Controlling Transnational Corporations

Key Points

Easy flow of capital across borders renders governments weaker in efforts to exert influence over national development.

U.S. leaders have used an array of foreign policy instruments to promote the spread of U.S.-based global corporations. Socially oriented corporate codes have come under government consideration.

Transnational corporations (TNCs) increasingly shape our lives as they weave worldwide webs of production, consumption, finance, and culture. Their ability to undermine or avoid government regulation and their rising strength relative to national governments have sparked citizen concern across the planet.

The United Nations defines transnational corporations as firms that control assets in two or more countries. Particularly since World War II, many large firms have taken advantage of improved transportation and communications technology to shift production and marketing beyond national boundaries. According to the UN Conference on Trade and Development, some 40,000 TNCs and their foreign affiliates control two-thirds of global trade in goods and services. Most global trade and investment, however, is controlled by a few hundred giant corporations that are larger economically than most nations. For example, General Motors’ sales in 1995 were greater than the gross national product (GNP) of 169 countries, including Saudi Arabia, South Africa, Malaysia, and Norway.

The easy flow of capital across national borders renders governments weaker in their efforts to exert influence over their nations’ development. Eager to attract or retain capital, governments often drain the public treasury or dampen regulatory enforcement as they bid for TNC investment—despite devastating social costs. Poorly paid workers, cramped working conditions, attacks on labor organizing, and environmental degradation are among the common results. TNCs maximize profits globally by pitting worker rights, wages, and environmental protections in one country against those in other countries, resulting in a destructive downward spiral into the abyss of rights and standards.

Since World War II, U.S. political leaders have used an array of foreign policy instruments to promote the spread of U.S.-based global corporations around the world. Responding to corporate pressure and lobbying, U.S. policymakers have established economic and political conditions both at home and abroad that are favorable to the marketing and investment ambitions of the country’s leading global firms. Corporations can avail themselves of tax credits and subsidized insurance on overseas investments as well as export financing. Regional and global trade agreements likewise ease corporate exports and investment while failing to impose requirements for socially responsible behavior.

More recently, however, labor and other citizen groups have pressured the government to reshape parts of U.S. policy in socially responsible ways. In the 1970s, the United States passed a Foreign Corrupt Practices Act to curb the use of corporate bribery to attain deals.

In the 1980s, human rights groups and unions successfully pressed Congress into passing legislation that conditions U.S. trade benefits on other countries’ respect for worker rights. This includes the Generalized System of Preferences (GSP), which gives developing countries preferential access to the U.S. market.

Many consumer, labor, and environmental protection groups now advocate that social charters protecting worker rights should be an integral part of all trade agreements. In the case of the North American Free Trade Agreement (NAFTA), then-presidential candidate Bill Clinton advocated in 1992 that a strong social charter to protect labor and environmental rights be included in the agreement. Yet as president, Clinton negotiated weak environmental and labor side agreements that have proved of minimal value in enforcing cross-border labor and environmental standards (see In Focus: NAFTA After Three Years ).

Socially oriented corporate codes of conduct have also come under government consideration. An important precedent in this area was the 1986 Comprehensive Anti-Apartheid Act, which added teeth to the Sullivan Principles by obligating U.S. corporations doing business in South Africa to treat black workers more fairly by offering equal pay for equal work, recognizing unions, and providing supervisory jobs for nonwhites. More recently, the U.S. government briefly considered instituting a corporate code of conduct for U.S. firms doing business in China. Instead the Commerce Department negotiated a set of “Model Business Principles,” which are weak and nonbinding social standards for U.S. firms operating in any country.

Problems with Current U.S. Policy

Key Problems

Although the NAFTA side agreements represent a step forward, they are not a good model for regulating TNC conduct.

TNCs remain largely free to seek the most profitable and least regulated locations for their production.

At a multilateral level, the U.S. has offered little support for measures designed to regulate corporate operations and protect worker rights.

As the home country of many of the largest global firms, the United States would do well to help lead the drive for a better framework to regulate these globetrotting corporations. Thus far, however, the U.S. government has done little to regulate TNC operations—largely because of the belief that what is good for these TNCs is good for the country, but also because of the difficulty of any nation alone attempting to regulate global firms with national regulations.

The U.S. government, concerned primarily with expanding overseas trade and investment, has not acknowledged the need for a comprehensive policy to render TNCs more socially and environmentally responsible. Citizen pressure has resulted in some important progress in linking trade and social issues on the bilateral and regional levels; the labor provisions of the GSP, for example, have resulted in minor improvements in the enforcement of labor laws by several U.S. trading partners. Yet, the “worker rights” clauses in other trade agreements such as NAFTA are even weaker and more difficult to enforce than those of the GSP.

Although the NAFTA side agreements represent a step forward in including social and environmental issues in trade agreements, they are not a good model for regulating TNC conduct. Instead of targeting individual corporate conduct, they focus exclusively on government enforcement—and many nations with which the U.S. trades have virtually no regulatory structure. Because of the weak regulatory structures in many countries and in the absence of enforceable international standards, TNCs remain largely free to seek the most profitable and least regulated locations for their production. In Southern California, for example, furniture companies have fled the state’s environmental regulations to the lax enforcement climate in Mexico.

One restriction on the United States using trade sanctions to encourage better business practices abroad is that these sanctions can only be used in the case of nonreciprocal trade agreements where special trading privileges are granted. If trade measures (restrictive quotas, higher tariffs, etc.) undermine normalized reciprocal trading relations, they may be judged to be a violation of the rules of the World Trade Organization (WTO) (see In Focus: World Trade Organization).

Both the U.S. government and a number of corporations have responded to rising citizen concern about exploitative TNC practices by promoting voluntary corporate codes of conduct. Yet Clinton’s 1995 “Model Business Principles” and other programs such as the Commerce Department’s Office of Export Promotion (which sponsors the Best Global Practices Award and the Best Global Practices Information Clearinghouse) have been more promotional than regulatory.

Rather than attempting to monitor business practices, the U.S. government asks TNCs themselves to submit examples of their “extraordinary leadership” in corporate citizenship. Toward this end, President Clinton expressed support of voluntary product labeling by TNCs so they could then inform consumers of their responsible business practices. But calls by citizen groups for mandatory listing of corporate labor and environmental practices (similar to the nutritional information required of food manufacturers) have been rejected.

At the multilateral level, the United States has offered little support for measures designed to regulate corporate operations and protect worker rights. The U.S. government has failed to ratify a series of international conventions promulgated by the International Labor Organization (ILO) and other UN organizations that advance social and economic rights. The ILO and other UN bodies seeking to improve socioeconomic conditions by raising international standards also face regulatory obstacles because international conventions depend on national governments for enforcement.

The Reagan and Bush administrations orchestrated an attack on the United Nations agency designed in the 1970s to address corporate issues: the UN Center on Transnational Corporations (UNCTC). For thirteen years, the UNCTC tried to institute a code of conduct for transnational corporations. At the 1992 Earth Summit, UNCTC’s proposal for an environmental code of conduct for corporations was spurned in favor of a voluntary code proposed by the Business Council for Sustainable Development, an organization of TNC executives who advocate a policy of “free-market environmentalism.”

Toward a New Foreign Policy

Key Recommendations

U.S. government should support efforts by the ILO and other UN bodies to strengthen enforcement of international labor rights as well as supporting UN work establishing an enforceable corporate code of conduct.

Strong international standards for corporate conduct will depend on strict national laws regulating business operations.

Until elections are freed from excessive corporate financing, politicians will remain highly susceptible to corporate influence, often against the interests of the majority.

There is an urgent need to subject the operations of transnational corporations to more effective citizen, governmental, and multilateral regulation. The U.S. government should strongly support efforts by the ILO and other UN bodies to strengthen enforcement of international labor rights. In particular, Washington should renew its own efforts and financially support UN work establishing an enforceable code of conduct for international business.

Similarly, the U.S. government should stand behind proposals to integrate social standards (that address consumer, environmental, and labor concerns) into trade agreements. In the World Trade Organization, Washington should link its rhetorical support for introducing worker rights into the organization with support for greater transparency within the WTO and opposition to expanding the powers of the WTO into new investment arenas. On the regional and bilateral level, the U.S. government should insist that future trade agreements include enforceable social charters.

Strong international standards for corporate conduct will depend on strict national laws regulating business operations. International laws and conventions will have no effect unless they are built on a foundation of tough national standards. Government—at the local, state, and federal level—should not relax domestic regulations in the hope of keeping TNC production at home. Instead, it should work on the domestic and international fronts to make corporations more socially responsible. In this regard, the social provisions of the GSP, Caribbean Basin Initiative, NAFTA, and other trade-related programs and agreements should be strictly enforced.

As corporate power transcends national boundaries, people throughout the world need to work together to monitor and press for better regulation of TNC activity. National and international citizen movements, like those that emerged during the NAFTA debate, demonstrate that citizens should continue to build a base for influencing international economic policy.

Citizen action to regulate international corporate operations is not limited to the institutional arena. The Coalition for Justice in the Maquiladoras (CJM) formulated a code of conduct to promote social responsibility in assembly plants on the U.S.-Mexico border. By generating publicity about inadequate working conditions, utilizing shareholder pressure, and organizing visitor exchanges, CJM prods maquila owners to adopt socially responsible business practices.

Boycotts, publicity, and labeling campaigns are other forms of action that can effectively challenge corporate power outside of institutional channels. Consumer support, boycotts, or boycott threats against such companies as the Gap, Starbuck’s, and Levi-Strauss helped persuade these corporations to adopt codes of socially responsible practices. Groups such as Global Exchange and the National Labor Committee are pressing reluctant TNCs to make these codes more meaningful. In a few campaigns, such as one targeting at the Gap in 1995, corporations have conceded to allow independent monitors into the factories of their overseas subcontractors. Groups like the Interfaith Center on Corporate Responsibility have organized stockholders to hold transnational corporations more accountable. A related strategy, adopted by groups such as the Fair Trade Federation and Trans Fair USA, is to support alternative production and marketing networks that can point the way to more responsible TNC practices.

Labeling campaigns, such as the “dolphin safe” symbol on tuna cans, are another effective way to influence corporate behavior. The use of voluntary ecolabels or labor labels provides a valuable approach toward ensuring corporate accountability since it alerts consumers to the conditions under which a product has been produced. The appropriateness of food-safety labeling has been accepted by the General Agreement on Tariffs and Trade (GATT), the predecessor to the WTO, thereby opening the door for citizen efforts to insist on social labeling for other aspects of the production process.

A combination of local, national, and international initiatives are needed to regulate TNC operations. Global corporations now dominate all of our economies, rendering national regulation less effective in controlling business activity. International agreements that require TNC subsidiaries to inform host nations about their production processes, use of toxic chemicals, and actual costs and income should receive U.S. backing. The U.S. government should also lead the way to make TNCs more accountable and responsible to local communities. While international in scope, most TNCs still depend on national and local government to provide services and infrastructure. Governments need to ensure that TNCs pay their share of these costs. Toward this aim, strong right-to-know laws should also be enacted.

Finally, the United States must make fundamental reforms in campaign financing. Until elections are freed from excessive corporate financing, politicians will remain highly susceptible to corporate influence, often against the interests of the majority.

With strong pressure from labor, environmental, and other movements, the U.S. government still holds the power to make corporate behavior far more socially and environmentally responsible.