Political Economy of Labor Provisions in Free Trade Agreements

Discussion Papers

No.780

by Hitoshi Sato

April 2020

ABSTRACT

This paper examines the effects of the inclusion of labor provisions in free trade agreements (FTAs) on the external tariffs imposed on non-member countries and the political viability of FTAs within a political economy model in which oligopolistic industry may make political contributions on import tariffs against non-member countries. Labor provisions encourage external tariff reductions by party countries with low labor standards, while weakening the external tariff reduction effect for the party countries for which labor standards are sufficiently high so that the provisions are non-binding. Labor provisions also influence the political viability of FTAs. When an FTA has a labor provision, its political viability will increase in counties even with the highest labor standards.

Keywords: labor provisions, free trade agreements, political economy, oligopolistic trade

JEL classification: F13, F53, F66

Please note that discussion papers are works in various stages of progress and most have not been edited and proofread and may contain errors of fact or judgment. Revised versions of these papers may subsequently appear in more formal publication series. The views expressed in this publication are those of the author(s). The IDE does not guarantee the accuracy of the data included and accepts no responsibility for any consequences arising from its use.