Didier Reynders, the European commissioner for justice, is keen on tighter rules governing companies’ supply chains © STEPHANIE LECOCQ/EPA-EFE/Shutterstock

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Hello from Brussels. As of last night the US has a new trade representative- designate, Katherine Tai, the current chief trade counsel to the Democrats on the House of Representatives ways and means committee. Formerly in USTR’s office of China trade enforcement, she is fluent in Mandarin and by all counts smart and easy to get on with. A break with the abrasive Robert Lighthizer machismo, for sure. Also, note, a technocrat rather than a politician.

In other news, President-elect Joe Biden has signalled very clearly he doesn’t want a load of grand new trade agreements: he wants relentless enforcement, particularly against China, in association with allies.

If that means no more pretending that micro-deals about lobster tariffs constitute a new era for transatlantic trade, we’re all for it. In other news, after another Boris Johnson-Ursula von der Leyen meeting last night, Sunday is now the final deadline for a UK-EU trade deal, honestly it is, even more final than the last final deadline, which was pretty final in itself. As the late British author Douglas Adams said: “I love deadlines. I love the whooshing noise they make as they go by.”

Today’s main piece focuses on an EU initiative to turn multinational companies into a global squad of employment and environmental inspectors, more or less, while Tall Tales of Trade is about the UK pretending that it didn’t comprehensively give way on the Brexit question of trade across the Irish Sea.

Don’t forget to click here if you’d like to receive Trade Secrets every Monday to Thursday. And we want to hear from you. Send any thoughts to trade.secrets@ft.com or email me at alan.beattie@ft.com

Brussels to corporations: clean up your supply chains

It’s an awkward time for Brussels to be chuntering on about exporting its values around the world through trade: as my colleagues describe, the EU has enough trouble getting them to Hungary and Poland.

Still, the EU institutions and particularly the European Parliament are insistent that trade should advance human rights, in particular labour standards, and protect the environment. It’s fair to say the Brussels old guard, particularly in the trade directorate, doesn’t instinctively embrace this idea. The standard view there is that sanctionable labour and environmental standards make it harder to agree trade deals (see Mercosur), punish developing country producers for what their government is doing and provoke accusations of neocolonialism from said authorities.

Brussels has a new route to try. As well as going through trade deals, the EU is looking at making multinationals responsible for human rights — and perhaps environmental violations — throughout their supply chains. This turns the issue from a trade thing into a due diligence corporate governance thing and puts it into the enthusiastic hands of Didier Reynders, the Belgian justice commissioner, who is super-keen.

Similar laws already exist elsewhere. On top of existing international agreements about criminal sanctions on bribery abroad, the EU has sectoral regulations on conflict minerals and illegally harvested timber, and voluntary initiatives with the textile and garment industries.

Some member states including France (human rights generally) and the Netherlands (child labour) have introduced their own due diligence laws, though there are questions about fairness and effectiveness. In fact, it’s partly the domestic grumbling they have encountered that has provoked them (particularly the Dutch) to push the idea at an EU level. Dutch companies, reasonably enough, have pointed out that if a multinational sited in one country is obliged to monitor and enforce labour standards on pain of hefty fines, it can be undercut by another in a less fastidious jurisdiction.

At an EU level, assuming they will be compulsory, the rules could be implemented by expanding existing corporate reporting requirements. More excitingly, the EU could create mandatory due diligence as a legal standard of care for companies to “identify, prevent, mitigate and account for actual or potential human rights and environmental impacts”, with serious fines for violation.

It’s not an unambiguously productive proposal. Going down the supply chain rather than the trade deal route can still have the same adverse side effect of taking production and jobs away from developing countries. And unlike labour standards in trade deals, it will apply only to those parts of the economy where western companies are operating or sourcing, possibly creating islands of well-treated workers in seas of oppression and pollution. 

On the plus side — as one of Trade Secrets’ favourite members of the European Parliament, the German Green Reinhard Bütikofer, says — a rule would give European companies political cover abroad. “Some companies have said to me that rather than imposing standards on their Chinese suppliers themselves they would much rather be able to go to them and say: this is the law, we have to obey it,” he told us. Bütikofer is a sharp critic of Volkswagen for producing cars in China’s Xinjiang province where many Uighurs live. A due diligence law would also allow European companies to benchmark their supply chain monitoring against others, he says.

So where is this issue going? Last week the member states, guided by the German presidency, called on the commission to design a solid legal framework for corporate due diligence. Getting all the member states on side for the final version will be trickier and could take years. Germany itself, the EU’s manufacturing superpower, is fiercely debating the idea of creating its own law, with ministers openly at odds. Bütikofer says the German government should break the impasse by seeing a domestic law simply as a transition to an EU-wide version.

The due diligence idea does look like it has legs, though how far they stretch remains to be seen. One group of people who may be privately relieved are some of the Brussels trade folks, happy that someone else is sharing the burden of trying to affect what European producers thousands of miles away are doing to their workers and the forests. Running a hypocritical neocolonialist enterprise gets lonely sometimes: it’s nice to have some company.

Charted waters

The UK economic recovery almost stalled in October as the services sector was hit by Covid-19 restrictions before the full November lockdown in England and increased Brexit uncertainty. Output grew 0.4 per cent in October compared with the previous month, down from 1.1 per cent in September and the lowest rate since May, data from the Office for National Statistics showed on Thursday.

Line chart of share of responding businesses in accommodation and food service activities, showing that the UK hospitality sector has been badly hit by the pandemic

Tall tales of trade

A poster in Northern Ireland calling for ‘No Border’ on the island of Ireland after Brexit
The withdrawal agreement introduces border frictions between Northern Ireland and Great Britain where they didn’t exist before © AFP/Getty Images

Soon we won’t have the Brexit process to kick around any more, or not at the same intensity, so let’s make the most of pointing out the tall tales while we can.

This week, separately to the trade deal talks, the UK and EU agreed how the Brexit withdrawal agreement will apply to Northern Ireland, which will remain inside the UK while also applying the EU customs code. A package of trusted trader schemes and temporary waivers on inspections was enough for the UK to withdraw its childish threats to override the agreement and break international law. But let’s be clear: the Johnson government’s promise that trade will flow as freely as before across the Irish Sea between Northern Ireland and Great Britain simply cannot be kept.

Companies will need health certificates for animal and plant products, import declarations and other bureaucracy. The UK claimed last year to have persuaded the EU to back away from its position on simultaneously keeping the Irish land border open and protecting the integrity of the single market by, if necessary, requiring some border protections down the Irish Sea. That was nonsense. It was a UK capitulation, as this week’s discussions are making clear. Cover it up with whatever Potemkin customs arrangement you want: the withdrawal agreement introduces border frictions between Northern Ireland and Great Britain where they didn’t exist before.

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