Germany’s global supply chains under scrutiny over forced Chinese labour

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Welcome to Trade Secrets. Last week’s big conference in Paris on financing the developing world’s green transition, which I wrote about in last week’s column, had a couple of interesting interventions including an apparent Chinese concession on rescheduling developing countries’ sovereign debt. See the links below for more details.

Today’s newsletter looks at the first cases coming in under new European laws designed to clean up multinationals’ supply chains, and a likely legal fight over plans to tax carbon-heavy imports that will test the EU’s commitments to the multilateral system. Staying with the green theme, Charted waters, below, is about the rise of China in the solar power industry as a harbinger of its dominance of electric vehicles.

Diligence long overdue

I don’t know about you, but I for one wouldn’t like to fall foul of the Lieferkettensorgfaltspflichtengesetz (LkSG) — it sounds like a whole heap of trouble. That’s the risk being run by Volkswagen, BMW and Mercedes-Benz after a complaint that their supply chains use forced Uyghur labour in the Xinjiang region of China.

The “LkSG”, as it’s known to its pals, is the new German law on due diligence in supply chains that came into force in January after several years in gestation. There’s a parallel pan-EU version in the works. It’s part of a general shift in the EU and elsewhere to hold multinationals legally responsible for environmental and human rights violations in their activities worldwide, a bit like environment, social and governance investment standards except less obviously a greenwashing stunt. (The US, by contrast, has long had rules against imports made with forced labour, and last week a congressional committee raised concerns about clothing possibly made by Uyghurs entering the US.)

Last Wednesday, the Berlin-headquartered European Center for Constitutional and Human Rights (ECCHR), a non-governmental organisation, filed a complaint against the three carmakers for using forced Uyghur labour in their supply chains. The next day, VW, whose AGM was enlivened by some human rights protesters last month, announced an independent audit of its Xinjiang operations.

We’ve come a long way since 2019, when (I’ve noted this several times but to me it’s still incredible) the then VW chief executive Herbert Diess live on camera literally denied any knowledge of Uyghur re-education camps.

The supply chain law isn’t dramatically far-reaching, not least because of resistance from German business when it was being debated. It explicitly doesn’t create a new civil liability for breaches of labour and environmental standards. But it seems like it will give more standing for litigants to bring cases. The very existence of a regulatory process gives groups such as the ECCHR more of a platform to make noises and shine lights, no matter what comes of the complaints. For the German government to not automatically have its multinationals’ backs abroad is quite a culture shift.

It’s also right in the middle of a big transformation of the European and Chinese car industries, particularly regarding electric vehicles. The EU, starting later in the sector (though not as late as the US), is trying to catch up quickly with China. But VW, though it’s been in China for decades and makes at least half its profits there, is struggling to establish the same position in EVs as it did in internal combustion engine cars. Its Chinese competitors such as BYD certainly don’t have this kind of scrutiny to deal with. It might not be too long before people start wondering publicly whether Europe would prefer a clean conscience or a car industry run by Europeans.

Wham-CBAM-thank-you-ma’am

Another European piece of legislation emerging triumphant from a protracted creative process is the carbon border adjustment mechanism (CBAM). The measure that appeared on the statute book last month, will require companies to start reporting from October, and will begin imposing tariffs in 2026 on goods from countries with weaker carbon pricing than in the EU to prevent carbon leakage.

To its credit, the EU has tried to make the CBAM compliant with WTO law, though it’s never clear how a dispute settlement panel might rule in an untested area such as this. Brussels has also painstakingly consulted and explained its plans to other countries. Its reward for all this co-operative behaviour has been a blast of opposition from other governments, particularly India, and talk of a WTO legal challenge.

I’ll get into technicalities and legalities in a future newsletter, but at this stage it’s worth noting that WTO litigation could come at a tricky moment. The organisation’s member governments are trying to get the US to engage on the issue of reviving the WTO’s dispute settlement system, whose Appellate Body (AB) Washington has been paralysed by refusing to appoint new judges.

The EU has stoutly maintained its defence of the dispute settlement system and led to the creation of a makeshift replacement AB to which countries could voluntarily sign up. (The EU and another potential CBAM litigant, China, are members: India is not.)

The US says, bluntly, it’s simply not going to subject itself to WTO disciplines that constrain its ability to set environment-related trade policy. The EU, admirably, by contrast wants to be both green and multilateral. If Brussels loses a case on some aspects of the CBAM, it’s going to have some tricky choices about how much to amend its plans, with the US saying “told you so” all the while.

Charted waters

China used to dominate the global market for solar equipment mainly as a manufacturer, winning a struggle for market share in the EU and the US a decade ago amid a series of trade battles involving antidumping and antisubsidy duties. These days its prominence is assured by being the biggest single consumer as well as producer.

We’re likely to see something a bit similar in electric vehicles. China’s massively growing domestic market, which is hard for imports to penetrate (if not for foreign-owned production in China such as Tesla), is becoming a springboard by which Chinese companies will dominate the world EV sector too. A prolonged period of tensions lies ahead in the EU and elsewhere over EV imports from China, as well as questions about Chinese EV companies investing in Europe.

Trade links

During last week’s Paris financing conference, China broke new co-operative ground by saying it would participate in a creditors’ agreement to extend repayment of loans by Zambia, though whether this is an actual restructuring that gets the country back to a sustainable path remains to be seen.

At the same conference, developing countries’ disillusionment with the IMF and World Bank became clear when Kenyan president William Ruto called for a new “green bank” outside the traditional institutions to finance the climate transition.

It’s not just low-income nations moaning about the IMF either: various gurus of the debt world have complained that the fund’s approach to restructuring sovereign debt is unclear and inconsistent.

My FT colleague Helen Thomas points out the heavy market concentration in global food trading, very much worth remembering for those of us who tend to assume commodity markets are perfectly competitive.

The new Chinese premier Li Qiang took an emollient line on his first tour of Europe, saying China did not regard the EU’s “de-risking” strategy as a threat.

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Trade Secrets is edited by Jonathan Moules

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Trade Secrets is edited by Jonathan Moules