Race to the Bottom

DEFINITION of 'Race to the Bottom'

A state of competition where companies, states or nations attempt to undercut the competition's prices by sacrificing standards, safety, regulations, wages and so on. A race to the bottom can also occur between nations and regions. In an attempt to attract investment like a new factory or corporate office, a jurisdiction may lessen regulation, reduce oversight, or otherwise compromise the public good in order to get a company to commit.

There are legitimate ways to compete for business and investment dollars - a race to the bottom is used to characterize competition that has gone over the ethical line and could be destructive for most of the parties involved.

BREAKING DOWN 'Race to the Bottom'

A race to the bottom is a result of cutthroat competition. When companies engage in a race to the bottom, it often has a negative impact far beyond the immediate participants. Lasting damage can be done to the environment, the employees, the community and the companies’ respective shareholders. Moreover consumer expectations of lower prices may mean that the eventual victor finds profit margins permanently thinned. Of course, if consumers suffer with poor quality goods or services as a result of corner cutting during the race to the bottom, the market for those goods or services could dry up for a period of time.

Race to the Bottom and Labor

The phrase race to the bottom is often invoked when discussing labor. Many companies go to great lengths to keep wages low in order to protect profit margins while still offering a competitive product. The charge that the retail sector, for example, is in a race to the bottom on wages and benefits comes up frequently. The sector as a whole resists labor law changes that would increase benefits or wages, which in turn would increase costs. In response to rising wages and benefits, many retail companies have moved production of goods overseas to regions with lower wages and benefits or have encouraged their suppliers to do so by using their purchasing power. The jobs that are left in the domestic market - the in-store functions - may cost more as laws change, but the bulk of labor involved in manufacturing and production can be moved around to whichever region offers the cheapest labor.

Race to the Bottom in Taxation and Regulation

Another feature that propels a race to the bottom is the increasing willingness of states and nations to change taxation and regulation regimes to attract business investment. The disparity in corporate tax rates worldwide has seen companies shift their head offices or split off operations to get the best effective tax rate. There is a cost to lost tax dollars, as corporate taxes help to pay for a country’s infrastructure and social systems. The same goes for environmental regulations. When a company is able to come in, make a mess, and leave it, the public pays for it in the long run no matter how much of a short-term boost the business activity generated.

In an economically rational world where all externalities are taken into careful consideration, there would be no concerns of a true race to the bottom. In the real world, where politics and money collude, races to the bottom do happen, and afterward there is often a new law or regulation created to prevent a repeat. Of course, over-regulation also has its risks and disadvantages to an economy.