Dr. Frederick Kliem is research fellow and lecturer at the S. Rajaratnam School of International Studies and the Centre for Multilateralism Studies in Singapore.
Germany's new law on supply chain responsibility for businesses operating abroad, passed in the last week of regular sittings before voters elect a new parliament in September, was a momentous piece of legislation.
After much controversy, numerous amendments and significant resistance from businesses and lobby groups, Germany's normally pro-business lawmakers made German companies directly responsible for maintaining ethically sound and sustainable working conditions along their global supply chains.
As of 2023, German multinationals will be accountable for breaches of basic human and labor rights along their entire overseas supply chains. The law prohibits forced and child labor and guarantees the right to form unions.
All companies with 3,000 or more employees will have to monitor, assess and regularly report on standards along their global supply chains. They will also be required to set up special compliance and complaint departments.
The new law will be among the toughest in the European Union; it is also a precursor to eventual EU-wide regulation. Hefty fines of up to 800,000 euros, or 2% of a company's annual revenues, will apply for any company found to be in breach of the law.
The idea is that the famous Made in Germany label will not only guarantee high product quality but also respect for human rights and minimum labor standards -- too often ignored by multinationals when it comes to their overseas operations. "Article 1 of the German constitution states that human dignity shall be inviolable, not German dignity," noted Labor Minister Hubertus Heil.
Critics argue that the law does not include direct environmental protections, is an overly bureaucratic sanctioning mechanism with exaggerated fines and does not offer rewards for ensuring sustainable production processes. Amnesty International has welcomed the law's intent but laments that compromises have allowed for too many loopholes.
Either way, greater oversight of and responsibility for the woeful conditions of cocoa and coffee producers in Africa and Latin America as well as textile workers in South Asia is a step in the right direction. It is unacceptable that large multinationals from the developed world profit from, but do not take ownership of, well-documented inadequacies in human rights and labor standards in the developing world, including child labor and the 2013 Rana Plaza catastrophe in Bangladesh.
The one major issue that lawmakers dared not speak about during the debate was China, with the new law set to open yet another front in the EU's already strained relations with Beijing. The EU recently implemented sanctions against China on human rights grounds for the first time since Beijing's crackdown on protesters in Tiananmen Square in 1989, to which China retorted with harsh countersanctions.
Germany has long caused frustration among those in the EU who believe engagement with China should focus more on human rights questions. This has been particularly true in the European Parliament, which largely sees itself as Europe's normative guardian. For decades, Germany has been heavily invested in China, both in terms of foreign direct investment and in an unsuccessful gamble on a more liberal Chinese future.
Germany's real Achilles' heel is its export-driven economy, and the automobile industry in particular. China is Germany's largest source of imports, as well as its most important non-European supplier, and third-largest export market. It is no surprise then that German Chancellor Angela Merkel was instrumental in concluding the EU-China Comprehensive Agreement on Investment, or CAI, which attempts to level the asymmetric playing field for foreign businesses in China, long a serious concern in the EU, and Germany in particular.
Many European Parliament members, such as the vocal China critic Reinhard Buetikofer of the Greens, oppose CAI partly because they believe it ignores human rights violations in China, including forced labor in China's western Xinjiang Province. The new German law takes these concerns into account and, together with France, will pave the way for eventual EU-wide regulations, further raising the stakes in the EU's relations with China.
The Chinese government is particularly sensitive to all things Xinjiang. It has reacted fiercely to a cotton boycott by some Western clothing brands, such as H&M, who sought to reduce purchases from Xinjiang, where local authorities allegedly coerce members of the region's Muslim Uighur minority into forced labor. This followed a number of countries officially branding China's treatment of Xinjiang's Uighurs as genocide.
Germany is more deeply integrated into global supply chains than most other industrialized economies, and a recent study by the German parliament found that several German multinationals do profit, directly and indirectly, from forced labor in Xinjiang. The list includes Adidas, Puma, BMW, Bosch, Siemens, Volkswagen and BASF. Until now, such companies faced neither legal liability nor reporting duty.
Policymakers and business elites alike are quickly coming to the realization that they can no longer simply reap the rewards of a booming Chinese economy without getting embroiled in political debates and geopolitical rivalries. The new supply chain law will only accelerate existing scrutiny of European supply chains, as well as the further diversification of foreign investment. Many companies might decide that it will be much easier to just withdraw from Xinjiang entirely.
For suppliers in the rest of Asia that depend on the German industry as customers, problems will likely mount. For European businesses, doing business in Xinjiang has become a lot more complicated, too, with potentially wide-ranging consequences. Political and business leaders should brace themselves for a serious backlash.