Ministry for Foreign Affairs of Finland 27 March 2023 Neema Komba, Linda Annala Tesfaye, Eva Nilsson, Nikodemus Solitander, Silke Trommer, Boris Verbrugge, Greta Andersson Towards inclusive European CSR policy Analysing the impacts of the EU corporate sustainability directive on LDC trade Towards inclusive European CSR policy Analysing the impacts of the EU corporate sustainability directive on LDC trade Neema Komba, Linda Annala Tesfaye, Eva Nilsson, Nikodemus Solitander, Silke Trommer, Boris Verbrugge, Greta Andersson Ministry for Foreign Affairs of Finland Helsinki 2023 Publications of the Ministry for Foreign Affairs 2023:5 Ministry for Foreign Affairs of Finland This publication is copyrighted. You may download, display and print it for Your own personal use. Commercial use is prohibited. ISBN pdf: 978-952-281-374-9 ISSN pdf: 2737-0844 Layout: PunaMusta Oy Helsinki 2023 Finland Publication sale Online bookstore of the Finnish Government vnjulkaisumyynti.fi Publication distribution Institutional Repository for the Government of Finland Valto julkaisut.valtioneuvosto.fi http://vnjulkaisumyynti.fi http://julkaisut.valtioneuvosto.fi Description sheet 27 March 2023 Towards inclusive European CSR legislation Analysing the impacts of the EU corporate sustainability directive on LDC trade Publications of the Ministry for Foreign Affairs 2023:5 Publisher Ministry for Foreign Affairs of Finland Author(s) Neema Komba, Linda Annala Tesfaye, Eva Nilsson, Nikodemus Solitander, Silke Trommer, Boris Verbrugge & Greta Andersson Language English Pages 104 Abstract In 2022, the European Commission adopted the proposal for the corporate sustainability due diligence directive to advance the green transition and protect human rights in the EU and beyond. The proposed new directive would compel EU companies of substantial size and economic power, as well as companies in identified high-impact sectors that operate in the EU to identify, prevent and mitigate the adverse impacts of their activities on human rights and the environment. This study draws from the literature on corporate social responsibility in global value chains, non-tariff measures, and inclusive trade, as well as insights from the Ethiopian garments industry and the Tanzanian coffee sector to analyse the potential impacts of this directive on least developed countries’ value chains and trade with the EU. Although the directive only directly applies to larger companies operating in the EU, this study highlights the likelihood of the directive’s far-reaching impacts on small-scale suppliers, small- holder farmers, workers, and communities in the least developed countries. The study offers recommendations to address the shortcomings of the directive as well as the accompanying measures to European governments to minimise unintended impacts and promote inclusive trade between the EU and least developed countries. Provision This report is commissioned as part of UniPID Development Policy Studies (UniPID DPS), funded by the Ministry for Foreign Affairs of Finland (MFA) and managed by the Finnish University Partnership for International Development (UniPID). UniPID is a network of Finnish universities established to strengthen universities’ global responsibility and collaboration with partners from the Global South, in support of sustainable development. The UniPID DPS instrument strengthens knowledge-based development policy by identifying the most suitable available researchers to respond to the timely knowledge needs of the MFA and by facilitating a framework for dialogue between researchers and ministry officials. The content of this report does not reflect the official opinion of the Ministry for Foreign Affairs of Finland. The responsibility for the information and views expressed in the report lies entirely with the authors. Keywords Corporate sustainability, due diligence, Corporate social responsibility (CSR), global value chains, human rights, inclusive trade, least developed countries, Tanzania, Ethiopia, Coffee, Garments industry ISBN PDF 978-952-281-374-9 ISSN PDF 2737-0844 URN address https://urn.fi/URN:ISBN:978-952-281-374-9 https://urn.fi/URN:ISBN:978-952-281-374-9 Kuvailulehti 27.3.2023 Kohti inklusiivista eurooppalaista yritysvastuupolitiikkaa Analyysi EU:n yritysvastuudirektiivin vaikutuksista vähiten kehittyneiden maiden kauppaan Ulkoministeriön julkaisuja 2023:5 Julkaisija Ulkoministeriö Tekijä/t Neema Komba, Linda Annala Tesfaye, Eva Nilsson, Nikodemus Solitander, Silke Trommer, Boris Verbrugge & Greta Andersson Kieli Englanti Sivumäärä 104 Tiivistelmä Euroopan komissio julkaisi vuonna 2022 direktiiviehdotuksen yritysten kestävää toimintaa koskevasta huolellisuusvelvoitteesta. Ehdotuksen tavoitteena on edistää vihreää siirtymää ja suojella ihmisoikeuksia sekä EU:ssa että globaalilla tasolla. Uusi esitetty direktiivi velvoittaa suuria EU-alueella perustettuja ja toimivia yrityksiä sekä korkeilla riskisektoreilla liiketoimintaa harjoittavia yrityksiä tunnistamaan, ehkäisemään sekä lieventämään toiminnastaan aiheutuvia haitallisia ihmisoikeus- ja ympäristövaikutuksia. Tämä tutkimus perustuu yritysten sosiaalista vastuuta globaaleissa arvoketjuissa käsittelevään tutkimukseen sekä tullien ulkopuolisen kauppasääntelyn ja inklusiivisen kaupan kirjallisuuteen. Analyysiä direktiivin mahdollisista vaikutuksista vähiten kehittyvien maiden arvoketjuihin sekä EU-kauppaan täydennettiin empiirisillä kartoituksilla Etiopian vaate- ja tekstiiliteollisuudesta sekä Tansanian kahvisektorilta. Vaikka direktiivi koskee ainoastaan suurimpia EU:n alueella toimivia yrityksiä, tämä tutkimus korostaa direktiivin todennäköisiä laajamittaisia vaikutuksia pieniin toimittajiin, pienviljelijöihin, työntekijöihin sekä yhteisöihin vähiten kehittyneissä maissa. Raportissa listataan suosituksia direktiivin puutteiden korjaamiseksi sekä liitännäistoimenpiteitä Euroopan valtioille tahattomien haittojen minimoimiseksi sekä EU:n ja vähiten kehittyneiden maiden inklusiivisen kaupan edistämiseksi. Klausuuli Tämä raportti on osa ulkoministeriön rahoittamia ja UniPID-verkoston hallinnoimia kehityspoliittisia selvityksiä (UniPID Development Policy Studies). Finnish University Partnership for International Development, UniPID, on suomalaisten yliopistojen verkosto, joka edistää yliopistojen globaalivastuuta ja yhteistyötä globaalin etelän kumppanien kanssa kestävän kehityksen saralla. Kehityspoliittinen selvitysyhteistyö vahvistaa kehityspolitiikan tietoperustaisuutta. UniPID identifioi sopivia tutkijoita vastaamaan ulkoministeriön ajankohtaisiin tiedontarpeisiin ja fasilitoi puitteet tutkijoiden ja ministeriön virkahenkilöiden väliselle dialogille. Tämän raportin sisältö ei vastaa ulkoministeriön virallista kantaa. Vastuu raportissa esitetyistä tiedoista ja näkökulmista on raportin laatijoilla. Asiasanat kestävä liiketoiminta, huolellisuusvelvoite, yritysvastuu, globaalit arvoketjut, ihmisoikeudet, inklusiivinen kauppa, vähiten kehittyneet maat, Tansania, Etiopia, kahvi, vaateala ISBN PDF 978-952-281-374-9 ISSN PDF 2737-0844 Julkaisun osoite https://urn.fi/URN:ISBN:978-952-281-374-9 https://urn.fi/URN:ISBN:978-952-281-374-9 Presentationsblad 27.3.2023 Mot en inkluderande europeisk företagsansvarspolitik Analys av effekterna av EUs direktiv om tillbörlig aktsamhet på de minst utvecklade ländernas handel Utrikesministeriets publikationer 2023:5 Utgivare Utrikesministeriet Författare Neema Komba, Linda Annala Tesfaye, Eva Nilsson, Nikodemus Solitander, Silke Trommer, Boris Verbrugge & Greta Andersson Språk Engelska Sidantal 104 Referat Under året 2022 antog Europeiska kommissionen ett förslag till direktiv om tillbörlig aktsamhet för företag i fråga om hållbarhet. Direktivet antogs för att möjliggöra grön omställning samt skydda mänskliga rättigheter, såväl i Europa som globalt. Det föreslagna direktivet kräver europeiska företag av betydande storlek och med stor ekonomisk påverkan, samt företag inom specifika riskindustrier verksamma inom EU, att identifiera, motverka, samt mildra negativa effekter som deras verksamhet förorsakar på miljön och mänskliga rättigheter. Baserat på forskningslitteratur kring företagsansvar i globala värdekedjor, icke- tariffära åtgärder, inkluderande handel, samt empiriska insikter från konfektionsindustrin i Etiopien och kaffeindustrin i Tanzania, analyserar denna studie direktivets möjliga inverkan på värdekedjor i minst utvecklade länder (MUL), samt på MUL-EU handel. Även om direktivet har en direkt inverkan endast på storföretag verksamma inom EU, visar denna studie hur dess implementering genom storföretagens värdekedjor troligen kommer att ha långtgående konsekvenser för mindre leverantörer, småbrukare, arbetstagare, samt lokalsamhällen i minst utvecklade länder. Studien presenterar rekommendationer för hur direktivets identifierade brister borde hanteras, samt hur europeiska regeringar kunde minimera oönskade följder och främja inkluderande handel mellan EU och minst utvecklade länder. Klausul Denna rapport är beställd som en del av UniPID Development Policy Studies (UniPID DPS), finansierad av Finlands Utrikesministerium (MFA), och hanterad av Finnish University Partnership for International Development (UniPID). UniPID är ett nätverk av finska universitet som etablerats för att stärka universitetens globala ansvar och samarbete med partner från det södra halvklotet, till stöd för en hållbar utveckling. UniPID DPS-verktyget stärker en kunskapsbaserad utvecklingspolicy genom att identifiera de mest lämpliga, tillgängliga forskarna för att svara på utrikesministeriets kunskapsbehov i rätt tid och att underlätta ett ramverk för en dialog mellan forskare och departementstjänstemän. Innehållet i denna rapport återspeglar inte Finlands utrikesministeriums officiella uppfattning. Ansvaret för informationen och åsikterna i rapporten ligger helt på författarna.  Nyckelord hållbar affärsverksamhet, tillbörlig aktsamhet, företagsansvar, globala värdekedjor, mänskliga rättigheter, inkluderande handel, minst utvecklade länder, Tanzania, Etiopien, kaffe, konfektionsindustri ISBN PDF 978-952-281-374-9 ISSN PDF 2737-0844 URN-adress https://urn.fi/URN:ISBN:978-952-281-374-9 https://urn.fi/URN:ISBN:978-952-281-374-9 Contents Foreword .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1 Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2 Introduction.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.1 Objective of study.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3 Corporate Social Responsibility Compliance in Global Value Chains.. . . . . . . . . . . . . . . . . . . . . 21 3.1 Governing global value chains through private compliance regimes.. . . . . . . . . . . . . . . . . . . 21 3.2 Mandatory due diligence legislation.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 3.3 Potential impact of EU CSDDD on value chains.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 4 EU–LDCs trade.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 4.1 EU–LDCs trade imbalance.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 4.1.1 Commodity dependence .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 4.1.2 Non-Tariff Measures .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 4.1.3 Inclusive Trade.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 4.2 The impact of the EU CSDDD on EU–LDCs trade.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 4.2.1 Sensitivity assessment .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 4.2.2 Social and environmental impact assessment of trade regulation.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 4.2.3 Assessing the inclusiveness of the EU CSDDD.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 4.3 Summary: potential impact of EU CSDDD on trade.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 5 Case Reports.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 5.1 Methodology.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 5.1.1 Institutional contexts of the cases.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 5.2 Case 1: The garments industry in Ethiopia   .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 5.2.1 Private compliance regimes in Ethiopia.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 5.2.2 The textile and garment industry in Ethiopia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 5.2.3 Environmental impacts of the Ethiopian garment industry.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 5.2.4 Impacts of EU CSDDD on Ethiopian garment industry .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 5.2.4.1 Impacts on the value chain.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 5.2.4.2 Division of costs and responsibilities .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 5.2.4.3 Impacts on trade between the EU and Ethiopia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 5.3 Case 2: The coffee industry in Tanzania .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 5.3.1 Private compliance regimes in Tanzania. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 5.3.2 The coffee industry in Tanzania. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 5.3.3 Human rights in the Tanzanian coffee sector.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 5.3.4 Environmental sustainability in the Tanzanian coffee sector.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 5.3.5 Impacts of EU CSDDD on the coffee industry in Tanzania.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 5.3.5.1 Impacts on the value chain.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 5.3.5.2 Division of costs and responsibilities.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 5.3.5.3 Impacts on trade between the EU and Tanzania.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 5.4 Insights from the case studies.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 6 Conclusion and recommendations.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 6.1 Recommendations for due diligence legislation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 6.2 Recommendations for accompanying measures to European governments. . . . . . . . . 83 References.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Annexes.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 8 Publications of the Ministry for Foreign Affairs 2023:5 F O R E W O R D The Ministry for Foreign Affairs has worked with responsible business conduct for over a decade. During the past years, the Ministry has closely collaborated with the Ministry of Economic Affairs and Employment, business, and civil society to elaborate, what due diligence – an ongoing process where businesses identify, prevent, mitigate, and cease adverse impacts caused by their own operations or business partners and provide remedy, when appropriate – means in different sectors, supply chains, or operating environments. Since 2019, guided by the Programme of Prime Minister Sanna Marin’s Government, the focus has been on how due diligence could be translated into legally binding obligation. The Ministry of Economic Affairs and Employment published an assessment memorandum on national due diligence obligation, where it was noted that the country of operation plays a role in how the objects of due diligence legislation – respect of human rights, environmental protection – can be met.1 In February 2022, the European Commission published its proposal for a Directive on Corporate Sustainability Due Diligence. This would place a due diligence obligation on human rights and the environment to large companies and smaller, certain risk sector companies operating in the EU. Both the national assessment memorandum and the draft directive include assessments on impacts to human rights, the environment, and EU companies, but very little assessment on how the directive would impact developing countries, their companies and trade. As such a legislation is quite new, we as legislators have little experience on its practical application or impacts. The unknown impacts have been a specific concern to our sustainable trade unit, as we work with both responsible business conduct and encouraging business in least developed countries (LDCs) to part take in EU value chains. 1 Piirto, Linda and Teräväinen, Sami (Ministry of Economic Affairs and Employment, Helsinki 2022): Memorandum on the due diligence obligation: Review of the national corporate social responsibility act, http://urn.fi/URN:ISBN:978-952-327-795-3. Retrieved 8 March 2023. http://urn.fi/URN:ISBN:978-952-327-795-3 9 Publications of the Ministry for Foreign Affairs 2023:5 This is why our unit requested studies to: i. Assess impact of the proposed legislation on the ability of particularly LDCs to participate in EU supply chains and the impact on their economies (e.g. jobs). ii. Identify key bottlenecks that prevent LDCs from participating in EU supply chains as well as measures that mitigate negative impact. iii. Propose options for Finland to support LDCs in meeting requirements of the proposed legislation. Furthermore, we requested the studies to approach the research topic by focusing on two developing countries, preferably LDCs, relevant to Finland’s development cooperation. The studies should also focus on supply chains both in primary production and in manufacturing. We have identified these as key “unknowns” on which we need to know more about in order to a) fulfil the objectives of the due diligence legislation and b) support developing countries and their companies to be a part of EU value chains in the future too. We are fortunate to have received two excellent research proposals that examine the topic from two different perspectives. The report at hand prepared by an international research team lead by the Hanken School of Economics analyses the implications of the proposed legislation on trade between Europe and developing countries. It considers particularly the textiles and garment manufacturing value chain in Ethiopia and the coffee production value chain in Tanzania, offering insights into the economic and social implications of the proposed legislation. The report offers recommendations to improve the proposed legislation and proposes accompanying measures to support LDC suppliers to cope with the regulatory changes. The second report titled The proposed EU Corporate Sustainability Due Diligence Directive and its impact on LDCs: A legal Analysis and prepared by an international research team lead by the University of Vaasa, provides a rich analysis of the proposed legislation particularly from a legal point of view, complementing the analysis of the first report. It offers insights into its implications of the proposed legislation for developing countries by considers the cases of Tanzania and the Democratic Republic of Congo.) The two reports provide independent assessments by the researcher teams of the proposed EU legislation on corporate sustainability due diligence and its implication for developing countries. We are confident that the findings of these reports will contribute significantly to discussions concerning the proposed legislation and will support in https://urn.fi/URN:ISBN:978-952-281-370-1 https://urn.fi/URN:ISBN:978-952-281-370-1 10 Publications of the Ministry for Foreign Affairs 2023:5 identifying measures to assist companies operating in developing countries to meet requirements of the proposed legislation. We would also like to thank both research teams for their excellent work and giving their expertise to these studies. We are greatly indebted to the UniPID network of Finnish Universities for facilitating the two research reports starting from the call for proposals, to managing contracts and ensuring the successful publication of the reports. We would in particular like to thank Kelly Brito for her professional support throughout the process. Commercial Counsellor Linda Piirto and Commercial Counsellor Antti Piispanen, Sustainable Trade Department for International Trade, Ministry for Foreign Affairs 11 Publications of the Ministry for Foreign Affairs 2023:5 1 Executive Summary This study analyses the implications of the proposed EU directive on corporate sustainability due diligence (EU CSDDD) on trade between Europe and developing countries with a particular focus on Least Developed Countries (LDCs). It brings together academic literatures that have remained separate until now, namely those of Corporate Social Responsibility compliance in global value chains, non-tariff measures (NTMs) and inclusive trade to estimate the impacts of the directive on LDCs. To assess the directive’s potential impacts, the report analyses two case value chains affected by the EU CSDDD: the textiles and garment manufacturing value chain in Ethiopia and the coffee production value chain in Tanzania. Both Tanzania and Ethiopia are Finland’s long-term development cooperation partners in Africa. In this report, impacts have been analysed through the lens of the above-mentioned academic literatures as well as Finland’s cross-cutting development policy objectives (gender equality, non-discrimination, climate resilience and low-emission development). The EU is one of the most important trade partners for LDCs, and the EU CSDDD will likely further burden and limit the already marginalised LDCs’ engagements in global value chains. Although the directive only directly targets large corporations operating in the EU and does not intend to be discriminatory, our findings indicate that it will have far-reaching impacts on value chains, suppliers and local actors from LDCs. Extant research shows that mandatory due diligence legislation tends to encourage risk-averse behaviour within companies, resulting in disengagement from certain suppliers or value chains particularly from LDCs. Similarly, the EU CSDDD does not provide incentives for meaningful engagement between EU companies, and companies and stakeholders in the LDCs. The directive explicitly promotes ’contractual cascading’ to business partners that often goes hand in hand with the cascading of costs and responsibilities towards suppliers in LDCs. Furthermore, industry schemes, multi-stakeholder initiatives, and associated third-party verification mechanisms are both explicitly and implicitly promoted, raising concerns about the replication of their known shortcomings. LDCs’ ability to comply with new standards and, on a broader level, support the upgrading of value chains would determine whether they are able to maintain their trade levels with the EU. However, the stringent requirements of the directive raise the question of whether the EU would maintain or expand its relations with LDC producers and suppliers. Although the EU has often had relatively more stringent requirements compared to other markets, 12 Publications of the Ministry for Foreign Affairs 2023:5 the extent to which the new directive would impact trade depends on the importance (and competitiveness) of the EU as a market for different products. The attractiveness of the EU market would also determine, to a certain extent, the LDCs’ will to invest in closing the regulatory gap or building their capacities to meet new requirements. However, local companies and producers from LDCs may not have the resources or technical capacity to close the gap on their own. In such situations, technology and knowledge transfer as well as technical assistance may be a standard remedy to ensure that local companies and producers can continue to participate in the value chain. Different factors such as commodity dependence, limited market diversity, regulatory gaps and constrained resources on the part of LDCs would increase a particular LDC’s sensitivity to the impact of new regulations like the EU CSDDD. Through our case reports of the garment sector in Ethiopia and the coffee sector in Tanzania, we suggest country- and sector-specific sensitivity assessment to be more useful than a macro-level approach assessing the impacts of the EU CSDDD. Furthermore, an inclusive trade lens in our analysis recognises that trade in global supply chains affects social inequalities (along the lines of gender, race, indigeneity, ableism, etc.), labour relations, environmental conditions, and good governance principles, such as transparency and inclusion. As such, the broader impact of trade must take stock of the conditions in which people affected by it live and work, as we have tried to do in the analysis. Our analysis of the inclusiveness of the EU CSDDD itself found shortcomings in its capacity, transparency and engagement dimensions, because the directive does not take into account, nor does it work to address the capacity constraints and vulnerabilities that local communities in LDCs face. Should abuses continue despite the due diligence approach prescribed in the directive, it is unlikely that this information would become known to governments, unless implementation of the directive engages in capacity building with grassroots. In this report, we offer recommendations to policy makers that address shortcomings of the EU CSDDD as well as the accompanying measures to support LDC suppliers to cope with the regulatory changes and to enable effective access to complaints procedures for affected communities in LDCs. The recommendations for the EU CSDDD include: 1. Promoting responsible supplier engagement and discouraging irresponsible cascading in the directive. 2. Integrating fair purchasing practices into the due diligence legislation that encourage the engagement of diverse and local stakeholders on an equal footing. 3. Making the EU CSDDD more coherent with the broader EU trade for all strategy which prioritises inclusive trade. 13 Publications of the Ministry for Foreign Affairs 2023:5 The recommendations for accompanying measures that EU member states could implement include: 1. Providing targeted support for initiatives that encourage inclusive due diligence through the engagement of diverse and local actors, and that address the needs of economically marginalised communities. 2. Monitoring the implementation of the EU CSDDD and supporting Civil Society Organisations (CSOs) and labour unions that can keep value chain actors accountable. 3. Raising awareness to LDC governments and CSOs and supporting their efforts to adjust to the directive. 4. Leading by example in implementing inclusive due diligence measures to the operations of state-owned companies, DFIs, and public procurement. 5. Increasing transparency in value chains and improving public accessibility of due diligence instruments. 6. Creating greater convergence between different (often competing) private sustainability standards and certification schemes. 14 Publications of the Ministry for Foreign Affairs 2023:5 2 Introduction In order to meet the UN Sustainable Development Goals and the European Green Deal, as well as to ensure alignment with guiding frameworks such as the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights (UNGPs), the European Union has proposed1 a new Corporate Sustainability Due Diligence Directive (CSDDD). The CSDDD will require firms active in the European single market to meet human rights and environmental standards in their global value chains (see highlighted overview below). In addition to the fulfilment and alignment with international agreements, the directive is indicative of a growing demand from European consumers for more sustainable products across industries (Tigan et al., 2021; Vătămănescu et al., 2021). The timing of the directive is urgent, since a vast body of literature, including recent studies (Nolan & Frishling, 2020; Tran-Nguyen et al., 2021), suggests that human rights due diligence (HRDD) is not implemented systematically among large companies. Moreover, the public availability regarding information on due diligence processes and assessment information is poor, despite it being almost a decade since the publication of the UNGPs. 1 In this report, the authors have used the text within the ‘Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937’, COM(2022)71, Brussels, 23.2.2022 as the main source – thus, if not explicitly mentioned it does not include e.g. the negotiating position (‘general approach’) of the European Council published on November 30th, 2022. For the case studies selected, however, the amendments put forward by the Council do not affect the sample or the analysis. 15 Publications of the Ministry for Foreign Affairs 2023:5 Overview of the EU CSDDD (source: European Commission, 2022a) • Specified due diligence obligations of firms: Annually updated due diligence policy; Identification of adverse human rights and environmental impacts arising from own operations in extended supply chains; Prevention and mitigation of adverse human right and environmental impacts; Establishment of grievance mechanism; Monitoring the effectiveness of CSDD measures; Annual, public communication of CSDD measures/results • Scope: 500+ employees & > €150 million turnover2; OECD risk sectors: 250+ employees & > €40 million turnover2; While SMEs are excluded they will be indirectly affected through supplier relations in global value chains • Enforcement mechanisms: Government supervision (national authority to impose sanctions, exert control; establishment of European Network of Supervisory Authorities ); Civil liability (through provisions of national law of EU member states) The CSDDD indicates a shift away from a purely voluntary and proactive logic of private governance systems as the most effective way of achieving sustainable development. The shift designates opting for a ‘smart mix’ of voluntary action and complementary regulation (Camoletto et al., 2022; Scherer et al., 2016). With its focus on due diligence, the directive moves beyond reporting requirements and can thus be seen to expand the EU’s Corporate Sustainability Reporting Directive, which focused primarily on reporting and transparency obligations. The CSDDD adopts an understanding on due diligence drawing from the OECD Due Diligence Guidance for Responsible Business Conduct (European Commission, 2022a, p. 32), which includes “measures for companies to identify and address adverse human rights and environmental impacts… [encompassing] the following steps: (1) integrating due diligence into policies and management systems, (2) identifying and assessing adverse human rights and environmental impacts, (3) preventing, ceasing or minimising actual and potential adverse human rights, and environmental impacts, (4) assessing the effectiveness of measures, (5) communicating, (6) providing remediation.” 2 Worldwide turnover for EU companies; EU-wide turnover for non-EU companies 16 Publications of the Ministry for Foreign Affairs 2023:5 This is characterised as a risk-based approach, since the directive requires firms to actively identify, manage and mitigate identified risks, through both operational and technical voluntary ethical codes and principles (Camoletto et al., 2022; Villiers, 2021). The directive resembles other second-generation due diligence legislation, such as the French Devoir de Vigilance law, the German Lieferkettengesetz, the Norwegian Supply Chain Transparency Act, and the Dutch Child Labour Due Diligence Act (Bright, 2021; Smit et al., 2020). In addition, the directive’s due diligence requirements are integrated into existing regulatory frameworks, such as the EU Timber Regulation and EU Conflict Minerals Regulation, as well as proposed sector specific regulations on deforestation and forced labour in the EU. While both the German law and the proposed CSDDD explicitly recognise that private governance initiatives such as certification and multi-stakeholder initiatives can form part of due diligence processes, there is broad agreement that private governance initiatives are insufficient for meeting legal requirements (LeBaron, 2020; LeBaron et al., 2022; LeBaron & Lister, 2021; Nolan & Frishling, 2020). 17 Publications of the Ministry for Foreign Affairs 2023:5 Figure 1.  Timeline of second generation due diligence legislation. Source: Verbrugge 2022. 18 Publications of the Ministry for Foreign Affairs 2023:5 The CSDDD will affect both EU and third-country firms. The scope of affected firms (what is referred to in the CSDDD as the ‘personal scope’) is determined for EU domiciled firms by their number of employees as well as their net global turnover, whereas for non-EU firms the criterion is related to the net turnover generated in the EU. The EU Commission is using turnover as a proxy for the social and environmental effects that the activities of those firms could have on the internal market3 (European Commission, 2022a). In addition, personal scope differentiates between firms that operate in high impact and high-risk sectors identified by the OECD’s sectoral guidance4, namely: the extractive sector, mineral supply chains, agricultural supply chains, garment supply chains, and the financial sector5 (European Commission, 2022a). The Commission estimates that the CSDDD will directly cover around 13,000 EU companies and 4,000 third-country firms (European Commission, 2022a). 99% of firms in the EU are thus excluded as small and medium sized enterprises (SMEs), including micro companies. Yet the directive is anticipated to affect a large number of suppliers and other corporate actors in the affected firms’ global value chains, many of which are geographically located in the Global South. It has been estimated that close to 80% of global trade is linked to the global value chains of large multinational firms, either through intra-firm (between parent companies and their affiliates or among the affiliates) or as inter-firm trade (between unrelated companies) (Lee, 2016) When it comes to trade with Least Developed Countries (LDCs), the EU is the second biggest export destination for LDCs’ trade in the world, after China (WTO, 2021). Nevertheless, much of the impact assessment of the directive is concerned with the impact of the directive on European companies rather than global supply chains and production networks (Camoletto et al., 2022; Patz, 2022). While it is anticipated that this directive will have a significant effect on global supply chains (Camoletto et al., 2022), and even more so on developing countries (Bose, 2021), there is very limited research on how the directive will impact trade with developing countries, especially least developed countries (LDCs). While the EU CSDDD ensures accountability is owed to the EU and its members states, there is still a question as to whether it gives influential voice to stakeholders from the Global South (Schilling-Vacaflor & Lenschow, 2021). 3 Calculation of turnover follows the standard methods for calculating net turnover as laid out in Directive 2013/34/EU, which also follow international accounting standards, but as no such international accounting standard exist for the calculation of number of employees the CSDDD uses number of employees only for EU companies (as the methods of calculation follow EU law) 4 OECD Due Diligence Guidance for Responsible Business Conduct, Sectoral guidance, available at:http://mneguidelines.oecd.org/sectors/. 5 Noting here that the negotiating position of the European Council (2022/0051(COD)) includes limitations on what is included within the scope of the financial sector http://mneguidelines.oecd.org/sectors/ 19 Publications of the Ministry for Foreign Affairs 2023:5 2.1 Objective of study The main objective of this study is to increase understanding of the impact of the EU CSDD on actors in LDCs to the extent that their activities are part of the global value chains of firms covered by the directive, and by extension, to analyse the potential impact of the CSDDD on EU–LDC trade. The main objective of this policy study is divided into three research questions: 1. What is the impact of the proposed CSDDD on the ability of LDC-based actors to participate in the value chains of firms covered by the directive, and how does the directive impact EU–LDC trade? 2. What are key bottlenecks that prevent LDC suppliers from participating in value chains of firms covered by the directive, and what measures to address the bottlenecks can be identified? 3. What policy and other capacity building options exist for EU governments, and particularly the Finnish government to support LDCs, including firms, in meeting the requirements of the proposed CSDDD? Because the CSDDD is still a work in progress and its final form is uncertain at the time of writing (winter 2022/23), this report cannot give final, conclusive answers to these questions. However, our analysis based on existing literature and original empirical research highlights key known and anticipated issues that are relevant to these questions and allows setting out a number of recommendations for policy-makers to consider when moving forward. The report analyses two selected global value chains in more detail: the garment manufacturing value chain in Ethiopia, and the coffee production value chain in Tanzania. The selected cases illustrate value chains from two high-risk sectors, as defined by the OECD’s sectoral guidance. Ethiopia and Tanzania are Finland’s long-term development cooperation partners in Africa and the EU is an important trading partner to both. In the analysis of this report, the impact on Finland’s cross-cutting development policy objectives – namely gender equality, non-discrimination, climate resilience and low- emission development – has been considered. 20 Publications of the Ministry for Foreign Affairs 2023:5 The report is structured as follows: Figure 2.  Structure of the report. 21 Publications of the Ministry for Foreign Affairs 2023:5 3 Corporate Social Responsibility Compliance in Global Value Chains This section reviews the literature on voluntary and mandatory CSR compliance in global value chains, particularly where the production activity context is LDCs, a body of literature here labelled as “CSR Compliance in Global Value Chains”. In general, the literature on Global Value Chains (GVCs) captures and acknowledges the power differentials between different actors – particularly between lead firms in the Global North and suppliers in the Global South (Alagmgir & Banerjee, 2019; Grabs & Ponte, 2019; Krauss & Krishnan, 2022). The GVC literature has also traditionally focused on questions such as the role of voluntary standards and certifications in the governance of GVCs (Grabs & Ponte, 2019; Riisgaard et al., 2020; Tampe, 2018; Van Der Ven, 2018), which dominate governance approaches to compliance in GVCs, including in the proposed CSDDD. This is because while the directive does not mandate particular compliance mechanisms, it acknowledges the central role of voluntary compliance regimes, such as ‘codes of conduct’, ‘suitable industry initiatives’ and ‘third-party verification’ regimes in its successful implementation. The first part (3.1) of our literature review of CSR compliance in GVCs covers the impact of private CSR governance regimes in LDCs, and the second part (3.2) summarises the available findings on the impacts of mandatory CSDD on LDCs. 3.1 Governing global value chains through private compliance regimes The CSR governance of the geographically dispersed global value chains of large multinational firms has traditionally been organised through self-regulatory and horizontal configurations (Fougère & Solitander, 2020). These configurations often follow the logic of market relations whereby multiple stakeholders negotiate and compete over deployment of various instruments of authority in the form of codes, guidelines, labels, and standards, which most often lack the coercive backing of state regulation (Fougère & Solitander, 2020; Shamir, 2011). While there exists considerable variation between these private governance initiatives in terms of their scope and governance (for an overview see LeBaron, 2020; Locke, 2013; Marx & Wouters, 2015), they invariably rely on the voluntary 22 Publications of the Ministry for Foreign Affairs 2023:5 efforts of companies, revolve around some sort of voluntary sustainability standard to which companies or products must adhere, and are often coupled with a mechanism for monitoring compliance, usually in the form of audits. Within GVC literature there have been several studies that point to different effects and effectiveness of these voluntary mechanisms. In general, on the one hand, one part of the literature has pointed out how voluntary mechanisms can create upgrading opportunities for ‘lower-tier’ suppliers in LDCs, which succeed in integrating social and environmental standards (Chiputwa et al., 2015; DeFries et al., 2017; Ruben & Zuniga, 2011). For this study it is important to acknowledge that the CSDDD is trying to address different forms of upgrading, namely a combination of economic, social, and environmental upgrading. Economic upgrading is defined as “a move to higher value activities in production, to improved technology, knowledge and skills, and to increased benefits or profits deriving from participation in GVCs” (Gereffi & Lee, 2016, p. 29). Social upgrading is defined as “the process of improvement in the rights and entitlements of workers as social actors and the enhancement of the quality of their employment” (Barientos et al. in Gereffi & Lee, 2016, p. 29) and is anchored in the ILO’s Decent Work framework. Social upgrading goes beyond access to better work resulting from economic upgrading, by including the enhancement of existing working conditions and enabling rights, thus improving the overall well-being of workers and local communities. Environmental upgrading is defined as “the process of improving the environmental impact of value chain operations – including production, processing, transport, consumption, and waste disposal or recycling” (Poulsen et al., 2018, p. 84), including firm capacities to meet international environmental standards and certifications. Environmental/social upgrading expands the scope of company-led CS(R) initiatives by also including non-corporate measures initiated by governments, unions and/or civil society organisations (Gereffi & Lee, 2016). Table 1 summarises the processes and outcomes attached to upgrading. 23 Publications of the Ministry for Foreign Affairs 2023:5 Table 1.  Processes and outcomes of GVC upgrading. Source: Authors’ summary. Examples of processes of upgrading Examples of outcomes of upgrading Previous research Economic upgrading Reorganisation of production; introduction of new technologies, increased collaboration; increased higher-quality product lines Move to higher value activities; improved technology, knowledge and/or skills; increased economic. benefits/ profits, increased. productivity, increased quality Bernhard & Pollak (2016); Gereffi & Lee (2016); Barrientos et al. (2011) Social upgrading Living wages, labour bargaining power, collective bargaining, social movement mobilisation/pressure, economic upgrading, rising demand for skilled workers; process quality standards Improved working conditions, improved labour rights, improved gender equitable opportunities, improved bargaining power, increased skill training, increased worker health/ safety, increased wages/ income Lee (2016); Bernhard & Pollak (2016); Barrientos et al. (2011) Environmental upgrading Transfer of good environmental practices, skills development, technology transfer, asset specific investments (e.g. soil testing, irrigation systems), multicropping, etc. Improved quality/ volume of natural resources; increased soil conservation efforts; decreased energy consumption, decreased water consumption; incr. biodiversity; decreased CO2 emissions Krishnan et al. (2022); De Marchi & De Maria (2019); Achabou et al. (2017); Khattak & Pinto (2018). 24 Publications of the Ministry for Foreign Affairs 2023:5 On the other hand, there is a body of GVC literature that shows how the voluntary standards can contribute to downgrading, for example through rent accumulation by lead firms, unproductive ‘rituals of verification’, or through the exclusion and livelihood precarity for lower-tier actors especially in LDCs (Alagmgir & Banerjee, 2019; Ponte, 2007). Table 2 summarises the processes and outcomes attached to downgrading of GVCs. Table 2.  Processes and outcomes of GVC downgrading. Source: Authors’ summary. Examples of processes of downgrading Examples of outcomes of downgrading Previous research Economic downgrading Value chain exclusion, pricing, rising input and labour requirements and costs, shortage of skilled labour; increased interest rates Loss of competitiveness, decreased exports, move to lower value activities Bernhardt, & Pollak, (2016); Barrientos et al. (2016) Social downgrading Power assymetries; pressure to lower prices/cost reductions; pressures on quality/ flexibility; state crackdowns on labour movements Decrease of real wages, wage discrimination, job insecurity, poor worker health,decreased employee benefits, inadequate skill training, weak bargaining power Lee (2016); Bernhard & Pollak (2016); Barrientos et al. (2016); Marslev et al. (2022); Godfrey (2015) Environmental downgrading Pressure to lower pric- es/cost reductions; pres-sures on quality/ flexibility; lack of basic entitlements to land; mono-cropping; large scale industrialisation Decreased quality/ volume of natural resources; decreased soil conservation efforts; increased energy consumption, increased water consumption/ degradation;decreased. biodiversity; increased CO2 emissions Krishnan et al. (2022); De Marchi & De Maria (2019); Achabou et al. (2017); Khattak & Pinto (2018). Of particular interest for this report (c.f. case studies in chapter 5) are impacts on smallholder producers (in agro-food chains), other small LDC-suppliers, and their (often low-wage) workers – all of whom share a dependence on large buyers. In terms of impacts of certification on smallholder producers in LDCs, several studies show how 25 Publications of the Ministry for Foreign Affairs 2023:5 socio-economic outcomes of certification for smallholders (Barrientos et al., 2016; Oya et al., 2018) and ordinary factory workers (Bartley & Egels-Zandén, 2015; Narula 2019) remain uncertain at best. Suppliers are often expected to carry the costs for CSR audits and other forms of data collection, and to invest in more sustainable production practices in order to comply with tightening CSR standards (Neilson & Pritchard, 2010; Ponte, 2019). Together, these pressures can create significant barriers to entry into sustainable value chains, notably for small suppliers. A shift towards remote and digital supply chain monitoring has further increased these costs (Narula, 2019). Previous studies also show how upgrading and downgrading might occur simultaneously in particular firms (Godfrey, 2015; Mulubiran & Karlsen, 2023; Rossi 2013). Relatedly, previous studies also underline how voluntary sustainability mechanisms are heterogeneous in their requirements and enforcement, while their benefits and costs may be non-linear across actors in the GVCs, with trade- offs across economic, social and environmental dimensions of upgrading (Kraus & Krishnan, 2022). A large systematic literature review by Oya et al. (2018) shows that, in the agriculture sector, private governance schemes generally have positive effects on prices and incomes of farmers, while neither wages nor overall household income are generally affected. And where there are significant upgrading effects, the institutional context matters substantially. Meanwhile, large and vertically integrated firms, whose relative importance varies across sectors, are often more equipped to deal with the costs and requirements associated with CSR compliance. In this way, the regime of private governance can increasingly be seen as serving the interests of a narrow set of lead firms, such as large retailers and brands. These lead firms do not only define the terms of sustainability but can also push the hidden costs of compliance further up the value chain, towards suppliers of raw materials and semi- finished goods. In this way, they can entrench or even strengthen their dominant position (De Neve, 2014; Nolan & Frishling, 2020; Raj-Reichert, 2020). The strategic response to CSR compliance among firms in LDCs can be seen to follow certain patterns: 1. A widespread strategy has been referred to as CSR decoupling. This form of decoupling takes place when companies adopt formal policies (e.g. codes of conduct) to demonstrate compliance with standards, while continuing with ‘business as usual’ (Jamali et al., 2017; Khan & Lockhart, 2022). This type of decoupling can be complete or partial, as decoupling in some areas (e.g. environmental policies) may co-exist with ‘loose coupling’ or ‘tight coupling’ in other areas (e.g. overtime) (Graafland & Smid, 2019; Jamali et al., 2017). A second form of decoupling, means-ends decoupling, occurs when 26 Publications of the Ministry for Foreign Affairs 2023:5 companies do implement certain practices, but a gap emerges between these practices and their outcomes. In other words, a CSR practice may not succeed in addressing the adverse impacts it is supposed to confront. This second form of decoupling can have serious unintended consequences, which are complex and difficult to understand or even perceive (Bromley & Powell, 2012). Means-end decoupling is more likely to take place in highly non-transparent sectors where compliance requirements are rigid and thus preventing the flexibility that is required for achieving the actual ends (Wijen, 2014). Both forms of decoupling can be strategic or spontaneous, and incentives and opportunities for decoupling can vary across supply chains. 2. Disengaging from more demanding buyers. This is a viable strategy only if the competitive landscape and supplier–buyer power relationships allow for buyer selection. For example, the increased presence of Chinese buyers in many LDCs might alter the buyer selection landscape. 3. Cost reductions. Suppliers may also try to cut costs for labour, health and safety, or may increase their reliance on subcontractors, temporary workers, or informal workers, in an attempt to further reduce costs and to evade responsibility (Soundararajan et al., 2018). 4. Increase pressures on lower tier suppliers, who may in turn increase pressures on their workers and suppliers (De Neve, 2014; LeBaron, 2020; Nolan & Frishling, 2020; Raj-Reichert, 2020). 5. Recoupling, which indicates “the process through which policy and practice that once were decoupled become coupled again” (Egels-Zanden, 2014, p. 61). For example, Dietz et al.’s (2021) large-scale study of the coffee GVC in Honduras found that the most consistent determinants of the recoupling of standards and practices was the use of significant price premiums, which provided farmers with the financial capacity to comply with the requirements of the private standards and certification scemes. Similarly in manufacturing, a longitudinal study by Egels-Zanden (2014) showed how in the long run, while suppliers initially responded with symbolic action, they showed substantial improvement in terms of environmental and social upgrading at least partly due to increased external code of conduct pressure and changed demands emphasising transparency. The study showed how a number of mechanisms increase recoupling: (1) increased external demands and surveillance, (2) changes in the type of external demands (particularly stringent auditing), (3) internalised external demands (e.g. recruiting for positions that over time drive change internally), and particularly (4) establishing more trust-based relationships between the suppliers and the stakeholder exerting pressure. 27 Publications of the Ministry for Foreign Affairs 2023:5 The variety of results of different studies also points to certain weaknesses, namely, the propensity to treat these mechanisms as relatively homogenous instruments with linear assumptions about either creating upgrading or downgrading outcomes, while many studies recognise that both upgrading and downgrading can occur simultaneously [e.g., modest or negative production effects can occur in tandem with positive changes in living standards and less absolute poverty]. One reason for this is the nature of the global value chains and the power relations between actors. For instance, some products certified as organic or fairtrade may be able to pass on the costs to consumers through higher prices [e.g., “premium coffee” (Chiputwa et al., 2015; Giovannucci & Ponte, 2005)], while others [e.g., certified timber and paper (Eden, 2010; Morris & Dunne, 2004), and textiles (Alamgir & Banerjee, 2019; Godfrey, 2015; Munir et al., 2018)] cannot, and the cost is therefore transferred onto the suppliers. In terms of social upgrading, many studies also point to how other than (multinational) firm–labour relations, state–labour or state–local firm relations act as the most central drivers for upgrading (Marslev et al., 2022). 3.2 Mandatory due diligence legislation A large part of available research on the impact of due diligence legislation has looked at the extent to which companies comply with legal requirements. Most of this evidence looks at ‘first generation’ reporting legislation (c.f. the UK Modern slavery Act; California Supply Chains Transparency Act; Dodd-Frank Act), but evidence for 2nd generation legislation is starting to emerge from France, where the Devoir de Vigilance law has been in force since 2017. Research on first generation legislation (Flynn & Walker, 2020; Koekkoek et al., 2017; Voss et al., 2021) shows that a portion of the companies that fall within the scope of legislation have increased reporting practices. Yet compliance with reporting requirements remains patchy, and companies continue to fall short of the requirements set by international norms and guidelines. Emerging evidence from France confirms such observations (Chambers & Vastardis, 2020; Schilling-Vacaflor & Lenschow, 2021). To the extent that companies undertake efforts to comply with legislation, they mostly do so to avoid reputational and, in second order, legal risks (Dean & Marshall, 2020; McCorquodale et al., 2017; Smit et al., 2020; Trautrims et al., 2021). Moreover, not all firms react in the same way. Larger and consumer-facing firms tend to have clearer incentives to comply with legislation. While compliance is often superficial and remains mostly confined to the sphere of reporting and formal policies, in some cases it can also act as a catalyst for wider organisational changes (Flynn & Walker, 2020; Sarfaty, 2015). 28 Publications of the Ministry for Foreign Affairs 2023:5 The actual implementation of due diligence, meanwhile, is subject to a number of patterns: 1. A focus on avoiding (legal, reputational, commercial) risks for the company itself, rather than the respective third parties (Barraud de Lagerie et al., 2021), notably rights holders. Existing research seems to give further credence to the fear that due diligence could amount to little more than a box-ticking exercise (Martin-Ortega, 2017; Nolan & Frishling, 2020). 2. DD processes rarely include external stakeholders that could challenge corporate power (notably trade unions, the state and certain CSOs) in a meaningful way (Maher et al., 2021; Monciardini et al., 2021). 3. Companies continue to revert primarily to the private governance initiatives that they already know, and notably to codes of conduct, audits, and certification (Smit et al., 2020; Trautrims et al., 2021; Voss et al., 2021; Tran- Nguyen et al., 2021). 4. Companies will often try to outsource responsibilities, and associated costs to suppliers (Monciardini et al., 2021; Nelson et al., 2020; Harline, 2014), through auditing requirements or other forms of contractual requirements but without adjusting the purchasing practices that create pressure on suppliers in the first place. The third and fourth points above are particularly central when contextualising the potential effects of CSDDD on LDCs. The ‘cascading’ of due diligence requirements occupies a central place in the proposed EU Directive, which would require companies to seek contractual assurances from business partners that they will comply with the company’s code of conduct (European Commission, 2022a, p. 55). While the proposed Directive would explicitly forbid the cascading of costs for audits to suppliers, it is not clear how this could be avoided, especially in light of previous research on the effects of mandatory human rights and environmental due diligence. Whereas cascading could also potentially result in a ‘trickle-down’ of social and environmental standards in global value chains, there is a risk that rising costs and responsibilities could disproportionatey affect smaller suppliers in LDCs with limited capacity and influence. For instance, analyses of the EU Timber Regulation have shown that it exacerbates rather than diminishes existing inequalities between small and large producers in LDCs (Acheampong & Maryudi, 2020; Maryudi et al., 2020). Moreover, the idea is that it will also create opportunities for companies seeking to adopt these standards, as they would obtain easier access to European markets. 29 Publications of the Ministry for Foreign Affairs 2023:5 Companies that fall within the scope of due diligence legislation, meanwhile, may become even more risk-averse, and may be tempted to rely on a strategy of disengagement, by avoiding ‘risky’ suppliers (Nelson et al., 2020). From a corporate perspective, to the extent that disengagement is commercially viable, it is often perceived as ‘the easier, cheaper and less risky option’ (Nelson et al., 2020). This is also why the enactment of Dodd Frank (conflict minerals) in the United States led to wide-spread disengagement on the part of companies, who refrained from sourcing from conflict-affected regions (and notably the DRC) altogether. The negative impacts (increased poverty, violence, and human rights abuse) on artisanal and small-scale miners in these regions has been widely documented (Harline, 2014; Türkelli, 2020). Ultimately, the move towards due diligence may contribute to broader trends like supply chain shortening, supplier consolidation, and a rooting out of intermediaries (e.g. traders), smallholders, and those in the informal economy (Nolan, 2018). Typically, these are the types of activities that the most vulnerable segments of society rely on for their economic survival. In sum, the risk with CSDD legislation is incentivising ‘decoupling’, as companies focus on formal policies rather than actual practices, or implement practices that are mostly ineffective. 3.3 Potential impact of EU CSDDD on value chains Based on the review of previous research, the key takeaways in terms of expectations of how EU CSDDD will impact the way business between EU and LDCs are as follows: y Using private governance mechanisms to control social and environmental impacts in the GVCs is likely to simultaneously create (competing) economic, social and environmental upgrading and downgrading effects y The strategic response of respectively decoupling and/or recoupling CS policies and practice is a central determining factor for the social and environmental upgrading or downgrading effects y Incentives for meaningful supplier and stakeholder engagement (a key factor for successful recoupling) remain thin. Instead, risk-averse behaviour on the part of EU companies could lead to disengagement from (suppliers in) LDCs. y Contractual cascading’ to business partners is explicitly promoted. Often, contractual cascading goes hand in hand with the cascading of costs and responsibilities. y Industry schemes, multi-stakeholder initiatives, and associated third-party verification mechanisms (audits) are implicitly and explictly promoted. This raises concerns about the replication of their shortcomings, which have been exposed in earlier research. 30 Publications of the Ministry for Foreign Affairs 2023:5 4 EU–LDCs trade This section addresses the current status of trade between the EU and LDCs, highlighting especially I) non-tariff measures (NTM), which might inhibit LDCs from benefits (such as economic, social and environmental upgrading) of trade with the EU and II) socio- economic structures that are increasingly understood to inhibit gendered, racialised and other minority groups from reaping trade benefits. The first part (4.1) sets out the state of EU–LDCs trade using statistics from UNCTAD, the European Commission and other international bodies. The second part (4.2) discusses EU–LDCs trade imbalance and draws attention to commodity dependence and non-tariff measures (NTM) on the one hand and to the growing significance of the ‘inclusive trade’ perspective on the other hand, which relates to Finland’s broader development policy priorities. The third part (4.3) summarises available findings on the impacts of NTMs and gender inequality on LDCs trade and analyses the EU CSDDD in light of inclusive trade principles. 4.1 EU–LDCs trade imbalance The ability of LDCs to participate in global value chains remains constrained, despite numerous free trade agreements and LDC-specific Special and Differential Treatment provisions at the World Trade Organization (WTO). The LDCs share in global trade is less than 1%. Between 2010 and 2019, total exports in goods and services from LDCs increased by 35%, driven mostly by 100% increase in services exports. Merchandise exports declined by 25% in the same period (UN-OHRLLS, 2021). In 2021, 12% of total LDCs’ trade was done with the EU, with 14.4% of all LDC exports going to the EU, making the EU the most important trade partner of LDCs after China. Meanwhile, LDCs make up only 1.5% of total EU trade, with imports from LDCs accounting for 1.7% of all its imports and exports amounting to 1.3% of all EU exports. The EU trades the most with China (16.2%), the United States of America (14.7%), the UK (10%), and Switzerland (6.5%). (European Commission, 2021). 31 Publications of the Ministry for Foreign Affairs 2023:5 Figure 3.  LDCs top trading partners in 2021. Source: European Commission, 2021. 23,80 % 12 % 10,40 % 5 % 4,60 % 4,20 % 4,20 % 3,90 % 2,60 % 2,20 % China EU27 India USA UAE Singapore Thailand South Africa Switzerland Japan LDC top trading partners in 2021 Although dependence on EU trade fluctuates heavily within the LDC group (see table 4), about 41% of LDCs have the EU as a key market taking at least 10% of its exports. 32 Publications of the Ministry for Foreign Affairs 2023:5 Table 3.  LDCs with EU exports above 10% of its total exports. Source: European Commission (2021), * Ratio of Sao Tome and Principe’s exports to the EU from UNCTAD (2021a). LDC country Share of its exports to the EU Chad 67.8% Comoros 43.2% Bangladesh 38.3% Malawi 35.2% CAR 33.6% Equatorial Guinea 31.7% Madagascar 31.0% Lesotho 28.9% Mozambique 22.5% Liberia 20.5% Sierra Leone 18.1% Mauritania 17.5% Cambodia 17.4% South Sudan 17.1% Uganda 16.5% Myanmar 15.3% Ethiopia 12.6% Senegal 11.5% Sao Tome and Principe* 96.4% 4.1.1 Commodity dependence 85% of LDCs are heavily dependent on one or few products, mainly commodities such as fuel, minerals, and agricultural products, for exports (UN-OHRLLS, 2021). According to UNCTAD, countries are dependent on commodities when at least 60% of the total 33 Publications of the Ministry for Foreign Affairs 2023:5 merchandise export value comes from primary commodities. In 2021, 65% of goods imported to the EU from Africa were primary goods (food and drink, raw materials and energy). However, crude commodities exports fetch relatively lower value compared to manufactured goods. Although manufacturing exports from LDCs have increased steadily from just over 20% in 2011 to about 37% of total exports in 2019, the increase has not been sufficient to reduce their commodity dependence. Moreover, the exporting sectors are dominated by labour and resource-intensive, low-technology, and low-skill processing such as textiles and garments. The percentage is even higher for the EU market, where over 60% of all exports from LDCs were in low-tech manufactured goods. Still, the LDC share of world manufacturing exports is relatively low at 0.54%, compared to 52.8% in developed countries (UNCTAD, 2022a). The growth in manufacturing exports remains the key driver for economic growth, employment and poverty reduction that leads to integration into GVCs and graduation from LDC status (UN-OHRLLS, 2021). Figure 4.  Level of commodity dependence in LDCs. Source: UNCTAD (2021a). 85 % 90 % 67 % 50 % 0 % 10 % 20 % 30 % 40 % 50 % 60 % 70 % 80 % 90 % 100 % All LDCs African LDCs Island LDCs Asian LDCs Level of commodity Dependence Due to their dependence on commodities and undiversified markets, LDCs’ value chains are particularly vulnerable to shocks. Due to the COVID-19 pandemic, LDC merchandise exports declined by 12% in 2020 (compared to -7% global average), with fuel and mining products being the most affected, while services exports from LDCs declined by 31% (compared to -21% global average) attributed to the decrease in tourism due to the pandemic (WTO, 2022). 34 Publications of the Ministry for Foreign Affairs 2023:5 4.1.2 Non-Tariff Measures Non-tariff measures (NTMs) are as defined by UNCTAD “policy measures, other than ordinary customs tariffs, that can potentially have an economic effect on international trade in goods, changing quantities traded, or prices or both”. Policy measures may be restrictive even when they are not put in place to restrict trade. At the same time, “many of these measures are not meant to be import barriers and […] do not place the imported good at a disadvantage” (Goode 2007, p. 309). It is therefore important to consider if and how trade policy measures have been adopted with restrictive intent and/or are deployed in discriminatory fashion. NTMs of particular interest for this study are mandatory requirements, rules and regulations aimed at protecting the environment, as well as humans, animals, or the planet. Some of the most prominent NTMs include Sanitary and Phytosanitary Standards (SPS), and Technical Barriers to Trade (TBT). SPS measures are all trade rules that restrict trade in the interest of human, animal or plant life or health. TBTs are all trade rules that make specifications about production and product standards. Both SPS and TBTs are regulated at the WTO and in Free Trade Agreements (FTAs). According to the World Bank WITS database (2022a), the most common NTMs imposed by the EU on its imports include: labelling requirements (covering 73% of imports), inspection requirements (60% coverage), product quality or performance requirements (58% coverage), certification requirements (55% coverage), registration for TBT reasons (51% coverage), prohibition for TBT reasons (43% coverage), authorisation requirement for TBT reasons (38% coverage), testing requirements (37% coverage), packaging requirements (34% coverage) and restricted use of certain substances (31% coverage). Although NTMs can have a corrective impact and reduce negative externalities to people and societies (Santeramo & Lamonaca, 2019), they can also be more restrictive to trade than tariffs, especially for small and medium enterprises particularly in LDCs. UNCTAD estimates that between 2008 and 2012, NTMs facing agricultural imports from low-income countries were approximately equivalent to a 27% tariff, which is 5.4 times higher than tariffs. According to UNCTAD and the World Bank (2018), developed countries impose twice as many NTMs on import products than developing countries, and four times more than LDCs, while the intensity of regulation for imports in developed countries is almost three times higher than that of LDCs. The regulatory distance between LCDs and developed countries can make it particularly difficult for LDCs to fully participate in certain markets. A recent study on the impacts of NTMs and tariffs found that the negative impact of NTMs is more significant than the negative impact of tariffs (Korwatanasakul & Baek, 2021). This is particularly true for 35 Publications of the Ministry for Foreign Affairs 2023:5 backward participation as the disharmony of NTMs might negatively affect backward participation in GVCs, while positively affecting forward participation in GVCs, regardless of sector (Kim, 2021). The EU tends to have more stringent NTMs compared to the rest of the world. 94.31% of EU import trade, and 93.88% of products imported to the EU are subject to one or more NTMs compared to the world average of 71.98% of trade subject to NTMs and 43.04% of products subject to NTMs. The EU is also more stringent than other developed economies, where on average, 80% of trade is subject to NTMs (Cipollina & Dimaria, 2020). Only 40% of imports to LDCs are subject to NTMs (UNCTAD & World Bank, 2018). NTMs vary across sectors, with the agri-food sector and textiles being the most regulated sectors in all economies, having the most NTMs, as shown in Figure 5 below. Figure 5.  Prevalence of NTMs in imports to the EU. Source: World Bank WITS database, accessed December 15, 2022. 0,00% 10,00% 20,00% 30,00% 40,00% 50,00% 60,00% 70,00% 80,00% 90,00% 100,00% NTM coverage ratio NTM frequency ratio EU World average (75 countries) 36 Publications of the Ministry for Foreign Affairs 2023:5 Figure 6.  EU NTMs by sector. Source: World Bank WITS database, accessed December 15, 2022. 0 20 40 60 80 100 120 Textiles and Clothing Animal Vegetable Hides and Skins Chemicals Food Products Mach and Elec Transportation Footwear Plastic or Rubber Fuels All Import Products Miscellaneous Metals Wood Stone and Glass Minerals European Union Non-Tari� Measure by Sector NTM Frequency ratio NTM Coverage ratio A study by UNCTAD (Rial, 2014), analysed the impact of NTMs on European imports of agriproducts from across the world. The study found that each additional requirement in the EU reduced imports by 3%. However, the reduction of imports from LDCs was 5%, with African LDCs being highly affected by these measures. See Figure 7 below. 37 Publications of the Ministry for Foreign Affairs 2023:5 Figure 7.  The decline of agrifood imports from LDCs to the EU due to increase in NTMs. Source: Rial (2014). 3% decline in imports from all countries Additional 2% decline in imports from LDCS 5% decline in EU imports from LDCs The lack of quality and compliance infrastructure to meet international trade standards has been affecting LDCs’ international trade competitiveness, leading to substantial import rejections, in particular markets and commodities (UNCTAD, 2022a). For LDCs to unlock their export potential, they must develop the capacities of the private sector to comply with international trade standards, as well as the countries’ capacities to provide proof of said compliance easily, and affordably (UNCTAD, 2022a). For example, the EU biofuels regulation has been shown to inhibit export-related investments in Africa (Schuenemann & Kerr, 2019). Particularly, the absence of infrastructure for compliance makes it challenging for producers to provide proof of compliance in areas such as measuring land use change impacts due to biofuel production. Nevertheless, for countries that invest in capacity development, the impact of NTMs may be positive. For example, Indian textile and garments exports to the EU increased overtime despite having more stringent regulations to safeguard health and the environment (Chattopadhyay, 2019). The ability to meet the requirements increased textile and garment imports even to countries such as Germany that had stronger standards than the EU. Furthermore, bilateral trade agreements often reduce the cost of NTMs, and may therefore reduce their impact on trade (Cadot & Gourdon, 2016). 38 Publications of the Ministry for Foreign Affairs 2023:5 4.1.3 Inclusive Trade In terms of wider societal access to trade benefits, recent research highlights how distinct social groups are generally disadvantaged in such access due to their generally disadvantaged positions in society. Women, LGBTQ people, people of colour, indigenous people, persons with disabilities, are examples of such, but also small-scale economic actors such as SMEs have been shown to disproportionately shoulder the costs of trade adjustment and to benefit less from the gains of trade (Busse & Spielmann, 2006; Siddiqui, 2009; van Staveren et al., 2007). Consequently, in recent years, global trade governance institutions have adopted what is generally called an “inclusive trade agenda”. Inclusive trade aims to “create better outcomes for more people as a result of trade, and in the process ideally ensure that the benefits of trade are widely shared” (Goff, 2021, p. 273). While policy practices vary, there are three common features that characterise inclusive trade initiatives (ibid.), which also reflect some of the stated goals of the proposed Directive: (1) a concern for social groups that are typically marginalised in global trade, including women, indigenous peoples, and Small and Medium Sized Entreprises (SMEs); (2) a concern for sensitive topics, including Investor–State Dispute Settlement, labour rights and the environment; (3) and a concern about process, including a desire for trade policy-making to be more transparent, inclusive and democratic. The EU participates in the global inclusive trade agenda via its Trade for All Strategy (European Commission, 2015; Goff 2021), which aims to provide a progressive trade policy and sits together with the Reflection Paper on Harnessing Globalisation (European Commission, 2017) and the communication on A Balanced and Progressive Trade Policy to Harness Globalisation (European Commission, 2018). These policy papers highlight the need to ensure trade policies are made in order to enable strong consumer, environmental, social and labour protections; the promotion of human rights, public health and sustainable development; the right of the state to regulate in the public interest; and the importance of transparency and inclusion in trade policymaking (Young, 2019). As gender equality is also a key priority for Finnish development cooperation, the gendered aspects of LDC trade are of particular importance here. In general, trade can be seen to be gendered in at least two ways: (1) different genders are attributed different social standing as well as roles and responsibilities, gender characteristics have an impact on the ability of individuals to engage with markets and the productive economy more generally, (2) different economic sectors have different gender profiles, whereby certain sectors have a predominantly feminine or masculine workforce or can be segregated along gender lines according to ranks and responsibilities (Hannah et al., 2018). Gender stereotypes can be actively perpetuated and fostered in development, for example when women are seen as ideally suited for assembly line work due to their alleged more docile nature and ‘nimble fingers’ (Elson & Pearson, 1981). Trade adjustments can also impact 39 Publications of the Ministry for Foreign Affairs 2023:5 gender relations in country, for example when transition from subsistence farming to commercialisation and agricultural exports is associated with men taking over female- intensive crops (UNCTAD, 2014). Generally speaking, women In LDCs tend to be constrained in the agricultural sector by their lesser access to land, credit, tools and technology, mobility, as well as by the double- burden imposed by childcare and household responsibilities (UNCTAD, 2022b). They also disproportionately carry out unpaid farm work and suffer gender-based violence and sexual harassment (UNCTAD, 2022b). In export-facing manufacturing in LDCs, women workers are concentrated in low-pay jobs and poor-working conditions and health and safety standards are common, although less so in Export Processing Zones (EPZs). Women are often exposed to sexual and verbal abuse both in the workplace and on the way to work. Childcare facilities are often limited, and breaches of women’s sexual and reproductive rights have been reported where factory managers interfere with women’s family planning (UNCTAD, 2022b). While this suggests that the relationship between trade and gender is complex, it cannot be neglected where trade is considered a policy tool for development. Instead, it is important to actively incorporate a gender lens in the analysis of trade performance, and to bear in mind gendered impacts in the formulation of trade and development policies and strategies. 4.2 The impact of the EU CSDDD on EU–LDCs trade Based on the literature presented in this section, it is likely that the EU CSDDD will impact the extent of EU–LDCs trade. The CSDDD constitutes an NTM in its own right that will prompt regulatory changes that might further inhibit LDCs trade participation. In light of the EU’s commitment to inclusive trade, it is important to consider whether the CSDDD also remove significant trade barriers and lead to environmental and social upgrading, which is the goal of the directive. The significance of NTMs on trade and whether trade is inclusive or not can only be determined on a case-by-case basis, depending on specific countries, products, and standards. As such, generalisation of impact is neither feasible nor useful (Santeramo & Lamonaca, 2019). At the same time, NTMs disproportionately affect LDCs. NTMs affect sectors differently, e.g., agriculture is likely more vulnerable than manufacturing or extractive sectors (UNCTAD & World Bank, 2018). 40 Publications of the Ministry for Foreign Affairs 2023:5 4.2.1 Sensitivity assessment In this section, we propose a sensitivity approach to assessing the potential trade impact of the directive. Although comprehensive sensitivity analyses are generally more complex, we have, based on existing literature, identified a number of key factors that provide an indication for the impact of the directive on the extent of trade between LDCs and the EU. In order to estimate the number of technical and reporting requirements that will increase due to the CSDDD, as well as an LDC’s capacity to comply with new trade standards due to this directive, the following actions are suggested: y Identify the number of reporting requirements at EU-level and member country level that will increase due to the CSDDD (Santeramo & Lamonaca, 2019; UNCTAD, 2022a) y Assess the ability of LDCs, and their specific sectors to comply with new sustainability standards. This would include an assessment of both the regulatory regime as well as implementation capacity. This will have an implication on the cost of conformity and provision of proof, which has a bearing on whether suppliers from this country can meet sustainability standards, and therefore continue to trade with the EU. (Schuenemann & Kerr, 2019; UNCTAD & World Bank, 2018) y Assess the ability of local industries in LDCs, and specific companies to comply with new sustainability standards. This requires an assessment of both the regulatory regime as well as implementation capacity. This will have an implication for their ability to successfully participate in global value chains and upgrading. (Cadot & Gourdon, 2016, Cadot et al., 2018, Chattopadhyay, 2019) y Assess the importance of the EU as a market (UNCTAD, 2022a). This would predict whether LDCs should put more effort into accessing the EU markets and developing capacities of its private sector in meeting the requirements. Various indicators for trade are available from UNCTAD and the World Bank which shows trade between the EU and individual countries, as well as with LDCs. The table A4 attached in the annex summarises the state of trade between the EU and LDCs. As such, certain sectors and countries would be more sensitive to this new regulation than others. Certain indicators such as export market concentration indices and export product diversification indices produced by the World Bank may be useful to predict the sensitivity of countries, or products to the new regulation. Several factors can increase developing countries’ sensitivity to the impact of this directive. This sensitivity assessment would be more useful if done at a sectoral level to predict changes in trade, although to some extent, it can be done at a macro-level. 41 Publications of the Ministry for Foreign Affairs 2023:5 4.2.2 Social and environmental impact assessment of trade regulation Many nations and trade governance institutions conduct impact assessments in order to ascertain the likely impact of trade policy changes on e.g. human rights, environmental protection, gender. The European Commission uses its trade sustainability impact assessment process for trade negotiations, however, impact assessment techniques can be deployed to assess any type of trade policy change. Impact assessments are usually conducted using a mix of CGE modelling and consultative procedures with stakeholders. Across the literature on trade impact assessments, there is broad consensus that more and better data is needed in order to get a better picture of the wider societal and environmental implications of trade policy changes and there are ongoing debates regarding appropriate methodologies (Hannah et al., 2018; Fontana & Wood, 2000). One useful tool is the improved gender-based impact assessment framework developed by Hannah et al. (2018), which can be adapted to assess the impacts of trade on human rights and environmental regimes more broadly. The three-step assessment process consists of: 1. Assessing the Context, this requires engaging in a broad, case-specific survey of the economic context in question which sets out to determine the gendered, human-rights and environmental context within which the sector in the LDC under investigation operates. It also entails determining relevant stakeholders as well as their capacities to meaningfully engage in the impact assessment and eventual addressing of asymmetrical capacities. 2. Modelling, this step involves applying existing gender-based, human rights or environmental CGE modelling. 3. Additional Forms of Data Collection, which entails explicitly reflecting on data limitations and developing alternative methodologies for assessing gender-based, human rights or environmental goals. This may entail consultation and exchange with local groups affected by the trade policy change, who, particularly in LDC contexts, are likely to retain information that is not available elsewhere. In section five of the report, we illustrate how to apply steps 1 and 3 of the suggested social and environmental impact. In the absence of a large sample size and full econometric modelling, it is nonetheless possible to assess the inclusiveness of the EU CSDDD itself as a new trade regulation, as we outline in the following section. 42 Publications of the Ministry for Foreign Affairs 2023:5 4.2.3 Assessing the inclusiveness of the EU CSDDD Kuhlmann (2021) develops seven dimensions against which the inclusiveness of a piece of trade regulation can be assessed, addressing systemic and stakeholder vulnerabilities and advance sustainable development through trade. The principles, as well as their rationales and required actions by governments are set out in Table 4. Table 4.  Inclusive Trade Principles. Adopted from Kuhlmann (2021). Inclusive Trade Principles Rationale Actions Special & Differential Treatment  Countries have different levels of development, needs and resources.  Recognise levels of development in legal texts and integrate capacity building.  Flexibility  Periods of uncertainty or crisis require flexible trade rules, particularly in poorly resourced contexts.  Include legal provisions in trade law that allow responding quickly to needs of stakeholders.  Include “review & revise” provisions.  Sustainable Development  Trade and growth need to support development via linking to the SDGs.  Incorporate ways to address environment, health, labour, gender equality, climate, poverty eradication and other considerations in trade law.  Equity  Economically marginalised groups disproportionately shoulder trade costs and have unequal access to the benefits of trade.  Tailor the design and implementation of trade law to the needs of economically marginalised communities, racial and ethnic minorities, small farmers, SMEs, women, people with disabilities, and indigenous groups.  Legal & Regulatory Gateways  Lack of knowledge about legal and regulatory frameworks.  Map legal and regulatory gateways that track common trade measures.  Inclusiveness, Engagement & Transparency  Lack of knowledge about laws and regulations among affected communities.    Lack of knowledge about impact on the ground of trade laws and regulations among policy- makers.  Engage in capacity building to improve knowledge about laws and regulations among affected communities.  Institutionalise stakeholder participation, consultation and engagement.  Include transparency provisions.  43 Publications of the Ministry for Foreign Affairs 2023:5 Inclusive Trade Principles Rationale Actions Implementation & Impact  Discrepancy between intended and real outcomes.  Assess implementation, impact and equitable distribution of trade law and regulation.  Assess how well trade laws and regulations measure up to stated or shared goals.  When assessing the EU CSDDD against the seven inclusive trade principles set out in Table 4, it is clear that the directive is firm-focused and does not refer to Special and Differential Treatment as the first inclusive trade criterion per se. Nonetheless, as has been previously presented in this report, it is clear the negative social and environmental effects that the directive addresses, disproportionately occur in developing countries. Therefore, the integration of capacity building in countries where the effects of the directive are to be expected should be central. This is not currently integrated into the legal text but may constitute an important aspect of implementation. Flexibility, the second inclusive trade criterion, is in principle provided by the directive where it allows the regulation to be reviewed on a seven-year basis, however there is a lack of legal clarity on how governments respond quickly to stakeholders’ needs if they should arise in the interim. Despite grievance procedures and the possibility to refer to supervisory authorities, the directive is not prescriptive as regards any obligations to resolve such matters quickly. In terms of the third inclusive trade criterion, sustainable development, the directive explicitly integrates rights and prohibitions anchored in international human rights and environmental law. However, the focus lies in areas that are traditionally seen as trade-related, such as labour abuse and environmental degradation, but falls short of incorporating new inclusive trade areas such as gender. In view of Finland’s wider development priorities, incorporating a gender-dimension in the implementation of the directive would appear to be key. Similarly, in terms of the fourth inclusive trade criterion, equity, SMEs are the only group listed under inclusive trade criteria, but does not tailor its design to other gendered and racialised minorities, which can be corrected in implementation. The directive does encourage Member States to set up regulatory gateways that help counter the lack of knowledge about rules and regulations as required by the sixth inclusive trade criterion. Given the lack of capacity in developing countries, which is particularly pronounced among the local communities and workers that the directive is 44 Publications of the Ministry for Foreign Affairs 2023:5 aiming to protect, it is questionable to what extent the proposed dedicated websites and digital platforms can be effective. This ties in with the seventh criterion of Inclusiveness, Engagement & Transparency, which must be assessed from the perspective of marginalised persons and groups. Here, it would be crucial in the implementation of the directive to actively work on capacity building, stakeholder consultation and engagement among those persons that the directive aims to protect. Given social realities and work conditions in LDCs, the directive is not adequately equipped to deliver in this category. 4.3 Summary: potential impact of EU CSDDD on trade y The EU Directive only directly targets larger corporations, but as shown in the literature reviews above, its rules are bound to also impact on intermediary and supplier companies in the various value chains. Some of these smaller players may be local companies in LDCs. For this reason, the impact of the directive has to been considered in a wider context of direct and mediated trade impact. New regulations add non-tariff measures that may be restrictive to trade between LDCs and the EU. y The LDCs’ ability to comply with new standards would determine whether they are able to maintain their trade levels with the EU. In some cases, introducing stronger standards in LDCs may increase their competitiveness, and therefore trade levels. At the same time, these gains tend to materialise in forward participation in GVCs (measured in domestic value-added share of gross exports), while backward participation tends to be hampered by NTMs (measured foreign value-added share of gross exports). y The importance (and competitiveness) of the EU as a market would affect the LDCs’ decision to invest in closing the regulatory gap. However, local companies may not have the resources or technical capacity to close the gap on their own. Technology and knowledge transfer as well as technical assistance may be a standard remedy to ensure local companies continue to participate in the value chain. y Social and environmental impact assessments of the CSDDD on a case-by- case basis would reveal whether the directive supports or undermines the attainment of its goals as well as Finnish development policy priorities in each case. y There are risks that real impacts remain unknown to governments due to gaps in EU CSDDD, notably in capacity, transparency, and engagement dimensions of inclusive trade principles. 45 Publications of the Ministry for Foreign Affairs 2023:5 5 Case Reports As outlined in previous sections, the impacts of the new directive on EU–LDC trade are likely to be country-specific and sector-specific. Therefore, to further illustrate the potential impact of the directive, we selected two high-risk sectors in two LDCs as examples – coffee production in Tanzania and textile and garment manufacturing in Ethiopia. Global agricultural supply chains face various human rights and environmental risks, for which corporations regardless of size trading in the EU are expected to report on the actual and potential adverse impacts of their activities including how they identify, assess, mitigate, and prevent human rights and environmental risks. The agricultural sector which employs 55% of the population in LDCs (UNCTAD, 2022a) is particularly vulnerable to climate change and faces various business related human rights abuses across its supply chains. The garment and textile sector is also becoming increasingly important to LDCs as an entry-level for industrialisation and a strategic sector for employment, growth, and graduation from the LDC status (UN-OHRLLS, 2021), while human rights abuses and adverse environmental impacts are prevalent in these GVCs (ILO, 2022). 5.1 Methodology The two case studies review existing literature on sustainability and responsibility in Ethiopia’s garment sector and Tanzania’s coffee sector. To develop our contextual understanding, we summarised the state of EU–LDCs trade and reviewed the institutional context in light of the proposed directive. This meant a review of ratifications of international conventions, existing legislation, as well as a mapping of potential threats to human rights, labour rights and environmental rights. Furthermore, we highlighted the current approaches to CSR in LDCs, with examples from Ethiopia and Tanzania. After reviewing the existing literature, we conducted altogether 11 interviews with organisational representatives from the sectors of inquiry, as summarised in Tables A1 and A2 attached. The interviews in Ethiopia consisted of six pre-selected organisations: a governmental organisation, a human rights organisation, an international development organisation, a private global garment buyer operating in the EU, a global labour union, and a private sector association. One of the interviews was conducted through a video call, the rest were undertaken face-to-face in the city of Addis Abeba, Ethiopia. 46 Publications of the Ministry for Foreign Affairs 2023:5 The interviews regarding the Tanzania case comprised four online interviews with (intermittent) video connection, as well as one written interview through the chat function. The interviews in Tanzania consisted of five pre-selected organisations: a governmental organisation, a cooperative, a private global coffee exporter operating in the EU, an international NGO and a private coffee roaster operating in Finland. The interview participants were approached either through email with an attached support letter from the Ministry for Foreign Affairs of Finland, or by phone call. Prior to the interview, each participant was asked to read through the interview consent form. Every interviewee also signed the consent form as a sign of agreeing to the interview. The interviews were recorded with permission from the interviewees. All the interviews can be characterised as semi-structured, in-depth, qualitative interviews (see, e.g., Longhurst, 2003). The interview questionnaire was devised with input from the entire research team and informed by the general literature review, as well as the c