Europe’s free market in offshoring

Summer 2021, Florence, Italy. The 422 workers at the Campi Bisenzio branch of the multinational GKN receive a letter announcing their redundancy. The automotive company has decided to “nearshore” its production to other sites held by the group in Europe. Several investments had been made in recent years to modernise production at the plant.

But the offshoring was not a symptom of a crisis; on the contrary, it was simply aimed at boosting the multinational's profits. In response, the workers occupied the factory. For the past two years, they have been campaigning against the closure of the site and for an alternative solution of renovating it to be greener.

January 2018, Amiens, France. The Whirlpool tumble-dryer factory offshores its production to Poland to take advantage of lower labour costs. 300 employees are left out in the cold. The motivation was obvious: in 2018, according to Eurostat, French employees earned an average of €35.80 an hour, compared with €10.10 in Poland, taking into account social-security contributions.

Since then, the gap has not narrowed much. In 2021, in the EU, the average hourly cost of labour (in industry, construction and trade services) for companies with 10 or more employees was €28.70. But there are wide variations from country to country, notes the French statistics office INSEE: their ratio is 1:7 between Bulgaria (€6.90) and Denmark (€48.30).

Whirlpool shows no signs of changing track. In the space of just a few years, the company has cut 3,000 jobs in Europe as part of a restructuring. Today, almost all the group's European factories are located in Italy and Poland.

"The problem is that [industrial relations in] the European Union [have been] built on a model that is more conflictual than collaborative", says Silvia Borelli, professor of European labour law at the University of Ferrara. "Despite rules to harmonise labour law, there are still enormous differences between countries."

European nearshoring

It is hard to put a figure on the phenomenon of regional offshoring, or nearshoring, from one country to another in Europe. The first difficulty is the lack of transparency: "There is no official database. When a company offshores production, it doesn't declare it to anyone", explains Silvia Borelli.

In 2017, several media outlets quoted figures published by Eurofound, the European Foundation for the Improvement of Living and Working Conditions. These detailed 752 cases of offshoring mentioned in press articles between 2003 and 2016, 352 of which involved another EU country.

In terms of jobs, of the nearly 200,000 jobs lost in 13 years, 118,760 could be attributed to a transfer of production to other EU countries. This took the general form of a west-east movement, from the EU-15 to the newer member states, including Slovakia, Poland and Hungary.

The reasoning is clear: either labour costs, or tax. The latter was the case in Spain in April 2023, when the shareholders of the construction giant Ferrovial voted 93% in favour of a "reverse merger", i.e. the absorption of the Spanish parent company by the Dutch subsidiary. This meant Ferrovial's head office and tax domicile would be transferred to the Netherlands, with its advantageous tax regime for companies and for dividends paid to shareholders.

Ineffectual, pro-business rules

Such strategies have consequences for the protection of workers. Theoretically, at EU level, in the event of an internal company relocation, transferred workers must retain the same rights, under the aegis of trade-union negotiators. In practice, however, the EU directive in question is almost always inapplicable, since it concerns situations where the same employment is continued in the destination country. This is “very difficult to prove because there can always be small changes", explains Silvia Borelli. "The directive is really designed for companies that remain in the same state, so its scope is limited."

For Borelli, the current legislation is not only ineffectual, in the sense that it does not prevent offshoring, "it is hypocritical: we have rules that are designed not to be applicable".

The very definition of the practice makes monitoring difficult. Offshoring is defined as the relocation of a production unit from one country to another. In general, this translates into a transfer of operations from one site to another. But offshoring can also become foreign outsourcing: closing a production unit in one country in favour of subcontracting to another firm in another country. This is typical in cases of corporate restructuring.

Raphaël Dalmasso, a legal specialist at the University of Lorraine, looked at French legislation governing redundancies and offshoring (in Relocation: an old problem in search of new answers, Etui, 2024): "The first large-scale offshoring operations [in France] in the 1990s involved the transfer of a workplace, often fully equipped, from one factory to another. The offshoring phenomenon that is more common today is harder to describe. For example, over the last 20 years, France's main carmakers have considerably reduced their domestic wage bill while opening factories in Eastern Europe and North Africa. Yet officially there was no relocation of jobs. Such changes are therefore somewhat hidden, and more complicated to describe from a legal point of view."

Dalmasso says that restructuring, whether in exceptional circumstances or in response to economic pressures, is seen as a "normal, everyday mode of management" for company directors. "Offensive" offshoring, with the aim of conquering markets, does not therefore require any specific economic justification. "Such measures can be implemented whenever the employer considers that there is an economic justification. In being exempted from the need to justify its choices, the employer is no longer subject to judicial review. The general idea is that the employer continues to be the sole arbiter of the theoretical appropriateness of the restructuring operation."

Support without oversight or conditions

The introduction of the Inflation Reduction Act in the United States in 2022 caused a stir in the EU. Presented as an anti-inflation measure, it provides for €340 billion in green subsidies for industries based in the US. This is generating fears in Europe about the possibility of offshoring across the Atlantic. In response, the European Commission has presented a "Green Industrial Plan" aimed at boosting the competitiveness of European zero-emissions industries by 2030 by means of a range of measures including simplified authorisations and regulations – and subsidies.

For Silvia Borelli, who has analysed European industrial policy (i.e. the direct funding of businesses by member states or the EU), the lack of oversight is a problem: "We have, for example, funds as part of the green deal or digital transition that are given to companies in furtherance of certain industrial policies, but there is no control once the companies have received the money. So they can legally offshore their production."

The academic draws a parallel with the monitoring of benefit recipients. "When a state pays money to the unemployed, it always tries to control what they do with the money. But there are no conditions for companies, under the pretext of freedom of enterprise". Nor are there any penalties. In the event of an offshoring, the state will find itself obliged to refund to the European Commission, or else to recover the money from the company.

"Today, what happens in practice is the other way round", says Borelli. "We have incentive policies run by governments to attract foreign companies. It's a system of competition based on freedom of movement and freedom of enterprise. In such a system, preventing offshoring amounts to limiting the freedom of movement of companies, and therefore goes against the principle of European integration."

The limits of trade union action

Although trade unions are often present in large companies and multinationals, their room for manoeuvre can be limited. "When unions get involved, it's usually when a redundancy plan is being implemented – the union is only there to limit the damage", says Borelli. In fact, whatever the form of action – strikes, factory blockades, media campaigns, etc. – it generally happens after the decision to offshore has been taken.

At present, trade unions lack the right to information and consultation that would enable them to take action earlier. They may also come up against the problem of industrial secrecy. "For instance, Peugeot, in deciding to produce an electric car in Poland, may invoke industrial secrecy", says Borelli. Works councils could therefore have a role to play. "But their role is difficult when the offshoring is intra-European, because the works council would need to represent either the workers in the country of origin or those in the destination country."

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Trade unions are all the more vulnerable given that offshoring exacerbates job insecurity, pay inequality, and worker protection. All this is happening against a backdrop of competition and fragmentation of the labour market. "We need to think about how to avoid conflicts between trade unions. How can we work together so that this is not detrimental to either side?"

Reshore?

The pandemic crisis of 2020 made EU countries aware of their weak industrial capacity. This was caused in part by past offshorings of production. "When we needed masks, we discovered that there were no factories in Europe", as Silvia Borelli puts it. A new policy discourse on de-offshoring – or “reshoring” – has emerged. "Recently, the European Commission introduced rules to limit offshoring outside Europe, but these are still very weak. The Covid-19 crisis also prompted the EU to encourage reshoring to “friendly” countries that share similar social standards. "There are directives to encourage reshoring, but these will only be useful if we control the movement of capital”, says Borelli.

According to a study published by Capgemini in April 2024, 47% of European and American big industrial companies have already "reshored" some of their production. 72% of them are working on a reindustrialisation strategy or have already put one in place – the majority within in the last two years.

In France, for example, the "France Relance" and "France 2030" plans aim to reshore industry and thus promote the "Made in France" label. The main sectors concerned are healthcare, agri-food, electronics, 5G and various inputs.

However, in a report published in late November 2023, the Cour des Comptes (France's auditor of state finances) pointed out several limitations. In its words: "Among the levers available to the authorities to encourage reshoring and avoid offshoring, the subsidy – which is easy to implement and popular with businesses – has been chosen. However, combined with broad targeting, there was a high risk that public funds would be spread too thinly, and in some cases that there would be a windfall effect."

Governments and the EU have several ways forward. One is to give the European Commission the authority to prevent offshoring while developing a European industrial policy. The other is to act at the national level, using industrial policies within each EU country.

"We seem to be heading more in the second direction", observes Silvia Borelli. "In any case, we can't go on like this, with a deregulated system that allows capital flight and worsens social inequalities. Today, the rich are getting richer, low-paid workers are losing their jobs, and it's ordinary citizens who pay the taxes that are paid out to companies that offshore. It's redistribution in reverse, and it doesn't work."