The Triple Bottom Line Blog

For your "law of unexpected consequences" file, check out this column from the current Economist. We're all familiar with the concept of the "race to the bottom" driven by globalization. The idea is that companies in manufacturing and other fields that are capable of relocation will shift their operations to countries that cater to them through weak regulatory regimes. The expected result: competition among nations to offer the "most attractive" business environments--even if that makes them among the "least attractive" from an environmental or labor-rights perspective.

There's some evidence that the race-to-the-bottom phenomenon is real. But now an American researcher named Mark Schapiro (whose book provoked the Economist column) suggests that an opposite pressure is being exerted by tough European regulators in a marketplace where global corporations want uniform international standards:

When [Schapiro] began his research, he found firms resisting the notion that the American market would follow EU standards for items like cosmetics, insisting that their American products were already safe. But as the book neared completion, firm after firm gave in and began applying EU standards worldwide, as third countries copied European rules on things like suspected carcinogens in lipstick. . . .

[Schapiro's] book [Exposed] records similar American reactions to the spread of EU directives insisting that cars must be recycled, or banning toxins such as lead and mercury from electrical gadgets. Obey EU rules or watch your markets "evaporating", a computer industry lobbyist tells Mr Schapiro. "We've been hit by a tsunami," says a big wheel from General Motors. American multinationals that spend money adjusting to European rules may lose their taste for lighter domestic regulations that may serve only to offer a competitive advantage to rivals that do not export.

In effect, European regulators are setting the agenda for businesses around the globe--especially since companies that want to do business among the 500 million customers of the EU have to meet EU standards anyway.

It seems likely that, in the long run, globalization may well promote higher rather than lower standards across the board--not just in regard to product quality but also environmental protection and even workers' rights. After all, the more unified the world's markets, the more fully pressures from consumer groups, human rights organizations, and environmental crusaders should eventually impact companies everywhere, producing not only rough equality across borders but also gradually rising standards of corporate behavior.

But only in the long run. In the short run, forces driving toward the top and toward the bottom will continue to compete, and watching how they interact will make for some fascinating business drama.

Labels: European Union, globalization, Mark Schapiro, Role of Government