Trust in global value chains 

The failure to offer a remedy to the social and environmental externalities deriving from global production has long been one of the main causes of public distrust towards the international trade regime and the rules governing it. Global value chains remain characterised by labour and human rights abuses and environmental degradation committed by corporations. Part of a wider trend in global governance, private actors have come to play a substantial role in the transnational regulation of sustainability and responsible business practices.

Private regulators in global value chains
Voluntary sustainability standards (VSS) drafted by multi-stakeholder and industry bodies have been created independent from public authority to define sustainability-related features of products. These standards specify what a sustainable product looks like, normally implementing a host of international obligations, and employ third-party certification to verify producers’ compliance. VSS play a crucial regulatory role in value chains. Over time, public authorities especially in the EU have started to use these standards, in particular to create a presumption of compliance in measures regulating value chains such as those of biofuels, timber and conflict minerals.

Another popular strategy employing private actors to pursue public goals can be found in the emerging moral responsibility of corporations to avoid causing or contributing to adverse human rights impact in their value chains. The United Nations Guiding Principles on Business and Human Rights operationalise businesses’ responsibility via human rights due diligence processes (HRDD). Multinationals become value chain regulators in the domain of human rights, with the responsibility to implement strategies and procedures to monitor respect of human rights, to take action in cases of breach, and to make sure that other economic entities connected to their activities do the same.

Trustworthy private regulators?
Both strategies rely on private authority. However, the potential of private standards and corporations to regulate sustainability in global value chains stands in sharp contrast to the fact that private actors are driven by private interests and economic motivations. Direct supervision and control by public authority is complicated by the technical nature of private actors’ regulatory prerogatives and their fragmentation. How can these private regulators be made trustworthy?

Institutional trust for public and private authority
Public authority necessitates the trust of its subjects. Without trust in public authority, subjects would not follow its directions, thereby ultimately undermining its authority. Public authority is therefore at the same time empowered and bound by trust. Public authority actively pursues and signals trust through procedures and requirements for including the interests of those affected, so that it can act in regard of all interests involved. The concept of institutional trust (Braithwaite, 1998; Tyler, 1998) is thus made visible through the procedures by means of which institutions guarantee and signal trustworthiness (Shapiro, 1987). With respect to its subjects, an institution should act with fairness; it should disregard its own interests as well as specific interests and instead take into account those of all the affected subjects. (Farina, 1993).

Also private regulators necessitate and operate, if partially, on the basis of this type of trust from those affected by their ‘rules’; this is particularly visible for VSS. A private standard has to be trusted by the consumers who purchase certified products as a trustworthy regulator. Consumers’ trust creates a market for sustainable product which gives a reason for producers to bear the extra cost of certification with a promise of economic returns. Therefore also producers are ‘subjects’ of the standard: they need a good (economic or ‘moral’) reason to take up certification. Some VSS ensure and signal their trustworthiness via procedures in standard-setting to mediate between different interests of those subject to them and attempt to ensure impartiality from the industry.

For companies implementing HRDD, a process has started to ensure that the trust of those more closely affected (i.e. the human rights holders) is necessary not just to avoid bad publicity, but increasingly to exercise their economic functions as expectations of business conduct evolve. This process coincides with the affirmation of regulatory responsibilities in the public domain for corporations. Companies thus have to signal their trustworthiness by demonstrating how human rights responsibilities are met, for example through human rights reporting. Specific procedures for other-regardingness are not present; different interests are only incorporated either spontaneously by the corporation, or under the threat of NGOs advocacy or litigation.

The way forward for trustworthiness
Mechanisms must be identified to enhance the need for institutional trust of private regulators. Since private regulators act partially on the basis of economic concerns, and partially on the basis of institutional trust, ensuring trustworthiness is about finding the optimal balance between (economic) incentives and 'other-regarding' procedures. Enhancing the conditions for trust should be a key responsibility for public authorities using private actors in the regulation of value chains, especially given the structural employment of private regulatory authority made by public regulators across the world.

This blog post is based on the author’s contribution to the Collaborative Project workshop on “Trust in Trade” which was held on 22 January 2018 at the Faculty of Law, Maastricht University. 

 Written by Enrico Partiti.