The effect of import tariffs on the race to the bottom in employment protection standards

This paper tests the effect of import tariffs on the race to the bottom in employment protection standards (EPS). It builds in the hypothesis that countries compete for FDI and use depreciation of EPS as a means to lure MNEs. The paper first tests the effect of tariff rates and EPS on FDI inflow on a panel dataset of twenty six countries covering twenty three years. The marginal effects were opposite in signs as predicted: positive for tariff rates and negative EPS. Thereafter, it constructs a spatial autoregression model correlating EPS in the host country to a space time lag of EPS in foreign countries. The effect is positive, confirming the race to the bottom hypothesis. The interaction term between the space time lagged EPS and tariff rates is added to the model, which shows that the autoregressive strength increases as tariff rates decrease.