The New Rules of Trade: How Due Diligence is Reshaping Global Value Chains

This article discusses the shift from voluntary sustainability standards to mandatory due diligence regulations in global trade, focusing on the challenges and implications for developing countries. It highlights the role of due diligence in addressing sustainability issues within global value chains and the potential for voluntary standards to support these efforts. The article underscores the importance of international cooperation and capacity-building to ensure that developing nations are not disadvantaged by these new regulations.

In an era where global trade intertwines with the fabric of sustainability, new regulatory frameworks are emerging to address long-standing environmental and social challenges. The latest report from the United Nations Conference on Trade and Development (UNCTAD), titled "Voluntary Sustainability Standards and Sustainable Development Due Diligence," sheds light on the evolving landscape of sustainable trade and the pivotal role of due diligence in governing global value chains (GVCs).

The Rise of Due Diligence in Global Trade

For decades, global trade has been a double-edged sword—while it has driven economic growth, it has also contributed to deforestation, climate change, and human rights violations, particularly in developing countries. In response, voluntary sustainability standards (VSS) were introduced as a way for companies to demonstrate their commitment to sustainable practices. These standards set benchmarks for ethical production, from respecting human rights to minimizing environmental impact.

However, VSS, despite its noble intentions, has struggled to generate the widespread, transformative change that was hoped for. The limited uptake and voluntary nature of these standards meant that many sustainability challenges remained unaddressed. This realization has led to a significant shift toward mandatory regulatory frameworks—most notably, due diligence regulations.

Due diligence, as highlighted in the report, requires companies to proactively identify, address, and mitigate risks associated with their business operations, particularly those related to environmental and social impacts. This shift marks a new chapter in the governance of international trade, moving from voluntary to mandatory approaches.

Challenges for Developing Countries

The move toward mandatory due diligence is not without its challenges, especially for developing countries. These nations, often the starting point of global value chains as producers of raw materials, find themselves at the forefront of these regulatory changes. While developed countries are driving the discourse on due diligence, developing nations are grappling with the practicalities of implementing these regulations.

One of the primary concerns is that due diligence regulations could lead to trade diversion, trade segregation, and sourcing diversion, where companies shift their supply chains away from regions perceived as high-risk. This could result in the exclusion of vulnerable economic actors, such as smallholder farmers, who are crucial to the economies of developing nations.

Moreover, the report emphasizes that these countries are not just passive recipients of these regulations—they have their sustainability challenges and priorities that may not always align with the new global standards. The rapid implementation timelines and the complexity of these regulations add another layer of difficulty, making it essential for international cooperation and support to ensure that these countries are not left behind.

The Role of Voluntary Sustainability Standards

Despite the shift toward mandatory regulations, VSS still has a role to play in this new landscape. The report suggests that VSS could serve as complementary tools in the implementation of due diligence regulations. Their existing infrastructure, such as audit systems and grievance mechanisms, could help companies meet the new regulatory requirements more efficiently.

However, there is a need for alignment between VSS and due diligence regulations. Misalignments, such as differences in the definitions of key concepts like deforestation, could undermine the effectiveness of these standards in supporting due diligence efforts. The report advocates for a careful selection of VSS by companies, ensuring that the standards they adopt are well-suited to meet the specific requirements of due diligence.

The Path Forward

The evolution of trade governance through due diligence regulations presents both opportunities and challenges. On one hand, these regulations have the potential to drive significant improvements in sustainability practices across global value chains. On the other, they risk marginalizing the very people they aim to protect if not implemented with care and consideration for the diverse contexts of developing countries.

The report concludes by calling for enhanced engagement and cooperation among all stakeholders involved in global trade. It emphasizes the need for capacity-building and support systems to help developing countries meet the demands of these new regulations. Additionally, it highlights the importance of creating inclusive multilateral platforms where all voices, especially those from the Global South, are heard and considered in the ongoing discussions about sustainable trade.

In summary, the UNCTAD report paints a complex picture of the current state of sustainable trade. As the world moves toward stricter due diligence regulations, the path forward will require a delicate balance between enforcing these rules and supporting the countries that are most affected by them.