Do Preferential Trade Agreements with Labor Clauses Displace Labor Abuses? the Unintended Consequences of Global Governance on Labor Standards

Labor rights abuses remain a critical challenge globally. Preferential trade agreements with labor clauses (PTALCs) have emerged as a governance tool to address this by embedding labor standards in trade liberalization. While prior research has focused on whether PTALCs improve conditions in signatory countries, this study examines their systemic effects on non-signatory countries. Drawing on the private regulation literature, it argues that PTALCs can trigger a 'displacement effect': By reshaping competitive incentives, these agreements raise the opportunity cost of maintaining high labor standards in excluded countries. Two channels drive this shift: Trade liberalization raises the relative cost of non-signatory exports, while labor clauses signal commitment that non-signatories cannot easily replicate. Using spatial econometrics on a panel of 109 developing countries (1985-2012), the paper finds that PTALCs with the United States are associated with a significant deterioration of labor practices in non-signatory countries. PTALCs with the EU, Canada, EFTA, Australia, and New Zealand do not produce a comparable effect, consistent with the expectation that displacement is strongest when PTALCs combine a large market with stringent provisions. These findings demonstrate that governance tools designed to improve standards can interact with competitive dynamics in ways that harm workers beyond their intended reach.