Due diligence legislation versus trade policy

Due diligence legislation versus trade policy

The EU’s inconsistent approach towards sustainability treaties

In February 2022 the European Commission launched a proposal for an EU corporate sustainability due diligence directive (‘CSDDD proposal’). Companies will be mandated, under threat of sanctions, to monitor adverse impacts that may arise throughout their value chain from violations of a series of sustainability treaties: that is, treaties on human rights, labor and the environment. These treaties are listed in a comprehensive Annex. This due diligence obligation applies globally; no distinctions are made depending on the countries where the value chain operates.

A few months later, in June 2022, the European Commission came out with a policy paper on the Trade and Sustainable Development (‘TSD’) commitments which the EU will incorporate in its bilateral free trade agreements and which it would expect is trading partners to observe. The Commission positions these TSD commitments in trade policy amongst a wider group of instruments to support sustainable trade, such as its CSDDD proposal. However, the Commission glosses over important differences between these two initiatives, one of which relates to companies and the other applicable to other states.

First, the EU’s trade agreements include a smaller set of sustainability treaties that it expects its trading partners to observe than the comprehensive list the Commission proposes in the CSDDD that companies must monitor throughout their value chain. Second, regarding the EU’s trade agreements, the Commission emphasizes its preference for a country-specific approach towards implementation of TSD commitments. Third, again regarding these trade agreements, the Commission wants to provide sanctions for violations of only a handful of sustainability treaties, and proposes to impose them only in case of serious violations. The handful of treaties being the Paris Climate Agreement, and the eight core conventions of the International Labor Organization (ILO). In October 2022 both the European Parliament’s International Trade Committee, as well as the Foreign Affairs Council endorsed the Commission’s selective approach towards sustainability treaties, as well as its country-based prioritization.

In Oscar Wilde’s phrase: ‘consistency is the last refuge of the unimaginative.’ Yet the discrepancy between due diligence legislation and trade policy is striking. Why does the European Commission demand much more from business, with respect to the supervision of sustainability treaties, than it can or wants to do itself?

To answer that question, a bit of history is illuminating. How did TSD commitments, with reference to sustainability treaties, become part of the EU’s bilateral trade agreements?

Sustainability chapters in EU trade agreements: until summer 2022

There was no place for agreements on environment and labor in the WTO, a longtime EU wish. Then the EU switched to bilateral trade agreements. Since 2011, in an agreement with Korea, the EU began to dedicate separate chapters to sustainability in its trade agreements. This practice became anchored in a value-based trade policy in a Communication of 2015: no further, preferential trade liberalization would be envisaged toward trading partners that did not share Europe’s basic values on human rights, labor and the environment. The emphasis on values was supposed to help make trade liberalization, always a thorny issue, more politically acceptable.

That policy choice was certainly not uncontroversial. Economists and business feared that value-based trade policy would make the economic benefits of trade liberalization too dependent on political trade-offs. This may also explain why disputes over TSD commitments in the EU’s bilateral trade agreements were not subjected to regular dispute resolution.

How does dispute resolution of a trade dispute normally work?

The procedure usually followed in trade agreements is modeled on the innovations introduced in the WTO Dispute Settlement Understanding in 1995. Consensus on the resolution of a dispute between the litigating governments is no longer required. A complaining government is entitled to submit a dispute to an independent panel of experts in a type of arbitration procedure. Their judgment is binding. If the losing party does not comply with the ruling, the successful complainant can impose trade restrictions as a countermeasure to force the loser to comply.

What was provided for a sustainability dispute?

The dispute did go before an independent panel of experts. However, their ruling was not binding, and sometimes was not even published. That ruling was no more than a building block for the opposing parties to still reach agreement.

This ‘status aparte’ of TSD commitments in bilateral trade agreements was fiercely criticized by civil society, by the European Parliament, and by a group of academics (I was among that group of critics). To those criticisms, the Commission and its advocates had a series of, often technical, responses. One such response was that TSD commitments would be too ‘vague’ to be subject to strict enforcement and penalties.

Critics such as myself have always found that vagueness argument to be nonsensical. Surely it is not credible to dismiss all human rights, labour and environmental treaties as ‘vague’. Our answer was: the Commission must select and possibly specify which TSD commitments qualify for normal, binding dispute resolution with sanctions.

Sustainability chapters in EU trade negotiations: from the summer 2022 onwards

After years of resistance, the Commission changed course in its policy paper of June 2022. Under its proposals, disputes over sustainability chapters in the EU’s trade agreements would henceforth be subject to normal dispute settlement procedures. But the Commission still maintained reservations. Sanctions for non-compliance with a binding ruling in sustainability disputes are only foreseen for serious violations of a handful of treaties: the Paris Climate Convention, and the basic ILO Conventions. The latter cover trade union freedom, prohibition of forced labor, the worst forms of child labor, and discrimination in working conditions. It should be noted that the proposal according to which violations must be serious before the EU considers sanctions for non-compliance with a ruling would create a threshold that applies only to sustainability disputes; this threshold does not apply to violations of trade regulation or intellectual property provisions in these bilateral trade agreements.

This new policy is already reflected in the bilateral trade treaty the EU concluded with New Zealand in the summer of 2022.

Implications of trade policy discussion for due diligence law

In sum, where government oversight of TSD commitments is concerned, fewer sustainability treaties are selected, there is a focus on country-specific implementation, and there are limits on enforcement (notably regarding sanctions in case of non-compliance). This contrasts with the wide range of sustainability treaties that companies are expected to oversee globally, without differentiation, under threat of sanctions. What could be the explanation for this discrepancy?

Perhaps the EU institutions want to limit the controversies that governments need to address. They may worry that quite a few sustainability treaties have had little or disparate effect in practice. A recent meta-analysis by Canada’s Tory University came to this sobering conclusion. In particular, treaties that did not involve trade or finance, and had no enforcement mechanisms of their own, were found to be ineffective, for example the UN Convention on the Elimination of All Forms of Discrimination against Women. (In passing it may be noted that this Convention is included in the Annex of the Commission’s CSDDD proposal, also in the TSD chapter of the EU’s recent trade agreement with New Zealand (though excluded from sanctions), but not included for instance in the EU’s recent agreement with Vietnam.) In fact, some treaties were judged downright counter-productive in this Tory University analysis, including the UN Convention on the Rights of the Child. (This Convention is included in the Annex of the Commission’s CSDDD proposal, but not in the TSD chapters of the EU’s recent trade agreements such as the ones with Vietnam or New Zealand).

As a possible explanation for this perceived dysfunction of treaties, the researchers posited that repressive governments score diplomatically by ratifying a treaty, but suffer hardly any negative consequences if they subsequently fail to implement such a treaty. Did the European Commission expect improvement in this disappointing situation through its corporate CSDDD proposal? Decentralized supervision of treaties by private stakeholders does have advantages, at least in theory. This creates a multitude of supervisors, closer to the workplace. But is this benefit always available?

What can European companies be expected to do, for instance in a foreign country with a repressive government? Is it reasonable to demand that companies speak up when a third country has reacted with hostility to such initiatives? To take an example, the Chinese reaction against H&M, Adidas and some other companies that raised critical questions about forced labor in Xinjiang is troublesome. Should the EU and Member States not take a stand together with their companies against violations of sustainability treaties, particularly in respect of countries where the EU has identified implementation priorities?

Other questions remain. For example, in its trade policy paper of June 2022 the Commission cautiously states that it still wants to investigate the possibility of subjecting the non-implementation of the Convention on Biodiversity to sanctions within the context of its free trade agreements. Yet in its CSDDD proposal of February 2022 the Commission showed no reservation in mandating companies, on pain of sanctions, to monitor their entire value chain in every country (be it a preferential or non-preferential trading partner of the EU) with respect to violations of the Biodiversity Convention as well as subsequent protocols.

In short, moving from non-enforceable to binding and sanctionable TSD commitments in the trade policy area has led the European Commission to opt for more selectivity and country differentiation. The Commission’s CSDDD proposal represents a similar move towards more binding sustainability-related obligations for companies. Pursuant to the UN Guidelines on Business and Human Rights (UNGPs) and the OECD Guidelines for Multinational Enterprises, companies have a responsibility to broadly supervise human rights, labour and environmental concerns that arise in their value chain. But, barring exceptional cases, such corporate responsibility is limited and does not amount to sanctionable obligations. This will change with the Commission’s CSDDD proposal. Yet contrary to its initiative in the trade policy area, the Commission in its CSDDD proposal makes hardly any selection amongst sustainability treaties, and no differentiation amongst foreign countries.

Despite Oscar Wilde’s misgivings, more consistency is desirable. There needs to be a better connection between obligations that EU governments impose on themselves, and want to impose on companies, when it comes to implementation, enforcement and sanctions in respect of sustainability treaties.

This blog was first published on EJIL:TALK! Blog of the European Journal of International Law.


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