Should labor practices in another country be a relevant consideration in international trade? Why or why not? International trade concerns all businesses. Per the International Labor Organization, (ILO, 2018) “achieving the goal of decent work in the globalized economy requires action at the international level, which includes human rights and labour” (A path to decent work). The trading of goods internationally means countries share products amongst one another along their borders. Labor practices are a relevant consideration in international trade. There are legal obligations for any country that must be considered related to another country’s labor practices when doing business internationally. Any given country has their own rules and regulations for business and should be followed per the legal requirement of that country when doing business internationally. It is best to know the legal requirements, have a native of the country interpret, if needed. This is so there are no misunderstandings of the legal requirements and always follow the legal requirements per the law when practicing international trade. It only makes sense to consider labor practices, as a business cannot obtain a license without a considering them. According to the ILO, there are minimum of labor standards that should be followed for countries (2018). It is these standards that keep all countries that obey them at an equal playing field for international trade. It also keeps safety Show When it comes to international business, one of the most important issues that companies can face is whether or not to use a third party to help meet some of their manufacturing needs. Apple, Adidas, Hewlett Packard and First Solar are among the many companies that have chosen to use third-party manufacturing companies to help fulfill the demand for their products. Shifting manufacturing operations to other countries can be a massive undertaking. There are several important factors to be considered in such a major decision…. The Pros of moving your manufacturing abroad1. Using third party companies, such as Foxconn in China, can provide access to labour that is cheaper and more efficient. There are a number of reasons why the labour is cheaper. China, for example, has a vast population, estimated to be at around 1.4 billion people, or approximately nineteen percent of the global population. The work force is therefore also enormous. This leads to competition for any available positions, and gives employers an advantage. The combination of this competitive job market with a lower cost of living than many Western countries means many Chinese workers are willing to work for less, which presents an opportunity for global companies to save on labour costs. It is not just the Chinese who are willing to work for less. In fact, companies often outsource to India, Southeast Asia, Mexico, and Central America because workers in these areas are willing to work for less as well. Because wages are smaller, payroll taxes are also smaller. There are far fewer unions in these countries, so there is a reduced risk of workers going on strike as well. There are also less work regulations for companies in these areas, such as required increases for overtime pay rates, which can save time and money. 2. The quality of the labour is often still great, despite the reduced costs. Most people who have ever used an Apple product, for example, can attest to the high quality. Apple is known throughout the world for its precision and impeccable design. The fact that Apple’s sophisticated products are manufactured by Chinese workers who often make less than seventeen dollars a day does not reduce quality at all. In fact, in the first day that pre-order sales went live for the IPhone 6 and the iPhone 6 Plus, 4 million phones were ordered. There were some concerns about the iPhone 6 Plus bending, but that didn’t stop people all around the world from waiting in massive lines to get their hands on one of these new phones. 3. Moving manufacturing overseas can mean that companies can close plants in their own countries. Shutting down these plants can save large amounts of money in real estate costs, as real estate is likely to be cheaper in the outsourcing country. The Cons of moving your manufacturing abroad1. Despite the fact that third party companies can often provide quality labour at a drastically reduced cost, there are sometimes moral issues that can accompany this type of labour. For example, working conditions for employees in these companies can be extremely difficult. To return to the example of Foxconn, the manufacturing company that makes products for Apple, Amazon, Hewlett Packard, and others, workers there often have to sleep in dormitories that have up to thirty people living in a three-bedroom flat. Workers also frequently have to work extremely long hours, to the tune of eighty hours per week. Furthermore, workers often have to stand, or are only allowed to use one third of a chair to sit on in order to keep them more focused. Life at these types of companies can be very difficult for the workers, and it is definitely something to consider when it comes to making business decisions for major corporations. Another key point to consider is that sometimes the factories and buildings in which these workers work often aren’t safe. These countries have fewer building regulations, and sometimes accidents happen. For example, in April 2013, an eight storey commercial building in Bangladesh that housed a clothing manufacturing company collapsed after cracks appeared in the structure. Over one thousand people were killed in this accident. 2. Outsourcing your manufacturing or other aspects of a domestic business means transporting large amounts of jobs elsewhere. Although this can increase a company’s bottom line, it can also require putting large numbers of domestic workers out of work, which can be hazardous to the company’s global brand management. In an age of increasing social responsibility, firing five thousand domestic workers is not exactly great for a brand’s image. Displacing so many people from their jobs is a very significant decision. Also, the workers who are losing their jobs are often the people who have helped grow the company into what it is. So, transporting so many jobs can often create resentment from, and hard times for, domestic workers. Between 2001 and 2011, around 2.7 million jobs were outsourced from the United States to China. A large percentage of those jobs were from the textile industry. While textile companies saved on their bottom lines by relocating operations to China, millions of workers lost their jobs in America. That is a heavy social cost to pay. There are both pros and cons to outsourcing manufacturing. Ultimately, it is up to the individual company to decide whether or not using a third party company to meet its manufacturing needs is the right decision. If a company can find a third party company which can provide cheaper labour, less regulation and fewer taxes, but also treats its workers fairly and provides them with a safe working environment and better quality of life, as many do, it can be an excellent option. The negative brand implications for putting domestic workers out of the job, and the possibility of forcing foreign workers to work in what are sometimes harsh conditions, however, may lead other companies to continue their domestic manufacturing practices. In an increasingly globalized world, opportunities for third party manufacturing will surely increase. The extent to which these opportunities will be taken advantage of is yet to be determined. Have you made the decision to start outsourcing your manufacturing, and what have been the results?
Simple measures like labeling toxic chemicals and organizing tools mean much safer working conditions on Costa Rican coffee farms. Engaging workers at a Honduran banana plantation contributes to their sense of empowerment while also increasing farm productivity. Partnering with the government of El Salvador to include good labor practices in its procurement checklist—just like price and quality—can improve working conditions nationwide as suppliers change practices to meet this important buyer’s criteria. These are just a few of the important benefits documented in several case studies BSR is publishing about 15 demonstration projects implemented over the past year to examine the real-life effects of improved responsible labor on key industries in Central America and the Dominican Republic. In these projects, which are part of our DR-CAFTA Responsible Competitiveness Project, we worked with corporate responsibility organizations in the region, local producer companies, international brands, local unions and labor groups, and government ministries to improve working conditions in both factory and agricultural settings. The case-writing team, led by Professor Richard Feinberg of the University of California, San Diego, provides an outside perspective on some of the successes and challenges associated with responsible labor programs. Our case studies suggest that responsible labor practices translate into financial rewards through expanded markets, higher productivity, reduced costs of compliance, and lower turnover. BSR’s experience has shown that the stories these cases tell are applicable not just in the DR-CAFTA region, but more broadly across a wide range of industries, economies, and geographies. While the DR-CAFTA agreement itself does not include provisions for monitoring and evaluating labor compliance, local producers who don’t make the grade risk losing their international buyers, who don’t want their brands associated with sub-par working conditions. What follows are some key benefits of investing in responsible labor practices. These benefits apply to both multinational companies that buy from the region, as well as to local producer companies. Increased Access to MarketsAs consumers become more sophisticated about the products they choose to buy, companies are being more selective about which local producers they use. To broaden their access to markets, producers can go beyond local legal minimums and position themselves as recognized leaders—allowing international buyers to confidently check off the “reputation risk” box on their purchasing checklists. El Salvador’s sugar industry is a case in point. In the past decade, the industry risked losing important buyers as child labor in Salvadoran sugar production grabbed international headlines, thanks in part to a Human Rights Watch report published in 2004. Even before the report, however, local sugar mills had identified child labor as a serious issue and had come together through the El Salvador Sugar Association to work with producers to eradicate child labor in sugar production. Upon release of the report, Coca-Cola committed to working with the association and the ILO to create alternatives for children to study instead of work. The results have been dramatic. Between 2003 and 2008, the number of children working in cane fields dropped by 72 percent, according to the Salvadoran Ministry of Education. The change has also helped the Salvadoran sugar industry: Five years ago, the sugar industry feared that buyers would pull out of the country and look to “safer” regions from which to buy their sugar. Today, many international buyers view El Salvador as a leader in the fight against child labor. This perception can help sway buyers to purchase from a provider in that country instead of from a provider in a laggard country. Increased ProductivityOur case studies suggest that investing in better working conditions—sometimes just by starting a dialogue with workers—improves employee productivity. For a long time, Central America’s banana industry has been known for tense relations between companies and workers. These strained conditions can limit opportunities for open dialogue and can even lead to violence. Productivity often suffers in this context because the workers are not included in discussions on how to make improvements. Finca Tropical—a banana plantation in Honduras—partnered with BSR and local organization FUNDAHRSE to train managers and workers on interpersonal communication and group facilitation. We created forums for managers and workers to come together and brainstorm simple, practical changes to improve farm productivity. BSR also provided workers with traditional management tools such as stakeholder-mapping and mission- and goals-setting to help them better understand the company as a whole and the importance of their contribution to overall business success. As the case study documents, workers began a dialogue with management on how they could improve their performance and efficiency on basic tasks, and management responded with productivity incentives. In the end, workers reported improved morale, and managers reported increased productivity. Reduced Operating CostsBSR’s DR-CAFTA project is also showing the link (sometimes direct, sometimes indirect) between labor practices and costs. One example is the Canadian apparel-maker Gildan, which operates Central America’s largest sewing plant in Honduras, employing approximately 5,000 workers. The Honduran textile and apparel industry faces fierce competition from Asia, a situation that often leads employers to pursue cut-throat labor practices. But Gildan decided to take a different approach, looking to gain a competitive advantage by improving health and safety practices. This helped the company save money by reducing the costs of compliance usually associated with meeting those standards. This shift in focus from basic compliance toward continuous improvement has produced notable change. Our case study documents how health and safety issues have been included in the annual performance evaluations of managers across all functions at the plant, and health and safety trainings now incorporate employees’ priorities and concerns. The accountability issue alone is critical. Because managers’ annual performance evaluations now include health and safety issues, managers are responding more rapidly to new initiatives, which reduces the time to implement management innovations and the associated administrative costs. While firm data are yet to come, managers are convinced that these short-term changes will reduce costs related to absenteeism and will increase worker productivity over the long term. Reduced TurnoverAn increasing number of studies are showing that salary isn’t the only motivator of high performance and loyalty; many other factors come into play. Our case studies support this, suggesting that leading labor practices also contribute significantly to employee loyalty. This is true especially in fast-growing sectors like Costa Rica’s electronics industry. Today, the communications technology industry comprises 12 percent of the country’s gross national product and more than a quarter of its exports. Global companies such as Intel have invested in Costa Rica’s electronics industry, which has helped create an internationally competitive cluster of high-tech service providers. The industry’s rapid growth has also led to a shortage of trained software developers and high turnover, particularly affecting small- and medium-sized businesses that struggle to compete with the salaries offered by large companies. In partnership with six local software companies, as well as the Costa Rican business association AED and the Costa Rican Chamber of Information and Communications Technologies (CAMTIC), BSR investigated the reasons for high turnover and discovered that the companies were offering inconsistent salaries with no mechanism for incentives and bonuses. We also discovered that employees at these companies believe that they have limited opportunities for career advancement. With orientation and training costs estimated at US$4,000 per new employee, BSR recommended that companies focus investments on incentives and rewards to retain workers. Participating companies are also implementing changes to make their work environments more employee friendly, such as increasing professional development training hours, adding flex time and telecommuting opportunities, and increasing the frequency of manager-employee meetings. Managers see that employee morale is improving, and they are confident that these changes will help reduce long-term turnover rates. Taking the First StepsThe demonstration projects of our DR-CAFTA Responsible Competitiveness Project make a strong case for why investing in responsible labor practices is good for businesses globally. Next week, we’ll use examples from these same case studies to examine what companies can do to start implementing change. These demonstration projects and case studies were made possible by a grant from the U.S. Department of State to BSR for its DR-CAFTA Responsible Competitiveness Project. The project works with producers, labor, government, and international buyers to promote responsible labor practices in countries of the Dominican Republic-Central America-United States Free Trade Agreement (DR-CAFTA). For more information, visit www.drcafta.bsr.org. |