_ Yuri Kofner, junior economist, MIWI – Institute for Market Integration and Economic Policy. Munich, 12 March 2021.
Compliance with certain social and ecological standards is an important task of the social market economy. In the opinion of German ordoliberal economist Walter Eucken (1952), in the domestic area it is part of the regulating role of national regulation (German: Ordnungsrecht). But at the global level, this “public good” can best be supplied through international relations. Starting here protects human and labour rights and the environment more than a national or pan-regional (EU) approach.
The globalization of German and European production processes under a capitalist system has led to an immense increase in prosperity in the emerging and developing countries, because the Western companies there create relatively better-paid jobs and higher environmental standards than there would be without their commitment. Currently, around a quarter of German goods imports are from developing and emerging countries with an annual per capita income of less than USD 12,500. The final demand in Germany secures a value added in the non-OECD countries with a total value of USD 176 billion, the final demand of the EU countries stands for a total value added of USD 926 billion, which is created in these countries.
The German federal government and the European Commission are now planning to introduce supply chain laws, according to which German and European companies can be held accountable, made liable and fined if they disregard or contribute to the disregard of children’s, human and labour rights and environmental standards by their foreign suppliers within their value chains.
However, in the opinion of leading economic research institutes (e.g. the Kiel Institute for the World Economy, the IW Cologne) and business associations (e.g. BDI, BDA, DIHK) this approach has considerable disadvantages and will actually have the opposite effect. Supply chain legislation at the national and EU level:
- is partially unnecessary, as many German companies have already voluntarily implement social and ecological due diligence obligations in their corporate policy, e.g. ILO conventions, ISO standards, OECD guidelines, and thus contribute to local sustainability in the supplier countries;
- is practically unfeasible as modern international supply chains are extremely complex;
- will burden German companies with even more bureaucratic requirements;
- will increase the cost of intermediate services and thus the end products of German companies;
- will result in the affected German companies withdrawing from the emerging and developing countries;
- and thus not only further reduce the international competitiveness of German companies, but also further reduce prosperity in Germany;
- will lead to companies from other parts of the world where human and labour rights and environmental protection are of much less importance, e.g. China, taking over the market shares that have been freed up by withdrawn German companies;
- will push workers (including children) in the supplier countries into even worse working conditions in the informal economic sector that do not exist within the framework of international supply chains, e.g., mining and prostitution;
- will reduce the welfare growth achieved thanks to German value chains in many emerging and developing countries, e.g. up to 1 percent of GDP in Cambodia, Vietnam and Malaysia.
The problem is not that German companies supposedly exploit the loopholes in the law and jurisdiction in the supplier countries, but the problem is the loopholes themselves. The reason being that many emerging and developing countries have formally ratified protective conventions in child, labour, human and environmental law, but have not yet implemented them.
Therefore, German companies should not bear the burden of inadequate social and environmental policies in these countries. As with climate policy, this is a global problem that only a global solution can do justice to.
The German government and the European Commission should therefore reject the planned supply chain law and EU legislation on corporate accountability. Instead, they should, at a maximally multilateral level, get the governments of the supplier countries to de facto implement internationally recognized social and ecological standards.
This could be achieved through the following means:
- Signalling a potential reduction in development aid. In 2019, Germany was in 4th place in terms of official development aid (ODA) expenditure in relation to GDP: 0.6 percent or USD 25 billion.
- Signalling potential punitive trade measures permitted under Article XX GATT if they prove necessary to protect the rights of people and nature.
- Signalling potential sanctions, e.g., the negative list approach based on the US model, which prohibits foreign companies that have been found to have committed misconduct from participating in German and European value chains. As with a cascade principle, one could transfer the inspection obligations for the domestic company to foreign suppliers.
- Obliging foreign trade partners to ratify and implement social and ecological standards, e.g. the ILO conventions, could become an important part of new trade agreements between the EU and third parties. However, their stringency would have to be decided individually and jointly in each case, depending on each partner country’s current development level (“right to regulate”).
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