The race to the bottom is a socio-economic phrase to describe government deregulation of the business environment, or reduction in tax rates, in order to attract or retain economic activity in their jurisdictions. An outcome of globalization and free trade, 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), and thus the metaphor where the bottom is the lowest wage that can be paid.
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 described the concept as the "race to efficiency", and others, such as Justice Louis Brandeis, as the "race to the bottom".
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), while 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 Carey 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, which registers its ship with flags of convenience, evading wage requirements and other expenses required by developed countries, thus providing the business model for the industry.
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 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.
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.
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