Supply Chain Due Diligence Risk Assessment for the EU: A Network Approach to estimate expected effectiveness of the planned EU directive

Abstract: Globalization has had undesirable effects on the labor standards embedded in the products we consume. This paper proposes an ex-ante evaluation of supply chain due diligence regulations, such as the EU Corporate Sustainable Due Diligence Directive (CSDDD). We construct a full-scale network model derived from structural business statistics of 30 million EU firms to quantify the likelihood of links to firms potentially involved in human rights abuses in the European supply chain. The 900 million supply links of these firms are modeled in a way that is consistent with multiregional input-output data, EU import data, and stylized facts of firm-level production networks. We find that this network exhibits a small world effect with three degrees of separation, meaning that most firms are no more than three steps away from each other in the network. Consequently we find that about 8.5% of EU companies are at risk of having child or forced labor in the first tier of their supply chains, about 82.4% are likely to have such offenders at the second tier and more than 99.1% have such offenders at the third tier. We also profile companies by country, sector, and size for the likelihood of having human rights violations or child and forced labor violations at a given tier in their supply chain, revealing considerable heterogeneity across EU companies. Our results show that supply chain due diligence regulations that focus on monitoring individual buyer-supplier links, as currently proposed in the CSDDD, are likely to be ineffective due to a high degree of redundancy and the fact that individual company value chains cannot be properly isolated from the global supply network. Rather, to maximize cost-effectiveness without compromising due diligence coverage, we suggest that regulations should focus on monitoring individual suppliers.