Globalization, competition, and convergence: shipping and the race to the middle.

Author:DeSombre, Elizabeth R.
 
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This article examines the impact of globalization on international environmental, safety, and labor standards through the lens of impact of open registration in shipping--the ability of shipowners to choose in which states to register their ships. Shipowners have moved registration of ships to low-standard states, while traditional national registries relaxed standards in an effort to keep ship registrations. But recent successes in increasing standards have come from mechanisms of exclusion: ships that remain outside the international regulatory process are prevented from benefiting from their free riding by the imposition of trade restrictions, dockworker boycotts, and inspection and detention processes that single out those operating outside the international regulatory framework. KEYWORDS: globalization, environmental standards, labor standards, international regulation, ships.

Those concerned about globalization generally have long been concerned that international competition will lead to a downward convergence of environmental and labor standards. This convergence could happen individually--states could competitively lower standards in an effort to lure industry and thus gain economic advantage, in what is referred to as a regulatory "race to the bottom," or it could happen collectively, as international standards mandate a least-common-denominator level of regulation. (1)

Ingo Walter, despite noting the contribution of environmental costs to plant closings in the United States, suggests that the bulk of the evidence "does not suggest massive environment-induced locational shifting thus far." (2) Yet evidence, both anecdotal and statistical, suggests that industries sometimes will move to take advantage of low environmental or labor regulations. Walter, despite the broad conclusion of minimal shifting, does point to smelters, refineries, and asbestos plants that were constructed outside the United States due to weaker environmental controls elsewhere. An examination of level of environmental regulation and industry location choices in states belonging to the Organization for Economic and Community Development (OECD) finds a relationship between environmental regulations and level and patterns of exports. As David Wheeler points out, even those who do not find support for the pollution haven hypothesis should exercise caution, because "there is no theoretical reason why industries with exceptionally high pollution control costs should ignore regulatory concerns." (3) And there is no theoretical reason for governments to ignore such industry decisions in deciding on levels of regulation. The jury appears to be out on the extent to which regulatory havens will come to exist and to draw industry to them and on the broader impact this phenomenon will have on global regulatory levels.

Shipping is a particularly relevant sector within which to examine hypotheses about the effects of globalization. This industry demonstrates the very real threat of lowered standards in response to globalization and freer trade. If regulatory havens or races to the bottom are to be encountered any-where, they would likely be found in shipping. As a report from the Australian parliament noted, "It is a world of too many ships that are over aged and under maintained chasing too little freight for too little return." (4) Ship registration is an often overlooked method of "moving" industries to a location with lower environmental and labor standards.

Moreover, open registries present a potentially easier form of encouraging industrial movement than do standard pollution havens. From the perspective of shipowners, registration in an open registry does not require physically relocating an industry; it simply means changing the flag flown and the port indicated on the stern. Fees are sent to an office, and inspectors--if any are required--generally go to where the ship is. Many ships registered in such localities never even visit their flag states. As Dale Murphy characterizes it, shipping is an industry marked by low asset specificity and thus a likely candidate for a race to the bottom. (5)

Shipowners have been willing to take advantage of the demonstrated willingness of some states to lower standards to attract ship registrations, with a dramatic migration of ship registration to open registries, resulting in at least initial lowering of environmental, safety, and labor standards. Competitive pressure internationally, from free trade and the general increasing globalization of production, has led to incentives to decrease standards. Substandard shipping itself confers a competitive advantage. Even apart from wages and labor standards, an OECD report found that lack of compliance by ships with international safety and environmental regulations conferred economic benefits on shipowners. The study concluded that nonobservance of these standards distorts competition in the shipping industry. (6) Another OECD study found that owners of substandard ships manage to externalize the costs associated with these ships and rarely suffer serious economic loss from the problems that arise from lack of adherence to collective standards. (7) The ease of movement of ship registration, in conjunction with these competitiveness effects, should provide the ideal conditions for downward harmonization.

But the result is neither a worldwide race to the regulatory bottom nor even a stable set of regulatory havens. Many states newly offering ship registration intentionally offer low standards to attract ships to the registry, and ship registrations have indeed increased at these locations (also known as flags of convenience [FOCs]). At any given time, some states--or even individual ships--have lower standards and others higher ones pertaining to environmental, safety, and labor issues on the high seas. But the regulatory environment does not remain stable. Once a registry enters the world market with low levels of regulation, a variety of actors begin efforts to increase the standards followed by the ships in those registries. The registries with the lowest standards generally give into the pressures to increase the environmental, safety, and labor regulations that registered ships must uphold. As standards increase in these registries, new entrants to the global ship registration market appear, offering lower standards than the prevailing ones, but they are eventually subject to the same pressures and change their behavior as well.

There is thus a kind of harmonization upwards that occurs across some states, over time. But it does not quite fulfill the optimistic projections of some scholars. What we get instead is a race to the regulatory middle. Standards increase upwards until they reach an equilibrium where the flag of convenience states require more environmental, safety, and labor protections than they initially did, but fewer than adopted originally by most of the advanced industrial states.

At the same time, these traditional maritime registries, with the highest standards, join the race to the middle as well. Because they are concerned about losing ship registration to FOC registries, they respond by opening international registries--which allow nationally registered ships operating internationally to be held to some different standards than under the traditional registry--and by encouraging "second registries," operating in over--seas territories of the home state, which can also have a different set of requirements and fees.

The phenomenon of flags of convenience ship registration thus suggests that in some contexts, regulatory havens will exist and will draw industry actors. But ship registration also demonstrates that regulatory havens not only will not lead inexorably to races to the bottom; they can, in some circumstances, help motivate pressure to harmonize regulations upwards, though perhaps at a lower level than would have been the case without the havens in the first place. Understanding the regulatory pattern required by registry states and adoption of standards by individual ships can therefore provide useful information for those engaged in a broader investigation of regulatory havens and races to the bottom.

Standards of Ship Registries

Shipowners have "moved" their registration to open registries in dramatic and increasing numbers, as demonstrated in Figure 1. This growth was particularly notable after World War II. Immediately after the war, the largest ship registries were the United States, United Kingdom, Norway, France, and the Netherlands. The largest ship registries at the beginning of 2005 were Panama, Liberia, Greece, the Bahamas, and Malta. (8) All of the new leading registries, except Greece, are open registries whose ship registrations come almost entirely from outside their borders.

These new registries are also, for the most part, developing countries. Running an open registry provides an opportunity for income generation. In Panama, for instance, the fees charged for the registry contribute (5) percent of the national budget. In Liberia, the ship registry constitutes one-sixth of the country's total revenue. Running an open registry can bring other types of benefits to a government as well. The Cambodian registry is a source of otherwise scarce foreign capital. (9) And open registry states feel no more of the negative effects (such as increased pollution or lower labor standards) from their registry than any other state does, since the ships they register have no connection to the state and may not ever travel there.

[FIGURE 1 OMITTED]

An estimated 64 percent of the world's merchant fleet tonnage is registered in flags of convenience. Three of the four largest oil tanker registries are FOCs, as are three of the four largest bulk carrier registries and all four of the largest container ship registries. (10) Most international trade--95 percent as measured by weight and two-thirds as measured by...

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