EU deforestation ban creates a hazy trade future
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Afiq Fitri Alias
LONDON, Sept 23 (Reuters Breakingviews) -The European Union’s drive to make its supply chain greener risks leading to a scorched-earth policy. A planned ban on agricultural imports from deforested land will affect developing countries producing commodities like timber and palm oil. The move is already causing exports to go elsewhere. If she doesn’t want to lose vital commodities, European Commission President Ursula von der Leyen will either have to offer aid or back down on labour and environmental protections.
Deforestation is a climate scourge. Forest fires are the second-largest contributor to global warming, accounting for 19% of global carbon emissions between 1959 and 2019, according to an Oxford University study. During most monsoon seasons, thick smoke travels across Southeast Asia causing dangerous spikes in air pollution, forcing schools to close and harming the economy. A series of forest fires in 2015 reduced Indonesia’s GDP by nearly 2%, according to research by the RAND Corporation.
The EU Deforestation Regulation (EUDR), due to come into force on Dec. 30, will prevent goods that can be traced to deforested land from entering the bloc. Approximately 90% of global deforestation is due to agricultural practices in South America and Southeast Asia, where products like palm oil and coffee are grown on an industrial scale and shipped across the globe. Such exports to Europe totalled $400 billion last year, according to a report by the Thai bank Krungsri.
The EUDR will create a complex, and possibly hard-to-enforce, set of requirements. Farmers will have to provide location coordinates of their plot of land to be checked against satellite imagery by a European customs officer. Adding bureaucracy into a largely informal market will be expensive: an EU assessment of previous rules put the total costs for member states at more than 460 million euros.
The EUDR has been attacked by both the Biden administration and China, which has refused to comply citing “security concerns”. Brazil, which exported $46.3 billion worth of affected products to Europe last year, described it as a “punitive instrument”. Bureaucrats from Australia and Brazil are also tussling with the EU over whose forest maps are more accurate. Even some EU countries like Germany, Italy and Sweden have sought to delay its implementation.
But the loudest voices against EUDR are Indonesia and Malaysia, whose combined palm oil exports make up 85% of the world’s supply, and approximately half of the EU’s total imports of the commodity. Jakarta has accused Brussels of “regulatory imperialism” and some Indonesian officials have claimed farmers lack both smartphones and the expertise to record location coordinates.
The recent destruction of 500,000 trees near Berlin to make way for a Tesla TSLA.O factory doesn’t help von der Leyen’s case. But the real issue for EUDR is that it strikes at the heart of an industry that is central to both the politics and economics of some developing countries. The palm oil sector contributed 2.7% to Malaysia’s GDP last year and employs roughly half a million people with a disproportionate influence on electoral politics. In Indonesia, the world’s largest palm oil producer, just five companies are responsible for most deforestation and have been sluggish in tackling the problem, according to data compiled by Trase, a not-for-profit organisation.
A joint task force between the EU, Indonesia and Malaysia has been meeting in Brussels since August last year to try and hammer out their differences. A Commission spokesperson told Breakingviews that the “situation is under constant review”. But an extension of the Dec. 30 deadline looks unlikely.
That leaves von der Leyen with three main problems.
For a start, the market is already fragmenting. Latest export data show Indonesian palm oil exports to Europe have dropped by 37% since the start of the year, while exports to China and India have risen between 20% and 30%. China and Malaysia have also signed new trade agreements to directly address the impact of the EUDR.
The second issue is that similar attempts to crack down on exports have led to unintended consequences. Two years after the EU imposed sanctions on Moscow following its invasion of Ukraine, the Russian economy has remained largely intact. Last month, countries that share a land border with Russia said continued sanctions-busting within the EU has made it harder for them to police the flow of banned goods. And there are signs that export fraud in commodities is already taking place. A study by Stratas Advisors suggests Malaysian palm oil exports are being disguised as used cooking oil, which is partly used for producing sustainable aviation fuel in Europe.
The third problem for the EU is a potential shortage of key commodities, although the bloc has been replacing palm oil used in food, biodiesel and energy with more sustainable alternatives like rapeseed oil. Still, Bloomberg reported that European traders have begun stockpiling coffee beans, another product covered by EUDR, a move that might increase already-high prices.
The stakes are high for Europe. Indonesia is the world’s largest nickel producer, while Malaysia is undergoing a semiconductor industry boom. Those two countries can supply the EU with materials critical to its future and allow it to diversify supply chains away from China.
The EU would like to negotiate free-trade agreements with both countries and the row over EUDR might force it to make concessions in other key areas such as labour and environmental protections. Policymakers in Brussels will be mindful of mistakes they made in trade negotiations with Latin America, which collapsed partly due to disputes over anti-deforestation standards.
But watering down progressive labour and sustainability demands could undermine Europe’s efforts to green its economy and the global campaign to slow down climate change.
If Brussels is unwilling to delay a piece of legislation that has been ready for over a year, it might have to pay up. Financial aid to developing countries’ farmers affected by EUDR might cost hundreds of millions of euros, on top of the 70 million euros Brussels has already pledged. But it might be von der Leyen’s best option to avoid a scorched-earth policy on deforestation.
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CONTEXT NEWS
The European Union Deforestation Regulation (EUDR) will from Dec. 30 require companies selling soy, beef, coffee, palm oil and other products in the bloc to prove their supply chains do not contribute to the destruction of forests.
By promoting the consumption of “deforestation-free” products and reducing the EU’s impact on global deforestation and forest degradation, the EUDR aims to bring down greenhouse gas emissions and biodiversity loss.
German Chancellor Olaf Scholz on Sept. 11 called for a delay in the law’s implementation. The International Coffee Organization on Sept. 18 also asked for a postponement. Some companies including Nestlé, Mars Wrigley and Ferrero have backed the EUDR while urging the bloc to do more to help companies meet the deadline.
Graphic: Palm oil trade between Europe, Malaysia and Indonesia https://reut.rs/4dgB00b
Graphic: Countries and commodities impacted by the EUDR https://reut.rs/4e1bXPP
Graphic: China’s imports of palm oil from Indonesia and Malaysia have surged https://reut.rs/4djB92O
Editing by Francesco Guerrera and Oliver Taslic
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