European Union Buries Supply Chain Act

The Supply Chain Act, which aims to uphold environmental standards and human rights, is supported by only a small number of countries. The controversial nature of the law is undeniable, despite some initial testing in Germany. However, the bill being debated in Brussels was much tougher and bore little resemblance to what was happening in Germany, where the law applies to companies with >3,000 employees. So what happened in the Belgian capital?

On February 28, Germany, France, and Italy abstained from voting. You’d think, what’s the big deal? The influence of the three largest economies plays a crucial role in shaping the European community. It seems that these countries did not vote “nay”, but even abstention can be considered as a vote against. This is how their actions were assessed by other members of the European Union, in particular Finland, Austria, and Slovakia.

This version of the bill was originally agreed under the Spanish Presidency of the EU Council of Ministers. Given the initial proposal, businesses with >500 staff members and an annual trading turnover exceeding EUR 150 million were mandated to rigorously oversee and enforce adherence to human rights and environmental regulations across their supply chain. That is, large European companies could be prosecuted for using forced or child labor. But the Europeans had to be held accountable not only for their own activities, but also for those of their international suppliers. Moreover, the bill added the need to comply with European pollution standards. Would Asian companies, particularly Chinese ones, many of which are contractors, agree to such terms? Based on the rampant presence of child labor and pollution in China and Southeast Asia, it’s improbable.

Gradually, the bill underwent significant changes. It ended up expanding the list to include European companies with 250 employees and a trading turnover of EUR >40 million a year. On top of this, European regulations have proven to be much stricter on those entities that operate in sectors where the risk of harm to the environment is much higher. The European lawmakers included the textile industry, mining, and agriculture. The mentioning of agriculture has caused considerable outrage from farmers and the agribusiness lobby.

German Finance Minister Christian Lindner speaks with German Chancellor Olaf Scholz as German Interior Minister Nancy Faeser looks on on the day of the weekly cabinet meeting at the Chancellery in Berlin, Germany, January 24, 2024

Yes, on the one hand, this law could guarantee the absence of double standards throughout the European Union. But at the same time, it places a huge responsibility. Entrepreneurs often struggle to effectively oversee the entire supply chain. This was stated by President of the German Chamber of Commerce and Industry Peter Adrian: “Companies are expected to exercise controls that are beyond their own control.” Typically, supply chains are made up of dozens, if not hundreds of companies and businesses only know the entity they are directly working with. Steffen Kampeter, Managing Director of the German employers’ association, also warned politicians against passing the bill: “In times of crisis, companies need flexibility and scope for innovation – and less bureaucracy from Brussels. But the EU Parliament’s proposal on the subject of supply chains only brings more regulation – and no additional protection for human rights. This will result in the companies themselves being overburdened with unnecessary work and their profits will be greatly reduced.”

In turn, unions would be empowered to sue firms on behalf of their own employees. Determining the potential benefits can be a challenging query. However, another thing is clear: it would definitely be a step forward in the area of business-union relations, but it would also make a significant contribution to the workers’ rights. And, more importantly for the European Union, the initiative came not from the people, but from the authorities. It would definitely put in a positive light the Brussels bureaucrats, who are now facing a low evaluation of their performance due to the crises in Europe. The energy, migration and, in some countries, political problems have taken their toll on the European citizens. Businesses today don’t have the same opportunities as they once did because of higher taxes and rising prices. And here the authorities are trying to “tighten the screws” even more.

There are numerous factors that can be discussed regarding the decision to suspend the bill. It’s important to keep in mind that upcoming elections may reshape the political landscape across the European Union. Brussels needs well-fed voters to go and vote for the incumbent government. When the number of unresolved problems is enormous, it’s extremely unwise to add some more. The politicians of European Parliament and other supranational structures understand that the current moment is not conducive for additional restrictions. Who knows what may happen after the elections?

Businesses across the European Union probably felt a rush of energy upon hearing about the bill postponement. German experts say, passing such a law would create “disproportionate bureaucratic obstacles and legal uncertainty.” It makes sense: who wants to think about what’s going on outside your own firm and be responsible for simply being the final link in the chain? Seems that politicians have heard the desire of business.

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