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Hello from Brussels. This week, the EU’s latest review of its trade policy is released. After the muted Christmas that comes from living in a country in lockdown, the city’s trade folk are fizzing with excitement at the thought of tearing open the wrapping paper on the brand new report. Many have barely slept.
Today we take a crafty advance look at an early draft we’ve got hold of to discuss what we think is the most interesting bit, on forced labour. Given the controversy over the EU’s Comprehensive Agreement on Investment (CAI) with China and the plight of the Uighur ethnic minority, it’s a rather bigger issue than when the review was commissioned last year. Tit for Tat, on a related theme, sees Baker McKenzie’s Anahita Thoms look at the German debate over a supply chain law there. Charted Waters highlights some of the ports that are benefiting from the Brexit trade disruption.
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When human rights abuses are bad for business
We’ll be honest: we weren’t expecting exciting things from the EU trade policy review (TPR) when it was started last year by the then trade commissioner, Big Phil Hogan. It’s also somewhat been pre-empted by several announcements since on enforcement, new anti-subsidy tools and the like.
But amid the familiar generalities (the draft we saw had eight mentions of our old favourite “open strategic autonomy” in 19 pages, including a nifty little graphic), there’s one genuinely interesting innovation. As we’ve written before, there’s a move afoot to make companies legally responsible for violations of labour and environmental standards in their supply chains, which started with national-level “due diligence” laws in France and the Netherlands. Germany, where a proposal for a similar law provoked fierce debate between ministries (and the country’s powerful multinationals, of which more later), used its six-month presidency of the council of EU member states last year to get governments to support in principle an EU-wide legal framework.
The CAI, which was pushed through in December, made this issue a lot more salient. Many of the 1m-plus people from the Uighur ethnic minority imprisoned in Chinese “re-education” camps are used for forced labour in factories, and it’s inconceivable that some of those products at some remove don’t make their way to Europe. In Germany there’s particular attention on Volkswagen, which has a car manufacturing plant in the region of Xinjiang, home of the Uighurs. Astonishingly, VW’s chief executive as recently as 2019 denied knowledge of re-education camps in Xinjiang.
So far the due diligence initiative has aimed to address the issue through corporate law by making individual companies themselves legally responsible for environmental and labour standards in their supply chains. The TPR goes further by floating the idea of hardwiring rules specifically on forced labour directly into trade law, enabling the EU to block imports if they use forced labour in production. This would amplify their impact a lot.
This approach, though unusual in the EU, is not unheard of. The EU already has rough equivalents in the form of rules to restrict imports of illegally logged timber and unsustainably caught fish. However, it’s not straightforward to design. For one, the law would have to decide how far down the supply chain to go. The immediate producers of goods destined for export to the EU? Their suppliers as well? Their suppliers’ suppliers? Genuinely difficult question. It also has to be framed carefully so as not to contravene WTO law, which allows countries to restrict imports because of so-called “processes and production methods” only under limited circumstances.
Still, pressure for action has been rising, not just from the usual suspects such as the Green members of the European Parliament (who brought out a discussion paper on this issue last week, presumably knowing what might be coming in the TPR) but also more centrist MEPs and member states. The EU might also be feeling shamed into action since the US is ahead of Brussels here, having last month put a total ban on cotton and tomato products from Xinjiang, with tough moves also afoot in Canada and the UK.
There’s also a tactical consideration inside the EU. The treatment of the Uighurs has emerged as one of the foremost arguments against ratifying CAI in the parliament and the member states. A separate, binding forced-labour provision in EU trade policy might help to neutralise that. You can make an argument — to be fair a pretty logical one — that it’s better to trade with and invest in another country while specifically targeting the abuses you are worried about than to simply cut off economic relations altogether.
Let’s be clear: this is all at a planning stage. The review leaves undecided the favoured mechanism for restricting imports made with forced labour, and the final version of the TPR report might be watered down from the draft we saw. But it does show you how fast things are moving. It wasn’t that long ago that putting binding labour standards into trade law was regarded with intense suspicion by mainstream trade people as disguised protectionism. It’s amazing how quickly grotesque human rights abuses in a big trading partner can concentrate the mind, especially if they’re bad for business.
It used to be the case that many Irish exports destined for Europe would pass through the UK and on to Dover before crossing into France. That journey has become far more complex post-Brexit.
That, as the FT reports on Monday, has led to a surge in demand for sea routes linking Ireland to the rest of the EU and has fuelled a Brexit boom at French ports such as Cherbourg, Dunkirk and Roscoff, and at Rosslare in south-eastern Ireland.
Tit for tat
Anahita Thoms, international trade partner at Baker McKenzie, tells us why the German debate over a supply-chain law has proven so contentious.
1. The EU’s focus on due diligence in supply chains follows a fierce debate in Germany on how to meet human rights standards and remain competitive in a globalised world. How would you characterise the German debate?
The debate has been very controversial. Some German businesses were sceptical about both incalculable liability risks and competitive disadvantages. Others argued in recent months that Covid-19 has led to a tense situation so this was not the best timing for such legislation. However, more and more German businesses are in favour of a supply chain law on [an] EU level, particularly those who are already employing due diligence in their supply chains.
2. A key criticism by German businesses has been that a law here would put them at a disadvantage to their European counterparts. Does the European Parliament’s move last month change this?
It is crucial that any supply-chain legislation ensures a level playing field and legal clarity for all businesses concerned. While a national supply chain law will most likely soon be passed in Germany, businesses are advocating for legislation on EU level. The harmonisation that comes with such an EU supply-chain regime would prevent a fragmentation of provisions and competitive disadvantages in the EU.
3. Do you think there is now enough support among the political and business establishment here for a supply-chain law to pass? And if so, in what form?
The new German supply-chain draft law is not as far-reaching as currently discussed concepts for an EU law. One of the most controversial issues concerned whether and how businesses should be held liable. Although Germany has decided not to include civil liability in its proposed law, it does provide for fines and a right for NGOs to sue businesses. However, the fact that the German government has come to an agreement shows that this issue has considerable momentum. I am convinced that it is only a matter of time until we will see a supply-chain law on [an] EU level in some shape or form.
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