Global Value Chains as a Legal Concept

Global Value Chains as a Legal Concept

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.

Jaakko Salminen & Mikko Rajavuori–

In the first blog post of this symposium Dan Danielsen and Jennifer Bair argue that law can open up a window into understanding global political economy, in particular today’s global value chain capitalism. In this post, we complement their analysis and argue that global value chain (GVC) theory, in turn, opens up an avenue for understanding recent legal developments in private governance, public law and private law doctrine./

How Law Enables GVCs to Externalize Costs

At the heart of mainstream GVC theory lies the notion of “governance”, or how a lead firm can control its value chain. Without effective governance, lead firms cannot ensure that products and services meet promised quality requirements nor ensure value chain-wide cost-management or research and development. When lead firms source the manufacturing of garments to Bangladesh, for example, they take care that all actors in the value chain are coordinated to comply with target market product quality and safety standards or the lead firms own production related objectives.

Yet this notion of effective governance only applies to the “internalities” of a GVC. Lead firms have traditionally left the task of dealing with matters like worker safety and greenhouse gas emissions to other actors. They become “externalities”.

There are clear tensions between these two worlds of value chain governance. On the one hand, technologies of value chain governance allow lead firms to effectively govern outsourced production when it suits their own interests. On the other hand, such effective governance is grotesquely contrasted by the lack of governance in the case of the social and environmental impacts of production.

Behind the distinction between internalities and externalities lie the legal institutions of contract and corporation. The way these quintessential private law institutions developed over the 19th and 20th centuries has put in place a global legal regime where companies are generally not liable for the acts of subsidiaries or suppliers. This makes the fragmentation of production into value chains lucrative not only for business reasons but also as a means to minimize costs from externalities. In a national context, outsourcing labour to a labour hire firm may allow a lead firm to compromise on work-related benefits that would otherwise be guaranteed employees by law or collective bargaining agreements. On a transnational scale, the differences in applicable regulatory and enforcement frameworks are often overwhelming, making even the approximate quantification of externalities traceable to value chain capitalism hard to gauge.

Such an evident disparity in the legal logic between internalities and externalities of production has led to developments on several different planes.

Internalizing Costs through “Private” Governanxe

Lead firms have primarily utilized (and researchers investigated) value chain governance mechanisms, such as supply contracts and corporate group-wide policies, to maximize the economic efficiency of outsourced production. Until very recently, anything beyond profit maximization was ignored. This, however, is changing.

Lead firms are increasingly putting in place novel contract-boundary-spanning governance mechanisms ranging from the Accord on Fire and Building Safety, that seek to guarantee safe working conditions to garment labourers in Bangladesh, to Maersk’s ‘carbon pacts’, that aim to minimize carbon emissions by coordinating the transport operations of key customers with thousands of suppliers in dozens of countries.

These novel sustainability governance mechanisms operate outside the bounds of individual contracts or corporations. The Accord, for example, is a governance contract where two ends of the value chain, lead firms and the representatives of supplier employees, enter into a special agreement to govern together all the manifold tiers of suppliers between them. The Accord establishes monitoring mechanisms and remedies for guaranteeing safe working conditions as well as granting labourers rights such as compensation for factory downtime and the right to refuse unsafe work.

Such contract-boundary-spanning governance mechanisms could in principle be expanded to govern almost any externality. Ultimately, though, these instruments are voluntary. They tend to emerge as the result of media fallout. If there is no media pressure, the instruments do not usually arise in effective forms, and there is a danger of them withering down alongside media coverage. And even in the best case scenarios, these instruments may only replicate existing power relations instead of providing real solutions to the underlying problem of outsourcing the governance of externalities via global value chains. The evolution of private governance mechanisms does, however, show that if lead firms so wish they can effectively govern even the most complex value chains.

Public law: Regulation via transnational sustainability laws

The ultimately voluntary nature of private governance has fixed eyes towards public law. At the international level, what progress has been made has not come with strong enforcement mechanisms. Instruments such as the OECD Guidelines for Multinational Enterprises and the UN Sustainable Development Goals highlight the possibility of boundary-spanning governance, but as soft law they do not provide binding obligations. Similarly, a standalone business and human rights treaty requiring lead firms to adequately govern their value chains is, despite talks, still a pipe-dream.

Several national laws, however, have stepped in to provide a more stable legal foundation for global value chain governance. In a recent paper, we have combed through ten established laws and one well-developed law proposal, spanning several US, European and Australian jurisdictions, to better understand the recent rise of hard laws that require lead firms in their jurisdiction to establish governance of their transnational value chains, or what we call ‘transnational sustainability laws’.

While these laws are still in their infancy, they are focused on requiring lead firms to exert adequate governance on their value chains. Thus, we argue that the concepts of value chain, lead firm and adequate governance are crucial for understanding and comparing the legal register of these laws. There is considerable diversity in how the laws construe these concepts based on, e.g., the age, context and national embeddedness of each statutory instrument:

Value_chain_chart_MR.png

For example, earlier instruments tend to avoid definitions of value chain while more recent instruments focus on specific corporate and contractual doctrines to establish the legal limits of any such concept. Similarly, instruments vary broadly in from which lead firms compliance is required, whether they adopt a broader or narrower stance on governance and what the effects of adequate governance are: would adequate governance, for example, provide a defence from liability? Despite their generally limited practical effect, these instruments demonstrate that regulators can conceptualize GVCs legally in a way that enables the public regulation of their externalities.

Private law doctrine: Liability for inadequate value chain governance

Public law has focused on establishing that lead firms can and must govern their value chains. Liability for inadequate governance of externalities is another story. Several recent cases have raised this question in different legal systems and under different causes of action.

Due to their transnational linkages, these cases face procedural challenges from applicable forum and law to questions on evidence, measuring damages, and cost assistance for indigent foreign claimants. Despite these challenges, there is precedent for example from the United Kingdom that a lead firm can be held liable under the tort of negligence for the consequences of inadequate governance, though with the caveat that such liability requires the lead firm to manifest that it governs its suppliers and subsidiaries.

A clear, private law doctrinal precedent of a lead firm’s liability for inadequate governance of its value chain is, in our opinion, the only way to truly manage the externalities in GVCs. Even such precedent is only a first step. Any reliance on the tort of negligence, for example, places the burden of proof on claimants, in practice requiring from them laborious access to the inner workings of governance in individual GVCs. While growing public regulation requiring lead firms to govern their value chains can potentially counteract some of these problems, securing GVC sustainability requires a cause of action with a stricter standard of liability. A model for such a cause of action, that also contain robust defences, exists in the form of product liability law.

A nascent law of Global value chains, but Where to next?

We are witnessing an unprecedented, multimodal development of law in response to the liability deficits inherent in today’s global value chain capitalism. This development can only be understood by reference to the mode of production that it responds to: global value chains. The developments discussed here work to conceptualize GVCs legally and prepare us for a nascent law of global value chains.

However, any legal conceptualization of the GVC is bound to have a major flaw in that GVCs are only one stage of development in a broader narrative of how law enables new forms of production. Law has been inextricably intertwined with the move from centralized mass production to global value chains and, most recently, to the platform economy. Regulating the externalities of individual forms of production (such as local labour and environmental statutes in relation to centralized mass production and transnational sustainability laws in relation to global value chains) overlooks the foundational role of contract and corporation in allowing new forms of production to ‘disembed’ earlier regulatory approaches, making them useless once the next new form of production rises.

The question then becomes if we truly want to tackle new forms of production ex post after they have become established and caused severe social, environmental, cultural and economic problems, or instead reimagine our very notions of contract and corporation so that they allow for the easier internalization of externalities already from the onset.

Jaakko Salminen (@mouetteobscure) is a Postdoctoral Researcher in Law at the University of Turku.

Mikko Rajavuori (@MRajavuori) is a Senior Lecturer in Law at the University of Eastern Finland.