Race to the bottom is a socio-economic phrase to describe either government deregulation of the business environment or reduction in corporate tax rates, in order to attract or retain usually foreign economic activity in their jurisdictions. While this phenomenon can happen between countries as a result of globalization and free trade, it also can occur within individual countries between their sub-jurisdictions (states, localities, cities). It may occur when competition increases between geographic areas over a particular sector of trade and production. The effect and intent of these actions is to lower labor rates, cost of business, or other factors (pensions, environmental protection and other externalities) over which governments can exert control.
This deregulation lowers the cost of production for businesses. Countries/localities with higher labor, environmental standards, or taxes can lose business to countries/localities with less regulation, which in turn makes them want to lower regulations in order to keep firms’ production in their jurisdiction, hence driving the race to the lowest regulatory standards.
The concept of a regulatory "race to the bottom" emerged in the United States during the late 1800s and early 1900s, when there was charter competition among states to attract corporations to base in their jurisdiction. Some, such as Justice Louis Brandeis, described the concept as the "race to the bottom" and others, as the "race to efficiency".
In the late 19th century, joint-stock company control was being liberalised in Europe, where countries were engaged in competitive liberal legislation to allow local companies to compete. This liberalization reached Spain in 1869, Germany in 1870, Belgium in 1873, and Italy in 1883.
In 1890, New Jersey enacted a liberal corporation charter, which charged low fees for company registration and lower franchise taxes than other states. Delaware attempted to copy the law to attract companies to its own state. This competition ended when Governor Woodrow Wilson tightened New Jersey's laws through a series of seven statutes.
In academic literature, the phenomenon of regulatory competition reducing standards overall was argued for by A.A. Berle and G.C. Means in The Modern Corporation and Private Property (1932). The concept received formal recognition by the US Supreme Court in a decision of Justice Louis Brandeis in the 1933 case Ligget Co. v. Lee (288 U.S. 517, 558–559).
Brandeis's "race to the bottom" metaphor was updated in 1974 by William Cary, in an article in the Yale Law Journal, "Federalism and Corporate Law: Reflections Upon Delaware," in which Cary argued for the imposition of national standards for corporate governance.
Sanford F. Schram explained in 2000 that the term "race to the bottom":
...has for some time served as an important metaphor to illustrate that the United States federal system—and every federal system for that matter—is vulnerable to interstate competition. The "race to the bottom" implies that the states compete with each other as each tries to underbid the others in lowering taxes, spending, regulation...so as to make itself more attractive to outside financial interests or unattractive to unwanted outsiders. It can be opposed to the alternative metaphor of "Laboratories of Democracy". The laboratory metaphor implies a more sanguine federalism in which [states] use their authority and discretion to develop innovative and creative solutions to common problems which can be then adopted by other states.
The term has been used to describe a similar type of competition between corporations. In 2003, in response to reports that British supermarkets had cut the price of bananas, and by implication had squeezed revenues of banana-growing developing nations, Alistair Smith, international co-coordinator of Banana Link, said "The British supermarkets are leading a race to the bottom. Jobs are being lost and producers are having to pay less attention to social and environmental agreements."[full citation needed]
Another example is the cruise industry, with corporations headquartered in wealthy developed nations but which registers its ships in countries with minimal environmental or labor laws, and no corporate taxes.
The term has also been used in the context of a trend for some European states to seize refugees' assets.
The race to the bottom theory has raised questions about standardizing labor and environmental regulations across nations. There is a debate about if a race to the bottom is actually bad or even possible, and if corporations or nation states should play a bigger role in the regulatory process.
International Political Economy scholar Daniel Drezner (of Tufts University) has described the "race to the bottom" as a myth. He argues that the thesis incorrectly assumes that states exclusively responds to the preferences of capital (and not to other constituents, such as voters), state regulations are sufficiently costly for producers that they would be willing to re-locate elsewhere, and no state has an economy large enough to give it a bargaining power advantage over global capital. A 2022 study found no evidence that global trade competition led to a race to the bottom in labor standards.
A 2001 study by Geoffrey Garrett found that increases were associated with higher government spending, but that the rate of increase in government spending was slower in the countries with the highest increases in trade. Garrett found that increases in capital mobility had no significant impact on government spending. His 1998 book argues against the notion that globalization has undermined national autonomy. He also argues in the book that "macroeconomic outcomes in the era of global markets have been as good or better in strong left-labour regimes ('social democratic corporatism') as in other industrial countries."
Torben Iversen and David Soskice have argued that social protection and markets go hand-in-hand, as the former resolves market failures. Iversen and Soskice similarly see democracy and capitalism as mutually supportive. Gøsta Esping-Andersen argues against convergence by pointing to presence of a variety of welfare state arrangements in capitalist states. Scholars such as Paul Pierson, Neil Fligstein and Robert Gilpin have argued that it is not globalization per se that has undermined the welfare state, but rather purposeful actions by conservative governments and interest groups that back them. Historical institutionalist scholarship by Pierson and Jacob Hacker has emphasized that once welfare states have been established, it is extremely difficult for governments to roll them back, although not impossible. Nita Rudra has found evidence of a race-to-the-bottom in developing countries, but not in developed countries; she argues that this is due to the elevated bargaining power of labor in developed countries.
Studies covering earlier periods by David Cameron, Dani Rodrik and Peter Katzenstein have found that greater trade openness has been associated with increases in government social spending.
Layna Mosley has argued that increases in capital mobility have not let to convergence, except on a few narrow issues that investors care about. In adjudicating default risk, inflation risk and currency risk, investors use a large number of macroeconomic indicators, which means that investors are unlikely to pressure governments to converge on policies. However, Jonathan Kirshner argues that the hyper mobility of capital has led to considerably monetary policy convergence.
Hegemonic stability theorists, such as Stephen Krasner, Robert Gilpin, and Charles Kindleberger argued that globalization did not reduce state power. To the contrary, they argued that trade levels would decline if the state power of the hegemon declined.
On 1 July 2021, when 130 countries backed an OECD plan to set a global minimum corporate tax rate, U.S. Treasury Secretary Janet Yellen called it a "historic day." She said, "For decades, the United States has participated in a self-defeating international tax competition, lowering our corporate tax rates only to watch other nations lower theirs in response... The result was a global race to the bottom: Who could lower their corporate rate further and faster?"
The race to the bottom has been a tactic widely used among states within the United States of America. The race to the bottom in environmental policy involves both scaling back policies already in place and passing new policies that encourage less environmentally friendly behavior. Some states use this as an economic development strategy, especially in times of financial hardship. For example, in Wisconsin, Governor Scott Walker decreased state environmental staff's capacity in order to accelerate the approval time for a proposed development. Pursuing a race to the bottom philosophy in environmental politics allows states to foster economic growth, but has great consequences for the environment of that state. Conversely, some states have begun to pursue a race to the top strategy, which stresses innovative environmental policies at the state level, with the hopes that these policies will later be adopted by other states. When a state pursues either a race to the bottom or a race to the top strategy, it speaks to its overall environmental agenda.
Races to the bottom pose a threat to the environment globally. Thomas Oatley raises the example of toxic waste regulations. It is expensive to treat chemical waste, so corporations wanting to keep production costs low, may move to countries which do not require them to treat their waste before dumping it. A more concrete example is the hydroelectric dam industry in South America. Gerlak notes that country and community desire for foreign investment in hydroelectric dams has created a race to the bottom in environmental regulations. All dam proposals go through an Environmental Impact Assessment no matter which country or countries it will be implemented in. Each country has a different way of conducting these assessments and different standards the dams must meet for approval. The lack of standard Environmental Impact Assessment standards has caused countries to streamline their Environmental Impact Assessment processes in places like Brazil. In some cases, countries require the assessment only after a dam proposal has already been approved. Other countries allow private developers from foreign firms or foreign nations, such as China to submit the Environmental Impact Assessment, which has the potential to omit certain environmental concerns in order to receive project approval and casts doubt on the legitimacy of the Environmental Impact Assessment process. If Environmental Impact Assessments are not done right there is a risk of dams causing severe social and environmental harm. Environmental Impact Assessments are not the only form of government regulation and dams in South America are just one example of a global trend in deregulation by states in order to bring in more foreign direct investment.
But the race to the bottom operates more subtly than most people suppose. The regressions suggest that while countries do compete with each other by instituting laws that are unfriendly to workers, such competition is not that pronounced. The real problem is that countries compete by enforcing labour laws less vigorously than they might—leading to increases in violations of labour rights prescribed in local laws. Competition between countries to attract investment is less in rules than in their practical application.
Today the majority of ship owners are based in wealthy maritime nations like the United States, Great Britain, Norway, Greece, and Japan, but their ships are registered and flagged in foreign countries with “open registries” — that essentially have no minimum wages, labor standards, corporate taxes, or environmental regulations and only a flimsy authority over the ships flying their flags. All these countries require is that ship lines pay a handsome registration fee. Carnival registered its fleet in Panama. Royal Caribbean registered its ships in Liberia. (During its two-decades-long civil war, Liberia earned at least $20 million every year by acting as the off-shore registry for foreign ships.)
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