As countries increasingly adopt due diligence legislation to promote human rights, labor standards, and environmental sustainability in global value chains, a complex dilemma arises. While these laws commendably aim to address moral and political issues in international trade, they may also impose significant costs on companies, potentially disincentivizing investment and trade. This study examines the impact of due diligence laws on international trade and business, analyzing some 60 cases. We explore their unintended consequences, including the potential withdrawal of investors from partner countries, reduced trade, including strategic commodities, and increased costs of compliance leading to competitiveness concerns. Our research categorizes different forms of legislation, investigating whether current due diligence laws are well-designed to achieve their goals without producing unwanted side effects. We end with a brief set of suggestions for a future research agenda.
Policy implications
- Tailored legislation for different regions: Develop due diligence laws that are tailored to the specific institutional and economic contexts of target countries. This approach could mitigate unintended negative impacts on trade and investment while still promoting human rights and environmental sustainability.
- Incentives for compliance rather than strict penalties: Instead of solely relying on punitive measures, introduce incentives for companies that comply with due diligence laws. This could include tax benefits or public recognition, which would encourage adherence without excessively burdening businesses.
- Sector-specific regulations: Implement sector-specific due diligence requirements to avoid the broad imposition of rules that may not be applicable across all industries. This would allow for more focused regulation where it is most needed, potentially reducing the overall economic impact.
- Strengthening international cooperation: Promote international cooperation in the development and enforcement of due diligence legislation. This could harmonize standards across borders, reducing the competitive disadvantages faced by companies in countries with stricter laws and fostering a more level playing field globally.
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