
Opportunities and Potential Challenges for Developing Countries Under EU Due Diligence Standards
Introduction
When it comes into force, the CSDDD may have a massive impact on products exported to the EU. In other words, the measure may impact all the EU imports from least developed countries, estimated to be US$ 76 billion as of 2022. Nevertheless, the impact of the measures depends on factors such as sector, country of origin and the nature of the importers of products. This article considers whether the EU’s standard drives policy changes in developing countries, potentially influencing local governance and trade negatively or positively. It is important to note that business sustainability and protection have been part of the EU’s core values.
Article 2 of the Treaty on European Union (TEU) enshrines the EU’s core values. These values gave rise to the Union’s creation and affirmed the universality of human rights and respect for the UN charter and international law. These values have continued to guide the EU’s actions. Constituting an integral part of a continuous sequence, Article 191 of the Treaty on the Functioning of the European Union (TFEU) deals with environmental policy and is at the top of the agenda as the EU’s core value. In its Communication of 14 January 2020, the EU calls for a Strong Social Europe for a Just Transition. The Commission emphasised its commitment to upgrading Europe’s social market economy to bring about a transition to sustainability. The essence of the directive is to contribute to the European Pillars of Social Rights, which promote decent work worldwide. Thus, the conduction of companies globally across all sectors of the economy is crucial to the success of the EU sustainability.
The EU Due Diligence Standards
The preamble to the Articles to the Directive made it clear that the EU is legally committed to achieving climate neutrality in 2050 for the remission of emissions by at least 55% by 2030. The best way to accomplish this plan is by tasking companies to change their ways of production and procurement. Article 1 of the CSDDD provides rules companies must comply with while conducting business. This is because their operations could adversely impact human rights and the environment. The rule applies to the conduct of their subsidiaries and business partners in the chains of activities carried out by the companies. Under the CSDDD, the companies have duties to put into effect a transition plan for climate change mitigation. The essence is for companies to link their operations to a sustainable economy to avoid global warming as stipulated in the Paris Agreement. The transition to economic sustainability is key to the EU political agenda, and companies have a huge role to play. Before the directive, voluntary frameworks at the global level were used to assist companies in becoming familiar with corporate sustainability due diligence.
Nevertheless, research shows that companies were reluctant to integrate sustainability into their operations. However, about 70% of companies participating in other 2021 Open Public agreed that harmonisation of the EU legal framework on due diligence for human rights and environmental impacts was needed. The United Nations Guiding Principles on Business and Human Rights (UNFPS) in 2011 stated that companies should try to address adverse human rights impacts by their operations, either directly or indirectly. The OECD updated 2023 the Guidance on Responsible Business Conduct to recognise businesses’ contributions to economic, social and environmental progress. Still, it urged them to prevent adverse impacts their conduct may have on communities and human rights. The ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy, last amended in 2022, included the human rights due diligence concept. Despite these principles, only a few companies claimed to have considered human rights and environmental protection.
CSDDD Scope
The CSDDD is familiar in several respects, as multinationals already comply with many sustainability standards. However, the main difference is compliance, as provided under the CSDDD, is according to law. In other words, there are sanctions for failure to comply with the law—if companies fail to adhere, punitive measures will be taken against them. Thus, the level of enforcement is interestingly new, plus the broad scope of the Directive and extra-territorial repercussions. The Directive applies to companies and partnerships with not less than 1000 employees and a net worldwide turnover of more than EUR 450 million. Suppose the company did not meet the threshold in paragraph (a) of Article 2 of the Directive, the ultimate parent companies of a corporate group, which meets the thresholds on a consolidated basis, franchisors/licensors that meet the conditions and threshold of the statement of the financial year. The same applies to non-EU companies with a net turnover of more than EUR 450 million in the EU. The obligation covers companies in third-world countries. However, due to the complex nature of traceability and non-transparent global chain, aggravated by the intricate corporate structure, the provision may require more work to ensure adherence. Nevertheless, the argument is believed to be bogus as companies can trace the safety of the food supply chain. The due diligence process stipulated in the Directive covers six steps interpreted by the Guidance for Responsible Business Conduct.
CSDDD and Trade in Developing Countries
Due to the abovementioned turnover requirements, the directive will only affect medium companies incorporated in third countries. Although short-term, it will likely impact the weak trade relations between the EU and developing and least-developed countries (LDCs) in Africa. The trade rules guiding the relations between the EU and African countries differ based on geographical location, the extent of development, and if there are in existence, Economic Partnership Agreements (EPA) or the Generalised System of Preference (GSP), which applies to the exports of the African country in question. Three trading regimes deal with trade relations between LDCs and the EU. First is the Everything but Arms (EBA), which applies to all LDCs globally, including Africa.
The second is Economic Partnership Agreements (EPAs), if the LDC has signed and ratified an EPA with the EU or is part of a sub-regional group that has signed the agreement. The third trading regime is the World Trade Organisation (WTO). At the start of the EU- African Caribbean and Pacific (ACP) countries’ negotiation of the EPAs, it was expected that the sub-regions East African Community (EAC), the Southern African Development Community (SADC), Central Africa, and the Economic Community of West African States (ECOWAS) would sign as a regional group. Still, in the end, countries signed without another region member. For instance, Ghana and Cote d’Ivoire signed, and Nigeria declined to sign with the argument that the terms of the agreement conflicted with its development objectives.
Similarly, Kenya and Rwanda broke ranks, and the EPA, although the EAC is a customs union, LDCs, including Tanzania, are not willing to sign as EBA covers it. However, the EBA only helps a little with the exports of value-added goods to the EU. The EBA is structured in such a way that it only favours exporters of primary goods; the reason for this is that the requirement of sanitary and phytosanitary and technical requirements by the EU for value-added goods from LDCs into the EU market are too stringent to be met. The requirements and technicalities involved are too complex for companies in LDCs to comply with.
Challenges of Developing Countries
Globally, international trade is believed to be key to alleviating poverty. Recent examples from emerging economies such as China, India, and South Korea, as well as other developing countries such as Tunisia, Mauritius, and Botswana, demonstrate that with the provision of an enabling environment, the international exchange of goods and services can promote economic growth and reduce poverty. This development path aligns with the United Nations 2030 Sustainable Development Goals (SDGs). However, the gains from trade and positive trade balance have yet to be seen in most developing countries; it is still abjectly poor, notwithstanding the extensive endowment of natural resources. The low trade volume and heavy reliance on raw materials from agricultural and extractive sectors exported to the EU duty-free under the EBA have yielded little benefits.
Several non-technical barriers prevent these countries from exporting valued added goods to the EU. Besides raw materials such as crude, for example, produced in Nigeria, recently, the Dangote group started refining petrol in the country, but the impact is yet to be seen. However, reliance continues on raw materials in most African countries because they need help to meet the obligations under the sanitary and phytosanitary (SPS) measure. The SPS under the WTO allows members to set their standards. As a result, members are to set standards that are not higher than international ones. Put another way, any restriction on the grounds of SPS shall only be ‘to the extent necessary to protect human, animal or plant or health, based on scientific principles and not maintained without sufficient evidence.’ In recent years, there have been reports of the UK rejecting many agricultural products from Nigeria. The European Union (EU) extended the ban on Nigerian beans in 2018 due to the failure to implement its food safety action plan. The EU Safety Authority banned Nigerian beans’ exports due to pesticides in 2015 because, according to the Union, they were beyond the residue limit of 0.01 mg/kg. In 2021, the Guardian newspaper reported that Nigeria lost $362.5 million yearly to the dried beans ban. As goods in SSA right from historical time face restriction of the non-technical barrier of not less than 57%, it is more likely that the requirement to show environmental and human rights credentials of export to the EU will constrain and impede international trade.
Challenges and Opportunities for Policy and Capacity Building
The United States Department of Agriculture and OECD conducted a study and found that countries in the name of SPS were introducing measures beyond the international norm. It was estimated that this resulted in US$ 5 billion, which was significant for developing countries dependent mainly on agricultural exports. From the above, the Directive may likely harm African countries that export products like foodstuff, beverages, and minerals from Africa and other developing countries to the EU. For instance, the export of live animals, vegetable products and base metals are listed as high-impact areas in the Directive. There is the challenge that a company may choose to leave a country for non-compliance with the CSDDD and believe it can control the problem at the domestic level. This may lead to investors leaving the country. The extent of human rights breaches and their negative implications are enormous. The negative impacts of non-compliance with human rights include but are not limited to the following: use of forced labour or child labour or underpayment of workers; poor safety and unhealthy working conditions; damage to public health through pollution; involuntary displacement of communities; and discrimination against employees. The CSDDD, in the abovementioned situation, may protect workers through its implementation.
Expected Economic Effects of the EU CSDDD
According to Wien, foreign direct investment, financial investment and economic upgrading do not bring about economic activities. Higher wages may not lead to good working conditions. An unregulated free-market economy benefits workers in the global south, but human rights violations and positive social impacts are not guaranteed. To this author, as voluntary measures are not easy to implement in developing countries, an international rule that is wider in scope remains the best option for the global south.
A hard law will lead to strong bargaining power for workers. The likelihood of taking legal action in Europe against a corporation that violates human rights standards in developing countries is a vital tool and power resource. It may also increase workers’ share of income in developing countries where the share of income is extremely low. However, the negative implication for developing countries is that companies may suspend economic relations with some economic partners in the global south or withdraw from countries if it becomes challenging to ensure that human rights standards are met. There is a possibility of this happening in some circumstances, but not often. Nevertheless, it is envisaged that the overall net effect of the direct impact of the EU CSDDD on economic welfare is expected to be positive.
Conclusion
The analysis considers the complexities and trade-offs connected with due diligence laws. While the law aims to promote human rights and environmental sustainability, such laws may have consequences for trade and investment. Even though the design of the CSDDD may align with the laws of the WTO, considerable evidence suggests that due diligence laws increase the cost of compliance, which could lead to reduced trade and investment flow, moving business elsewhere and leaving a high-risk country. Nevertheless, CSDDD has the prospects to boost trade LDCs, protect human rights and preserve the environment if issues of equity are considered.
Inebu Agbo-Ejeh is an Assistant Professor at the American University of Nigeria. She holds a doctorate (PhD) in commercial law from the University of Cape Town, South Africa; a Master of Laws in international economic law from the University of Warwick, United Kingdom; and a Bachelor of Law (LLB) from the University of Jos, Nigeria. She is also a Barrister and solicitor of the Supreme Court of Nigeria.