How to Responsibly Manufacture Products Overseas

The 20th century version of globalization has seen criticism from several angles recently.

Authors like Matt Stoller have noted that the tightened supply chains do not have the wherewithal to withstand disruptions like a giant container ship getting stuck in the Suez Canal - or a global pandemic causing various bottlenecks.

Others have noted that offshoring supply chains enables workers to be treated inhumanely and serious environmental degradation.

Globalization’s critics have argued that products manufactured overseas should be prohibitively taxed or even outright banned in order to promote local economies.

This article does not address the issues arising due to tightened supply chains. Rather, we’d like to focus on how developing countries might benefit from globalization provided we address the challenges around labor and environmental issues.

Despite the hundreds of years that have passed since David Ricardo originally developed his theory, the main premise of comparative advantage still holds true. This is still why we call a plumber to fixe our faulty toilet rather than an electrician. Similarly, it remains preferable to all parties to have labor-intensive production sited in places with relatively low labor costs.

But this comes with an important caveat—that companies should not be taking advantage of the people in these lower-cost countries. They should refrain from environmental degradation, pay a living wage, and allow wages to rise & the local economy to develop in the hopes that one day the low-cost labor country will price itself out of the market and move into higher value-added production.

The key focus shouldn’t be where a product is made, or by whom – but how it is made. Are there ethical guidelines in place to ensure that the activity has a benefit to the society, or is it simply an arbitrage for low wages or pollution?

Some ways to ensure that products supplied abroad are produced ethically is to include provisions covering labor and environmental issues in a production agreement or supplier handbook. This is currently being done by a number of multinationals.

Once these ethical obligations are in place, it is important to ensure that suppliers adhere to these constraints. The best way to accomplish this is to place ethical issues on the same plane as quality issues.

Just as quality inspectors will perform third party audits of manufacturing processes and test goods for quality issues; there can be social audits performed before a supplier is engaged and/or during the manufacturing process.

It is true that there are still ways for a supplier to fool the auditors or otherwise avoid some of its ethical production commitments. But we do not need to think too far outside the box to arrive at what could be a workable solution for this if we continue to view ethical production issues along the same plane as quality issues. This was the approach taken by a working group from the ABA Business Law Section that released a set of Model Contract Clauses on responsible supply chains.

In the same way that failures to reach certain quality standards allow for goods to be rejected by the purchaser— failures to uphold ethical production commitments should be a basis for rejecting the “ethically contaminated” goods. This means that the supplier would have to absorb the production costs without having received payment for the goods. This could prove to be a substantial down-side risk sufficient to ensure that suppliers adhere to their ethical commitments.  

Globalization has many benefits, provided you’re able to control some of the worst externalities of the system. We shouldn’t reject globalization entirely simply because of the failures of 20th century leaders to properly manage those challenges. We should instead be honest about those challenges, and seek to develop solutions which ensure that the fruits of a 21st Century Globalization can be shared by all.

Disclaimer: The information in this article is provided for informational purposes only. You should consult with an attorney before you rely on this information. This information should not be seen as legal advice and does not create an attorney-client relationship. This article is meant to be a general discussion and may not include all relevant information regarding the issues covered.