State Department layoffs could hurt US companies’ ability to compete globally – an economist explains why
- The mass layoffs at the US State Department could hurt US companies’ ability to compete globally by eliminating expertise on business and human rights.
- The State Department’s Business and Human Rights team, which was eliminated in the layoffs, helped American businesses avoid committing human rights abuses and violating international laws.
- The rise of global norms governing business and human rights has created growing importance for US companies to navigate shifting risks and regulations, with nearly 28 million people in forced labor globally and downstream concerns on AI and surveillance tools.
- US-based multinational companies will soon be subject to EU human rights due diligence laws, which require them to conduct risk analyses and publicly report on their human rights impacts, potentially giving European competitors an edge over US companies.
- The elimination of the State Department’s expertise in business and human rights could weaken US global business position, as market analysts predict steady growth in investor demand for ESG investment opportunities and consumers increasingly value products from responsible businesses that demonstrate respect for human rights.
When more than 1,300 people at the U.S. State Department lost their jobs in a mass firing this summer, most headlines focused on what it meant for American diplomacy. But the layoffs are about more than embassies and foreign policy – they could also make it harder for U.S. companies to compete in global markets.
The July layoffs – part of a sweeping Trump administration reorganization effort, with more cuts still expected – eliminated the State Department’s Business and Human Rights team, which helps American businesses avoid committing human rights abuses and violating international laws.
As an economist who studies international trade, I know that BHR is an area of growing importance for both global governance and U.S. competitiveness. In addition to being an academic, I have worked at several U.S. trade agencies and the World Bank, and in 2019-20 I served as a Franklin Fellow with the State Department’s Bureau of Democracy, Human Rights and Labor. In that role, I worked closely with the BHR team and saw how critical their expertise was in helping U.S. companies navigate shifting global human rights risks and regulations.
Losing that support puts American businesses at risk of falling behind market trends and expectations.
The rise of business and human rights policy
Global norms governing business and human rights have been evolving for more than 75 years, starting with the 1948 Universal Declaration of Human Rights. While that landmark document was geared toward governments, in 2011 the United Nations Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises represented explicit guidance from member countries – including the United States – that companies, not just governments, are responsible for respecting human rights.
This guidance means that businesses must avoid causing or contributing to human rights abuses through their operations or supply chain relationships. Potential supply chain concerns include both “upstream impacts,” such as purchasing from suppliers that use forced labor, and “downstream impacts,” such as selling products to oppressive governments.
These sorts of risks are more common than you might think. Nearly 28 million people are in forced labor globally, making products from cotton to car parts, according to the International Labour Organization. Downstream concerns have focused recently on the sale of AI and surveillance tools to authoritarian governments such as Iran. Avoiding these abuses not only reduces business risk but also helps weaken incentives for such practices.
For decades, the State Department has taken the lead within the federal government in the task of promoting U.S. human rights policies globally. Historically, its three main responsibilities in this area have included reporting on human rights conditions at the country level, providing foreign assistance to promote human rights, and engaging in diplomatic efforts to improve human rights conditions globally.
The portfolio of the BHR team fell mainly within this third area of responsibility and included providing expertise as international policies related to business and human rights continued to expand.
The rise of human rights due diligence laws
Over the past 10 years, some of the world’s largest economies have begun to enact laws that require businesses to conduct risk analyses and publicly report on their human rights impacts. These laws – known as human rights due diligence, or HRDD, laws – have been passed or proposed in the European Union, France, the Netherlands, Germany, the United Kingdom, Australia, South Korea and Thailand.
Of particular importance is the EU Corporate Sustainability Due Diligence Directive, which was adopted by the EU in July 2024 and will begin to go into effect in 2028. Its broad scope will reshape compliance for global companies across markets, industries and supply chains.
Although it is too soon to measure the full impact, many companies and industry groups have endorsed human rights due diligence laws. Industry groups and associations have published statements in support of HRDD laws, which they see as leveling the playing field for responsible business activity. A 2025 survey of 1,300 German corporate decision-makers found that most believed their country’s HRDD law gave them an edge over European competitors – and 44% said it gave them an advantage over U.S. and Chinese companies as well.
The US falls behind on sustainability
U.S.-based multinational companies are subject to the HRDD laws in the countries in which they do business. Starting in 2028, these companies will need to comply with new human rights laws if they want to participate in the EU market. Although some industry groups are in support of these laws, others, such as the U.S. Chamber of Commerce, have expressed concerns about the implementation timeline and some specific requirements.
Prior to the reorganization, the State Department worked closely with multilateral and international organizations, as well as other governments, to establish clear policy frameworks for business and human rights. By eliminating the Office of Multilateral and Global Affairs, which housed the BHR team, the reorganization of the State Department has effectively eliminated this source of expertise and support for U.S. businesses operating in global markets.
In my professional experience, which stretches back to the economic boom period of the 1990s, U.S. competitiveness depends upon a clear understanding of global markets and policies. U.S. businesses must be able to work within the regulatory framework of the countries of their suppliers, partners and customers.
In addition to government regulations, U.S. corporations face pressure from their consumers and investors, who are increasingly interested in supporting corporations that can demonstrate responsible business practices. From fair-trade coffee to environmental, social and governance investment portfolios, markets are increasingly placing value on products and businesses that can demonstrate respect for human rights. Despite political controversy and backlash, market analysts continue to predict steady growth in investor demand for ESG investment opportunities, with ESG assets on track to reach $40 trillion by 2030.
In order to best position U.S. businesses to understand and navigate the emerging role of human rights issues in global markets, the U.S. government needs expertise in these issues. By jettisoning that expertise, I believe the country risks weakening its global business position.
I served as a Franklin Fellow with the U.S. Department of State during the 2019-2020 academic year.