Driving forced labour out of supply chains starts to get serious

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Welcome to Trade Secrets. Sometimes a trade issue that’s been bubbling along steadily seems rapidly to become “A Thing”. In this case, it’s the question of human rights abuses in corporate supply chains, specifically European companies and the alleged forced labour of Uyghurs in China’s Xinjiang province. (Unlike the sweatshop debates of the 1990s about the pros and cons of low-cost workers in global value networks, no one thinks forced labour in car and chemical factories is to be applauded.) Oh, yes, and the World Trade Organization ministerial meeting is next week, so a quick note on that. Charted waters assesses the big fall in lithium prices.

Cleaning up the corporates

I’ve been following the various attempts to monitor and clean up global value networks for a while now and at times it all felt a bit symbolic. Bearing in mind the old Brussels saying that EU trade policy is set by Germany and thus by German manufacturing, and thus by the German car industry, and thus by Volkswagen, was anyone ever really going to interfere in their supply chains? (I’ve said this several times, but remember, it was less than five years ago when the then VW chief executive literally denied knowledge of re-education camps in Xinjiang.)

Now it’s getting a bit real. First there’s the staff rebellion at the German consultancy that surveyed VW’s operations in Xinjiang and claimed to find no evidence of human rights violations. Then BASF sold two chemical plants in Xinjiang after complaints of abuses at its Chinese joint venture partner. Then, following allegations published in Handelsblatt that it too ignored abuses at a JV partner, VW has also started a review of its operations in the province.

Now thousands of cars made by Porsche, Bentley and Audi (all brands owned by VW) are being impounded in US ports because they are alleged to contain components made using forced labour. US legislation on the subject dates back to 1930, and in 2021 a law was passed to institute a presumption that certain Chinese companies manufacturing in Xinjiang were using forced labour. (An FT colleague has written on German companies’ dilemmas here.)

Interestingly, events in Europe are actually front-running the arrival of legislation in the EU. The EU’s own forced-labour law, which has been thrashed around for years, is just now getting to a three-way negotiation between the European parliament, the European Commission and the European Council of member states, though campaigners (predictably enough) say the Council’s position in particular is too weak.

A separate corporate due diligence initiative, over which agreement had apparently been reached in December, may now be delayed by Germany and specifically the Free Democrats in the governing coalition digging in their heels. Germany itself has had a due diligence law in place since last year, and though it’s weaker than the EU version, it’s already started generating cases. German businesses are not fans of it.

As I said of the German due diligence law when the first complaints started rolling in, it’s not always the criminal and civil liability that matters as much as giving campaigners an opportunity to shine a light and make noise.

These laws also have a habit of reproducing themselves internationally. Part of the EU’s motivation for passing a forced labour law was to keep up with the US (the “Washington effect”, we might call it). The (now realised) threat of European companies’ exports getting caught in US customs is a reputational risk if nothing else. The UK, which currently has a sector-specific approach to imports made with forced labour, might well have to follow the EU and pass a broader law, for the same reason.

WTO dispute settlement dispute still unsettled

The WTO ministerial meeting in Abu Dhabi starts a week today, February 26. I’ll go into detail in the newsletter that day, but today here is a quick note on one bit that definitely won’t get fixed there — restoring the WTO’s dispute settlement system to full functioning.

To recap: the US continues to refuse to appoint judges to the Appellate Body (AB) until reform happens. Fundamentally, it wants a one-stage panel hearing rather than the two-stage appeal process. There’s no consensus here: the draft negotiating text on dispute settlement literally leaves the relevant section blank.

Why is the US so obsessed with one stage rather than two? Couldn’t panel decisions irritate it just as much as AB rulings? Well, the political economy here is that the panel stage is dealt with by a different part of the WTO than the AB, which has its own secretariat and is much more independent.

Panel members include current serving national ambassadors to the WTO, and the process is regarded as being influenced more by political positioning and the general vibe around the building, and can be more deferential to governments’ wishes. For example, on the apparently abstruse but incredibly vexed question of “zeroing” — the US’s antidumping methodology beloved of its steel industry — AB rulings have been consistently more hostile than those of the panels.

But the EU and others are keen on keeping the two-stage process. A group of middle-income countries including Indonesia, India and South Africa recently published a paper explaining their support for the principle, and rejected an idea to classify cases into levels of complexity to streamline hearings. Result: impasse. It’s hard to see how the WTO members get to consensus from here.

Charted waters

There’s been a sharp correction in lithium prices as demand for Chinese electric vehicles slows while production of the battery mineral has come on stream.

It turns out that the green transition hasn’t abolished the boom-bust cycle for commodities and that the best cure for high prices is high prices.

Trade links

Speaking at the Munich Security Conference over the weekend, the Chinese foreign minister Wang Yi said that other economies “de-risking” from trade with China was a mistake.

Some good news for the UK in the week Goldman Sachs said Brexit had seriously damaged the economy: its financial services industry has seen a smaller exodus to the EU than pessimistic forecasts suggested. One cute example: a senior banker claims his employer, Morgan Stanley, created a token job title to give the false impression he was based in Frankfurt rather than London.

The world’s biggest solar company has warned rich nations not to cut out Chinese suppliers.

The EU has launched an antisubsidy investigation into a Chinese train manufacturer.

Trade Secrets is edited by Jonathan Moules