Made in Misery: Mandating Supply Chain Labor Compliance.

• Author: Zenker, Julia

TABLE OF CONTENTS I. INTRODUCTION 298 II. THE PRIME CONDITIONS FOR SUPPLY CHAIN 304 CONTRACTING A. The Macro Level 304 B. The Micro Level 306 III. A TUG OF WAR OVER SUPPLY CHAIN 310 MAINTENANCE BETWEEN PRIVATE AND PUBLIC GOVERNANCE REGIMES A. The Achilles Heel of Public and 311 Private Transnational Labor Governance 1. Public Governance 311 2. Private Governance 313 3. Battle of the Norms: When 318 Public and Private Governance Regimes Collide B. Taking Advantage of Synergistic Gains: 320 Private and Public Working Together 1. The Dominican Republic 321 2. Jordan 322 3. Brazil 324 IV. GOVERNING A CONSTELLATION OF INTERESTS 326 A. Importing Countries 326 B. Exporting Countries 329 C. Private Regulators 329 D. Global Buyers 330 E. Suppliers 330 V. CONCLUSION 331 I. INTRODUCTION

International outsourcing has become a hallmark of the modern economy. (1) On the campaign trail, Donald J. Trump put companies on notice that outsourcing would be reversed under his presidency. Trump's "re-shoring" or "insourcing" plan--the idea that as the cost of manufacturing in developing nations increases, manufacturing jobs will return to developed countries--underscores the lack of nuance behind such a policy. (2) Manufacturers will not be driven back to developed countries, but rather will seek out alternative countries in the developing world with more favorable manufacturing conditions. (3) Outsourcing appears to be a permanent market feature, and therefore the workers that assemble most consumer products will remain abroad. To ensure that products have not been made under abhorrent working conditions, the transnational community must orchestrate a comprehensive supply chain maintenance framework.

While intra-industry trade--the flow of goods within the same industry--comprises a large portion of international trade between developed countries, international outsourcing has introduced developing countries as major players in the world market. (4) From 2004 to 2008, the value of outsourcing contracts ranged from $85 billion to $97 billion worldwide. (5) The trade in parts or components of a final product has proven more cost-efficient for firms than intra-firm production in many industries. (6) Developments in telecommunications, finance, and neoliberal trade policies have enabled firms to produce goods at a lower cost by fragmenting the stages of production, often across the globe. (7)

On the whole, developing countries lack the robust regulatory and enforcement frameworks possessed by their developed counterparts. (8) Even when developing nations have robust labor protections on paper, their public institutions are generally too weak to enforce them on the ground. (9) The developing countries' labor markets, therefore, have a comparative advantage over the labor forces in developed countries. (10) The absence of regulatory safeguards for labor conditions effectively lowers the cost of labor in the developing world as compared to the developed world. (11) Although firms are tasked with coordinating the modularized production system and transporting the goods from one stage to the next, the savings in the costs of labor exceed the added transactional costs. Developing nations, therefore, are presented as prime locations to modularize the manufacturing of component parts. (12) Indeed, a survey of three hundred high-ranking corporate executives revealed that the most attractive destinations for offshore activities are India, China, and Latin America. (13)

The corporations investing in international outsourcing have a strong interest in perpetuating substandard working conditions, particularly in those developing regions mentioned above. (14) In part, the cost advantage of outsourcing is the product of discounts on workplace safety and worker rights protections. (15) As a result, principal corporations are reticent to urge their suppliers to raise the labor standards at their factories unless reputational consequences would harm the principal corporations' bottom lines. (16) Otherwise, a firm-wide policy to raise labor standards at outsourcing facilities may very well undermine the gains the firm yields by outsourcing. (17)

Historically, consumer demand has driven change in the labor conditions of manufacturing workplaces in the developed world. While campaigns for sweatshop labor reform organized by consumers can be an effective strategy for changing corporate behavior, typically a highly publicized tragedy must strike in order to galvanize consumers. (18) The infamous Triangle Shirtwaist Factory fire revealed the consequences of the poor treatment of factory workers during the Industrial Revolution in the United States. (19) The company had a policy of locking the workers inside, and the public outcry after the workers in the factory were unable to escape the flames precipitated labor law change. (20) Likewise, the more recent collapse at Rana Plaza in Bangladesh temporarily incited consumer outrage and a renewed interest in reforming labor conditions in the manufacturing sector. (21)

However, manufacturing is no longer contained within the borders of a single state, and laborers and consumers are no longer constituents of the same politicians. Since the manufacturing sector is now largely outsourced to suppliers abroad, the developed world's consumer base-and thereby voter base--has considerably less leverage to force labor reforms in key jurisdictions. (22)

The increased complexity and the international character of manufacturing as a result of outsourcing have demanded a creative solution to raise labor standards. Over the past two decades, the consumer push for corporate social responsibility has produced several private methods of ensuring labor law compliance, such as voluntary codes adopted by individual firms, collective standards adopted by a consortium, and non-profits dedicated to certifying corporations and inspecting foreign suppliers. (23) The Worker Rights Consortium (WRC) published a model code of conduct that requires its licensees to promote freedom of association at their supply chain factories. (24) Non-profits like "B Lab" assess traditional corporations dedicated to considering the interests of "stakeholders" in business decisions. (25) Worldwide Responsible Accredited Production (WRAP), the Fair Labor Association (FLA), and similar organizations inspect and certify factories abroad that comply with certain workplace safety and worker rights standards. (26) Through this certification mechanism, brands can advertise to their consumers that they only outsource to suppliers with certain labor standards. (27)

While these developments in non-profit oversight and certification seemingly align the interests of suppliers, principal corporations, and workers, actors have conceived of ways to game the certification systems. (28) Principal firms have little reason to directly intervene when the compliance monitoring mechanisms in place insulate them from backlash to a failure in supplier compliance. (29) And the laws of the countries in which firms are incorporated do not impose liability on parent companies for the misdeeds of their manufacturing subcontractors abroad. (30)

Moreover, not all component parts are manufactured and sold directly to the parent company. (31) Supply chains are often comprised of multiple stages of production in several factories that supply one another--hence the "chain" moniker. (32) Some suppliers may, as a business practice, obscure the names of subcontractors or other upstream suppliers to ensure that buyers do not make dealings without the first-tier supplier. (33) As a result, there is no incentive for the suppliers or buyers to ensure that the factory preceding them in the chain has adequate labor protections. (34) If an upstream supplier has labor violations in its factory, the first-tier supplier and buyer can plead ignorance. (35)

Supply chain contracts between parent companies and suppliers have also undergone a transformation in response to consumer outrage over preventable industrial accidents. It is now commonplace for supply chain contracts to contain labor provisions. (36) Parent companies have, in effect, attempted to supplement or layer public labor regulation with private contract provisions. (37) Whether these provisions are actually enforced between principal and supplier to raise the standards of workforce safety and improve worker treatment remains to be seen. (38) Labor provisions and non-profit certifications may very well serve to absolve a parent company of wrongdoing in the court of public opinion in the event of an accident or an expose revealing sweatshop conditions in the parent company's supply chain. (39)

A clear trend has emerged in response to public outcry over supply chain labor conditions: private actors are assuming the role of regulator where public governance used to reign supreme. (40) The emergence of non-profit oversight of supply chain labor practices and the addition of labor provisions in supply chain contracts raises new questions with regard to transnational labor governance. Scholarship over the past decade indicates that private labor regulation alone cannot replace labor law enforcement by strong public institutions. (41) The principal query is no longer whether those private governance mechanisms have been more effective than public governance mechanisms in raising labor standards across supply chains. (42) Rather, the new challenge in eradicating the pernicious problem of supply chain labor management is outlining the ways in which public governance and private governance can complement and reinforce one another. (43)

This Note analyzes the functions and failures of public and private governance tools in the supply chain labor context. The proffered solution harnesses the various actors' interests in each link on the chain to raise labor standards through complementary public and private governance mechanisms. In Part II...