Why import bans to combat forced labor may backfire

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Trade is not exactly top of everyone’s mind at the moment, let’s be honest, what with the warnings of an imminent Russian invasion of Ukraine and all. As a reminder, here are my thoughts from a couple of weeks ago on how EU trade policy inadvertently contributed to that unfortunate situation. It’s worth remembering that for all the talk of Ukraine joining NATO, its decisive move into the EU sphere of economic and trade influence is clearly also a big factor in Russian President Vladimir Putin’s thinking. On a barely cheerier note, today’s main piece is about the attempts to restrict the sales of goods made with forced labor, and what role border measures might play. Charted waters is about the rise in the costs of shipping furniture, and how some companies are now bringing its production closer to home.

Get in touch. Email me at alan.beattie@ft.com

Deadly force

You’d think that stopping products made with forced labor being sold in your market was a) a bit of a no-brainer and b) something any ambitious policymaker would elbow others aside to take credit for.

But this is trade, in fact it’s the EU and trade, so it’s not that simple. Just as last week’s European Chips Act on semiconductor subsidies had European commissioners squabbling with days to go before launch, the task of who deals with forced labor is being punted from one part of the Brussels machine to another.

This might seem odd, given how much it goes on about transmitting European values ​​such as labor standards in its trade policy, but the EU is actually lagging behind a bit on this issue. The US has had a ban on imports made with forced labor since 1930 and toughened it considerably last year to restrict imports from Xinjiang, with Canada also passing legislation. You might expect the cuddly employee-friendly Europeans to be keener than the free-market Americans, but then you’ve underestimated the superior firepower of US labor unions on the trade policy process. There’s also some resistance from corporate Europe to import bans, which I’ll go into later.

We wrote about this in Trade Secrets last year, since when there have been some developments. But the central dilemma remains. The debate is about whether blocking the sale of forced-labor goods in the EU is better done with an import ban or a “due diligence” initiative that makes companies legally responsible for broader environmental and human rights abuses in their supply chains. (You can also do this via the “trade and sustainable development” chapters of preferential trade agreements, which are currently being reviewed, but that’s not a very powerful tool, not least because the EU has already signed PTAs with most of the large economies which are likely to sign one in the foreseeable future.)

Forced Labor has now been taken up as a personal initiative by European Commission President Ursula von der Leyen, as emphasized in her State of the Union speech last year. But von der Leyen being enthusiastic about something trade-related is not always a good sign, as her support for utterly futile trade talks with India suggests. And it’s not an issue that the commission’s directorates are exactly fighting each other to own.

In an act of turf-vacating rarely seen in Brussels, the commission trade directorate and its commissioner say this is best dealt with not as a border measure but as part of the “due diligence” legislation as mentioned above. Sabine Weyand, head of the EU directorate, recently told the European Parliament (really worth a watch if you’re trying to get your head round the issue), that the US has encountered problems with imposing broad blocks on imports, including setting up new companies to circumvent restrictions. The US system involves shifting the burden of proof on to companies to show they aren’t made with forced labor and risks cutting off developing regions from trade altogether.

An EU import measure would also run the risk of breaking WTO law if Brussels imposes a forced labor ban at the border but not inside its Single Market. (Rather embarrassingly the International Labor Organization estimates there are about 1mn forced-labor workers in the EU itself, out of a global total of 25mn.)

What of the domestic lobbying pressures in the EU, especially given the change of government in Germany? Last year Trade Secrets wondered whether big companies were likely to oppose a far-reaching due diligence law. In fact, they’ve now got one in Germany they can evidently live with, not least because it does not go very deep into the tiers of suppliers in the value chain. (There are a lot of stages in the supply chain between cotton picked by Uyghurs in Xinjiang and shirts turning up in EU clothing stores.)

It’s the import ban the companies do not like. Roland Busch, chief executive of Siemens, tried the environmentalist argument to make a blanket case against border measures, telling the Süddeutsche Zeitung newspaper in December that export bans would mean no more solar cells from China and the energy transition coming to an end. Late last year, Herbert Diess, the Volkswagen chief, also weighed in on the inadvisability of decoupling from China, though he did not repeat his extraordinary claim from 2019 that he was unaware of the existence of re-education camps in Xinjiang.

Working out which way the EU is going to jump is one for the specialist Brussels bubble-watchers, one of the very best of whom is sadly just departing. I’d emphasize, though, that forced labor is a big deal and some very clever technocrats are working hard on it, but no one knows yet how to fix it. In other words, it’s trade. In fact, it’s the EU and trade, so it’s not that simple. I’ll keep watching.

Charted waters

Furniture prices have been rising, as sofas, tables and chairs have become casualties of the global shipping and supply chain crisis. This is due largely to their size, with container costs rising by as much as 1,200 per cent since the start of the pandemic.

European and US retailers have long imported these kinds of items from China, with furniture imports from China to the UK growing from $ 50mn in 1993 to $ 4.3bn in 2020, according to UN trade data.

Bar chart showing furniture is among the industries hardest hit by surging shipping costs, Simulated impact on consumer prices, by top 10 products (%)

However, the recent rise in transport costs has prompted some European and US retailers to move manufacturing operations to domestic factories, or those nearer home. A number of European retailers have relocated production to countries such as Poland, Lithuania and Latvia, which also benefit from lower labor costs and access to raw materials such as wood.

The Joe Biden administration has announced a rather vague Indo-Pacific strategy of which the trade part is supposed to compensate for the US abandoning the Trans-Pacific Partnership it came up with in the first place. Few think it will.

The UK foreign secretary Liz Truss is preparing another capitulation to the EU over the Northern Ireland Protocol, in what is now a venerated British tradition of talking tough to Brussels before meekly knuckling under.

A very detailed long read on the UK’s attempts to build the lucrative battery stage of the electric vehicle supply chain at home.

China purchased literally none of the $ 200bn additional exports from the US it agreed to buy in a deal with former President Donald Trump in January 2020, a pact that the Biden administration has nonetheless quixotically decided to pursue.

China is escalating the trade coercion of Lithuania by putting blocks on beef exports from the Baltic country. Financial Times journalists go into depth on the issue here.

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