What is the 'Race to the Bottom'?

The race to the bottom refers to a competitive state where a company, state or nations attempts to undercut the competition's prices by sacrificing quality standards or worker safety, defying regulations, or paying low wages. The race to the bottom can also occur among nations and regions. For example, a jurisdiction may relax regulation and compromise the public good in an attempt to attract investment, for example, the building of a new factory or corporate office.

Although there are legitimate ways to compete for business and investment dollars, the race to the bottom is used to characterize competition that has crossed ethical lines and could be destructive for the parties involved.

BREAKING DOWN 'Race to the Bottom'

The race to the bottom is a result of cutthroat competition. When companies engage in the race to the bottom, its impact is felt beyond the immediate participants. Lasting damage can be done to the environment, employees, the community and the companies’ respective shareholders. Moreover, consumer expectations of lower prices may mean that the eventual victor finds profit margins permanently squeezed. If consumers confront poor quality goods or services as a result of cost cutting during the race to the bottom, the market for those goods or services could dry up.

The Race to the Bottom and Labor

The phrase race to the bottom is often applied in the context of labor. Many companies go to great lengths to keep wages low to protect profit margins while still offering a competitive product. The retail sector, for example, is often accused of engaging in a race to the bottom and using wages and benefits as the target of economies. 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 the production of goods overseas to regions with lower wages and benefits or have encouraged their suppliers to do so using their purchasing power. The jobs that remain 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 to regions with lower cost labor.

The Race to the Bottom in Taxation and Regulation

Another factor in the 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 worldwide has seen companies shift their head offices or move operations to obtain a favorable effective tax rate. There is a cost to lost tax dollars because corporate taxes contribute to a country’s infrastructure and social systems. Taxes also support environmental regulations. When a company spoils the environment during production, the public pays 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 considered, a true race to the bottom is not a concern. In the real world, where politics and money collude, races to the bottom occur and they are often followed by the creation of a new law or regulation to prevent a repeat. Of course, over-regulation also has risks and disadvantages to an economy.

 
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