Bloc will require large companies to ensure their supply chains are free of human rights and environmental abuses, with fines for failing to comply
But the issue of forced labour, particularly complex for firms active in China, is not covered by the EU, which will address it with a separate ban
Harvesting of cotton in Xinjiang has come under the microscope over alleged forced labour. Photo: Getty Images
Large companies operating in the European Union will be slapped with large fines for human rights and environmental abuses in their supply chains, new rules to be unveiled on Wednesday show.
But the legislation does not include a ban on the import or marketing of goods made using forced labour, according to a draft document seen by the South China Morning Post.
Instead, the European Commission will develop a separate forced labour ban, which could be years in the works, in the latest twist in an internal rigmarole over how to handle the thorny issue of goods made in the western Chinese region of Xinjiang, where observers and governments allege the widespread use of forced labour.
A proposed ban was announced to great fanfare by European Commission President Ursula von der Leyen last September, and was widely seen as targeting Xinjiang. China denies there is any forced labour in the region.
However, little guidance was handed down from the top, leaving departments to squabble over who should be responsible for a ban that would be “a nightmare” to administer, sources said.
Business-minded lawmakers and officials wanted the forced labour ban to form part of the new legislation, while those more concerned with humanitarian issues lobbied for an outright ban. “The Commission should be ambitious and work on a proper import ban inspired by the model that exists already in the US and other countries, so that we can stop products made with forced labour at our borders,” said Anna Cavazzini, a Green lawmaker in the European Parliament.
Last month, Sabine Weyand, the EU’s director general for trade, argued against a separate ban, which she said would place “a heavy burden” on the importer, which would have to prove there was no trace of forced labour in its goods.
“We’re working to make sure that we do not have to start from scratch on a proposal which is intimately linked,” she said.
But now, her powerful trade department will start developing a separate tool from scratch.
“We need to address goods made by forced labour no matter where they are made, in the EU or elsewhere,” said a spokeswoman for the EU’s department of trade. “The Commission is now working on the ways to introduce such a prohibition.”
The new due diligence plan for supply chains will instead impose stringent reporting rules on big companies – those with more than 500 employees and net turnover of over 150 million euros (US$175 million). Non-European firms will qualify if they generate that same level of turnover in the EU market.
The threshold is lower, at 40 million euros, for firms in “high-risk” sectors. Among these are textiles manufacturing, agriculture, forestry, fisheries, food manufacturing, and extractive industries, which include energy and metals.
The legislation will affect 13,000 EU companies and 4,000 non-EU companies, based on EU estimates.
That would represent only 1 per cent of the businesses in Europe: the document states that 99 per cent of businesses active in the EU fall beneath the threshold, with the business-friendly bloc determined to avoid placing a “financial and administrative burden” on small firms.
International firms with sizeable operations that are found to have abuses in their supply chains would face penalties.
These companies will be responsible for breaches of international standards in their supply chains, including the forced labour covenants of the International Labour Organization (ILO), and will have to provide detailed evidence that they are regularly auditing their suppliers and buyers for infringements.
For firms active in China, these may be difficult to monitor and comply with. China has ratified only 20 of the 26 ILO conventions, and has not adopted conventions on forced labour, freedom of association and collective bargaining.
Companies will be fined if it is shown that they have not carried out the requisite auditing.
They will not be able to simply dump suppliers that have breached standards: the document discourages “disengagement”, suggesting that big businesses should work with suppliers to improve their practices.
“For example, terminating a business relationship in which child labour was found may expose the child to even more severe adverse human rights impacts,” read the draft text, which went on to encourage building schools as a way to head off forced labour instead.
Rather than banning products outright, fines would be doled out, with individual victims of breaches entitled to sue the firms in question.
Internal documents seen by the Post show that the EU has been advised on the risks of trying to apply such laws to China.
At an internal event involving think tanks and business groups, the EU was warned about China’s anti-sanctions laws, which prevent Chinese companies abiding by punitive rules from other countries.
“In China there have been cases of companies being threatened that if they don’t work in a certain region there will be retaliation,” read one document. “The legislation poses the risk for companies that they could be faced with opposition by local governments. It is unclear whether the EU would support the companies in such situations.”
The new EU rules also show corporate lobbyists’ efforts to water down the scope of the rules.
“Companies should not replace the role of states,” said a representative of BusinessEurope, a lobby group. “In some states there is no rule of law, no transparency and a very strong role of the state in the economy. This would limit the ability of companies to act as well as comply and would have an impact on the costs.”
Nonetheless, business figures warned that the legislation threatened to overwhelm companies.
“In view of the size of the challenge, it is wrong to shift the task of protecting human rights and the environment on to companies in this way,” said Wolfgang Niedermark, an executive at the German Federation of Industries. “Companies want sustainability in their supply chains and are already doing everything they can to meet their responsibilities.”