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Race to the bottom is a socio-economic phrase 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).[1][2] It may occur when competition increases between geographic areas over a particular sector of trade and production.[3] 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.[4]
But the race to the bottom operates more subtly than most people suppose. The regressions suggest that while countries do compete with each other by instituting laws that are unfriendly to workers, such competition is not that pronounced. The real problem is that countries compete by enforcing labour laws less vigorously than they might—leading to increases in violations of labour rights prescribed in local laws. Competition between countries to attract investment is less in rules than in their practical application.