Global Supply Chain Transparency is More Urgent than Ever

Here’s what open government can do about it.

Written by @Joseph Foti

This piece is part of OGP Horizons, a series from OGP that explores topics at the cutting edge of open government. OGP Horizons aims to capture open government innovations from around the world to tackle today’s biggest challenges — from navigating new technologies to responding to global issues like climate change. Today’s and tomorrow’s problems can not be solved by governments alone — they will require all of us to evolve, together.

Since the 1990s, labor, human rights, and environmental concerns have featured heavily in debates about globalization. These issues strike at the heart of what we care about in open government.

A key issue is that the cost savings of outsourcing come not just from differences in labor price, but that those differences in labor cost, in part, derive from the longstanding repression of freedom of association and labor rights. Similar arguments have been made about the seeming success of environmental controls in wealthy countries and the rise in pollution in middle-income countries dedicated to manufacturing.

The downsides of interdependence are especially pronounced in the extractive sector. Wealthy Western countries’ concerns of energy dependence became most acute following the terrorist attacks of 11 September 2001, although they had existed for decades before. Beyond energy independence, there are concerns that fossil fuel use drives repression and corruption.

The consequences of Russia’s full-scale invasion of Ukraine and China’s repression at home and in Hong Kong illustrate the real-world risks of repression and corruption. Sanctions regimes have only been moderately effective in raising the price of Russian exports and concerns over slavery and other forms of repression continue worldwide.

Yet, all is not negative with globalization. Indeed, multiple studies show that in the several decades before the COVID-19 pandemic, the deepening trade interdependence and an increase in multi-country manufacturing are partially responsible for the highest drop in poverty in history. (Admittedly, trade is not always a source of poverty reduction, and poverty reduction has hit significant obstacles in the last several years, including in terms of growth associated with global manufacturing.)

The puzzle is how to do globalization better — a globalization that supports democratic peace, promotes human flourishing, and uses resources in more efficient and less-damaging ways.

Emerging policy responses

Democratic governments have engaged in a number of policy solutions to respond to the concentration of production in such countries. Solutions have included sanctions (with the US, EU, and Global Magnitsky targeting human rights), industrial policy (providing direct support to domestic producers), so-called “friend-shoring” policies.

As these new policies take effect, much has been made about “leakage.” Concretely, sanctions against Russia have turned India into a major exporter of petroleum overnight, raising concerns that India may be laundering revenue toward the commission of war crimes. (Recent reports suggest that sanctions and tracking may be having their effect, however.)

This problem is exacerbated by climate change and its response. Governments have increasingly pivoted from cap-and-trade models of dealing with climate change toward subsidy-based models. Specifically, because so many clean technologies depend on critical minerals which are often from highly repressive countries and subject to cartelization by repressive regimes. Where those minerals come from democratic countries, such as Chile, it is essential to avoid the worst of the resource curse — de-industrialization, repression, and declining terms of trade.

One element of the response to the labor, human rights, environmental, and corruption-related issues has been to improve the transparency of global supply chains. This push is coming from a number of places, but open government approaches are essential. These emerging approaches fall into several categories, each of which directly ties to open government values: traceability, liability, public accountability mechanisms, and efforts to limit repression of activists and journalists. Each is discussed below.

Traceability and Disclosure

Increasingly, new technologies are replacing the “Made in…” labels as a way to track production. Older systems of tracking have grown outdated as dozens of countries may be involved in the production of an individual item, and a particular factory, forest, or farm within a country may hold itself to higher environmental, social, or labor standards than another.

Companies and regulators are using more sophisticated technologies to improve cross-border movement. For example, in recent Open Government Partnership (OGP) action plans, both the Republic of Korea and the United States have undertaken commitments to improve tracking and information, although neither received particularly high marks. But combinations of administrative simplification (e.g. the creation of single customs portals), genetic testing (especially for nature crimes), and the use of stronger verification processes (including blockchain) can, together, help stop cross-border crimes.

While these emerging techniques can be employed to improve authentication and verify provenance, they run into two problems. First, they will work better with larger, unmixable, and relatively unprocessed materials. It will be harder to trace processed ores or refined petroleum products than it would be to trace mahogany or salmon. Second, these techniques may not be as effective at ensuring good governance. For example, it may be more difficult to ensure that all parts of a car are not produced by companies whose owners may be individuals of concern (e.g. organized crime members or targets of sanctions) or to ensure that all stages of the supply chain were free of child labor or forced labor. Enforcing good governance may still use less technologically exciting tools, such as knowing if a factory is in a region of concern or through audits, which may rely on a combination of self-regulatory and regulatory processes.

It is likely that much of the work will still be done “the old-fashioned way” — meaning through forms and inspections verifying self-submitted data. Given that, the hard lessons on what makes for a good traceability process apply. The longstanding and recently intensified loss of confidence of the Kimberley Process for so-called “blood diamonds’’ is essential reading. Critics cite a number of problems:

• The process had a poorly defined scope, which did not adequately include human rights violations or crimes by state actors (not only issues of civil conflict).
• Transparency has also been questioned, with allegations that decision-making processes lack accountability and transparency.
• There have been further complaints that monitoring and oversight is not adequately independent or transparent. Critics argue that some participating countries have not adequately implemented or enforced the relevant rules, allowing conflict diamonds to enter the market through loopholes and smuggling routes.

As a result, the process has largely failed to stem the flow of conflict diamonds even beyond Africa.

Creating Liability

Establishing clear liability and pathways for justice is a core part of accountability. To what extent companies (or governments) can be liable for their actions has been a topic of consistent debate for decades. Some feel that moving production across borders benefits from weak laws and lax enforcement more than anything, and there is some evidence to confirm that. Establishing transboundary liability is a step toward ensuring that justice can be served in reliable courts, even when actions occur at an arm’s length from the original company.

A precedent-setting Earth Rights International case brought against Burma decades ago established that corporations can be held liable for human rights violations. In this case, oil company UNOCAL was found liable for collaboration with the Burmese junta in using forced labor. (Arguably, one of the first natural and human rights petitions was brought against an overseas corporation before any particular government.)

Toward Actual Accountability

But can companies be held liable for what contractors and subcontractors do? The law, for a long time quiet on this issue, is changing. The European Union is increasingly legislating liability for environmental damage. The United States has expanded anti-corruption measures, human rights measures, and beyond. Most notably, the US has stepped up Lacey Act enforcement, which bans import of any forest products harvested illegally according to the laws of the country of origin. (Congress may also enhance the law.)

Country-level courts have upheld supply chain liability as well. Most notably, Goldman Prize-winning lawyer Chilekwa Mumba successfully sued Vedanta Resources for the actions of its subsidiary, and the claim was upheld by a UK court. (A recent suit by Zambians in a South African court against Anglo-American mining for lead poisoning was thrown out, however, on the grounds that the company and its subsidiary did not know of the hazard it was creating at the time.) Even the US Supreme Court, usually circumspect toward public claims of harm, has intimated that American companies can be responsible for criminal actions of their subsidiaries — in this case, slavery.

Not all is rosy, however, and progress will not be linear. Recently, the EU member states have dragged out negotiations to endorse due diligence rules on supply chains — at least initially. Larger members backed out of supporting the directive, although negotiations for the final stage of approval are due at the end of April 2024. If passed, this would require large companies to report on the environmental and human rights impacts of their suppliers. More importantly, it would also establish national authorities to monitor supply chains and a duty upon states to ensure that those harmed by actions along the supply chain receive compensation. If passed as currently written, this would be a significant step forward for supply chain management. However, it is unclear, with elections impending, exactly whether or how the directive might be finalized.

In the absence of concrete government policy, or alongside it, the labor rights movement — especially around apparel and food industries has proven methods to ensure actual change in behavior. The Coalition on Immokalee Workers has worked to end modern-day slavery, human trafficking, and gender-based violence through its “Worker-driven Social Responsibility” paradigm, which it refers to as a worker-led, market-enforced approach. The certification processes of the Fair Food Standards Council is another example. Judy Gearhart has summarized a number of these evolving strategies, including enforceable agreements and forced labor import bans.

Harmonizing Upwards?

One final area continues to evolve and provide access to information and justice on supply chains: trade law. It is beyond the scope of a short blog to dive into the many, many dispute mechanisms created as part of trade mechanisms, let alone to evaluate them for effectiveness. At a minimum, however, one can note that there are a growing number of complaint processes for a growing set of issues. The OECD Guidelines on Multinational Corporations (MNCs) lays out guidance for disclosure (“Section III: Disclosure”) of MNCs and those they have a “business relationship” with. While it does not carry much more enforcement beyond a reputational risk for those companies, it does create an expectation that member governments will increasingly rely on these methods across the supply chain on issues as diverse as conservation, corruption, greenhouse gas emissions, and land grabs.

Regional and global trade agreements, too, may often make explicit the importance of supply chain transparency. Despite recent increases in trade barriers, many acts toward either liberalization or friend-shoring make explicit appeals to supply chain awareness and transparency in the interest of security, labor protection, and trade harmonization. This marks a clear shift away from the “downward harmonization” of such standards across borders, which, in previous decades, focused largely on the removal of subsidies and tariffs.

This topic has already made its way into many OGP action plans in the various corporate transparency acts — most notably beneficial ownership information, which the majority of OGP countries now tackle in some way. Other areas, such as open contracting, have seen significant strides forward — as in discussions of green procurement and purchasing — but they have not yet made it into OGP action plans at the scale of more topics. Given the trends outlined in this post, however, it is likely only a matter of time before they do.