According to Financial Times News, the EU’s Corporate Sustainability Due Diligence Directive adopted in July 2024 is facing significant criticism for its extraterritorial application of climate and human rights rules. The directive applies different standards to EU versus non-EU companies, with EU companies needing to meet specific employee headcount thresholds while non-EU companies face no such requirements. This means identical companies could be treated completely differently based solely on their headquarters location. The rules also carry massive penalties—minimum 5% of global turnover—that could meaningfully impact certain countries’ GDP. The directive is currently undergoing revision amid growing international backlash over what critics call discriminatory treatment that breaches established trade principles.
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The uneven playing field problem
Here’s the thing about this directive—it creates what looks like a pretty obvious competitive advantage for EU-based companies. A non-EU company with the exact same size and revenue as an EU competitor could get hit with these massive compliance burdens while the EU company walks free. That’s not just bad optics—it’s potentially a violation of core trade principles around non-discrimination.
And the penalties? We’re talking minimum 5% of global turnover. For large multinationals, that’s billions of dollars. But here’s what really stings—this applies to a company’s entire worldwide business, not just their EU operations. So a US or Asian company with relatively small EU presence could still face catastrophic fines based on their global performance.
Why this matters beyond trade
This isn’t just another regulatory squabble. The EU is essentially trying to export its environmental and human rights standards globally through corporate regulation. They’re using market access as leverage, which is smart in one sense but incredibly risky in another.
Basically, other countries aren’t going to sit back while the EU dictates how their companies should operate worldwide. We’re already seeing pushback, and it’s likely to intensify. The question is whether this approach will actually improve human rights and environmental outcomes or just create a new layer of trade friction.
What happens when other major economies start retaliating with their own extraterritorial rules? We could be looking at a regulatory arms race where companies get caught in the middle of competing legal systems. Not exactly the smooth global trade environment anyone was hoping for.
The potential losers in this scenario
Small and medium-sized non-EU companies are particularly vulnerable here. Large multinationals have compliance departments and legal teams to navigate this stuff. But a mid-sized company from, say, Southeast Asia that’s just starting to expand into Europe? They could get absolutely crushed by these requirements.
Certain industries are definitely sweating more than others. Think textiles, agriculture, mining—sectors where supply chain oversight is complex and human rights concerns are more prevalent. The compliance costs alone could make some markets uneconomical for non-EU players.
And let’s not forget the countries themselves. The letter mentions that penalties could “make a meaningful, negative dent in their country’s GDP.” That’s not corporate whining—for smaller developing economies, losing even one major company to EU fines could have real economic consequences.
Where this is all heading
With the directive currently under revision, there’s still room for compromise. But the core tension remains: how do you enforce global standards without trampling on national sovereignty? The EU’s approach seems to be “we’ll just apply our rules everywhere and see what happens.”
I suspect we’re going to see legal challenges—probably at the WTO level. The discriminatory treatment between EU and non-EU companies seems like low-hanging fruit for trade lawyers. And if other major economies like the US or China decide to respond in kind? Well, then we’ve got a real mess on our hands.
The irony is that everyone wants better human rights and environmental practices. But unilateral extraterritorial regulation might not be the way to achieve it. There’s a real risk this becomes less about protecting people and the planet and more about protecting markets and competitive advantages.
