Race to the bottom

The race to the bottom is a socio-economic phrase which is used to describe government deregulation of the business environment or taxes in order to attract or retain economic activity in their jurisdictions. An outcome of globalization and free trade, the phenomenon may occur when competition increases between geographic areas over a particular sector of trade and production.

The incentive to deregulate comes from the consumer who wishes to pay a competitive rate for items or services, rather than one set by the government often at the behest of businesses or unions.

History and usage

The concept of a regulatory "race to the bottom" emerged in the United States during the late 19th and early 20th century, when there was charter competition among states to attract corporations to domicile 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 also 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."

Another example is the cruise industry, which registers its ship with flags of convenience, circumventing wage requirements, and other expenses required by developed countries, thus providing the business model for the industry.

See also

3

Further reading

• Vogel, David. 1995. Trading Up: Consumer and Environmental Regulation in a Global Economy. Cambridge, MA: Harvard University Press. ISBN 0-674-90084-7

External links

• Definition from the Financial Times Lexicon
• "Racing to the bottom" in The Economist
• Yablon, Charles M., "The Historical Race Competition for Corporate Charters and the Rise and Decline of New Jersey: 1880-1910", The Journal of Corporation Law (2007)