Most Favoured Nation: Forced Labour
... will it work?
Welcome to the 66th edition of Most Favoured Nation. This week’s edition is free for all to read. If you would like to receive top quality trade content in your inbox every week, please do consider becoming a paid subscriber.
Hot on the heels of its proposed corporate sustainability and supply chain due diligence directive, this week the European Commissioned tabled draft rules which would prohibit the placement of products made with forced labour on the EU market.
“Why didn’t you just say ‘import ban’?”, I hear you ask. We’ll get to that.
The new rules would:
Outlaw products made with forced labour from being placed on the EU market or exported, no matter whether they were made within the EU or elsewhere. [*nods at EU’s WTO obligations*]
Use the ILO’s definition of forced labour: “All work or service which is exacted from any person under the threat of a penalty and for which the person has not offered himself or herself voluntarily”
Be enforced by member-state customs authorities, who will carry out investigations based on information collated by the EU and external submissions from civil society organisations.
Where forced labour is uncovered, require customs authorities to intervene to and withdraw products from free circulation within the EU and prevent export. Businesses would then be required to dispose of the products.
Empower member-states to penalise non-compliant companies.
Require member-states to recognise each other’s decisions.
Include a non-cooperation clause, allowing authorities to take decisions based on best available evidence, in the event companies and non-EU countries refuse to cooperate.
Unlike the corporate sustainability and supply chain due diligence proposal, which applies solely to larger companies, cover SMEs.
Come into effect 24 months after the rules are placed on the statute books, meaning it would apply from 2025 at the earliest.
Anyway, rather than all this complication, why hasn’t the EU just copied the US and enacted a blanket import ban on goods made in Xinjiang and be done with it?
The first is that the EU does not want to explicitly single out China. This has a legal rationale — from a WTO perspective, such measures are more likely to survive challenge if they are non-discriminatory and apply equally to all goods no matter the country of origin — but also political. These provisions are obviously designed in reaction to Chinese practices, and will impact lots of firms operating out of China, but if no one says China perhaps the political/economic retaliation won’t be as extreme … or something.
But the other reason is that this is generally how the EU does things. Take normal product standards. In most people’s mind every imported product gets checked at the border by a burly customs inspector to make sure they comply with EU rules. But that’s not really how it goes.
Generally speaking goods aren’t checked at the border to assess conformity with EU rules. (Unless we are talking about agrifood …) Rather, importers (or the company responsible for placing the product on the EU market) are made liable for ensuring the product conforms with EU rules. Enforcement is then largely carried out in market by the market surveillance authorities in respective member-states.
Why is done this way? First, it’s really hard to check this stuff at the border. Like, imagine all the different type of folk you’d need hanging around at customs posts if you needed to take apart everything that entered to make sure it all conformed to the relevant European standards. Agro. It would also be really expensive.
Another reason is that shifting the liability to the importer, to a degree, outsources the compliance function to the private sector. Most firms want to obey the rules. Most don’t want to come under legal fire from governments. Most don’t want to place something on the market that breaches the rules or could be dangerous. This means that, bigger importers at least, will want to make sure that things they are importing actually conform with the relevant rules, and will engage third-party certification bodies to test them and provide additional reassurance, even when not strictly required.
All of the above is also why rules of origin compliance, as another example, is rarely contested at the border, rather by via post-hoc investigation.
The forced labour proposal is based on the same principal. The idea is that simply creating the new rules will see the majority of companies comply. The in-market investigations can then focus on the most egregious cases, and make examples of the worst offenders.
It also means that, in practice, most SMEs will remain largely unbothered … as they already are when in comes to general compliance …
But will it work?
I suppose it depends on your definition of success. Will it lead to a change in China’s approach to forced labour? Probably not.
Will it make life difficult for firms operating in China? Yes, without a doubt. A dynamic I think people miss is that complying with the new EU supply chain due diligence and forced labour rules would require companies to start asking questions about the practices of their Chinese suppliers. And given China contends there is no forced labour getting a straight answer will be difficult. And even asking the question will get firms into trouble with the Chinese state. Many will then come under pressure to not only say nothing, but to make public statements in support of China. Yikes.
Will this then lead to firms servicing the EU market from other countries? Yeah, I guess so, but it won’t be easy.
Further Reading
MFN fan favourite Chad Bown has a new paper out arguing that a pandemic treaty should not be left to the health folk at the WHO, and requires WTO involvement. (My slightly snarky suspicion is that involving the WTO would be a surefire way to ensure nothing gets agreed for 20-years or so, but that also might be true of the WHO.) Read it here:
The UK has a new trade secretary, Kemi Badenoch. Occasional MFN contributor, George Riddell and I have a new piece out setting out the top six things she will need to deal with. Top of the list … India.
First up on the agenda for the new Secretary of State for International Trade will be the multitude of trade negotiations currently underway. Most pressing will be the negotiations between the UK and India on a new FTA. The previous government had committed to finalising negotiations by Diwali, on 24 October 2022.
This had been a point of concern for some business associations in the UK who had written to the previous Secretary of State, Anne-Marie Trevelyan (now Secretary of State for Transport) to express the need for substance to come before speed in the negotiations. Getting this balance right will be a top priority for the Department of International Trade (DIT) if the new FTA is to contribute to the UK’s economic recovery.
Best wishes,
Sam
There is also a legal reason for the EU's different approach. WTO law permits border restrictions to enforce domestic measures. But for this, the domestic measure has to be non-discriminatory. If the ban is on placing forced labour products on the market, it is formally (de jure) non-discriminatory in the sense that it does not matter where these products are made. There is a question about whether this is still de facto discriminatory, given that some imports will be more likely to be made using forced labour than others, or than domestic products, though (to some people's surprise) there is quite a bit of forced labour everywhere. But that aside, this is closer to non-discrimination than a ban on imports that are made *using* forced labour per se. It is difficult to argue that such an import ban enforces a domestic measure, even if the domestic measure is a ban on using forced labour. Second, a ban on sale makes an exception easier to justify, because the harm being targeted is to consumers, not to the workers (Art XX(d) GATT). Nobody now needs to worry about inadvertently buying forced labour products. This is in addition to a public morals defence (Art XX(a)). There are a few other details, but the overall message is this: if you want to ban something, ban sale + imports, not just imports. This has been known to trade lawyers since the Tuna-Dolphin cases in the early 1990s (which the US lost).