Most Favoured Nation: National Treatment? (£)

Supply chain due diligence, a trade deal with India, Singapore and patents

[PSA: I will write about trade-specific issues relating to the Russian invasion of Ukraine in future MFNs, just not this week.]

There are two fundamental principles underpinning the rules-based international trading system. The first is that (subject to terms, conditions, FTAs, sanctions, etc.) a country should treat all foreign imports equally, no matter their specific country of origin. This is referred to, stupidly, as most favoured nation.

The second is that (again, subject to terms and conditions) foreign investment, imports and firms operating in your market should be treated the same as their domestic equivalents. This is known as national treatment.

Anyway, on Wednesday the European Commission published its long-awaited proposal for a directive on corporate sustainability and supply chain due diligence (note: this is not quite the same thing as its also long-awaited instrument banning goods made from forced labour, which is still in production).

If implemented, companies would be required to:

• integrate due diligence into policies;

• identify actual or potential adverse human rights and environmental impacts;

• prevent or mitigate potential impacts;

• bring to an end or minimise actual impacts;

• establish and maintain a complaints procedure;

• monitor the effectiveness of the due diligence policy and measures;

• and publicly communicate on due diligence.

Arguably all reasonable requests, but quite administratively burdensome, ie not cheap. Which leads to the question of coverage: do all companies have to comply or just big ones.

The answer: big ones. But the exact criteria depends on whether the company is EU-based, or foreign:

• EU companies:

  • Group 1: all EU limited liability companies of substantial size and economic power (with 500+ employees and EUR 150 million+ in net turnover worldwide).

  • Group 2: Other limited liability companies operating in defined high impact sectors (such as textiles, agriculture and mining), which do not meet both Group 1 thresholds, but have more than 250 employees and a net turnover of EUR 40 million worldwide and more. For these companies, rules will start to apply 2 years later than for group 1.

• Non-EU companies active in the EU with turnover threshold aligned with Group 1 and 2, generated in the EU.

But reading this … isn’t there, like, a national treatment issue?

I mean, let’s take a hypothetical scenario in which I run a company that employs 20 people and has €200 million in EU sales. If I base this company in the EU, then I don’t have to comply with the new due diligence requirements because my company has fewer than 500 employees. Cool.

But if I base the company in, say, the UK … then I do? Because there is no employee threshold for foreign firms selling into the EU.

I dunno.

Trade lawyers, what do you think?