BRITISH economist Joan Robinson noted that "the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all".

This is the essence of some arguments for why the demands of five low-wage Chinese clothing firms in Newcastle are worth supporting. The firms have taken the National Bargaining Council for the Clothing Manufacturing Industry and Labour Minister Mildred Oliphant to court over having to comply with the legislated minimum wage.

If bargaining council stipulations are enforced, thousands of jobs could migrate elsewhere, with the losers being South Africa’s workers.

It is a powerful argument. But is the economics behind it correct? And should it be supported? It is worth revisiting Robinson’s views on the matter.

Reducing the real wage was defined by Robinson in 1937 as one of four "beggar-my-neighbour" policy weapons, the others being exchange-rate depreciation, export subsidies, and import restrictions. Within a single country, Robinson argued, a beggar-my-neighbour policy would have a similar effect to an increase in domestic investment. Assuming it led to a rise in the trade balance, it would increase employment, output and income. These similarities evaporate, however, when analysed from the global level, as a beggar-my-neighbour policy might increase a single country’s sales but only at the expense of another’s, said Robinson. The best-case outcome then is that global levels of employment, trade and income remain unchanged. In contrast, "an increase in home investment brings about a net increase in employment for the world as a whole".

In detailing this difference, Robinson makes an important distinction, between competition that is unfair, as it competes in a zero-sum manner, and competition that is fair, as it facilitates the progressive expansion of the size of the economic pie. Competition based on technological advances and improved quality is fair. They expand the economic pie and potentially benefit everyone. Beggar-my-neighbour labour policies compete through lowering the real wage and benefits, worsening working conditions and engaging in unfair trade practices.

Noncompliant Newcastle firms want to use beggar-my-neighbour labour policies to save 16,700 jobs. These firms compete against low-wage producers from abroad for the domestic market. Despite thin margins and fierce competition, it is improbable that most of the 16,700 workers are at risk. This is about the number of clothing workers paid below the legislated minimum wage.

As for working conditions, signed affidavits by workers at Newcastle firms describe working 15-hour days without overtime pay, having wages deducted for taking longer than two to three minutes for a bathroom break, being fired for falling sick, appalling health and safety "standards", and being locked in the factory during 12-hour night shifts.

Wages for machinists in nonmetro areas are R40-R60 a day, or R200-R300 a week, according to University of Cape Town professors Nicoli Nattrass and Jeremy Seekings in a report for the Centre for Development and Enterprise. Based on Southern African Clothing and Textile Workers Union calculations, this will rise to R73-R104 a day, or R369-R534 a week, if the minimum wage is enforced. In comparison, farm workers now earn R105 a day.

Central to Nattrass’s and Seekings’s argument is that if low-wage nonmetro firms are exempted from minimum wages, skilled and higher-paying metro firms will be unaffected. This assumes that metro firms that produce more expensive items do not compete for the same markets as nonmetro firms making simpler goods. In practice, such a neat distinction does not exist, according to a long-time Cape Town clothing manufacturer (who asked not to be named). "Newcastle labour constantly undermines employment in Cape Town," I was told.

Even if concessions are granted to these firms, who can guarantee that still greater concessions will not be asked for when new lower-wage competitors emerge from abroad? The constant hunt for ever "cheaper" labour creates a "race to the bottom" on a global scale. This is apparent in the number of apparel firms that have relocated from South Africa to lower-wage Lesotho. This poses a conundrum; for if South Africa doesn’t use cheap labour policies, then another country less concerned with enforcing minimum-wage laws might. South Africa’s labour and wage standards will be respected only if the government and trade unions face up to this challenge.

The crux of Nattrass’s and Seekings’s argument is that these firms provide "labour-intensive" employment and so must be supported. For us to evaluate this properly, we need to consider the differences between industrial policy and employment policy.

Effective industrial policy aims to create internationally competitive firms. It cannot be successful if held captive to promoting labour-intensive production. Good industrial policy will, over time, create jobs through growth and industrial diversification. Support cannot be given indefinitely to producers who are unable to become internationally competitive, and certainly not when paid for by consumers through higher prices.

More fundamentally, there is no guarantee that any advantage created by cheap labour can be sustained. Eventually, technological innovation and mechanisation defeat cheap labour. Cheap labour is not itself an engine of growth.

Extensive surveys conducted by Simon Roberts and John Thoburn (2004) and Mike Morris and Lyn Reed (2009) show that clothing and textile firms in South Africa that competed most successfully in global markets after 1994 were those that invested in technology and human capital and entered into higher value-added niches.

As an employment or social policy, supporting these labour-intensive firms makes little sense. They are in effect already funded through a regressive tax (as poorer consumers who buy this clothing are paying for the quota protection against cheaper imports); do not enhance competitiveness; and provide an unpleasant work experience. The only point in its favour is that wages are a relatively high proportion of costs.

Unemployment should be addressed through investment, training, a more targeted and efficient Expanded Public Works Programme and support for small and medium-sized enterprises. These and other policies must be carefully explored.

National labour legislation is no longer effective against unfair competition based on cheap labour and the race to the bottom. The labour market is a global one, requiring globally agreed and enforced minimum wages and conditions. These promote a competitive raising of skills, efficiency and technique that can end up benefiting everyone.

South Africa might begin working towards this by joining with countries in the region and other Brics members (Brazil, Russia, India and China) to lobby at the World Trade Organisation for goods made using labour paid below an agreed minimum real wage to be labelled an unfair trade practice.

Beggar-my-neighbour labour policies are a dead end. Increasing economic opportunities can be provided in a way that expands the economy and enhances competitiveness without threatening basic labour standards. For this task, an entirely different set of tools is required, most notably investment.

• Strauss is an occasional staff member at Corporate Strategy Industrial Development, Wits University. He works as an economics consultant.