Energy & Environment, EU trade policies, Free comment, Social & human rights

Trade, values and supply chains: the trade policy challenge ahead

industrial size textile factoryTrade For All’, the EU’s new trade strategy, aims to better connect ‘values’ and trade. It is part of a broader movement in this direction at global level. Corinne Vadcar outlines the dynamics shaping this trend and what are the key challenges in making trade, human rights, labour rights and environmental sustainability work together in a world of global supply chains.

 

 

A new vision consisting in connecting international trade to values is emerging. The process is part of a much larger trend in international relations: the competition between norms and standards of the large economic powers, the US, the EU, Japan and China. By ‘norms’, we mean here labour rights, environmental sustainability, and also ethics and human rights.

 

Beyond the great-powers’ battle to impose their own rules internationally, the move towards values in trade is interesting in itself. A first such movement appeared with Corporate Social Responsibility (CSR) obligations in the 1990s. CSR aims to increase a company’s sense of responsibility towards the community and environment (both ecological and social) in which it operates. Today, in a world of global value chains, policy makers want to go further.

 

Mixed outcomes of sustainable trade initiatives so far

 

So far, experience shows a mixed picture of success in linking values to trade.

 

At the international level, negotiations to include a ‘social clause’ into the WTO’s agreements have consistently failed. But a minimum set of labour law requirements was introduced in 1998 at the International Labour Organization, and there are also the 1976 Guidelines for Multinational Enterprises of the OECD.

 

The EU, as one of the biggest economic powerhouses, wasn’t successful in having free trade negotiation partners such as the Gulf Cooperation Council or the Southern American bloc Mercosur in the 2000s. The EU has sometimes been accused of ‘normative imperialism’ when negotiating free trade agreements. In contrast, the Trans-Pacific Partnership (TTP) recently signed by Washington with Asian countries is the very first example of a trade agreement asserting the US’ ‘soft power’ in international trade.

 

Hard law vs soft law

 

At national level, few countries have adopted and implemented legislation to foster ‘values’ in international trade rules. Some EU Member States tried to ensure a level playing field in all European trade agreements with the concept of reciprocity.

 

A few countries, such as Canada, Switzerland and the US have introduced legally binding liabilities under civil or penal law for a parent company, mainly involving supply chain due diligence obligations. Others are attempting to do so. A current French legislative proposal wants French companies employing 5,000 employees or more domestically or 10,000 employees or more internationally to develop plans for and publish due diligence reports for human rights, and environmental and social risks; in case of non-compliance, the firms would incur penalties up to €10 million.

 

There is also the private-sector driven self-regulation movement which has produced non-binding codes, charters and internal guidelines, i.e. ‘soft law’. This movement is stronger than the legislative trends highlighted above. Thanks to this soft law, some companies do not enter cooperation with foreign suppliers if these haven’t received CSR certifications.

 

Soft law has also brought mixed results. The CSR case shows that there can be very different situations. Many companies have been engaged for years in CSR to meet legal obligations (compliance) or to prevent reputation risks. Because risk relating to company’s image and brand is actually today the most serious sanction for not following CSR rules, it is increasingly difficult to ignore new normative driving forces. Verifying CSR compliance has become a significant activity for inspection companies (pre-shipment inspection). Freight and logistics firms also contribute to sustainable development by reducing greenhouse emissions during international transport.

 

Yet some players at the end of a supply chain are unware of being stakeholders; some others are being ignored by promoters of CSR. Some small companies or less-internationalized ones would practice CSR if they saw other ones doing it or were obliged to satisfy the CSR criteria as suppliers of big and intermediate-sized companies. Also, SME would also practice CSR if they received more help to do so. Ultimately, though companies would enter into CSR schemes and engage in activities that are more aware of ethics and human rights issues if a compelling case can be made to them that these practices are source of better performance, competitiveness and innovation.

 

Key to success – engaging emerging powers and stakeholders

 

In order to show some effectiveness, initiatives to increase ‘sustainability’ in trade requires a global approach. And more attention to stakeholder engagement.

 

Today the trend towards associating sustainability and trade issues is taking on a new dimension.Among very recent steps, let us highlight ‘Trade for All’, the new European Trade Strategy, in which the European Commission intends to “use trade agreements and preference programmes as levers to promote, around the world, European values like sustainable development, human rights, fair and ethical trade and the fight against corruption”.

 

On the other side of the Atlantic, US government announced in January 2016 measures in favor of anti-slavery (i.e. human trafficking) in supply chains. TPP incorporates enforceable obligations on labour rights. It also contains chapters on regulatory convergence, transparency and anti-corruption.

 

An increasing number of trade agreements include provisions on labour and environment: 41 on labour and 62 on environment as of 15 May 2015. Admittedly, this represents respectively only 15% of implemented and 23% of FTAs notified to the WTO. But we are definitely on the road to much ‘harder’ law. Bilateral, regional or plurilateral agreements are the levers different players mean to use to connect trade to values.

 

The main economic powers or countries have been adopting new initiatives or implement existing texts such as the EU with the Bangladesh Sustainability Compact adopted in the aftermath of the Rana Plaza scandal, the 2015 Labour Rights Initiative in Myanmar, the EU proposal on a Conflict Minerals regulation, the 2013 Corporate Transparency on Payments directive.

 

But addressing sustainability and trade issues requires a global approach. Needless to say that normative influence cannot be exercised without associating big emerging countries such as BRICs. Examples of this exist: US President Obama reached an agreement with China on climate change in 2014 before the COP21, he also reached an agreement with India on renewable energies in January 2015. Developing countries whose participation in global value chains is upstream also need to be associated in the process.

 

A true step forward on all these ways will only be achieved if they are supported by awareness programs and educational work. This is mostly relevant for some of the above-mentioned companies who need to be educated on responsible behavior as efficiency factor and incentivized accordingly. It is also relevant for countries in which international firms are outsourcing production with programs such as the World Bank’s ‘Better Work’.

 

Ethics and human responsibility might not so much be a new frontier, but a new stake for international trade.

 

Challenges ahead

 

While there are advances in the bilateral field, prospects for sustainability initiatives in the WTO are bleak in the Post-Nairobi environment.

 

Above all, global value chains are undergoing strong transformations with expansion of services and new digital technologies. It’s quite easy to design ‘traceability’ and ‘labelling’ obligations on a good: it is much more difficult to do so on a service.

 

Regulation efforts on global value chains are taking place at a time when these are radically changing: servicification and industrial digitization might rapidly transform supply chains and contract them in the long run. At the same time, new trade operator profiles are emerging, such as micro-multinationals, born global companies, start-ups – thus giving birth to mini-supply chains. Issues such as sustainable development, human rights, fair and ethical trade in global value chains will arise differently with these new types of players.

 

CSR obligations have to date been included in global value chains as part of the compliance process but didn’t lead to a real (r)evolution. This raises basic questions. Is regulation the best way to go? Regulation is important but privately led innovation (eco-design, circular economy, etc.) may probably go further. The debate on this issue is set to continue.

 

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Corinne Vadcar is a Paris-based trade policy analyst. You can follow her on Twitter @VadcarCorinne

 

This piece is based on talking points presented by the author at a roundtable organized by La Fabrique Ecologique on “International Trade and Sustainable Development” (Paris, November 9, 2015)

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