Assessing the Potential Impact of the EU Forced Labor Regulation and Corporate Sustainability Due Diligence Directive

On November 19, the European Council adopted a Forced Labor Regulation (FLR) banning products in the EU market that are made using forced labor, which is the final step in the European Union’s decisionmaking process. The European Union’s adoption of this regulation follows on the heels of and complements its adoption of the Corporate Sustainability Due Diligence Directive (CSDDD), which became effective on July 25, 2024, and calls upon companies of a defined size to conduct due diligence in identifying and addressing adverse human rights and environmental impacts within their value chains and operations. These actions are significant not only because of their implications for the private sector’s consideration of the human rights and environmental consequences of their activities but also for international business governance, as they reflect the transformation of soft law practices into binding legal requirements.

Q1: What does the FLR cover, and when will it take effect?

A1: The FLR covers goods, including their components, imported into, exported from, or made in the EU market that involve forced labor, as defined by the International Labor Organization. The FLR uses a risk-based approach, in which country and EU authorities will examine a company’s imports, exports, and products for areas of risk and address them directly through investigations and further actions. Enforcement and enactment of the regulation will require collaboration between the EU authorities and its member states, and decisions to investigate can come from credible sources or assessments of risk factors. The burden of establishing that a good has been made with forced labor rests with EU or national authorities. In cases where violations are found, products must be blocked or removed from the EU market and disposed of as appropriate. Remedies may include financial or nonfinancial compensation for workers affected by forced labor as well as reimbursement of the costs incurred by public authorities for any necessary remedial measures. The regulation also mandates the creation of a database aimed at assisting relevant EU and EU member-state authorities in identifying products and regions of the world where there is a significant risk of forced labor and authorizes the European Commission to “cooperate and exchange information with authorities of third countries, international organizations, civil society representatives, trade unions, business organizations and other relevant stakeholders.” The regulation entered into force on December 13, 2024, and must be implemented three years later.

Q2: What does the CSDDD require, and what will it mean for companies in practice?

A2: The CSDDD requires that EU companies with over 1,000 employees and a net turnover (gross revenue minus incurred costs) of EUR 450 million and non-EU companies with a net turnover of EUR 450 million in EU markets regardless of their number of employees conduct due diligence in understanding and assessing risks involving human rights and environmental impacts in all of their activities. This includes both upstream operations (activities related to the production of goods, for example, supply of raw materials like cotton or minerals) and downstream operations (activities related to distribution of goods). The directive will also apply indirectly to many subsidiaries and parts of companies outside of the specific targets in Europe as companies subject to the directive implement their changes throughout their operations. Businesses must identify areas of adverse impact, prioritize impacts by severity, and take actions to end or mitigate adverse current impacts as well as prevent future and further impacts. The directive also specifically requires companies to adopt and implement a transition plan for climate change mitigation. The remainder of the requirements primarily involve monitoring and reporting—both by the companies and by new external mechanisms—to ensure effective actions are being taken. These external mechanisms include supervisory authorities established by each member state to monitor the implementation of the directive and, if needed, impose administrative sanctions. The European Commission will serve as a coordinating authority, reviewing the overall implementation and effectiveness of the legislation. The CSDDD is complemented by the recently adopted Corporate Reporting Sustainability Directive, which requires large companies to report on the social and environmental impacts of their activities. 

Companies that fail to comply with the CSDDD’s requirements will be subject to supervisory administrative measures, which may include sanctions of up to 5 percent of the company’s global turnover, civil liabilities, and exclusion from public procurement. Such potentially substantial consequences make it likely companies will comply. The CSDDD also allows for the remediation of any violations, which should help companies improve their standards rather than drive problematic behavior underground.

It will take time to put the CSDDD requirements into practice, and it may take even longer to see the impact of the directive. Member States have two years to incorporate the CSDDD regulations into national law or—in the case of countries with existing due diligence legislation, like Germany and France—to harmonize their laws with the CSDDD. Starting in 2026, companies will receive additional time to comply with the regulations based on their size and net turnover. For instance, EU companies of over 5,000 employees with a net turnover of EUR 1,500 million are due to comply by 2027, while the smallest ones of over 1,000 employees with a net turnover of EUR 450 million must comply by 2029.

Q3: How does the FLR relate to the CSDDD?

A3: The FLR applies to all products from all businesses, while the CSDDD applies only to companies of the defined size. The requirements imposed by the FLR are likely to become part and parcel of the due diligence processes adopted by those companies covered by the CSDDD. Importantly, the FLR acknowledges that during an investigation, authorities may take into account any due diligence carried out by a company, which may obviate the need for such an investigation.

Q4: What broader implications might these actions have for companies outside the European Union, including those in the United States?

A4: The European Commission estimates the number of non-EU companies directly subject to the CSDDD to be approximately 900. But both the EU CSDDD and FLR will impact companies across the globe, both directly as covered companies apply these requirements throughout their global activities and indirectly, as companies that do not do business with the European Union are influenced by the activities of those that do. The CSDDD’s and FLR’s requirements may prompt companies outside their scope to increase due diligence efforts to maintain competitiveness in the European and global market, transforming due diligence over time into a standard business practice, or focusing more on non-EU markets. The global network of supply chains coupled with the expansive nature of the CSDDD and FLR may also result in non-EU countries choosing to bring their laws into alignment with these EU laws to prevent potential future barriers to EU market entry.

Q4: How do these actions fit into the broader international movement toward increasing due diligence requirements?

A4: The FLR and the CSDDD demonstrate the European Union’s leadership on business and human rights and corporate sustainability and are part of a broader global movement promoting responsible business conduct. While Germany, France, and Norway already have business due diligence laws that require annual impact reports and risk assessment systems, the CSDDD expands upon these laws by widening the scope of companies involved, as well as the targeted criteria, and calls for further company responsibility, remediation outside of the courts, and meaningful stakeholder engagement.

The CSDDD builds upon existing voluntary guidelines, including the UN Guiding Principles for Business and Human Rights and the OECD Due Diligence Guidance for Responsible Business Conduct, which is based on the OECD Guidelines for Multinational Enterprises. Companies have been increasingly aligning their policies with these best practices for years, but the CSDDD goes a step further by mandating compliance and imposing penalties. While many other countries have created National Action Plans surrounding human rights due diligence and forced labor, including the United States, Colombia, Brazil, Japan, and Australia, few have mandated due diligence in the same way the European Union has.

Opponents argue that the CSDDD and FLR are either an imposition by the European Union on other countries or that they will decrease the motivation of companies to independently pursue human rights-related improvements, reducing due diligence to a box-checking exercise. Proponents of these laws argue that raising the floor is important to ensuring a level playing field where all businesses have to adhere to minimum standards of conduct, and if anything, the standards established by these actions do not go far enough. They further argue that establishing a baseline should not hinder companies that want to go above and beyond those standards.

Q5: How do these efforts relate to similar efforts the United States is undertaking to promote robust due diligence in value chains and to ban goods made with forced labor?

A5: The updated U.S. National Action Plan on Responsible Business Conduct (NAP) presents a roadmap and resources that businesses operating in the United States can use to better assess and address the human rights and environmental risks in their operations and supply chains. However, while the U.S. NAP articulates an expectation that companies conduct due diligence, it does not require such practices, which is significantly different from the mandatory requirements of the CSDDD.

That said, the United States has been an international leader in imposing mandatory restrictions on the importation of goods made with forced labor. Section 307 of the Tariff Act of 1930 imposes a general prohibition on the importation of goods made with forced labor into the United States. For much of its history, however, goods produced using forced labor were banned under this law only if U.S. producers could meet the demand for those goods themselves; if there was “consumptive demand” for a good, it was permitted to enter the United States even if it was made with forced labor. Thus, the prohibition on the importation of goods made with forced labor was almost never applied until the passage of the Trade Facilitation and Trade Enforcement Act in 2015, which closed the “consumptive demand” loophole and thereby empowered U.S. Customs and Border Protection (CBP) to block all goods suspected of being produced with forced labor from entering the United States. This created a significant uptick in Withhold Release Orders, which CBP uses to detain goods at a U.S. port of entry based on forced labor.

That increase was further accelerated by the 2022 Uyghur Forced Labor Prevention Act, which establishes a rebuttable presumption that any good made in or connected to the Xinjiang region in China is made with forced labor, including goods made by workers subject to transfer programs, as well as a list of entities implicated in forced labor by Uyghurs or other groups covered by the law. Importantly, the presumption relieves CBP of the burden of proving that any good connected to Xinjiang or workers from Xinjiang is made with forced labor and instead places the burden on the company to prove the contrary. Some advocates against forced labor would like to see the European Union adopt a similar approach to the FLR.

It is notable that in the United States, the import ban on products made with forced labor has not applied to shipments with a value of USD 800 or less (the so-called “de minimis exemption”). This has allowed purchases of products from some companies that otherwise would have been subject to the forced labor ban to circumvent duty fees and customs scrutiny. Many labor unions, business associations, and other advocates have argued for closing this loophole, and the Biden administration has recently sought to do so to the extent possible through executive action. In the Explanatory Memorandum of the FLR proposal, the commission decided against any form of de minimis threshold for products, even those coming from small or medium enterprises, in order to avoid loopholes that may allow products using forced labor into the EU market.

Aly Senko is a former research intern for the Human Rights Initiative at the Center for Strategic and International Studies in Washington, D.C. Lauren Burke Preputnik is a former senior program manager for the Human Rights Initiative at CSIS. Scott Busby is senior associate (non-resident) for the Human Rights Initiative at CSIS. Michelle Strucke is director of the Humanitarian Agenda and the Human Rights Initiative at CSIS.