In the previous blog post, I wrote about the need to spread the preconditions for “relatively free markets” around the world – defined as markets where everyone involved can freely participate in working out the rules. I raised the question how countries with relatively free market conditions can organize trade in such a way that conditions for greater freedom will tend to spread ever further, rather than contracting.
One effort along these lines is the passage of supply chain laws, such as the German “Supply Chain Due Diligence Act” (that has come into force on January 1, 2023) and the European Union “Corporate Sustainability Due Diligence Directive.” The latter exists in draft form; once it is passed, it will require the 27 EU member countries to pass enabling legislation. The intention is to require companies exceeding a certain size to ensure that the products they import from abroad have been produced under minimally fair labor and environmental conditions. The EU directive (as drafted) will require companies to monitor the production conditions of their suppliers throughout the commodity chain; the German law only requires monitoring of direct suppliers. These are laudable efforts, despite their limitations (for example, enforcing compliance may present great challenges, companies under a certain size are exempted meaning that a large portion of imports is not affected at all, and the financial industry is largely exempted). Information sources on these legislative efforts are listed at the end of this blog entry.
Yet, even the best commodity chain laws have a serious failing: they locate the responsibility for change primarily among private companies. This means that companies are asked to perform tasks for which they are not constructed (e.g., monitoring labor conditions among their suppliers) and which they are therefore likely to perform poorly and with little enthusiasm. In addition, even the largest companies can not (and should not) be held responsible for a country’s legislation and the enforcement of its laws. As the official German government FAQ on the topic states, “No company will be expected to change the legal and political conditions in the partner country.” However, spreading relatively free markets to other countries necessarily involves the responsibilities of governments: to pass, enforce, and themselves observe laws to protect freedom of speech, the environment, the rights of laboring people, etc.
Therefore, in addition to supply chain laws, I propose to build on anti-dumping provisions. According to rules of the World Trade Organization, these provisions allow a country to impose import duties on goods that have been unfairly subsidized, meaning that they are being sold abroad at less than the selling price within the exporting country (and usually also less than the costs of production). The excessively cheap prices make it difficult or impossible for competing companies to produce and sell the goods in a responsible manner. The duties are justified as a defense against such unfair competition. Below I have listed some sources on anti-dumping duties.
However, anti-dumping duties are often imposed rather arbitrarily (against some countries but not others), and the revenue they raise can be used for any purpose that the importing country’s government wishes. They are therefore currently a tool for punishment but not for spreading truly free and fair market conditions.
What I propose instead is to base anti-dumping duties on a set of clearly and transparently stated criteria, and to spend the revenues they raise within the exporting country to address the causes for imposing the duties. I call these “anti-dumping duties for democracy” or ADD for short. If the government of the exporting country does not allow the funds to be spent in this way, the funds can be spent in another country that faces similar duties. However, under no circumstances may the funds be spent in the importing country.
To flesh this out: Country X exports garments to country Y. The garments are manufactured in ways that lead to severe water pollution of a kind that is not allowed in country Y. In addition, unions are suppressed, leading to very poor wages for the workers. These practices allow companies in X to produce garments at such low costs that producers in Y can not compete. In addition, companies in X that wish to use more expensive production processes that avoid water pollution, and who pay their workers better, are not be able to compete within country X. Classic anti-dumping duties would simply hurt the entire garment industry in X.
However, if country Y (and hopefully, a number of other importing countries as well) imposed ADD, then the funds raised thereby would be spent within country X in order to do things such as:
- pass laws for better protection of water quality, and to fund agencies that monitor water quality and enforce the water protection laws,
- finance the introduction of more environmentally friendly technologies in the textile and garment industries (e.g., via low-interest loans),
- pass and enforce laws that support free labor unions,
- directly support labor unions financially (particularly in the textile and garment industries),
- pass and enforce laws pertaining to labor conditions, including the funds needed to perform regular inspections of work places.
The more precisely the reasons for the ADD are articulated, the more precisely can the funds be directed at measures that will make it possible to eliminate those duties in future. As implementation proceeds, the duties are reduced or eliminated.
If the government of country X refuses to accept funds for the purposes described above, then the funds can be spent in another country Z with similar environmental and labor conditions as in country X. Then, change is supported in country Z instead of country X.
For the ADD to achieve their stated goals, they need to meet certain standards of fairness and justice, to be adjudicated by an international court. For example,
- A country may not impose obviously different standards on different trading partners (countries or companies).
- A country must not impose standards on other countries that it does not meet itself.
- All ADD must be grounded in international law, such as the Universal Declaration of Human Rights and other international conventions signed and ratified by a large number of countries.
That is, the introduction of ADD needs to occur within an institutional framework that avoids their arbitrary use, setting standards for the ADD themselves and allowing aggrieved parties to go to some kind of court. This would require the establishment of an appropriate institutional structure, either changing the responsibilities of existing organizations such as the World Trade Organization and the International Labor Organization, or founding a new organization with its own mission.
All of this is extremely far-fetched today. But it is the kind of institutional framework that I believe is needed in order to spread relatively free markets around the world. By this tool, countries would be able to protect their own legislation for human rights and the environment against destructive competition. The same tool would help other countries to implement more progressive agendas. It would support trade among those countries willing to promote change in favor of democracy, human rights and environmental protection. Gradually, anti dumping duties for democracy would make a difference on a world scale.
Sources on Supply Chain Laws
Initiative Lieferkettengesetz (Coalition of organizations based in Germany that supports the passage of more stringent legislation in Germany as well as the EU; note that the English language version of this site is very limited)
German Federal Ministry for Economic Cooperation and Development:
- Better protection of human rights and the environment along global supply chains – The Supply Chain Due Diligence Act will apply from 2023
- Supply Chain Law FAQs
European Commission
Reclaim Finance and Friends of the Earth France
Press Release Dec 1, 2022: CSDDD: under pressure as EU Council adopts measures excluding financial sector
EQS Group
Dec. 12, 2022: EU Supply Chain Law Obliges Companies to Operate in a Fair and Sustainable Manner
See also an article on the difficulty of tracing supply chains backwards:
Kelly Oakes, Feb. 7, 2023, Why fabric fraud is so easy to hide, BBC.
Sources on anti-dumping duties
European Commission. Anti-dumping duties
European Commission. Trade defence
Corporate Finance Institute. Anti-Dumping Duty
