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for Europe

The

supply chain law is a

great opportunity for Europe ...

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for emerging markets

There

are many advantages

for emerging countries through the Supply Chain Act ...

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for

companies

 

The Supply

chain law will develop

into a positive game changer for companies ...

Promising
prospects
Eine Europäische Perspektive

For companies in the European Union, the Supply Chain Act means that they must ensure that their suppliers comply with human rights and global environmental standards along the entire supply chain. Refraining from child labor, forced labor, abuse and environmental destruction in distant countries indisputably increases procurement costs. But the additional costs are marginal relative to the entire production and trade cycle in most industries.

 

However, the leadership of European countries in implementing the 2011 UNHCR guidelines automatically leads to a stronger customer-supplier relationship between European companies and those emerging market companies that implement human rights on the ground. This strengthens medium- and long-term supply security in such a way that Europe can also continue to generate steady growth. For each individual, this means job and prosperity security. 

 

However, the Supply Chain Act means much more for Europe and its economy: the observance of human rights and thus of adequate payment leads to a decrease of economic flight. The history of Europe and many countries has shown that prosperity also leads to better education, which in turn leads to fewer wars. It is undisputed that these are desirable goals from an ethical point of view, but from an economic point of view, the effect that, in addition to economic flight reduction, the flight from war and the associated misery is reduced, will have a positive influence on the economic development in Europe.

A European perspective

The Supply Chain Act is not only important for emerging markets. It is a great opportunity for Europe, its companies and its citizens, if it is implemented sensibly. 

Fair economic cooperation with emerging countries does not mean foregoing corporate profits and individual consumption. Rather, it means initiating the shift from short-term action to sustainable action. 

But the benefits for Europe do not stop there. The Supply Chain Act prevents and even repairs environmental damage in many ways. Cleaner water, less deforestation while rebuilding, and avoiding dead land degradation allows us all to support global climate goals and reduce climate disasters like floods and storms. 
 

So the costs of adequate payment arising for the european economy are at the same time compensated by security of supply, health, less expense for refugees, reduced environmental damage, and reduced need for military intervention.

Just as China is investing in roads for Africa to increase its ties to the continent, Europe should use the Supply Chain Act to invest sustainably in relations with emerging economies and to share with them the global economic and wealth growth.

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No investments through debt and dependency, but through fair and sustainable cooperation. For the governments of emerging countries, it has started to become an important factor for national peace that people are granted the human right to grow up and live healthy and secure including an environment making that possible. Local governments have realized that there is no need to accept environmental damages in order to export natural resources. Going one step further, it will even be a monetary advantage to increase the activities against environmental damages and human rights abuse.

Human rights compliance is more expensive than non-compliance. Mining (or other businesses) with environmental damages is less expensive than without. To prevent environmental damages during mining, production or even agriculture, means taking measurements against pollution, reducing consumption of water, using filters for emissions a.s.o. This increases the cost of production (agriculture is an exception, as in some cases of misuse of fertilizers or herbicide the costs can be reduced while increasing the harvest at the same time).

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That is an easy truth, at least from a commercial perspective. Expenses are reduced, if a business does not have to pay minimum wages and lets children work for even less than adults. Expenses are also reduced, if a mining company does not have to care about the environmental damages or protective equipment for their employees. But what does that mean for the country exporting goods?

An emerging countries perspective

Expenses for human rights compliance and environmentally acceptable acting are local expenses. Based on the same quantity in export, these local expenses will increase the national product one on one and the foreign trade balance proportional to the exporting quote of the supplies.However, a price increase in theory decreases the demand and thereby the export of these products (depending on the price elasticity). It depends on two factors, whether that has a negative impact on the foreign trade balance:

  • One factor is the gap between the general price elasticity. It decides about the change in sales volume one way or the other. This gap depends on the competitors. Especially on natural resources there are often a very limited number of international competitors and the production cannot be increased easily to cover the worldwide demand. However, competitors, who have higher costs, because they already respect human rights, will become stronger. 

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  • Another factor is the effect on the wealth development in the EU. If the change in the distribution of wealth is not connected to a parallel general growth of wealth, the overall buying capacity in the EU would decrease. That would have a negative impact on the price elasticity.

At least in some areas it is not necessarily the case that the prices on the world markets increase because of human rights compliance and environmental acceptable acting. In some areas the skimming of excess profit might just change because the profit is less, even if there still is profit. One negative impact is that local prices would increase as well. Even if that is no disadvantage on the national product or the foreign trade balance, it has an impact on local wealth. Because the wages go up at the same time and more jobs are created to be compliant in all aspects, the impact will be limited, but not excluded for all parts of the society. Per material or product, an individual analysis would be necessary to evaluate the specific impact on the local and the export market. However, in the next steps we will see why the factors for a growth in the foreign trade balance will exceed the losses.

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Ein Konzernperspektive
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A corporate perspective

Even if the Supply Chain Act seems to be a competitive disadvantage for European companies, it will become a positive game changer for them. Not only will it generate a level playing field in Europe, but it will also establish additional advantages. 

In general, economic advantages and business advantages do not necessarily comply with each other. Often it is exactly the other way around. The main topic in business these days is the short-term success. That is not really the focus of the Supply Chain Act. But if companies need to comply, it can be a competitive advantage in the long run. The ACP countries have a young and growing population. So, these countries are steadily growing markets. With the Supply Chain Act, this growth will increase.

 

So, the more intense the trade relations are, the more the market will be accessible as well. The Supply Chain Act can also protect local markets, but in order to do so, the act must be valid for all companies acting anywhere in the European Union (or Germany, if it will be a local law only), because otherwise the competitive disadvantage will eliminate locally headed companies. That is the biggest problem of the current German draft for the act, because it focusses only on companies with their headquarters in Germany.  

If the law is not valid for all goods and services sold (and thereby for all companies on the same market) in the EU, it will have destructive impact on the local economy. 

In the long run, it will be a competitive advantage to cooperate more with the emerging markets, especially if the current partners use resources and economic power to suppress the EU (like in the Nord Stream 2 topic). Giving the EU a congenial appearance will allow the EU more independence from other markets and more stability in the relationship with African countries.

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