The EU wants to ensure that companies only work with suppliers of raw materials and other suppliers who respect human rights.
(Photo: imago/Aurora Photos)
Berlin The national supply chain law that will apply from next year – and even more so the planned even stricter rules at EU level – could prompt German companies to break off their business relationships with poorer countries.
The people in the affected countries would thus be robbed of their economic development opportunities without the human rights situation improving. This is the result of the Kiel Institute for the World Economy (IfW) in a report for the employers’ association Gesamtmetall. The study is available to the Handelsblatt.
According to the Supply Chain Due Diligence Act, companies with at least 3,000 employees must ensure from the beginning of 2023 that their suppliers do not violate human rights, such as child labor.
A year later, companies with at least 1,000 employees will also be included. In order to fulfill their duty of care, the companies must set up a risk management system and report regularly.
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According to the report, the law could hit small and medium-sized suppliers from countries with a problematic human rights situation particularly hard. The researchers Alexander Sandkamp from the IfW and Gabriel Felbermayr write that it is precisely when German companies only make little sales with suppliers that there is a risk that they will break off the business relationship rather than take on the extensive testing and control obligations and the reporting bureaucracy from the Austrian Institute for Economic Research Vienna (Wifo) in the report.
Read here: The long struggle for a German supply chain law
The law would increase the effective cost of trading with poorer countries. Not only the direct costs for setting up risk management or for fulfilling the reporting obligations are relevant, but also “the diffuse legal risks that result from the supply chain law”. And the fact that higher market access costs have an effect on the export and import behavior of companies is empirically well documented, the study goes on to say.
According to German law, breaking off business relationships should only be the last resort. Rather, the principle of “qualification before withdrawal” applies. This means that companies should first check with the supplier whether any violations of human rights or environmental concerns covered by law can be remedied within a reasonable period of time.
Development policy goals could be thwarted
However, if a withdrawal does occur, it will not remain without consequences: “In the worst case, this will lead to a reduction in per capita income in the countries concerned,” says Sandkamp. After all, companies that export goods to Germany or other EU countries often pay higher wages and taxes and are more productive and innovative than companies that only produce for the local market.
However, development policy goals such as eliminating child labour, reducing the informal sector or improving employment opportunities for women would be even more difficult to achieve with falling per capita income. “The approach of a supply chain law, which is welcome in terms of ethics, could become an undertaking that is questionable in terms of ethical responsibility,” write the economists.
>> Read here: Supply chain law: Draft by the EU Commission provides for stricter rules than in Germany
This applies all the more to the proposal for a European Supply Chain Directive. The draft recently presented by the EU Commission, for example, also provides for civil liability for companies and thus goes well beyond German law. If it were to be implemented, the further increase in liability risk would make “the withdrawal scenario for companies from these countries very real,” warns Felbermayr.
“In addition, the global competitiveness of European companies would be weakened compared to competitors who come from countries without comparable regulations,” says the economist.
Gesamtmetall Managing Director Oliver Zander also harshly criticizes the Brussels plans: It is “simply absurd” that German companies that are only just adapting to the national law would have to change again in order to meet the “even less achievable” requirements of the planned EU to comply with the directive.
In their report, Sandkamp and Felbermayr propose the alternative approach of a so-called “negative list”. This should list suppliers who have become aware of violations of human rights or environmental regulations and who will be subject to sanctions.
Such an approach would “contribute both more cost-effectively and more effectively to strengthening human rights” and should therefore “become the core of European regulation,” says the study.
More: HRI study: Cost burden due to observance of human rights only low