The EU Due Diligence Directives (Part 1): A paradigm shift in regulating GVC networks

The externalization of the EU’s CSDDD to international trading partners has two important implications. First, these regulations encourage countries to adopt strong human rights and labor protection that are good for workers and society. CSDDD can foster a culture of transparency, accountability, and responsible sourcing in business operations, which can enable efficient and competitive access to finance and new markets, mobilize international investment, and promote innovations.  

Second, these regulations facilitate the rise of the EU as a standard-setter, meaning that the importing countries assume the role of defining what environmental and human rights standards should be in the exporting country. This may not be appropriate from a developing country perspective since they prefer to formulate environmental and human rights standards based on their development priorities. Furthermore, non-compliance with standards carries the potential risk of terminating business contracts, thereby missing the opportunity to participate in value-chain-led trade. This may generate unintended consequences for local employment, revenue, and economic growth. 

Considering the interdependence between lead firms and subsidiaries or suppliers in developing countries, the potential socioeconomic implications of the CSDDD for upstream value chains of labor-intensive sectors, such as textiles, clothing, and leather, are significant. A recent study argued that the EUDR and CSDDD pose the risk that companies subject to due diligence and responsible business practice requirements may shift their sourcing from high-risk to low-risk countries rather than promoting the dissemination of best practices throughout the value chain and enhancing capacity, where it is most needed. 

Moreover, CSDDD’s disciplines are placed as obligations of means, denoting that business entities are expected to undertake suitable measures to mitigate adverse human rights and environmental impacts rather than ensure specific outcomes. One of the most distinguished features of CSDDD is that it not only applies to its own business operations but also covers the business operations of subsidiaries and suppliers located in third countries. This encompasses all business activities of upstream suppliers and specific business activities of downstream business partners in value chains, including storage, distribution, and transportation. 

As the CSDDD mandates significant changes in production practices and policies along the entire value chain, it could have significant implications to the governance structures in which lead firms and suppliers interact. The directives will allow lead firms to gain better insights into business operations, thereby addressing the inherent shortcomings of the cascading compliance paradigm, which often limits lead firms’ control over suppliers’ sub-suppliers. Yet, enhanced control of lead firms along the value chain could also undermine potential opportunities for suppliers to upgrade within value chains, thereby exacerbating power imbalances and inequalities. 

Strict environmental standards and human rights norms in international supply chains will, in addition, create unviable dilemmas for EU policymakers. These standards can significantly increase the cost of production in developing countries, which in turn can increase the cost of imported products in the EU market. This may lead to a significant decline in national economic welfare and pose considerable challenges in garnering stakeholders and political buy-in for the globalization of EU value-based trade policies. More specifically, it may create challenges for EU trade negotiators in maintaining their core values, idealism, and pragmatism in the global trade arena.  

Overall, the EU’s imperatives to discipline its domestic supply chains through the CSDDD create a foreign policy conundrum for EU policymakers. On the one hand, the EU is pursuing a range of policies that emphasize diversification from China-centric global supply chain networks and engages with more likeminded and strategic trading partners, such as India. Conversely, the EU’s approach of transnationalizing its domestic regulations through CSDDD may escalate trade frictions with key trade partners, thereby jeopardizing its initiatives to foster sustainable supply chain networks. 

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