Week 14

The spotlight on the bottom line: how multinationals export human rights.
(child labor and sweatshop abuses by foreign contractors of American corporations)

Foreign Affairs, March-April 1998 v77 n2 p7(6)

By Spar, Debora L.

Full Text

In 1996 Kathie Lee Gifford made frontpage news. The well-liked television personality had lent
her name to a discount line of women’s clothing that, it was discovered, had been made by
underage Central American workers. That same year, the Walt Disney Company was exposed
contracting with Haitian suppliers who paid their workers less than Haiti’s minimum wage of $2.40
a day. Nike and Reebok, makers of perhaps the world’s most popular athletic footwear, were
similarly and repeatedly exposed.

In all these cases, the companies accused were U.S. manufacturers of consumer products. They
were being targeted for human rights violations committed abroad not by their own managers or
in their own plants but by the subcontractors who produced their products in overseas facilities.
Traditionally, the corporate response to this subcontractor problem has been predictable, if
unfortunate. U.S. firms have argued that they cannot realistically or financially be held responsible
for the labor practices of their foreign suppliers. “The problem is, we don’t own the factories,” a
Disney spokesperson protested. “We are dealing with a licensee.”

Recently, though, this attitude has started to change. As a direct result of heightened human
rights activism, sharper media scrutiny, and the increased communication facilitated by the
Internet, U.S. corporations are finding it difficult to sustain their old hands-off policy. Under
pressure, they are beginning to accept responsibility for the labor practices and human rights
abuses of their foreign subcontractors.

CODES OF CONDUCT

Much of this new activity clusters around the promulgation of voluntary codes of conduct. In just
the past several years, U.S. industry has proposed and accepted a rash of codes. In 1996 Labor
Secretary Robert Reich launched a “No Sweat” campaign designed to force foreign garment
makers to comply with U.S. labor laws and to expose retailers who might be purchasing garments
made under sweatshop conditions. This was followed by the widespread publication of a Labor
Department “Trendsetter” list of retailers that had publicly agreed to “demonstrate a commitment”
to U.S. labor laws and to monitor the working conditions under which their garments were
produced. In August 1996 the White House established an Apparel Industry Partnership, which
devised a workplace code of conduct defining decent and humane working conditions, applicable
to all participating companies as well as to their overseas contractors. To ensure that the code
became more than a public relations exercise, members of the Partnership also proposed that the
code’s adherents open their facilities to periodic inspections by independent monitors. Even more
striking is Social Accountability 8000, an ambitious attempt to compel firms to comply with a
certifiable set of labor and human rights standards, launched last year by the Council on
Economic Priorities and a group of influential companies. SA8000 rests on market acceptance,
not legal coercion. Firms would comply with the standards and the monitoring necessary to
ensure compliance simply to win certification. Already, the retail giants Toys `R’ Us and Avon
have announced their intent to demand that all their suppliers become SA8000-certified.

It is easy, perhaps, to be cynical about these codes. Prominent critics such as Louis Henkin of
Columbia School have charged that they carry less weight than legal standards and lack
bite. But it is not clear that such skepticism is warranted. In fact, codes of conduct have already
begun to be a significant factor in the pursuit of human rights. By changing the calculus of U.S.
firms doing business abroad, codes can change their behavior.

CAUGHT IN THE ACT

The logic follows a pattern that one might call the spotlight phenomenon. When U.S. corporations
go abroad, they take more than their capital and technology with them. They also take their brand
names, their reputations, and their international images. They bring in their wake the scrutiny of
U.S.-based activist groups and the international media. When U.S. corporations are caught
engaging in unfair or abusive practices, these groups spring into action, casting a shadow of
scorn. To some extent, the process echoes the familiar muckraking of decades past, but the
combination of an increasingly global economy and evermore sophisticated and diverse
communication channels has recently expanded the reach of even small-scale critics. On the
Internet, grassroots activism has, quite literally, been electrified. Using inexpensive electronic
mailing campaigns, human rights groups can reach a far wider audience than in the past, drawing
supporters from across national borders to mobilize consumer boycotts or political action
campaigns. Once these campaigns reach the public arena, the perpetually hungry media brings
attention to even small stories–especially those pitting giant U.S. corporations against hapless
foreign workers.

Although this new form of muckraking creates its own potential hazards, it also affects the basic
calculus of an investing firm. Suddenly, the advantages of lowercost labor or lower-cost inputs
from more abusive suppliers must be weighed against the crush of negative publicity, the cost of
public relations, and the possibility of consumer protests. For consumer products firms, the
impact is particularly intense since highly visible brand names provide an ideal target for smear
campaigns and other public attacks.

At the moment, public awareness of human rights issues is not fully decisive in the marketplace.
Customers still seem to favor brand, price, and quality over perceptions of humane treatment and
social responsibility. But these preferences are starting to change. In a 1995 survey, 78 percent
of respondents said that they would prefer to shop at retail stores that had committed themselves
to ending garment worker abuse; 84 percent said they would pay an extra $1 on a $20 item to
ensure that the garment had been made in a worker-friendly environment. Similar results
appeared in a 1996 survey–only this time, nearly 24 percent said that retailers and not just
manufacturers should take responsibility for preventing the use of sweatshop labor. Such polls do
not, of course, necessarily predict consumer behavior, but they do seem to show a heightened
awareness of human rights issues and a newfound eagerness to hold manufacturers and retailers
accountable for their behavior.

As public concern coalesces around issues of human rights, the promulgation of codes and
standards completes the spotlight phenomenon. Once firms have adhered to publicly
acknowledged standards, they magnify the effect of their own violations. So long as firms could
argue that subcontractors were beyond their reach, they could limit the public fallout from findings
of abuse. With codes in place, however, firms can no longer hide behind an arm’s length
relationship of indifference. Once they have agreed to comply, they will be forced to–not by the
sanction of law but by the sanction of the market. Firms will cut off abusive suppliers or make
them clean up because it is now in their financial interest to do so. The spotlight does not change
the morality of U.S. multinational managers. It changes their bottom-line interests.

A RACE TO THE TOP

Already, early evidence supports the potency of the spotlight phenomenon. When reports
surfaced that Reebok was purchasing soccer balls stitched by 12-year-old Pakistani workers, the
firm sprang into action. It created a new central production facility in Pakistan and established a
system of independent monitors. Eager to retain its image as a strong supporter of human rights
around the world, Reebok affixed new “Made without Child Labor” labels to its soccer balls. The
Gap also bowed dramatically to public pressure. After several high-profile protests in 1995,
including one at a Manhattan store, The Gap signed an agreement with the National Labor
Committee committing itself to independent third-party monitoring of its overseas suppliers.
Starbucks Coffee, generally regarded as one of the most socially progressive U.S. firms, was
heavily picketed in 1995 by activists demanding that the company keep closer tabs on the
Guatemalan plantations from which it buys some of its coffee beans. The chain eventually
complied, issuing a revised code of conduct and specific action plans for all of its supplier
countries.

Recently, the spotlight has focused most frequently on Burma, whose ruling junta, the State
Peace and Development Council, is one of the world’s most repressive regimes. Facing mounting
criticism of their presence in Burma, Levi Strauss, Macy’s, Liz Claiborne, and Eddie Bauer all
pulled their operations out of the country. So did oil giants Texaco and Amoco, even though just
six months earlier Amoco’s president had described Burma as one of his firm’s most promising
new regions for exploration. A spokesman for Eddie Bauer neatly captured the changed calculus
facing the firms. “After months of researching the situation,” he announced, “we deemed that the
political climate and growing opposition to trade in Burma posed a potential threat to our future
manufacturing opportunities.” In other words, they were leaving purely for commercial reasons.
The spotlight had made its way to their bottom line.

What makes this dynamic even more powerful is the potential for cooperation and collective
action. The problem for competing firms is that the force of the market makes it difficult for any
single company to pay higher wages or insist on superior labor standards. Of course, some firms
do so out of conviction; others do so because they have a higher-quality or niche product that
enables them to pass cost increases on to their consumers. Yet in the aggregate, the familiar
problem of “free riders” remains. If one firm pays the higher wage or refuses to do business with
an exploitative low-cost subcontractor, it risks losing market share to more callous competitors.
Thus, multinationals have long been able to rationalize their use of low-wage labor or abusive
subcontractors by appealing to the unstoppable force of global competition. If they held to higher
standards, they claim, their rivals would instantly overwhelm them. Theoretically, the only way to
solve this free-rider problem is through collective action. If all firms–or at least a good majority of
the larger ones–adhere to the same standard, none is individually penalized. Collective action
can thus force a race to the top rather than the much-heralded race to the bottom. What changes
the direction of this race is the combined force of codes and publicity. Firms adhere to the higher
standard because public attention forces them to do so. And the more companies adhere, the
easier it is for even the low-profile or sluggish to join.

The Burma withdrawals showcased this collective dynamic. Once Levi Strauss pulled out, it was
easier for Macy’s and Liz Claiborne to follow. Collective action was also a major component of
Reebok’s approach to Pakistan. Before proceeding with its child-labor-free campaign, the
company obtained approval and support from both the World Federation of Sporting Goods
Industry and the U.S.-based Sporting Goods Manufacturers Association. When Reebok refused
to sell balls made with child labor, so did all of its competitors. None, then, were left at a
commercial disadvantage–and all collectively left themselves vulnerable to the scrutiny of the
spotlight. As pressure for codes continues to mount, and as firms such as Price Waterhouse and
Kroll Associates eagerly offer to perform audits of firms’ compliance with the codes, such cases
will probably proliferate. In the process, human rights are likely to improve.

STRANGE BEDFELLOWS

Human rights and U.S. multinational corporations are traditionally considered unlikely bedfellows.
By nature, firms are not in the business of promoting human rights abroad, and advocates of
human rights have typically disdained corporations rather than embracing them. When
Washington has pursued a human rights agenda, U.S. firms have historically been little more
than the awkward instrument of U.S. policy: their activities are denied to rogue states as
retribution for human rights abuses.

But perhaps there is another way to think about multinational involvement. In some cases and
industries, the natural impact of U.S. firms may well be to hinder the development of human
rights. Sometimes multinationals funnel capital to repressive states or abuse the labor force they
find at their disposal. Sometimes their presence cements the power of dictators or helps suppress
opposition groups. Earlier this century, for example, United Fruit helped mastermind a coup in
Guatemala; ITT played a key role in overthrowing the popularly elected government of Salvador
Allende in Chile; and U.S. mining and oil companies forged cozy relationships with dictatorial
regimes across Africa. But overall and empirically there is little to suggest that U.S. investment is
inherently bad for human rights in the developing world. If anything, the available evidence
indicates that the presence of U.S. multinationals usually corresponds to an improvement in
human rights. This relationship certainly does not prove that U.S. investment causes human
rights to be more respected, but neither does it give any credence to predictions of exploitation
and malfeasance. Investment by U.S. firms may well help move human rights in a positive
direction.

It would be absurd to advocate investment by U.S. firms as a panacea for the human rights
abuses that pepper the globe. A multitude of ills can only be addressed through diplomacy,
persuasion, or sometimes force. But there are things that multinationals, especially U.S.
multinationals, can do. Simply by following their own interests, they may influence the local
environment in positive ways. They bring jobs, capital, technology, know-how, management
techniques, labor relations, and administrative structures that are unlikely to depart too
dramatically from U.S. standards. These working standards will nearly always be higher than
those that prevail in the local developing economy.

Finally, U.S. multinationals bring with them the glare of public scrutiny and the changes it can
induce in an increasingly global marketplace. When local producers in Vietnam, Pakistan, or
Honduras exploit their work force, few in the West hear of it, especially if the products are not
exported to Western markets. But when those same producers become suppliers to Reebok, Levi
Strauss, or Walt Disney, their actions make headlines in the United States. Changing their
behavior becomes, increasingly, a bottom-line concern of Reebok, Levi Strauss, and Disney.

Under these circumstances, the old Leninist link between multinational firms and foreign
exploitation seems outmoded or even contradictory. Rather than having an interest in subverting
human rights, corporations–particularly high-profile firms from open and democratic societies–
may well see the commercial benefits of promoting human rights. It is ironic, and certainly not
obvious. But in a world marked by international media and transnational activism, U.S.
multinationals could be–indeed, may already be–a powerful instrument in the pursuit of human
rights.

Debora L. Spar is Associate Professor of Administration at Harvard University’s
Graduate School of Administration.

COPYRIGHT 1998 Council on Foreign Relations Inc.