Race to the bottom

Occurrence and limitations

The occurrence of races to the bottom is mitigated by the costs of moving investment and production between countries, by persistence of comparative advantages (such as skilled workforces, infrastructure or proximity to natural resources), and by the presence of minimum standards, rules or conventions which prevent them.

Races to the bottom can also occur between the states or administrative regions within nations, which often seek to attract businesses and jobs on the basis of a favourable regulatory environment. The extent of such intra-national races is limited by the power and inclination of central national governments to act against them.

Implications

In its early stages, a race to the bottom can arguably be a force for good, in situations where laws are genuinely and inefficiently burdensome.

In general, however, these contests regularly work to undermine the ability of governments to protect labor standards such as workers' compensation, or to raise taxation in order to fund social services and correct externalities (such as pollution and social degradation).

Races to the bottom between sovereign states can also undermine democratic accountability, since the elected governments are no longer economically capable of passing legislation which enforces environmental or labour protections that are more stringent than those current in neighbouring countries.

Causes and responses

The dismantling of tariffs and other trade barriers, facilitated by the rules set within the World Trade Organization, and encouraged (in the South) by US influence through the World Bank and the IMF, may have removed an important constraint on races-to-the-bottom; without protected domestic industries, countries are more dependent on liquid investment capital. One solution to this problem is to employ international fora, such as the WTO itself, to set satisfactory environmental and labor rules at a global level. To date, however, the WTO has proved ineffective in addressing these problems.

Another suggested method for avoiding races to the bottom is moral purchasing. Moral purchasing can influence decisions at the level of individual buyers, or it can involve forbidding or applying heavy tax, tariff and trade sanctions to nations that permit the export of offensive goods, re-directing revenues raised from such tax or tariff to combating abuses.

Occurrence in international labor markets

The positive argument for free trade rests on the economic theory of comparative advantage, which in turn depends on the necessary condition of "capital immobility." If financial (or labor) resources can move between countries, then the comparative advantage theory erodes, and absolute advantage dominates. Given the liberalization of capital flows under free trade agreements of the 1990s, the necessary condition of capital immobility no longer holds. As a consequence, the economic theory of comparative advantage no longer supports free trade theory. Because labor is fairly immobile, financial capital is moved across international borders seeking the least cost labor. Because a huge pool of labor exists in the world, this process is often cited as another example of the race to the bottom.

Where these races to the bottom occur, it becomes unclear whether it is actually in nations' collective self-interest to support free trade.

Corporate Law

In the US legal academia, there is a longstanding debate whether US corporate law is subject to a race to the bottom or a race to the top. Given that it has always been possible to incorporate in one state and do business primarily elsewhere, US states have rarely been able or willing to use corporate law to protect the interests of shareholders, creditors, employees and other corporate constituencies. From the "race" to attract incorporations, Delaware has emerged as the winner, at least among publicly traded corporations. The corporate franchise tax accounts for between 15 and 20 % of the state's budget.
At the heart of the debate lies the question whether the US states' corporate law is desirable in its present state or not. The most important proponents of the "race to the top" perspective have been Henry Winter, Roberta Romano, Frank Easterbrook and Daniel Fischel. The "race to the bottom" perspective started with an article by William Cary in 1974 and has been developed further most importantly by Lucian Bebchuk. However, according to a recent critical appraisal by Mark Roe, the debate is misconceived, since Delaware's law has less been shaped by competition with other states, but by pressure from the federal level. The empirical evidence does not conclusively support any of the theories.

In Europe, regulatory competition has long been prevented by the real seat doctrine prevailing in private international law of many EU and EEA member countries, which essentially required companies to be incorporated in the state where their main office was located. However, in a series of cases between 1999 and 2003 (Centros, Überseering, Inspire Art), the European Court of Justice has forced member states to recognize companies chartered in other member states, which is likely to foster regulatory competition in European company law.

Rhetoric

The phrase race to the bottom is used sometimes in a pejorative context by those opposed to globalization and those supporting "fair trade" companies.

An example: in response to reports that British supermarkets had cut the price of bananas, and by implication had squeezed revenues of banana-growing, developing, nations, Alistair Smith, international co-ordinator of Banana Link, said "The British supermarkets are leading a race to the bottom. Jobs are being lost and producers are having to pay less attention to social and environmental agreements." [1]

See also