Good for some, bad for others: US investors and non-trade issues in preferential trade agreements

Abstract

Preferential trade agreements (PTAs) trigger investment through their commitment to a liberal market economy. Increasingly however, PTAs go far beyond liberalizing trade and investment flows. Especially controversial features included in most modern PTAs are environmental and labor standards. Do these standards affect business activity? If so, how do investors react to such non-trade issues in trade deals? The literature provides inconclusive findings about the impact of standards on foreign direct investment (FDI). Some contributors argue that strict standards decrease FDI, whilst others claim that environmental and labor protection increases productivity and, in consequence, inward investment. In all likelihood, the usage of aggregated FDI data, as is the case for most studies, causes confusion. I expect standards to influence investors' decisions -but heterogeneously across sectors. Environmental and labor standards should reduce FDI in polluting and low-skilled labor endowed industries, but increase investment in environmentally clean and high-skilled labor abundant sectors. Based on an original dataset of environmental and social standards in trade agreements and at the sector-level disaggregated US-FDI data, I find robust support for my argument. The paper provides a more nuanced picture on the standards and investment nexus: Standards have no uniform effect on multinationals. Instead, they are good for some, but bad for other industries.

Labor upgrading and export market opportunities: Evidence from Vietnam

“…Developed country governments may employ labor‐related conditionality as a means of placating domestic interest groups (Hafner‐Burton, 2009). At the same time, developing country governments are willing to commit to labor rights improvements, because PTAs offer improvements in current account positions, increased tax revenues, and greater foreign direct investment (Manger, 2012; Lechner, 2018). Some developing country governments may even undertake labor rights improvements prior to negotiating trade deals with the United States or European Union, in order to make themselves more attractive potential partners (Kim, 2012).…”

Labor clauses in trade agreements: Hidden protectionism?

“…Lechner (2018) examines the impact of environmental and labor standards in US PTAs on US outward foreign direct investment Berger et al (2020). investigate the trade effects of environmental provisions in PTAs.…”

Social protectionist bias: The domestic politics of North–South trade agreements

“…Thus, environmental standards also attenuate the fears of competition among low-skilled workers often employed in polluting industries. By signing PTAs with environmental standards, Northern governments also signal to their constituents that their commitment to address climate change will not lead to jobs being offshored to dirtier jurisdictions (Lechner, 2018). Therefore, governments include such standards in trade deals as a side payment to societal losers from trade liberalisation to ensure their support for an agreement.…”

“…3 However, this opposition does not manifest itself at the ratification stage. Furthermore, social standards can generate investment in greener industries abroad, as argued by Lechner (2018), which means business interests might be converging with those of environmentalists.…”