The Downsides of European Integration: Social Dumping

The European Union (hereafter EU) is often portrayed in the public discourse as a stronghold of responsible capitalism, and the idea of a social Europe. However, European Integration led to the development of deleterious phenomena typically associated with the most criticized aspects of world capitalism and globalization, such as social dumping (Bernaciack, 2015). This article addresses social dumping, specifically focusing on the European context. In the first place, the academic debate around such practice will be addressed by showing how different academic strands achieve different conclusions. Afterwards, the relevance of social dumping in the real world will be addressed by illustrating some empirical cases and quantitative data. The third and last section will delve into the structural features of the EU that are believed to foster and encourage social dumping.

Image 1: Cole, L. (2021). The EU as a stronghold of responsible capitalism [Illustration]. The Economist.

Magdalena Bernaciack defines social dumping as “the practice undertaken by self-interested market participants, of undermining or evading existing social regulations with the aim of gaining a competitive advantage” (Bernaciack, 2015, p. 2). In other words, social dumping encompasses a variety of practices carried out mostly by multinational corporations (hereafter MNCs) aimed at escaping social regulation, and ultimately increasing revenues. One spectacular aspect of social dumping is industrial relocation, by which entire production sites are moved from one country to another, and thousands of workers suddenly lose their jobs. The aim of such practice is that of seeking better conditions concerning the price of labour, and therefore it is often directed toward developing countries that can provide a cheap labour force (Bernaciack, 2015). However, as it will be explained, it is just one of the aspects of a much more complicated phenomenon. Consistently with Bernaciack’s definition, other practices of social dumping are those aimed at lowering social protection and wages using the threat of relocation as a means to obtain concessions from the workforce (Greer & Haupteimer, 2015).

Social dumping has acquired specific importance in the European context since the establishment in 1992 of the European single market, with the treaty of Maastricht enabling the free movement of goods, capital, services, and persons (EUR-Lex) and, thus, allowing corporations to move freely and establish their production plants and headquarters where they find it is more convenient. The single market entails the removal of external fees among member countries, preventing them from using their external fiscal policies to promote national markets and hence creating a regime of competition without the intervention of states (EUR-Lex). In this context, social dumping has acquired importance, as free movement of capital and goods allowed firms to deploy their production lines where they found it to be more convenient without having to pay any additional fees. Such a dynamic was exacerbated by the admission to the EU of the Central and Eastern European Countries (hereafter CEE) since their economies were considerably less developed than the previous EU members and generated social unrest and discontent among workers and trade unions (Bernaciack, 2015).

Image 2: Unknown (n. d.). The signing of the treaty of Maastricht [Photograph]. Studio Europe Maastricht.

Conflicting views

This phenomenon can be interpreted from various standpoints. From a neoclassical and liberal point of view, social dumping is the natural consequence of Ricardian economic specialization: every country should engage in the economic activity for which it holds a comparative advantage (McCloskey, 2006). This implies an international division of labour, meaning that countries with a developed industry should carry out capital-intensive production, whereas those that can count on an abundant and cheap labour force should engage in labour-intensive production (McCloskey, 2006). Therefore, it is logical according to this view that firms engage in the relocation of entire segments of production, and that cheap-labour countries try to attract such investments to secure their role in the world economy. After the admission of the Central Eastern European Countries (CEE) to the EU in 2004 and 2007 (Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia), it became clear that such countries held an advantage regarding the cost of labour, labour regulation and social regulation. This asymmetry, together with the absence of trade restrictions that characterizes the EU single market, boosted such a process, fueled both by the profit-seeking logic of firms and by the willingness of CEE countries to secure a role in the world economy (Bernaciack, 2015).

Neoclassical economics does not assign a negative meaning to social dumping, but rather argues that it has an overall positive effect on the whole economic outcome, that it boosts market efficiency (Marin, 2004) and is unavoidable in a context of open regionalism (Nunnenkamp, 2006). As mentioned above, countries that engage in economic activities for which they hold a comparative advantage are able to secure a share of the world market, for they are capable of producing a certain good in a cheaper way than the other competitors (Marin, 2004). A great example of this is South Korea, that by opening to the world market and exploiting the competitive advantage it held in the price of the labour force achieved a great role in the world economy and a considerable economic power (Kanbur, 2009).

Unknown (n. d.). Stop social dumping [Illustration]. The Left.

However, this perspective neglects the social impact of social dumping practices and widely overlooks a crucial aspect: the relation between labour and capital. Free movement of capital in search of better conditions to reproduce itself and increase revenues, in fact, has important implications concerning labour standards, labour protections, and wages. Critical Political Economy focuses on these aspects by framing social dumping in the wider picture of globalization and neoliberalism. As argued by Harvey (2005), the rise of neoliberalism in the ‘70s entailed a shift in the balance of power between capital and labour. The opening of national economies that neoliberalism implied led to an increase in terms of international competition both for capital and labour. Firms that previously had to compete in a national market protected by external fees faced greater competition, and the bargaining power of the labour force on the national level was mutilated by the increased availability on a global scale (Tilly, 1995). Therefore, from a critical standpoint, the constitution of the EU single market and the admission of the CEE countries offered MNCs a crucial tool to engage in practices aimed at reducing the social costs of production (those costs determined by social regulation or social norms) and wages.

Image 4: Cristofani, B. (2017). Deindustrialization [Illustration]. The Economist.

One of those practices has been labelled by scholars as management whipsawing (Greer & Haupteimer, 2015). It consists of using the threat of industrial relocation (moving production elsewhere with better conditions and lower costs), posted workers (cross-border workers that live in one country but work in the neighbouring one), and immigrant workers (Krings et. al, 2015) to force the labour force to accept worst conditions. In other words, the mere threat of industrial relocation can be used by firms, in the realm of collective negotiation with workers, to drive down their requests and obtain better conditions for production. Furthermore, management whipsawing is aimed at pitting workers from different countries against each other in order to start a race to the bottom in terms of wages and working conditions to attract investments (Greer & Haupteimer, 2015). The relocation of a segment of production initiates a competition between workers in different countries aimed at attracting such investment, especially in those countries where there is a significant rate of unemployment. The same mechanism is also applied to states; countries compete against each other to offer better conditions to firms that seek to relocate, in this case in terms of lower salaries and lower labour protection (Greer & Haupteimer, 2015).

Similar dynamics are the consequence of what Clua-Losada (2015) identified as the competition discourse. The competition discourse, which is the emphasis on the need to remain competitive in the world market, is often used by MNCs to drive down wages and social regulation. The imperative of being competitive is a tool that capital uses to justify cuts to wages, to demand more permissive labour regulation from governments, and the establishment of the EU single market exasperates this logic. The common market among European Countries, as argued by Tilly (1995), increased competition, since economic actors had to start competing on a bigger scale and could not be protected by governments with external fees. Such condition is used by firms to reclaim lower wages and blander labour legislation either to governments, emphasizing the fact that they would otherwise have a disadvantage compared to firms in other countries, and to workers, who are threatened with losing their jobs if the firm is not competitive (Clua-Losada, 2015).

Image 5: Schrank, P. (2017). A conflicting issue [Illustration]. The Economist.

The real-world magnitude of social dumping

Scholars have addressed several real-world situations in which MNCs enacted social dumping practices. The massive employment of immigrants from CEE countries in Ireland in the construction sector in the post-2004 period led to the worsening of labour conditions caused by an excess of cheap labour force (Krings et al., 2015). The employment in Germany of workers contracted in Poland and Bulgaria allowed lowering cost of labour (Pedersini & Pallini, 2010). The concessions made by trade unions under the threat of FIAT to relocate production from Italy to Poland led to labour conditions below the level established by national collective bargaining (Meardi, Strohmer, & Traxler, 2013; Simoni, 2010). The complete relocation of Bekaert’s Italian plant to Romania entailed the sudden loss of 318 jobs openly undertaken to reduce the cost of labour (Bekaert, 2018). All such practices are linked by a common denominator: social dumping.

Image 6: Unknown (2014). Race to the bottom? What race? [Illustration]. IREF.

This phenomenon is rather difficult to quantify, thus establishing its real weight within the framework of European Industrial relations remains a partially unsolved challenge. Nevertheless, research shows that West-East relocation is relevant under certain aspects and in certain geographical and occupational areas. It is demonstrated, in fact, that 40% of relocations by Europe-based firms occur toward CEE countries (Sunjka & Papadopoulos, 2019). Moreover, data show that a relevant percentage of manufacturing activities in certain countries are relocated abroad and that MNCs play a prominent role (Sunjka & Papadopoulos, 2019). As argued by Meardi et al. (2013), MNCs have demonstrated reluctance to allow the same conditions of workers’ participation in receiving countries compared to those in their country of origin. Furthermore, Galgózgi et al. (2006) observed that the drivers of industrial relocation are primarily to be identified in the differentials of wages (both in real wages and growth trends) and productivity. These two assumptions show that regardless of the real quantitative relevance of West-East relocation, the incentives for this phenomenon to proliferate do exist. However, its numerical relevance and effects on employment remain unclear.

Considering the initial statement, what is more important and perhaps more striking is the fact that the structure of the EU and the EU single market encourage such practices. The ECJ issued two crucial judgements concerning the cases Viking (2007) and Laval (2008), establishing the supremacy of free capital movement over national social regulation, meaning that every time that national labour and social regulation are threatened by one of the four freedoms of the EU single market, the latter has primacy over the former. Therefore, the structure of the EU inherently promotes the imbalance between capital and labour, providing the tools to encourage a race to the bottom in terms of labour standards (Meardi, Strohmer, & Traxler, 2013; Trapmann, 2015). As Tilly (1995) stressed, the establishment of the single market increased competition among economic actors, leading to the consequences that have been previously illustrated. However, the single market established in the Maastricht treaty (EUR-Lex) is one of the foundations of today’s EU, and any attempt to curb the dynamics addressed in this piece risks infringing the common rules set in 1992, as demonstrated by the Viking and Laval judgements. Therefore, the very structure of the contemporary EU is tightly related to the practices of social dumping.

Image 7: Unknown (n. d.). The EU single market [Animated illustration]. AmCham EU.

Conclusion

The judgement of social dumping transcends the academic purpose of this article and falls into political evaluation. What this piece intends to achieve is highlighting the existence of such a phenomenon and trying to build a connection between its various manifestations and the EU. Even though the EU is often portrayed as a stronghold of responsible capitalism, its structure inherently encourages practices that potentially have dreadful social effects, insofar threatening the image of the long dreamed Social Europe. One of those is social dumping. Academia is divided between a passive acceptance that frames this phenomenon as unavoidable and even positive, and sharp refusal, being it the manifestation of power inequalities between capital and labour in the world economy. Although the quantitative relevance of social dumping is disputed among scholars and certainly needs to be furtherly proved, this article highlighted the existence of such practice within the EU. Furthermore, it tries to establish a connection between the phenomenon under analysis and the EU structure. Several structural elements have been found to possibly have an impact on exacerbating, and even boosting social dumping. The idea of a social Europe is well alive in the conscience of European peoples, however, as briefly elucidated, the road is full of obstacles that need to be overcome.

Bibliographical references

Bekaert (2018, June 22). Bekaert announces decision to close Figline-Valdarno site. Retrieved from Bekaert: https://www.bekaert.com/en/about-us/news-room/news/bekaert-announces-decision-to-close-figline-valdarno-site Bernaciack, M. (2015). Introduction. In M. Bernaciak, Market expansion and social dumping in Europe (pp. 1-19). New York: Routledge. Clua-Losada, M. (2015). Tracing the competitiveness discourse in Spain: Social dumping in disguise? In M. Bernaciack, Market Expansion and Social Dumping in Europe (pp. 210-226). New York: Routledge. EUR-Lex. (n.d.). Economic and Monetary Union (EMU). Retrieved from EUR-Lex: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=LEGISSUM:economic_monetary_union Galgóczi, B., Keune, M., & Watt, A. (2006). Relocation: concept, facts and policy challenges. Transfer, 499-520. Greer, I., & Haupteimer, M. (2015). Social dumping with no divide: evidence from multinational companies in Europe. In M. Bernaciack, Market Expansion and social Dumping in Europe (pp. 140-157). New York: Routledge. Harvey, D. (2005). A brief history of neoliberalism. Oxford: Oxford University Press. International Transport Workers’ Federation and Finnish Seamen Union vs. Viking Line ABP and OÜ Viking Line Eesti, Case C-438/05 (European Court of justice December 2007, 2007). Kanbur, R. (2009). The Co-Evolution of the Washington Consensus and the Economic Development Discourse. Macalaster International, 8. Krings, T., Bobek, A., Moriarty, E., Salamonska, J., & Wickham, J. (2015). Large-scale migration in an open labour market: The Irish experience with post-2004 labour mobility and the regulation of employment standards. In M. Bernaciack, Market Expansion and Social Dumping in Europe (pp. 25-43). New York: Routledge. Laval un Partneri Ltd vs Svenska Byggnadsarbetareförbundet and Others, 0341/05 (European Court of Justice December 18, 2008). Marin, D. (2004). ‘A Nation of Poets and Thinkers’ - Less so With Eastern Enlargement? Austria and Germany. GESY, 1-46. McCloskey, D. (2006). The Industrial Revolution was a Great Tide. In D. McCloskey, Bourgeois Dignity: Why Economics can't Explain the Modern World (pp. 3-11). Chicago: University of Chicago Press. Meardi, G., Strohmer, S., & Traxler, F. (2013). Race to the East, race to bottom? Multi-nationals and industrial relations in two sectors in the Czech Republic. Work, employment and society, 39-55. Nunnenkamp, P. (2006). Relocation, Offshoring and Labour Market Repercussions: The Case of the German Automobile Industry in Central Europe. The effects of globalization on national labor markets: Diagnosis and therapy. Berlin: Duncker & Humblot. Pedersini, R., & Pallini, M. (2010). Posted workers in the European Union. Dublin: European Foundation for the Improvement of Living and Working Conditions. Simoni, M. (2010). Fiat Restructuring and the Pomigliano Case: A New Era in Italian Industrial Relations? Italian Politics, 198-219. Sunjka, N., & Papadopoulos, G. (2019, 1 July). EUROSTAT. Retrieved from International sourcing and relocation of business functions: https://ec.europa.eu/eurostat/statistics-explained/index.php?title=International_sourcing_and_relocation_of_business_functions#General_overview Tilly, C. (1995). Globalization Threatens Labor's Rights. International Labor and Working-Class History, 1-23. Trapmann, V. (2015). Social dumping with no divide; Evidence from multinational companies in Europe. In M. Bernaciack, Market Expansion and Social Dumping in Europe (pp. 140-156). New York: Routledge.

Visual References

Image 1: Cole, L. (2021). The EU as a stronghold of responsible capitalism [Illustration]. The Economist. Retrieved 05/08/2022, from: https://www.economist.com/europe/2021/05/15/the-eu-is-trying-to-become-a-welfare-superstate

Image 2: Unknown. (n. d.). The signing of the treaty of Maastricht [Photograph]. Studio Europe Maastricht. Retrieved 06/08/2022, from: https://studioeuropamaastricht.nl/2022/03/29/call-for-papers-the-30th-anniversary-of-the-maastricht-treaty/

Image 3: Unknown. (n. d.). Stop social dumping [Illustration]. The Left. Retrieved 07/08/2022, from: https://left.eu/issues/explainers/posting-of-workers-an-explainer/

Image 4: Cristofani, B. (2017). Deindustrialization [Illustration]. The Economist. Retrieved 06/08/2022, from: https://www.economist.com/special-report/2017/10/05/worries-about-premature-deindustrialisation

Image 5: Schrank, P. (2017). A conflicting issue [Illustration]. The Economist. Retrieved 05/08/2022, from: ://www.economist.com/europe/2017/09/21/charlemagne-the-row-over-posted-workers

Image 6: Unknown. (2014). Race to the bottom? What race? [Illustration]. IREF. Retrieved 06/08/2022, from: https://en.irefeurope.org/publications/online-articles/article/race-to-the-bottom-what-race/

Image 7: Unknown. (n. d.). The EU single market [Animated illustration]. AmCham EU. Retrieved 05/08/2022, from: http://www.amchameu.eu/singlemarket