The Role of the State in Disrupting the Distribution of Power within GVCs

The Role of the State in Disrupting the Distribution of Power within GVCs

NB: This post is part of a symposium on law and global value chains co-convened with the Institute for Global Law and Policy’s Law and Global Production Working Group.

Ioannis Kampourakis–

The research Manifesto on the role of law in global value chains highlights the centrality of legal regimes for the ‘creation, structure, geography, distributive effects and governance of Global Value Chains’. The recognition of law’s constitutive role in the chain means that law is not simply an institutional backdrop for the operations of the chain but rather endogenous to GVCs. Indeed, transnational corporations that coordinate GVCs are not mere ‘context-takers’ but rather play an important role in producing the rules that govern their own operations. This jurisgenerative capacity of private corporate actors weakens democratic control over the production process and creates the potential for dis-embedding the transnational economy from social values and relations. Yet, the law that is endogenous to GVCs is not impenetrable to attempts to introduce such values within it, as recent “corporate sustaintability laws” imposing transparency requirements have illustrated. The normative project of ‘politicizing’ the endogenous law of GVC capitalism by injecting public values within regimes of private governance has the capacity to limit corporate rationalities of profit-maximization and to generate progressive social reforms across the chain. However, such attempts can only incompletely realize the goal of subjecting GVCs to democratic accountability, while they might reinscribe a neo-colonial dynamic, in which it is up to consumers and investors in the Global North to police the practices of firms exploiting workers and extracting resources from the Global South. Insofar as national and international law remain powerful inscriptions of democratic legitimacy with the capacity to steer collective life beyond market rationalities, any normative undertakings that seek to disrupt the current distribution of power within and across GVCs must also be channeled through them.

Transforming the Endogenous GVC Law

The recognition that transnational companies are exporters of legal frameworks that define the law on the ground in the area of their activities appears to increasingly underpin public policy. New ‘corporate sustainability laws’ have tried to harness this capacity of private corporate actors to produce social ordering transnationally in order to make production more environmentally sustainable and respectful of human rights. These ‘corporate sustainability laws’ have primarily taken the form of mandated non-financial disclosures. Examples of such reporting requirements can be found in the Dodd-Frank Act of 2010, the EU Directive 2014/95, the UK Modern Slavery Act of 2015, or the German CSR Directive Implementation Act of 2017. In all of these schemes, enforcement attaches to the ‘first-order’ obligation of transparency, rather than the ‘second-order’ obligations of actually making production more sustainable or respectful of labor rights. In other words, lead firms can only face liability for failing to make the necessary disclosures, and not for the socially irresponsible conduct itself. The thought is that transparency will enable reputational sanctions and ‘learning pressures’ exerted by the markets and civil society to do the work of forcing companies to act in more socially responsible ways.

In order for social pressure to result in lasting reform, there has to be some mechanism for setting and enforcing standards of conduct. Transparency requirements rely on civil society and market pressures to trigger internal forces of self-limitation within lead firms. This self-limitation can take the form of corporate codes or public statements that recognize a responsibility of lead firms toward contractual parties and stakeholders across the chain. In turn, these can be understood as parts of contractual arrangements within the chain with binding effect, giving rise to legal liability of parent companies. Often these arrangements are set up such that, even when there is no direct contractual relationship between the parent company and the workforce of the supplier (or other stakeholders, e.g., in case of environmental damage to a community), the victims of a violation could make a claim as third-party beneficiaries.

Taken together, these schemes can be understood as an attempt to produce transnational, functional equivalents to the constitutional state and its limiting function. Non-binding instruments (e.g., the UN Guiding Principles of Business and Human Rights) or transparency requirements (e.g., the UK Modern Slavery Act) generate norms that only serve as starting points for the generation of intracorporate norms (e.g., corporate codes), which then produce the actual standards for external review. This vision prioritizes the penetration of public rationalities and social values within the law of GVCs, sidelining top-down aspects of national (and international) legal interventions.

Public Voice?

This attempt to transform, politicize, and re-embed the endogenous law of GVCs relies on the pressures of civil society and the market for the triggering of self-limitation (e.g., in the form of corporate codes that could eventually provide a legal basis for liability or in the form of participation in monitoring and accreditation schemes, such as that of the Fair Labor Association). Without such pressures, the contractual governance of GVCs cannot be made accountable to social values because there is no such commercial interest. Yet, this reliance reifies the unequal social power behind societal forces of ‘self-limitation’, cementing the exclusion of those who do not have the means to shape normative outcomes through their market activity. For instance, reputational sanctions are much more likely to come from the influential consumer and capital markets of the Global North, rather than from the Global South where extraction and production is located. This renders individual consumer action and investment choices within western societies responsible for private-led ‘welfare’ reforms in the Global South. In addition, even if the outcome of such processes leads to increased protection of labor, social, and environmental rights in developing countries, it comes at the price of the absence of participation of precisely those individuals who are supposed to benefit from the enjoyment of the rights. The tension with questions of democratic legitimacy lies in the fact that the beneficiaries of the ‘self-limiting’ corporate codes (e.g., stakeholders in developing countries) have not participated in their co-authorship.

The Role of the State, the Demos, and International Law

The asymmetries of power and the democratic deficits that undercut the reliance on civil society point to the importance of involving public law regulation in any normative attempt to disrupt the corporate rationalities that dominate GVCs. Conceiving of limiting attempts (e.g. protection of labor rights) as only internal to the value chain encourages a search for synergy between corporate profitability and sustainability. In other words, transnational labor law regulation (through, for example, non-financial reporting, corporate codes, and subsequent obligations of monitoring by buyer firms), may be said to be beneficial not only to society at large, but also to long-term profitability for involved parties through a mitigation of risks and stabilization of expectations. However, such a synergetic approach delimits visions of social transformation and falls short of the institutional ambition that can characterize national law and international legal norms.

On the other hand, public law regulation, including that of developing countries, has the capacity to directly challenge the current distribution of wealth across the chain by means of labor law, environmental law, administrative law, tax law, or accountability mechanisms like human rights due diligence, etc. Top-down regulation needs not be antagonistic to the normative project of politicizing the law of GVCs. It could, instead, be complementary, disrupting the logic of profitmaking engrained in transnational private governance when it conflicts with collective goals for equality, dignity, and environmental sustainability.

Yet, the insistence on democratic capacities to steer collective life towards goals of social justice regardless and beyond market rationalities cannot be separated from concerns of global justice and international development. The assertion that the state is relevant needs to find ways to tackle the collective action problem of ‘race to the bottom’ with regards to labor rights in developing countries and the diminished regulatory autonomy of developing states when buyer firms function as de facto gatekeepers to the market. International law may be seen as offering little in that regard, when, for example, the International Labor Organization’s supervisory system is reliant on enforcement measures by states themselves. However, robust protection of freedom of association transnationally can contribute to the creation of ‘strategic trust’ between states, as the more free and empowered trade unions are, the greater trust countries will have that their counterparties are complying with the commonly agreed level of labor standards. Introducing effective labor clauses in trade agreements and formulating alternative, region-wide model labor regulations based on fair trade principles and open-border immigration policies (e.g., the earlier Alternatives for the Americas) have also been advocated by transnational advocacy networks. The potential of further forms of international, South – South cooperation, including the working group on transnational corporations to produce a Binding Treaty on Business and Human Rights, need to be taken into account. Finally, an approach that highlights the necessity of input legitimacy needs to explore the possibilities entailed by novel public/private collaborations that involve the participation of trade unions, such as the Bangladesh Accord on Building and Fire Safety and worker-driven social responsibility more broadly. The focus on international legal norms and political co-operation has a legacy in international law (e.g., New International Economic Order proposals) and in the broader post-war quest to transform the ‘welfare state’ into the ‘welfare world’. In that direction, normative projects that seek to disrupt the distribution of power within GVCs must go beyond a reconfiguration of private law instruments, incorporating the institutional ambition and the ‘publicness’ of the state and its law.

Ioannis Kampourakis is a Postdoctoral Associate at the Centre for Socio-Legal Studies, University of Oxford and a Postdoctoral Fellow at the Edmond J Safra for Ethics, Tel Aviv University.