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Germany Considers Pausing Supply Chain Due Diligence Law Amidst Business Backlash

TL;DR intro

  • Pause on Due Diligence Law:The German government is considering a two-year pause on its Supply Chain Due Diligence Law to ease the bureaucratic burden on companies until a European directive takes effect in 2026.
  • Companies' Views:Many German companies find the law costly and cumbersome, arguing it affects their global competitiveness, while some support it for fostering responsible corporate behavior.

The German government is contemplating a two-year suspension of the country's supply chain due diligence law, a move aimed at alleviating the bureaucratic load on businesses until a European directive takes effect. This consideration, announced by Minister Robert Habeck, has stirred mixed reactions among politicians and business leaders.

Germany's Supply Chain Act, effective since January 2023, mandates companies with over 1,000 employees to implement rigorous due diligence procedures to monitor human rights and environmental standards throughout their supply chains. However, many German companies have struggled with the financial and bureaucratic burdens imposed by the law, claiming it undermines their global competitiveness.

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Impact on Businesses

Businesses like BAUCH, a German engineering company, have expressed significant challenges in complying with the Supply Chain Act. CEO Manfred Bauch highlighted the difficulties in monitoring the extensive supply chains that span across multiple countries and involve numerous intermediaries. "It is almost impossible to access a mine in Asia or Africa from Europe," Bauch remarked, underscoring the impracticality of obtaining accurate information about the entire supply chain.

The law has not only increased operational costs but has also put German companies at a disadvantage compared to non-European competitors who do not face similar regulatory requirements. For instance, the logistics sector has criticized the law for its unrealistic expectations, with Harry Seifert, chairman of Seifert Logistics GmbH, calling it "nonsense" given the current economic climate.

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Government and Political Reactions

Minister Habeck's proposal to pause the law was seen as a potential relief for businesses. He stated, "We can pause it. That would be the best thing. I think that is absolutely feasible," suggesting that a suspension could liberate companies from the current constraints. However, the suggestion has met resistance from some coalition partners.

The Social Democrats party, through lawmaker Martin Rosemann, rejected the idea, questioning whether human rights should be compromised to appease businesses. In contrast, FDP lawmaker Carl-Julius Cronenberg supported the proposal, arguing that suspending the law would provide much-needed breathing space for small and medium-sized enterprises (SMEs) during economically challenging times.

Future Outlook with EU Directive

The European Corporate Sustainability Due Diligence Directive (CSDDD), approved by the EU parliament in April 2023, is set to be implemented by 2026. This directive will require large companies operating within the EU to ensure their supply chains do not involve forced labor or environmental harm, aligning closely with Germany's current legislation.

German companies must prepare for this forthcoming directive, as it will necessitate redrafting the national supply chain law to comply with EU standards. The pause proposed by Minister Habeck could serve as a temporary measure, allowing businesses to adjust and prepare for the broader European regulations.

Industry Challenges and Compliance Costs

The compliance costs associated with Germany's Supply Chain Act have been a significant point of contention. The German government estimated annual compliance costs at €43.5 million, with an additional one-off cost of €109.7 million. However, business groups argue that the actual costs are much higher. Violations of the law can result in fines up to €8 million or 2% of a company's annual revenue.

Moreover, the law's requirements have created a cascade effect, where smaller suppliers are pressured by larger companies to meet due diligence standards. Achim Dercks, Deputy Chief Executive of the German Chamber of Commerce DIHK, noted that SMEs are often overwhelmed by the multitude of information requests from their larger partners, lacking the capacity to enforce standards among their suppliers.

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The debate over Germany's Supply Chain Act highlights the tension between regulatory compliance and business competitiveness. While the law aims to foster responsible corporate behavior and ensure human rights and environmental standards are met, the practical challenges and costs associated with compliance have led to widespread criticism from the business community. As Germany contemplates a temporary suspension of the law, companies must prepare for the broader EU directive that will shape the future of supply chain due diligence across Europe.

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