Surprising fact: The Democratic Republic of Congo (DRC) produces more than 70% of the world's cobalt, holds 60% of the planet's coltan reserves and is the world's fourth-biggest producer of copper, which Goldman Sachs is calling the "new oil." A great economic boon, you might think, for the people of DRC. But sadly, DRC is notorious for using forced labor, especially child forced labor, with warlords and corrupt politicians pocketing the profits at the expense of an impoverished population. DRC remains the fourth-poorest country in the world, according to Global Finance.
Cobalt is a key element in lithium-ion batteries, which power many of the shiny new objects craved by the socially conscious in rich and emerging countries, such as iPhones and electric vehicles. Coltan is an essential element in tantalum capacitors, which are used in almost every kind of electronic device. Copper usage spans electronics, motors and construction, and demand is growing: Compared with the electricity generated via natural gas or coal, solar energy requires double the amount of copper per megawatt, while offshore wind requires five times the amount, according to Thomas Insights.
The irony of embracing a “greener” future at the expense of not only plundering more, just different, natural resources, and via slave and child labor to boot, is only just becoming a mainstream talking point.
Until recently, international trade’s great big dirty secrets regarding forced labor remained mostly hidden beneath layers and layers of supply chain complexity. Importers and retailers have been able to throw up their hands and ask how they could be expected to know where every ounce of raw material or component parts came from, emerging as these things do from deep within sub-tier supplier networks.
This was precisely the argument offered by a number of U.S.-based tech companies as recently as November 2021, when a case against them was brought by a class of child laborers who mine cobalt in DRC, as reported by law firm Baker McKenzie. The U.S. District Court for the District of Columbia dismissed the suit because, it said, “it takes many analytical leaps to say that the end-purchasers of a fungible metal are responsible for the conditions in which that metal might or might not have been mined, especially when that mining took place thousands of miles away and flowed through many independent companies,” before reaching the defendant U.S. tech companies.
Those “analytical leaps” are now being attempted. Some governments, for better or worse, are attempting to hold companies more accountable, driven by a groundswell in public opinion in some (but not all) of the world’s largest consumer economies. New legislation is afoot, most notably in the U.S. and the EU.
The U.S. passed into law in December 2021 the Uyghur Forced Labor Prevention Act (UFLPA) that bans the importation of any goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part in the Xinjiang Uyghur Autonomous Region of the People’s Republic of China. The ban is ostensibly a response to the mistreatment of ethic minority Sunni Muslim Uyghurs by the predominantly Han majority Chinese government. It is also, arguably, part of the U.S.’s broader trade war with China. Another targeted example is the U.S. Department of Labor’s move in November 2022 to include lithium-ion batteries on its “List of Goods Produced by Child Labor or Forced Labor” because of cobalt.
But these explicitly limited and targeted pieces of legislation sit in marked contrast to the extremely broad measures sought by the European Union in its recent proposal to prohibit any and all products made with forced labor from being sold on the EU market. “National authorities will be empowered to withdraw from the EU market products made with forced labor, following an investigation. EU customs authorities will identify and stop products made with forced labor at EU borders,” said the European Commission in a statement issued Sept. 14, 2022.
No product or industry is exempt. Foreign companies are also subject to compliance. And the consequences of non-compliance are severe — companies don’t just lose the ability to sell those products in the EU, they also sacrifice the products themselves, at a loss.
Daniel Smith, ESG director of product marketing at supply chain platform e2open, says the new regulations reflect a trend that began a number of years ago. The U.S. has had laws against forced labor for a while, he points out. But there have always been loopholes, where a company could show it made an effort at due diligence, or the product was something strategic or of high importance, so the government made exceptions. “Those loopholes have been closed now,” Smith says. “It’s a positive step.”
Smith says Australia and the U.K. have had modern slavery laws on the books for decades, but the UFLPA is the first that is likely to be robustly enforced. “That brings a lot of brand risk for companies that can’t comply, as well as financial risk — in loss of market, loss of sales. Not only is there robust enforcement and an extremely heavy burden of proof, that burden falls now on the companies. Before, they could say they took reasonable care. Now they have to prove it. It’s hard to overestimate how important that shift is,” Smith says.
The details of the EU legislation are yet to be ironed out, but meanwhile that shift in responsibility means businesses are left with tricky questions. Do I have trust in my suppliers? Do I need to restructure my supply chain around total avoidance of forced labor? Is that even possible? And, where does unpaid prison labor — still notably legal in the U.S. — fall into all this?
Perhaps more important than any of those questions is: How are these new rules and laws to be enforced?
“Enforcement is not possible,” says Ram Ben Tzion, co-founder and CEO of digital freight vetting platform Publican. Tzion says the EU has consistently advocated a more comprehensive view of environmental, social and governance (ESG) concerns, but this is a giant step into generality. “This legislation would imply that no Teslas or iPhones could be imported into the EU.”
“What I find to be almost unbelievable is that governments are pushing responsibility for enforcement onto importers,” said Tzion. “If you decide to impose sanctions on a country or region or raw material A, B or C, then every company is being asked to do something that’s beyond the capabilities of a government. That makes no sense.”
The problem is, in part, political, Tzion says. “More and more countries post-COVID are adopting a nationalist approach to trade, but doing so through sanctions rather than customs policies,” he says.
Tzion suggests an approach similar to that taken in international banking to prevent money laundering. Usually, compliance requirements dictate vetting bank customers via background checks. “Instead of trying to check each and every transaction, you pre-approve the customer depending on their ethics and standing,” he says. “It should be similar in the supply chain, where you can pre-approve a vendor, so you know they’re not related to any forced labor. That way, you’re allowing all supply chain managers to choose who they do business with, rather than each acting like their own enforcement agency, which is unrealistic.”
Technology brings some prospect of relief, but it’s not going to solve the problem without deeper and clear-eyed discussions about how private corporations develop capabilities to police their supply chains down to the last ounce of every single element of every single product.
Publican and e2open both offer customers the ability to take advantage of vast, centralized databases of detailed information gathered from millions of purchase orders and shipping documentation, including customs forms, in order to identify problematic suppliers. Artificial intelligence can do a good job of ferreting out suspect patterns, and automating alerts to importers.
But, in the end, much of the work required is manual, and costly. Ultimately, those costs are likely to be passed on to the consumer, Tzion says. “At the junction of trade and politics, it’s always the supply chain, and it’s the consumers that lose out.”
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