What is Race to the Bottom?

For example, the companies usually compete to gain the market share Market ShareMarket share determines the company’s contribution in percentage to the total revenue generated within an industry or market in a certain period. It depicts the company’s market position when compared to that of its competitors.read more, whereas governments of different countries compete to earn more foreign direct investmentsForeign Direct InvestmentsA foreign direct investment (FDI) is made by an individual or an organization, into a business located in a foreign country. The host nation receives job creation prospects, advanced technology, a higher standard of living, infrastructural development, and overall economic growth.read more. When competition becomes fierce, the participants resort to unethical or hazardous practices like compromising quality, low wages to workers, weaker regulatory policies to withstand the competition.

Key Takeaways

  • “Race to the bottom” definition portrays a phase of competition between firms or governments during which they resort to hazardous practices like a compromise on quality, reduced wages, and deregulated business environment to maintain the best position.

  • Justice Louis Brandeis popularized the term in 1933 in a judgment for the Liggett V. Lee case pointing out the relaxed rules and regulations implemented to obtain a competitive advantage.

  • Developing countries compete by reducing tariffs and deregulating policies as a part of trade liberalization to grab the opportunities presented by globalization.

  • It mainly affects workers since they are subjected to low wages and inappropriate workplace practices.

Race to the Bottom Explained

The “Race to the Bottom” phrase was popularized through the verdict made by Justice Louis Brandeis of the US Supreme Court in 1933 for the Liggett v. Lee case. It remarked that competition between states to get firms to incorporate in their jurisdiction was “one not of diligence but laxity.” His statement indicates that the states feature relaxed legislation to obtain a competitive advantageCompetitive AdvantageCompetitive advantage refers to an advantage availed by a company that has remained successful in outdoing its competitors belonging to the same industry by designing and implementing effective strategies that allow the same in offering quality goods or services, quoting reasonable prices to its customers, maximizing the wealth of its stakeholders and so on and as a result of which the company can make more profits, build a positive brand reputation, make more sales, maximize return on assets, etc.read more rather than stringent regulations and due diligenceDue DiligenceDue diligence is a thorough examination of information and strict adherence to the applicable rules and regulations. It ensures asset protection as well as the avoidance of malpractices and conflicts.read more. That is a movement from the desired level to an undesirable level of rules and regulations due to the extreme force of competition.

The “Race to the bottom” phase of competition can occur at any level between any entity. For example, it can happen between two neighboring retail shops selling the same merchandise, companies in the same industry, different states and countries, etc. When companies in an industry enter this phase of the competition, they try to withstand it by resorting to unethical means or bearing the loss at initial years. At the same time, governments attract investments by presenting a deregulated business environment, reduced tax rates, and other trade liberalizationTrade LiberalizationTrade liberalization refers to eliminating or easing trade barriers between countries to promote free trade of goods and services.read more initiatives.

Elements of trade agreements ascertain its inclination towards giving importance to tariffs, barriers to trade, and investors’ rights. Also, it usually provides less importance to provisions explaining wages, work hours, health, and safety and contains oppressive measures pulling the laborers down. Stopping this requires authorities to focus on better labor provisions for nurturing respect for workers, social clauses helping workers advocate for their rights, and leverage for better working conditions.

Example

The competition in the e-grocery delivery business in New York presents one of the best examples. In New York, the big retailers competing to dominate the online market have triggered a scenario affecting big and small players alike. 

Race to the Bottom and Globalization

GlobalizationGlobalizationGlobalization is defined as the extension of trade, commerce and culture of an economy across different nations.read more benefits countries in many ways, like exploring shared knowledge, job creation, and increased cross-border investments. However, its impact also generates unhealthy competition. For example, developing countries compete to attract foreign direct investments (FDI) by establishing lax FDI policies and relaxed labor standards. 

Specifically, laxity in environmental regulations and labor laws helps a country gain more inward FDI than developing nations with strict policies. Hence competing countries will have similar policies. Likewise, competitors will follow the same if a country reduces its tariff rates or labor standards. This negative competition scenario resulted in nations competing for foreign investments oppressing the development of a welfare state system and poorer section of the societies. Hence these developing countries create a “stuck at the bottom” situation restricting them from understanding what is the “race to the top” phase and pursuing its positives.

This has been a Guide to Race to the Bottom & its Meaning in Economics. We explain the race to the bottom using its example and globalization’s impact. You can learn more from the following articles –

It refers to a phase of intense competition during which the competing entities utilize unethical business practices to kill the competition and usually eliminate small competitors from the market. This race will hurt workers, poorer societies, and small competitors.

Globalization presents a global market with opportunities to all nations, including developing and underdeveloped countries. The competition will drive the countries to relax critical environmental, labor, and tariff regulations. To survive in the global market and thus attract investment, governments will make unnecessary and drastic changes in the trade laws proportional to other competitors bringing a race to the bottom.

Stopping a competition with detrimental effects and developing a race to the top model necessitates reframing trade relations and the procedures to remedy breaches of workers’ liberties. Including initiatives that go beyond essential labor norms, for example, is a key component. For long-term solutions, a focus on pay, hours of labor, health and safety standards, resurrected enforcement measures for swift action in the event of infringement, and state capacity building is required.

  • Classical EconomicsWelfare EconomicsInvisible Hands in Economics