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A Closer Look at TPP’s Labor Protections: Will Labor Costs Undermine Competitiveness?

The Obama Administration is touting the Trans-Pacific Partnership (TPP) as a 21st century trade agreement with the highest labor standards ever agreed but what does this really mean?

The sales pitch for TPP also focuses on lowering costs through lower tariffs and a closer trading relationship between the 12 TPP countries. It is hard to imagine how government and businesses can upgrade labor protections while at the same time lowering overall costs. The reality may be that lower tariffs at best offset the increase in labor costs.

Similar to earlier trade agreements, TPP mandates standards on labor and requires that each TPP party effectively enforce its labor laws, including commitments to the International Labor Organization (ILO) Declarations.

The TPP labor chapter also requires that TPP parties implement transparency provisions and provide the public an opportunity to provide input on labor enforcement. For certain TPP countries this will be a challenge. For Vietnam, Malaysia and Brunei, the commitments are further in consistency plans. Each signed on to these “side letters” to TPP containing specific actions that country must take to implement the labor commitments. These are arguably both additional commitments and elaborations for the labor chapter and once implemented, may ultimately increase labor costs and decrease overall competitiveness.

Transparency and public participation in government decision-making is somewhat new territory for all three countries and it will be interesting to see the impact of these commitments on labor rights and labor costs once they are fully implemented. Transparency and public participation requirements bring with them new obligations on TPP parties and with increased public scrutiny and involvement, countries will be more accountable for their actions. The labor commitments are subject to dispute settlement under TPP if it can be demonstrated that the failure to comply had an effect on trade between any of the parties.

Pursuant to the TPP text, the agreement may enter into force two years after signature when at least six parties accounting for at least 85 percent of gross domestic product of all 12 TPP parties, notify New Zealand, which has been entrusted to supply copies of the text.

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So the implementation of the labor provisions may be delayed for a few years but each country must begin the process of implementation in tandem with its ratification procedures. The stage is set for enhanced labor regimes in Vietnam, Malaysia and Brunei and the resulting effects will not be known for some time. Smart investors and businesses will start working with these countries to better understand how they plan to implement these commitments and to the extent possible, provide insight and advice from the business perspective.

For many countries in South and Southeast Asia manufacturing costs can be quite high. Dealing with poor infrastructure, lack of reliable energy and a difficult bureaucratic environment leave labor costs as the only cost that can be kept relatively low. Improving labor standards and empowering workers are important and laudable goals but it will likely come at a cost to competitiveness.

Will the lower tariffs implemented with TPP offset any increases in labor costs due to the TPP obligations? Possibly, but more likely labor costs will begin to increase over time. That doesn’t necessarily mean that Vietnam and Malaysia will lose manufacturing to other producing countries especially if overall conditions in other countries are unpredictable or unstable. The TPP Rules of Origin (ROO) provisions could help keep costs down by allowing low cost inputs from other TPP countries to be used in the manufacturing process without paying any duties.

Other important issues are not necessarily contemplated by TPP but must be considered by the private sector. How secure are the supply chains for inputs in the manufacturing process? Will increased transparency force governments to put pressure on the private sector to be more transparent and accountable? Factory safety will be an important issue as well, after the tragedies in Bangladesh and Pakistan buyers know well that safety issues can be devastating to company reputations.

As buyers and retailers review their sourcing needs, TPP countries will get a closer look with lower tariffs on the horizon, but tariffs are not the only aspect of TPP that needs to be reviewed.

The commitments in the labor chapter as well as the other chapters need to be considered because the changes brought about by TPP will have an important impact on all aspects of the economy. The way in which the TPP parties implement their obligations will certainly set the stage for how competitive they will be in the coming years.

By Mara M. Burr, executive vice president, World Strategies LLC