Does Compliance Pay? Social Standards and Firm-level Trade (an Author Summary)

Author Summary by Greg Distelhorst and Richard M. Locke

In an age of growing international trade and investment, one of the great public concerns is that globalization encourages a “race to the bottom.” Fatal accidents in overseas factories, modern slavery in global supply chains, and the long hours and low pay of workers in the developing world all raise the question: is globalization to blame?

The race to the bottom suggests that exporters compete, in part, by lowering labor or environmental standards to secure business. In this logic, exporters in developing countries face an unenviable choice. Either break the rules or lose your customers.

We noticed that previous research examined this issue at the macro-level, analyzing trade flows between national economies. Because the race-to-the-bottom logic involves decisions by trading firms, we designed a study to test its implication at the micro-level. We examined compliance and trade in individual firms by studying a global sourcing company that allocates orders from hundreds of importers to thousands of export factories around the world.

Surprisingly, we found the opposite pattern. Compliant exporters received more orders from importers. When firms moved from noncompliance into compliance, their average orders increased by 4 percentage points on average (approximately $110,000 USD per year). This was not the pattern expected if exporters compete with one another by lowering their labor standards. It’s worth noting that we observe this in authoritarian countries like China or Vietnam that simultaneously play an important role in global trade and have only limited labor rights and democratic freedoms.

We detect this compliance premium among importers in the apparel industry, where anti-sweatshop campaigns have pressured brands for years to clean up their global supply chains. Our findings suggest that these social movements have to some extent succeeded in shaping the trading patterns of western firms, who apparently prefer doing business with factories that observe minimum social standards.

On the other hand, we also find that these pressures for upward harmonization of standards—a phenomenon known as “California effects”—were far from sufficient to achieve global compliance with minimum standards. Most exporters in our remained noncompliant with basic standards throughout the period of our research. Future research might attempt to replicate these findings in new samples of trading firms and explore whether compliance premiums actually improve the financial performance of exporters that comply with basic labor and environmental standards.

About the Authors: Greg Distelhorst is Assistant Professor of Global Economics and Management at the MIT Sloan School of Management and Richard M. Locke is Provost and Professor of Political Science and Public and International Affairs at Brown University. Their research “Does Compliance Pay? Social Standards and Firm‐Level Trade” is now available in Early View and will appear in a forthcoming issue of the American Journal of Political Science.