Ethical Issues in the
Global Economy

The business world is changing. It is evolving into a fully integrated global economy, where corporations and their managers are faced with moral dilemmas and ethical questions as they expand their operations on a worldwide scale. As raw material sources, supply chains, and production facilities are increasingly being built and moved overseas, businesses are beginning to uncover new issues which complicate their processes and operations. Gray areas are developing relating to humanitarian and labor issues, environmental concerns, and governmental regulations that challenge even the most socially responsible and forward thinking companies. At the same time, citizens and shareholders alike are challenging global firms to address the Triple Bottom Line approach, an approach that equally emphasizes the importance of people, the planet, and profits in measuring the success of any given firm. Companies are still expected to succeed financially, while simultaneously taking care of the environment, their employees, and the communities in which they operate.
In order to gain insight into this situation, one may consider The Travels Of A T-Shirt In The Global Economy by Pietra Rivoli. In this case study of a truly global product, Rivoli explores the path that a simple cotton t-shirt follows from raw material, to finished product, and finally on to its own secondary market. She explores the people behind each step in the process, the environmental concerns, the governmental aids, and the restrictions present in the global marketplace. Through all of this, questions related to ethical decisions are raised at every stop along the way. How are the laborers treated and compensated? What is the environmental impact of the manufacturing and supply chain processes? How do government regulations and subsidies alter free trade markets? By taking an in-depth view into the travels of a single t-shirt, one can find examples and situations where companies strive to achieve their social responsibilities and other opportunities where they can improve on their commitment to society.
As the global economy continues to develop and the interdependence of every country increases, three major ethical issues come to light: labor standards, environmental impact, and the role of government. These areas have proven to be core-critical to business throughout history, but especially in the present day as they relate to the concept of the triple bottom line: people, planet and profit.
One of the top ethical issues when conducting business around the globe is the development of universally acceptable labor standards. As countries develop from agrarian societies, to industrial centers, and finally, to corporate economies, working conditions and standards evolve with them. By way of example, Chinese garment factory workers endure long hours and harsh conditions when compared to their American counterparts. In fact, many of the factory conditions in China would not be tolerated in America, especially with regard to safety and compensation. However, as Rivoli mentions, when interviewing several Chinese factory workers during her research, they were happy to have positions in factories because they were preferable to the even harsher working conditions on farms in rural parts of China. In other words, as individuals, many factory workers in China are content with the opportunity to work in a factory, despite their circumstances being totally unacceptable to an American. Further complicating the ethical considerations related to working conditions in poorer countries is the fact that these conditions, or more specifically the lower cost associated with these factories, is the main reason that companies made the decision to do business with the factories in the first place. If the cost of improving these conditions affects the price of doing business in a specific country or region, businesses may decide to move their manufacturing elsewhere, causing the jobs to disappear completely and negating the positive changes altogether.
History makes it clear that the acceptability of inhumane working conditions will not be the reality in China forever, and we are already beginning to see this shift. Similar to the industrial and corporate economic developments in the West, minimum standards will improve as workers demand safe environments and fair compensation. One ethical concern is the West’s obligation to accelerate this process. Unlike industrial and corporate economies that developed in the West, developing countries in the East have models to examine as part of the process and the opportunity to accelerate the implementation of labor rights laws. By the same token, corporations in the West face moral obligations to demand minimum standards throughout their supply chains – guaranteeing the elimination of child labor and other brutal industrial practices in developing countries.
Working against this positive evolution, corporations have been motivated to move production facilities to developing countries - countries transitioning from agrarian to industrial economies - because laborers are more willing to work in hazardous environments or less desirable positions for less pay. While China’s booming economy has grabbed most of the headlines in the past twenty years, many firms have recently been moving their production facilities from China to even lower cost countries in Southeast Asia such as Thailand and Indonesia. This short-term, profits-only goal, Rivoli’s "race to the bottom," prevents many corporations from seeing the larger opportunity. By investing in the development of a sustainable and healthy supply chain, corporations could increase profits more sustainably by aligning their monetary goals with those of global society. As we saw with the Nike protests of the 1990s related to child labor and other inhumane practices within their supply chain, consumers have become more aware and interested in a company’s ethical composition and social responsibility efforts. Although still not necessarily a model company, Nike has made tremendous advancements in taking accountability for labor standards throughout its supply chain and overall transparency to consumers. More and more, consumers are choosing brands whose ethical practices align with their own.
Dr. Rivoli notes that most of the apparel company executives that she spoke with believe that environmental issues will be the next challenge facing their global industry. Key environmental issues affecting business include industrial waste, sustainable development of raw materials, and emissions. These issues affect business not only because laws require firms to change equipment and procedures to meet imposed standards, which costs businesses money, but also because as previously noted, consumers are increasingly demanding that companies "do no harm" when conducting business. Globalized companies face a difficult task balancing the high demand for a low cost product with the demand for an environmentally friendly one. As we read in The Travels of a T-Shirt in a Global Economy, there is increased pressure on overseas manufacturers to cut costs, which leads to them cutting corners, and adapting practices such as dumping chemicals into the water to avoid the costs of becoming environmentally compliant. From an environmental point of view, the clothes we wear and the textiles they are made from can cause a great deal of damage. Because factories in developing countries have increased global output and experienced less environmental regulation, globalization has therefore substantially increased pollution and negatively impacted local communities which must deal with the consequences. The constant demand for lower prices could potentially cause a race to the bottom in environmental practice, especially for companies with operations in countries without a high level of regulations. This assumes that manufacturers will continue to search for locations in which the environmental laws are the weakest in order to reduce their costs. On the other hand, companies using a Triple Bottom Line approach will realize that while they can lower their overhead costs by ignoring their impact on the environment, there is a higher cost to society as a whole. Rivoli also notes that as developing countries industrialize, they will experience environmental degradation, but as incomes grow, consumers will begin to demand cleaner water and air. This has led to a new theory, with many believing that the global economy will instead lead to a race to the top in environmental practice. If this holds true, global companies will need to ensure that their products are in compliance in the most heavily regulated countries, which will encourage investment in clean technology and environmental compliance.
Similar to ethical concerns around labor, consumers have also begun to pay close attention to a firm’s environmental impact, whether abroad or at home. As a response to this trend, Starbucks has launched several advertising campaigns that highlight the focus they place on environmental awareness at each step in their supply chain. While there is a chance that Starbucks may just be an altruistic company, there is no doubt that they are keenly aware of the growing preference for sustainable production techniques and choose to highlight these practices in their advertising to appeal to their target consumer. Similarly, in recent years there has been a growing interest in “going green” in Western countries. Companies such as Method Products have capitalized on this trend and have been able to differentiate themselves in the marketplace for the sole reason that they are environmentally conscious. Moreover, publications such as Newsweek release annual reports ranking the world's greenest companies, reflecting consumers' demands for firms to adapt a green approach. These examples illustrate that a environmental awareness approach is gaining momentum as a competitive advantage in the modern global economy. Another ethical issue that comes to light when analyzing global business is the degree to which governments influence the dynamics of free trade and the markets in which different companies and countries are conducting business. As Rivoli discusses, government involvement and regulations are present at nearly all the stages in the lifecycle of a t-shirt, from subsidies being provided to American cotton farmers, to the Chinese government’s historical control of the textile factories and manufacturing, to the quotas and tariffs being imposed by the American government on apparel imports from certain countries. Some types of regulations are more impactful than others, and although it would be unrealistic to call for an end to all types of government involvement, what becomes apparent after examining the different types of regulations is that the notion of free trade is being challenged in many aspects of business today by the involvement of governments. One of the ways that government is involved in business today is through the assistance it provides to manufacturers, in their quest to control the rising costs of things like labor and raw materials as well as the demand for lower prices caused by increasing competition. An example of this type of government interaction is the subsidies that are provided to cotton farmers by the American government. As Rivoli notes, dominance in world markets is almost always short-lived in the majority of industries, with competitive advantages shifting to other countries as they develop better technology or offer cheaper production costs. However, the United States has remained the undisputed leader in the cotton production industry for more than 200 years. While Rivoli is quick to mention that there are various factors that have led to this dominance, including improvements in technology and the past control of labor markets, she concedes that a large part of the success today can be contributed to the abilities of the farmers to come together to lobby for their collective industry and to collect the subsidies that the government continues to provide. Of course, this type of government support flies directly in the face of the notion of free trade that the US so loudly champions to the rest of the world. In fact, the World Trade Organization (WTO) and numerous small countries have charged that these US subsidies have made it impossible for the smaller countries to compete in the global cotton industry entirely. For cotton farmers outside of the US, and similarly for farmers or companies in other industries, it has become a daunting task to compete with their American counterparts - not always because of technology or other competitive advantages, but because of the larger advantage of government financial support. In addition to government subsidies for farmers, free trade is also disturbed by government imposed tariffs on imports. In an effort to protect the cotton and textile companies in the United States and select countries, tariffs have been imposed which have raised the price of most imported t-shirts by an average of 16%. In other words, companies with manufacturing in the US and a few other countries receive a 16% cost advantage over the countries required to pay tariffs. These apparel tariffs are also unusually high, about 10 times higher than the average 1.5% tariff on other imported goods. Another purpose served by tariffs is found by examining politics, as politicians often use a reduction in apparel tariffs as a bargaining tool. For example, tariffs have been reduced in some Middle Eastern countries to help establish friendships in critical areas that benefit the US military operations. It seems impossible to satisfy cotton and textile companies both domestic and abroad, and opponents of apparel tariffs are quick to point out the negative aspects. A downside to tariffs is that they encourage foreign countries to race to the bottom by cutting production costs to remain competitive in the global market. This in turn contributes to several of the ethical issues we have already touched on, as it leads to companies cutting their labor costs and cutting corners when it comes to environmental standards. Since 95% of the apparel purchased in the US in 2007 was imported, it is difficult to see how these tariffs have been effective at achieving their theoretical purpose.
When tariffs alone do not result in the desired outcome, government-issued quotas or limits are often implemented to restrict the number of imports into the country. These quotas are used to limit the market share held by a specific country. As Rivoli notes, “while the market forces powering the race to the bottom are strong, the political forces pushing back against the markets are strong as well, particularly in the US.” In other words, the best product with the best price doesn’t always win. While the goal of quotas is to help protect companies with operations in the US and ally countries, they don't necessarily come without consequences. Some economists have estimated that the textile and apparel quotas in 2002 cost the US $174,825 per job saved. One aspect of this theory is that if quotas were not in place, apparel would be even cheaper, and the average disposable income would increase as people would be spending less on clothing. Quotas also make low-end producers enter high-end markets in order to increase profit margins for the limited quantity imposed. As a response to quotas, companies have started making apparel in multiple countries so that they are able to meet the demand for their product in the US.
Are quotas or other government regulations ethical in global business or another one-sided political move? Democratic governments work to satisfy citizen interests, other types of governments often have selfish internal motives, economists argue for free trade, and organizations like the WTO attempt to make everyone play by a uniform set of rules. The future of government regulations will most likely continue to be influenced by money and power, and to a lesser extent, the majority vote.
Companies in developed countries like the United States can and are making a difference. They are creating initiatives, developing social contracts, and choosing to do business with suppliers and factories that adhere to certain standards. In doing so, the supply chains must keep up with the new expectations or risk being left out of future growth. Tangible evidence of this can be found in the way that Nike has changed many of their factories. After poor conditions were found in many of the factories that developed their shoes, they created a new emphasis on people and made the decision to work with suppliers who provided better working conditions for their employees. Additionally, as Rivoli asserts, some of the social changes in developing countries can happen organically. This has been shown time and time again in countries as they mature into industrialized nations. From the textile mills in England, to the American Northeast, to the Southern United States, difficult and punishing conditions have eventually given way to better compensation and working environments because of laborers’ demands and expectations, with the surrounding communities benefitting from this growth and progress. This is already beginning to be seen in places like China where workers’ safety and concerns are being improved, and their personal freedoms are expanding. Finally, government involvement is always going to play a large role in the globalization of companies. Laws, regulations, standards, and subsidies will likely never lead to a truly free market. However, as ideas and communications are more readily shared and accessible, there is some hope that nations can strive to work together and create a more level playing field for all involved.
In the new global economy, there are many concerns and expectations to consider. With the triple bottom line approach, companies may not be able to solve all of society’s problems, but they can go a long way towards improving life for their employees and the communities in which they do business, leaving a cleaner and more livable environment, while still creating a healthy profit for their shareholders. It is a delicate balancing act that will require constant supervision and correction, but a healthy triple bottom line is a lofty goal to which all corporations should aspire.