Race to the bottom is a socio-economic concept describing a scenario in which individuals, companies, or governments compete by incrementally lowering standards or regulations to reduce costs in order to attract economic activity. This can include labor laws and enforcement, tax rates, and environmental regulations. The race to the bottom phenomenon is in contrast with traditional competition, which tends to improve goods and services.
The term "race to the bottom" can be traced back to the early 1900s, when United States Supreme Court Justice Louis Brandeis used the term in a court ruling. The metaphor would later be used by William Cary in an article in the Yale Law Journal, "Federalism and Corporate Law: Reflections Upon Delaware".
The race to the bottom hypothesis is the idea that countries compete by progressively lowering their regulatory standards to attract trade and investment. Whether the race to the bottom persists in global markets today is debated among academic circles, with empirical evidence supporting both sides. Additionally, the expansion of free trade in textiles in the early 21st century serves as a critical case study for the race to the bottom hypothesis in the global value chain. The implication of a race to the bottom on environmental policy is also strong, applying to both policy within the United States and around the world.
Deregulation
The term has primarily been used to describe either government deregulation of the business environment or reduction in corporate tax rates, in order to attract or retain economic activity in their jurisdictions. While this phenomenon can happen between countries as a result of globalization and free trade, it also can occur within individual countries between their sub-jurisdictions (states, localities, cities). It may occur when competition increases between geographic areas over a particular sector of trade and production. The effect and intent of these actions is to lower labor rates, cost of business, or other factors (pensions, environmental protection and other externalities) over which governments can exert control.
This deregulation lowers the cost of production for businesses. Countries/localities with higher labor, environmental standards, or taxes can lose business to countries/localities with less regulation, which in turn makes them want to lower regulations in order to keep firms' production in their jurisdiction, hence driving the race to the lowest regulatory standards.
History and usage
The concept of a regulatory "race to the bottom" emerged in the United States during the late 1800s and early 1900s, when there was charter competition among states to attract corporations to base in their jurisdiction. Some, such as Justice Louis Brandeis, described the concept as the "race to the bottom" and others, as the "race to efficiency".
In academic literature, the phenomenon of regulatory competition reducing standards overall was argued for by A.A. Berle and G.C. Means in The Modern Corporation and Private Property (1932). The concept received formal recognition by the US Supreme Court in a decision of Justice Louis Brandeis in the 1933 case Ligget Co. v. Lee (288 U.S. 517, 558–559).
Brandeis's "race to the bottom" metaphor was updated in 1974 by William Cary, in an article in the Yale Law Journal, "Federalism and Corporate Law: Reflections Upon Delaware," in which Cary argued for the imposition of national standards for corporate governance.
Sanford F. Schram explained in 2000 that the term "race to the bottom":