Beyond Supply Chain Transparency Laws

Global trade and the supply chains that support it are undergoing a period of profound change. Supply chains face threats including a resurgence of protectionism, climate change, decaying infrastructure, and human rights abuses. The Development Channel’s series on global supply chains will highlight analysis on emerging trends and challenges. This post is from Zoe Rubin, former intern with the Council on Foreign Relations’ Civil Society, Markets, and Democracy Program. 

In recent years, U.S. and British lawmakers have pressed corporations to voluntarily address rampant labor abuses in global production networks. In particular, new and proposed laws require firms to publicly report what actions they’re taking to eradicate slavery and human trafficking in their supply chains.

These laws depend on consumer pressure, with the assumption that the fear of being “named and shamed” will compel companies to do their human rights due diligence. California passed the California Transparency in Supply Chains Act (TISCA) in 2010, which requires companies headquartered or doing business in the state to disclose their efforts to eradicate slavery and human trafficking from their supply chains. A similar UK law, the Modern Slavery Act, came into force in 2015. And the U.S. Congress is currently considering the Business Supply Chain Transparency on Trafficking and Slavery Act, which would mandate that public companies disclose measures taken to address forced labor conditions to the Securities and Exchange Commission. None of these sanction companies that do nothing to identify or address forced labor in their supply chain.

Greater corporate transparency alone will not bring about much-needed reforms in how firms do business. To spark change, governments should hold companies legally accountable when they fail to investigate rights violations in their supply chains or address these abuses when they find them.

Studies show consumers don’t care.  A 2014 poll found that British consumers were largely apathetic to labor abuses in companies’ product supply chains. They cited other corporate practices as more pressing, namely tax dodging, exorbitant executive pay, and corruption. And management research suggests that while consumers value corporate transparency, they don’t use the new information about a company’s supply chain to demand changes in the way it makes things. After a scandal revealing hazardous denim treatment practices, Nudie Jeans, a Swedish clothing brand, began disclosing its supplier lists and factory audit reports. The company found that consumers were subsequently more willing to purchase its products, despite the fact that reports revealed some workers treat the jeans with dangerous chemicals that cause potentially life-threatening respiratory disease. Likewise, Patagonia, the American outdoor clothing company, is completely open that human trafficking persists, despite its longstanding social responsibility efforts, and its customers keep buying.

Major companies, meanwhile, regularly flout supply chain transparency laws. Five years after the passage of the California act, less than a third of corporations affected by the law actually published all the information they’re supposed to report. Dole, a fruit and vegetable company, did not even post a TISCA-mandated slavery and human trafficking disclosure statement, and Caterpillar, Hyundai Motor America, and Krispy Kreme Doughnuts all reported that they make no effort to evaluate and address human trafficking and slavery risks. (Compliance with other domestic supply chain-related regulations has also varied widely. A study of the U.S. Dodd-Frank Act rule on conflict minerals published last year found that only 7 percent of companies reported strong efforts to determine whether they bought minerals that benefited armed groups.)

If supply chain transparency laws alone will not advance labor rights, then how can governments clean up global supply chains? Requiring firms to proactively address, not just disclose, slavery and human trafficking risks would be an important start.

Other countries have done this. Since 2003, Brazil’s labor ministry has published a so-called dirty list of firms found to employ forced laborers. Blacklisted companies cannot receive loans from state-backed banks, face restrictions on the sale of their products, and experience private sector boycotts, as some firms publicly refuse to buy from them. The government will remove companies from the list after two years only if they have paid all required fines and reformed their labor practices. Companies can lose their assets, namely land, under a 2014 constitutional amendment if they are found to use slave labor. These financial—not just reputational—costs create strong market incentives for employers to better monitor their working conditions.

When held legally accountable for their suppliers’ labor violations, corporations more readily identify, prevent, and mitigate human rights abuses. In 2008, Brazil prohibited children under eighteen from farming tobacco, and subsequently enacted strict penalties for domestic and international tobacco corporations, including foreign companies, whose suppliers use child labor. Human Rights Watch found that as a result, most tobacco companies now require farmers to sign contracts that contain an explicit ban on child labor and mandate financial penalties for noncompliance. Company representatives conduct routine site visits to suppliers to reinforce their zero tolerance policies on child labor. Various European countries, including Finland, Germany, Italy, Spain, and the Netherlands, also punish companies in their construction sectors whose subcontractors fail to meet certain labor standards.

The court of public opinion is no substitute for a court of law. The United States, United Kingdom, and other governments should require businesses to find and address instances of labor abuse throughout their supply chains—a call that many advocacy groups have taken up—and punish those who fail to do so.