Bureaucracy and ESG certifications are squeezing German international supply chain

Standard bureaucracy, uncertainty, and high costs: German industry considers the Supply Chain Certification Act, which went into effect a year ago, an aberration of economic policy. The regulation forces companies to ensure that their suppliers abroad are not involved in exploitative activities, do not allow children to work, or are a threat to the environment. For now, this is a German regulation, but it anticipates a devastating European regulation theoretically passed in December.

Local companies must verify and document this. In a survey by the Federation of German Industries (BDI), published in the German newspaper Welt, the vast majority of companies complained of negative consequences. And although the “Law on Supply Chain Care Obligations” applies only to large companies with 3,000 or more employees in the first year and to companies with 1,000 or more employees from the beginning of the year, the additional burden also affects small and medium-sized companies that nonetheless also supply large companies because they still have to certify their products.

“The enormous bureaucratic effort the law creates is bringing many companies, especially small and medium-sized enterprises, to the brink of despair,” said BDI President Siegfried Russwurm. In the survey, 92 percent of companies covered by the LkSG criticized the additional bureaucratic effort as “very high” or “high.”

Among mainly medium-sized companies, which are only indirectly affected by the law, the figure is almost as high, with 88 percent complaining of a high burden. To protect themselves, large companies demand proof from their suppliers that they respect human rights at home and abroad.

According to the survey, one in two companies today is forced to use the services of outside consulting firms or law firms. The BDI is equally critical of the extension of the Supply Chain Act to companies with 1,000 employees. This further increases the potential for conflict in supply chains and the disproportionate bureaucratic burden, Russwurm warns.

Given Germany’s heavy reliance on business with China and the supply of raw materials and energy, the economy and the federal government are aiming for greater diversification of trade relations. But according to the BDI, the Supply Chain Act counteracts this goal and is a “geopolitical self-objective.”

As a survey of nearly 400 industrial companies shows, nearly one in four large companies with more than 3,000 employees is reducing the number of their suppliers. Fourteen percent are even considering withdrawing from high-risk countries, but this will worsen the competitiveness of German companies and, in any case, will not improve conditions in those countries.

The risk of withdrawal from high-risk countries or termination of trade relations

Even among companies that have only been subject to the law since the beginning of the year, 15 percent plan to withdraw from at-risk countries or even sever trade relations to reduce risks to human rights and the environment.

In addition, three out of four industrial companies surveyed complain that this supply chain certification law is adversely affecting their business appeal abroad. International partners perceive this law as increasingly protectionist, according to business associations.

“Politicians should accept that the influence of German companies beyond their direct contractual partners is limited,” says BDI President Russwurm. In his view, a more strategic use of development cooperation would be more effective in raising standards in the supply chain of German companies.

Last year, the Association of German Chambers of Industry and Commerce (DIHK) also arrived at a similarly negative result following a survey of members. The Wholesale and Foreign Trade Association (BGA) also criticized the “bureaucracy monster.”

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The obvious bureaucrats’ self-defense

Completely different is the assessment of the Federal Office of Economics and Export Control, which reports to the Federal Ministry of Economics: the LkSG challenges companies but does not overwhelm them, the office said earlier this year. Implementation of the law has been highly successful. During the nearly 500 inspections of businesses in the first year, there was no need to impose penalties. Of course, the bureaucrat comes to defend his actions. Would anything else be possible?

Meanwhile, fears are spreading in the economy that the supply chain will soon shrink. In fact, the German Supplier Control Act is just a preparation for a much tougher law that holds manufacturers accountable for human or environmental rights violations carried out by suppliers, with a heavy and generalized legal burden. It is a very heavy bureaucratic burden that will damage the competitiveness of European companies, including Italian ones, and protect neither a job nor a human right for anyone. Simply put, those products will go to 90% of the world that is not in the EU.

Accuses to Chancellor Scholz

If standards are not met abroad, logistics chains that pose a risk will face high penalties. “We are paying for Europe’s raised index finger with the loss of welfare,” warns the president of the Wholesale and Foreign Trade Association (BGA), Dirk Jandura. The von der Leyen Commission has disappointed him immensely: “It is not the voice of economic reason, but the face of bureaucracy.” This is not a great discovery: Brussels is ruled by a self-referential bureaucracy that pursues as its goal the impoverishment of European citizens for the assertion of its own absolute power; only the Germans did not realize this.

To stop Brussels’ plans, Jandura and Russwurm, together with employers’ president Rainer Dulger and craft industry president Jörg Dittrich, sent an incendiary letter to the federal chancellor. In it, they ask Olaf Scholz (SPD) not to accept EU plans for a law on moral and environmental control of the supply chain

The provisional agreement between the Council and Parliament in mid-December was rushed and immature, the letter says. “The proposed regulations are neither practical nor proportionate. We therefore ask the federal government not to accept the outcome of the negotiations.” This also puts the German government in crisis because the FDP, the liberals, have rejected the German draft directive, and this will force Germany to change its position. This will send the Commission into a tailspin, and there will be great confusion in the European institutions, but this is only good.