As managers of globally integrated firms grapple with supply chain disruptions, such as pandemics, supplier bankruptcies, contract breaches, shipping logistics problems, payment risks, political instability, and trade wars, another potential threat often goes overlooked: labor.
The sanctions initiated against China by former President Trump and subsequently maintained by President Biden, as well as the push for supply chain resilience in the wake of Covid-19, exemplify how quickly the market landscape can change. Companies need to adapt swiftly to navigate these shifts, and one area that’s underestimated is labor-related threats within the supply chain.
New risks emerge in both domestic and international settings. Local challenges may include the renewed wave of union organizing within major companies, such as Starbucks and Amazon, and a rise in US strike activity. Meanwhile, international labor risks often involve working conditions in foreign suppliers’ facilities over which buying firms typically have little control.
Although global economic integration has fostered outsourcing and offshoring, it has also augmented the reputational and legal risk for firms reliant on global procurement and supply chains. There are a record of legal norms being violated, especially through exploitation of labor or manipulation of worker rights, which major legal jurisdictions are becoming more proactive in addressing.
Notably, the 2021 Uyghur Forced Labor Prevention Act (UFLPA) was implemented to penalize and eliminate human rights abuses against Chinese Uyghurs, including compulsory labor benefiting Chinese firms. Customs and Border Protection has been actively enforcing the UFLPA, going as far as impounding thousands of high-end Porsches, Bentleys, and Audis from Volkswagen.
Trade agreements have also started to incorporate labor chapters to address these issues. For instance, the United States-Mexico-Canada Agreement entails a ‘Facility Specific Rapid Response Labor Mechanism’ that lets any of the three countries lodge a complaint about a specific facility that allegedly violates Mexican law on freedom of association and collective bargaining.
European countries have been undertaking regulatory action as well. France and Germany have recently enacted laws stipulating specific requirements and liabilities for companies regarding supply chain labor. There are ongoing negotiations for an EU-wide transparency law that could introduce extensive due diligence requirements for multinational firms.
Therefore, it is critical for all firms, regardless of size or industry, to assess their vulnerability to these emerging legal and supply chain risks. It might be useful to designate a person or a team to oversee the supply chain risk management process, as stipulated by the German Supply Chain Act. Proactive measures need to be taken to prevent supply chain disruptions and potential liabilities arising from labor rights abuses. Collaboration with organizations such as the Responsible Contracting Project could also provide support in ensuring compliance and navigating legal processes.
This information shared in this article is intended for an audience of legal professionals working at large corporations and law firms, it has been derived from an in-depth analysis of supply-chain labor risks, written by Kevin Kolben, professor of business law at Rutgers Business School. To learn more, you may continue reading the original piece here.