Changes in economic policymaking are rare but can have far-reaching global effects when they do occur. In the 2000s, discussions revolved around global tax competition, often viewed as a “race to the bottom.” A decade later, the spotlight shifted to income inequality and related policies.

Today, there is a competitive regulatory landscape aiming not only at achieving domestic environmental and social goals but also indirectly imposing rules on other countries without their consent. Policymakers worldwide, including in the U.S., need to be aware of this concerning trend.

The most recent significant example is the European Union’s corporate sustainability due diligence directive, effective since July. This directive mandates that businesses of a certain size must “identify and address adverse human rights and environmental impacts of their actions within and outside Europe” to encourage responsible corporate behavior.

The European Commission highlights that these rules will promote international competitiveness, foster innovation, and provide legal certainty for companies addressing sustainability impacts. However, there are concerns among legal and economic experts about possible effects on affected companies. Businesses now must assess their global supply chains for issues like working conditions, equal pay, freedom of speech, and environmental impact.

These regulations enable legal action against companies if any part of their supply chain is deemed to violate environmental or human rights standards, regardless of local compliance. This may lead businesses to consider pulling out of countries with less stringent rules, potentially affecting global supply chains.

In the past, debates have centered on whether using trade policies to influence environmental and labor standards in developing countries could be effective or viewed as protectionism. The collapse of talks in Seattle following President Clinton’s labor standards push illustrates developing countries’ skepticism.

The EU directive and other similar measures could further exacerbate disruptions in global supply chains and potentially lead to a shift towards more nationalistic policies. This could impact labor standards and environmental practices in various countries, causing income inequality and hindering international trade progress.

U.S. businesses with extensive global operations have expressed concerns and called on the U.S. government to address the issue. However, all countries should monitor and participate in shaping such rules to safeguard their own interests.

Ultimately, domestic policies should be determined by citizens and their elected officials, not dictated by external regulations.