Race to the Bottom

Race to the bottom refers to a phrase used in economics to describe the event of intense competition among companies, regions, or nations to become the winner and maintain the best position turning detrimental to the interest of stakeholders and competitors involved.

For example, the companies usually compete to gain the market share, whereas governments of different countries compete to earn more foreign direct investments. 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.

• “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.

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 advantage rather than stringent regulations and due diligence. 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 liberalization 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.

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. 

The competition in the field affected many big players like Jet.com of Walmart. For many years they suffered a loss of $20 on every fresh food delivery in New York City to stay in the competition and win customer loyalty. Eventually, Jet.com stopped delivering fresh products and started focusing on dry goods. AmazonFresh, looking forward to stimulating growth, has dropped the $14.99 monthly supplement charged for home delivery, integrated its logistics, and has declared that it is working on self-competition by launching another network of food stores.   

Globalization 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 –

• Classical Economics
• Welfare Economics
• Invisible Hands in Economics