How standards of conduct set half a world away are shaping big companies' behavior.

(FORTUNE Magazine) – RESCUE WORKERS needed a week to dig out the bodies last April after a garment factory collapsed in Dhaka, Bangladesh. At least 80 people died, and another 100 were seriously injured. The factory made sweaters for European retailers Carrefour and Zara, and that is the nightmare of globalization: poor people working in unsafe conditions to produce goods for consumers in the West. It's part of what corporate critics invariably call a "race to the bottom." Multinational companies, they say, seek out places where labor is cheap, and safety, health, and environmental laws are weak.

But a closer look at how globalization works shows that the idea of a race to the bottom obscures more than it explains. Yes, U.S. companies roam the globe in search of low-cost labor--but some of them export health and safety standards when they open factories in the developing world, while others keep an eye on suppliers to avoid having a sweatshop label attached to their brand.

There's more: U.S.-based companies that sell globally are scrambling to comply with an array of European environmental laws that are much stricter than those they face at home. Regulations enacted in Brussels now govern how computers, cellphones, and aircraft engines are designed. Finally, China has begun to grapple with energy and pollution problems so severe that they demand innovative solutions. One example: More than 170 Chinese cities have banned brick in new housing because making bricks in vast quantities requires too much soil and energy. So big chemical companies are developing energy-efficient building materials that will be used worldwide. You could call those unexpected consequences of globalization a "race to the top."

The drive to meet rising global standards of one kind or another is affecting just about every multinational FORTUNE 500 company. Spurred by regulation in Europe and the prospect of sales to China, General Electric is investing $1.5 billion over the next five years in research into energy-efficient and environmentally friendly products like wind turbines, clean coal technology, and appliances that save water or electricity. Intel, Xerox, Motorola, and Dell are revamping their supply chains to get lead out of microprocessors, copiers, cellphones, and computers. And Nike and Gap dispatch inspectors who monitor hundreds of their suppliers in the developing world, at considerable expense.

What we're seeing here are local standards that have worldwide impact--for better or worse. It can be frustrating (not to mention costly) to comply with tough European Union regs, but it's bad business for multinationals to make things that won't sell across the global economy--so companies tend to cleave to the highest regulatory standards and consumer expectations no matter where they arise. Even a big state like California can have influence far beyond its borders, partly because of Washington's laissez-faire attitude toward regulation.

It's no wonder that 15,000 lobbyists now work in Brussels. The EU has in recent years set mandatory targets for the use of renewable energy, banned hazardous materials from electronics products, and required the recovery and recycling of computers and cellphones. Businesspeople say some of these rules are onerous. Right now a bitter debate is unfolding over proposed legislation, called REACH (Registration, Evaluation, Authorization, and Restriction of Chemicals), that would require companies to test the safety of more than 30,000 chemicals already on the market, raising the costs of products from shampoo and toothpaste to automobiles. "REACH takes a sledgehammer approach," says Mike Walls, managing director of the American Chemistry Council, an industry group. "It's unworkable, it's unwieldy, and it will be very difficult to administer." REACH could cost eight billion euros to implement over the next 11 years, its critics say. But if it takes effect in the 25-nation EU, where about 450 million people live, the law will be impossible to ignore. "Europe in many ways is the global regulatory superpower," says Jeffrey Immelt, chairman and CEO of GE. "It can speak with one voice and a degree of certainty."


LEAD-BASED SOLDERS are literally the glue that has held the electronics industry together for over 50 years. Today lead is found in most radios, TVs, computers, cameras, mobile phones, and digital music players. It poses no known danger to users of those devices, but lead that gets into the waste stream can make people sick if they ingest it. New European rules, known as Restrictions on Hazardous Substances, or RoHS, effectively ban the use of lead, cadmium, mercury, and certain flame retardants in most electrical and electronic products. The global electronics industry must comply by next year.

RoHS is "often compared to Y2K, but it is so much bigger," says Michael Kirschner, president of Design Chain Associates, a San Francisco technology consultancy. "Manufacturers have hundreds of suppliers, and you need to assess every one of them."

When Intel executives heard about the proposed lead ban in 1999, they were inclined to lobby against it. (More lead goes into ammunition than into electronics.) But Craig Barrett, Intel's CEO at the time, urged his people to see whether they could develop an alternative. Since then, about 500 Intel engineers and dozens of suppliers have been drawn into what the company describes as a "massive, industrywide effort with many technological, logistical, and economic challenges." They have come up with a tin-silver-copper alloy that, their testing shows, seems to work as well as lead and costs about the same. Intel has also begun to think more expansively about its environmental impact by considering the entire life cycle of its products and the materials needed to make them. "What the Europeans have done is help us broaden our focus," says Todd Brady, an environmental and health expert at Intel.

Europeans think about the environment differently from Americans, in part because there are more of them crowded into less space. Their approach to environmental protection is often guided by the "precautionary principle," the idea that it's better to be safe than sorry when dealing with potential harm. "Remember, they have green parties, and some have elected members to governments," says Gary Litman, vice president for Europe and Eurasia at the U.S. Chamber of Commerce.

EU energy policy, for example, aims to double, from 6% to 12%, the amount of energy produced from renewable sources such as wind, water, solar power, and biomass. In an effort to meet the targets by 2010, governments have subsidized renewables. Wind power was an immediate beneficiary. As the Europeans built more and more wind farms, new technology was developed to enable wind turbines to ride through disturbances in the electric- ity grid. Economies of scale drove down costs. And regulators in U.S. states, some citing the European precedent, enacted their own renewable targets. Says GE's Immelt: "That's how wind energy came of age."

Currently Europe is rolling out an ambitious effort to recycle electronic waste--everything from computers, TVs, radios, and cellphones to stereos, microwaves, power tools, and hair dryers. Producers are held responsible for recycling their own products, through compliance schemes being worked out country by country. Partly as a result, Dell will now pick up its equipment from anyone and recycle it at no charge--in Europe or the U.S. Dell is also rethinking the design of its computers. The company uses fewer screws and no glue, so its machines are easier to disassemble. Plastic parts are labeled to aid recycling, and an internal chassis is made of steel that can be reused or melted down.

It's not just technology companies that have to adapt to European standards. New planes being developed by Boeing and Airbus will use a GE engine that meets strict noise standards set by the EU. "European airports are right on top of everybody, so you have to be a good neighbor," says Michael Bair, vice president and general manager at Boeing. Midwestern corn farmers are avoiding genetically modified seed because the Europeans require labels on food containing even small amounts of genetically modified ingredients.


WHEN CHINA'S MINISTRY of Science and Technology decided to build a new headquarters in Beijing, the government sought help from an unlikely partner--the Natural Resources Defense Council, best known for litigating and lobbying for stricter environmental rules in the U.S. The resulting green building uses the best available technology to save energy and water; since it opened last year, it has been toured by 2,000 local officials, designers, and architects. "In terms of environmental innovation, China's going to kick our ass within a decade unless we wake up," says Rob Watson, a senior scientist with the NRDC who works on China projects.

At least on paper, China is matching, if not exceeding, environmental standards set in the West. To curb its dependence on imported oil, China has adopted fuel-economy rules for automobiles that are more stringent than those in the U.S. or Europe. That is putting pressure on GM and Volkswagen, the leading foreign carmakers in China, to find ways to profit from selling small, fuel-efficient vehicles. The Chinese government is also investing in fuel-cell technologies for motor scooters, cars, and buses, hoping to invent an entirely new kind of auto industry. "They've set the policy stage for innovation," says Watson.

Desperation is driving the initiatives: Like so much in China, the scale of environmental problems is mind-boggling. China is home to five of the world's ten most polluted cities in terms of air quality. It burns dirty coal in more than 2,000 plants, generating clouds bearing mercury, soot, and sulfur dioxide that have been tracked all the way to the Oregon coast. China's industry is wasteful, requiring three to ten times more energy than industry in the U.S., Western Europe, or Japan to produce a dollar of economic output. Water is in short supply and deserts are expanding rapidly, according to Elizabeth Economy, the author of The River Runs Black, a book about China's environmental crisis.

Global companies are poised to capitalize. Immelt says that GE's investments in clean coal technology, wind power, nuclear energy, and fuel cells are being made with China in mind. "While Europe has been a driver for innovation in cleaner technologies, China promises to be its market," he says.

Because China relies so heavily on coal, for instance, it is likely to become the biggest buyer of a cleaner coal technology called IGCC (integrated gasification combined cycle, if you must know) that converts coal to natural gas, which generates fewer pollutants. The technology can be combined with a process in which carbon dioxide, which contributes to global warming, can be captured and buried deep in the earth. David Hawkins, an expert on climate change with the NRDC who has consulted in China, says, "I think we'll see the technology move forward there faster, conceivably, than in the U.S."

Bill McDonough, the architect and industrial designer, predicts that China will become a seedbed for environmental innovation. "The Chinese are very practical," he says. "They are asking what mistakes have been made in the rest of the world and how they can avoid them." McDonough, who is chairman of a nonprofit called the China-U.S. Center for Sustainable Development, says new building materials will be developed for China--he is working with the chemical industry giant BASF to develop a strong, lightweight, insulating poly- styrene to replace brick--as armies of Chinese people move to the cities. He foresees solar-power farms on a vast scale. "China is the place where the costs of solar collectors will drop once they go into mass production," he says. "It's a massive gift that China will give to the world."

Much of this is speculative, of course. China's economy, for now, is not structured to promote energy savings or prevent pollution; most apartments and homes are not even equipped with thermostats. Moreover, the Beijing government's environmental rules are often ignored in the provinces and municipalities. "You can have all the demonstration projects that you want, but the question is, How you do get them replicated throughout the country?" asks Elizabeth Economy, the author. "You need the right institutional framework, and it's not there yet."


MORE THAN 90% of the world's computers, digital cameras, and mobile phones are produced in the low-wage manufacturing centers of Asia. Last year Wal-Mart alone imported about $15 billion in goods from China. Taken to its extreme, the search for cheap labor leads to tragedies like the collapse of the Spectrum Sweater factory in Bangladesh, where workers told horror stories about forced labor and an inability to collect their pay. An English-language Bangladeshi newspaper called the Daily Star wrote afterward, "It is the collusive arrangement of government agencies and factory owners who cut costs at the expense of the safety of the workers that is the cause of so many deaths and injuries in this [garment] sector."

But the situation facing workers, even in a country as underdeveloped as Bangladesh, is not always so dire. In Dhaka, the city where Spectrum Sweater used to do business, three factories supply caps, jogging suits, and sportswear to Nike. Protest groups rattled the company in the 1990s when they exposed the deplorable working conditions under which some of its high-priced goods were made. Now Nike monitors its suppliers to try to ensure that workers are safe and that their basic rights are protected.

Nike's 2004 Corporate Responsibility Report details its extensive--and expensive--efforts. The company now employs more than 90 people in 21 countries who try to enforce a code of conduct that covers safety, child labor, overtime pay, and human rights. It carried out more than 1,300 inspections and audits during the year and contracted with the Fair Labor Association, an independent nonprofit, to perform unannounced audits of 5% of its plants. This year Nike took the unprecedented step of disclosing the names and locations of its suppliers. In effect, the company was telling protesters that it no longer had anything to hide.

So are workers in poor countries any better off? The evidence is mixed. But many experts believe that factory conditions are improving, albeit gradually and unevenly. When U.S. multinationals build their own plants in the developing world, they bring along American-style health and safety standards--if not pay scales. Intel, for instance, employs nearly 20,000 people at assembly and testing facilities in Costa Rica, China, Malaysia, and the Philippines that look much like its facilities in Silicon Valley. "It's tough at first to import that Intel safety culture and our attention to environmental detail," says Dave Stangis, Intel's director of corporate responsibility. "But over time, it starts to spread." DuPont goes a step further: It has a unit called Safety Resources that has built a business of consulting with industrial companies in China and India, among other places, that want to improve their health and safety records.

Contract factories are not held to the same standards. Carrefour and Zara had codes of conduct, but that didn't protect the workers who died in Bangladesh. Some factory owners have been caught keeping two sets of books and coaching workers to lie to independent monitors. China bans independent labor unions. And many factories are not monitored at all.

But brand-name firms in the footwear, apparel, toy, and electronics industries have adopted codes of conduct and inspection regimes. "There has been a sea change," says Pietra Rivoli, a faculty member at Georgetown University and the author of a new book called The Travels of a T-Shirt in the Global Economy. "Until recently the U.S. brand-name companies would say they had neither the right nor the responsibility to do anything about their supplier factories."

Some companies are now trying to take monitoring to the next level. They want to fix problems that include a hodgepodge of rules, inefficient and overlapping inspections, and a lack of transparency. To that end, Gap last year issued a report acknowledging flaws in its supply chain; it said, for example, that some suppliers in Africa used unsafe machinery, and it pledged to try to do better. Recently Nike, Gap, Patagonia, other apparel companies, and several nonprofits agreed to develop uniform standards and a shared inspection system that will be tested in Turkey. "The real challenge for the industry is how do you take all of this to scale," says Hannah Jones, who's in charge of corporate responsibility at Nike.

Other industries are following fast. After a British nonprofit exposed unsafe conditions in an electronics factory last year, Dell, IBM, and Hewlett-Packard agreed to develop a code of conduct for their industry. Market forces are also coming into play. Companies are finding that suppliers that treat their workers fairly are more reliable and productive. And an unexpected labor shortage in China's Pearl River delta has created upward pressure on wages.

Here's another twist from China: Some migrant workers are complaining that U.S. codes limiting work hours are preventing them from working as hard as they want and saving enough money to return to their villages. Surely other unforeseen consequences of the new international regulatory climate will appear, and some may be harmful--higher costs for businesses, a proliferation of lobbyists, and barriers to trade. But for now, at least in some ways, the unexpectedly broad reach of local rules is making the global village cleaner and safer.



Rising standards of one kind or another affect just about every multinational company. Some examples: