're talking about standards such as the right to organize and the right to collective bargaining ... That's the kind of minimum standard we want to see recognized in this trade agreement. It's not that they should have our standards of wages, pensions, and all that, but they should have the right politically and through collective bargaining to negotiate what is reasonable for them. [Hon. Warren Allmand, 28:1725]

Contrary to this view, others maintain that trade liberalization provides an opportunity for countries and their workers to enhance their economic well-being; the wealth-creating effects of trade liberalization will result in better working conditions and higher labour standards. The Committee was told that the alleged "race to the bottom" is a myth unsupported by any evidence. A recent OECD study found a positive two-way relationship between trade liberalization and improvements in association and bargaining rights and not a single case where association rights had deteriorated after trade reforms.6

The Committee was also reminded that many countries with low labour standards view the demands for these to be raised as disguised protectionism and as tantamount to undermining their real competitive advantage, namely low-wage labour.

Source: International Labour Office. The information presented in this table is current as of 23 June 1999.

At present there is no formal link between international trade and the protection of workers' rights. The World Trade Organization (WTO) was never intended to make this link; except in the case of prison labour, WTO rules are devoid of any binding obligations to comply with internationally recognized labour standards. In fact, the December 1996 WTO Ministerial Conference identified the International Labour Office (ILO) as the competent international body responsible for protecting fundamental workers' rights in a multilateral trading environment. All WTO members are members of the ILO, and many of them have ratified one or more ILO conventions dealing with the fundamental rights of workers. Even so, there is a tremendous reluctance to permit countries to use trade sanctions as a means of enforcing fundamental labour standards. As stated in the WTO's Singapore Ministerial Declaration in December 1996, "[w]e reject the use of labour standards for protectionist purposes, and agree that the comparative advantage of countries, particularly low-wage developing countries, must in no way be put into question."

The ILO's governing body has identified seven conventions embodying fundamental labour standards that should be extended to workers, irrespective of a state's level of economic development. These include the Freedom of Association and Protection of the Right to Organize Convention, 1948 (No. 87); the Right to Organize and Collective Bargaining Convention, 1949 (No. 98); the Forced Labour Convention, 1930 (No. 29); the Abolition of Forced Labour Convention, 1957 (No. 105); the Discrimination (Employment and Occupation) Convention, 1958 (No. 111); the Equal Remuneration Convention, 1951 (No. 100); and the Minimum Age Convention, 1973 (No. 138). These conventions - commonly referred to as core labour standards - are regarded as the fundamental basis of all other rights in the workplace. They were reaffirmed by the 86th International Labour Conference, at which the ILO Declaration on Fundamental Principles and Rights at Work was adopted. This declaration obliges all member states to respect the fundamental principles associated with the aforementioned core labour standards, whether or not they have ratified the relevant conventions. As shown in Table 6.1, many potential FTAA signatories have ratified, or are in the process of ratifying, at least some of these conventions. Eleven of these countries have ratified all seven conventions. Canada has ratified four, and the United States has ratified one and is in the process of ratifying another.

Despite the lack of evidence that trade liberalization may lessen the core rights of workers, the Committee believes that it is important to strengthen the link between core labour standards and trade. Labour standards must be protected and improved. In keeping with the position taken in its Report on the WTO, the Committee is reluctant to endorse a hemispheric trade agreement to permit trade sanctions against signatories deemed to be in violation of one or more of the ILO's core conventions. No organization is capable of arbitrating alleged violations and, as noted in the aforementioned report, there are several drawbacks to relying on the ILO to defend the fundamental rights of workers in a multilateral trading environment such as that contemplated under an FTAA. One is the lack of a basis for protecting workers' fundamental rights in the absence of ratification, a situation that is commonplace since only a minority of potential FTAA signatories have ratified all seven conventions relating to core labour standards. It is also thought that some of the core ILO conventions lack the necessary legal precision and predictability to allow their enforcement to be linked to trade rules. Moreover, the ILO's enforcement mechanism is clearly wanting.7

Though the Committee does not support the use of trade sanctions as a means of ensuring that FTAA members comply with ILO core labour conventions, it does believe that the ILO's role in protecting the fundamental rights of workers in the Americas, and even elsewhere in the world, must be enhanced under an FTAA. This position is consistent with the one taken in the Committee's Report on the WTO.

As previously noted, some witnesses supported the creation of a link between an FTAA and core labour standards. The Committee also heard a dichotomy of views on the preferred approach for their linkage. Some opposed using a NAFTA-like side agreement and wanted to incorporate labour standards in an FTAA. Others endorsed the idea of a separate agreement outside of an FTAA. The Committee believes that an ancillary agreement, such as the North American Agreement on Labour Co-operation (NAALC), might best address the concerns of those who fear that Canadian labour standards would diminish with freer trade in the Americas. Such an agreement would avoid the likely possibility of protracted negotiations by eliminating an additional layer of complexity. More importantly, the possibility of using labour standards to facilitate protectionism would be reduced, a position also endorsed by the WTO. By seeking an agreement on core labour standards outside of an FTAA, each country's sovereignty in the area of labour law would also be assured. In the Committee's view, the primary focus of an FTAA side agreement on labour standards should be standards related to the fundamental rights of workers as identified by the ILO's Governing Body, although the promotion of non-core labour standards should also be encouraged. An FTAA supplementary accord on core labour standards should protect these rights to the extent that they are protected under national legislation. The institutions, enforcement provisions and dispute resolution features put in place to achieve this goal should encourage signatories to respect and build upon their core labour standards.8 The Committee also believes that the ILO should be an active participant under these agreements and that the model selected must be affordable for all FTAA signatories.

The Committee therefore recommends:

10. That the Government of Canada work to build up the presence of the International Labour Organization in the hemispheric initiative and continue to promote labour standards throughout the Americas.

2 Department of Foreign Affairs and International Trade, Opening Doors to the World: Canada's International Market Access Priorities, 1999, July 1999, Chapter 3, p. 1.

3 International Monetary Fund, Direction of Trade Statistics Yearbook, 1998.

4 NAFTA's long-run impact on the size of the Canadian economy was estimated to be less than 0.1% (see Department of Finance, The North American Free Trade Agreement: An Economic Assessment from a Canadian Perspective, November 1992, p. 33-5).

5 World Trade Organization, Annual Report, 1998, p. 48-9.

6 OECD, Trade, Employment and Labour Standards, Paris, 1996, p. 112.

7 The ILO encourages compliance through its international supervision activities. Every five years members are obliged to supply reports on the effect given to ratified conventions. The Committee of Experts reviews these reports. If a government is deemed to be delinquent it is informed of the necessary steps that should be taken to ensure full compliance. In addition, any member state, or national or international workers' or employers' organization may make a representation that a member state has failed to comply with a ratified convention. These representations are reviewed by the Governing Body, which may decide to appoint an independent Commission of Inquiry. The Commission reports its findings and the Committee of Experts follows up on the implementation of any recommendations. While these procedures may persuade some member states to comply, in reality the ILO is void of any real enforcement powers.

8 One reason why some witnesses opposed linking trade and labour standards through a supplementary agreement like the NAALC was the perceived ineffectual enforcement mechanism associated with this agreement. This perception has merit, since enforcement penalties are limited to non-enforced labour laws dealing with health and safety, child labour and minimum wages. The majority of submissions to date pertain to alleged violations of the right to freely associate and organize a union. Enforcement provisions pertaining to violations related to this key labour standard, in conjunction with the right to bargain collectively and the right to strike, are limited to ministerial consultations, with no further action required.