EU's Deforestation Regulation is meant to cut imports from developing countries

The EU's Deforestation Regulation disguises protectionism as environmental stewardship. (Representative image)

While the US sees itself as a leader in technology, China as a factory of the world, the European Union (EU) hopes to position itself as a leader in regulation-making. Within three weeks of introducing the Carbon Border Tax in the last week of April, the EU Council, on May 16, adopted the EU Deforestation-Free Products Regulation, also known as EU Deforestation Regulation (EU-DR).

Though the EU-DR claims to tackle global deforestation, the EU’s history reveals a different reality. By cutting down primary forests to expand agricultural land, the EU's forests now account for less than 0.7 percent of its total forest area, significantly lower than the global average of 33 percent. It is, therefore, crucial to question the EU's motives in preventing other nations from pursuing similar paths.

Planned to grow exports

The EU-DR is driven by the agenda of encouraging local production and export of selected agricultural commodities by making imports more challenging. The products targeted by the EU-DR are those for which the EU wants to reduce imports while promoting exports. The EU is already competitive in many of these products, as evident from its global export value of $96.2 billion compared to imports of $91.9 billion in 2022. The EU aims to cut imports further with the implementation of the EU-DR.

The regulation will adversely affect India's exports worth $1.3 billion
(calendar year 2022 data) to the EU. Coffee, leather hides, skin and preparations, oil cake, paper and paperboard and wood furniture are among the significant products that would get affected. The EU's share in India's global exports for products covered under the Carbon Border Adjustment Mechanism and EU-DR is 23.6 percent.

Besides these items, the EU-DR covers cattle, buffalo, meat of bovine animals, soya beans, palm oil, cocoa bean, powder and chocolate. The product list is set to be expanded soon. Besides India, Malaysia, Indonesia, Brazil, Argentina, Ecuador, Peru, Guatemala, Costa Rica, Colombia, Cote d’Ivoire and Vietnam will be adversely affected.

When the regulations come into effect, exporters to the EU must ensure that products have been grown on land that has not been deforested after December 31, 2020. To begin with, the new rules will apply to large firms from December 2024 and to small firms from June 2025. The EU is set to classify countries as low, standard, or high-risk. High-risk countries must meet more obligations and be subject to more checks. Such arbitrary categorisation of countries violates both the WTO's National Treatment and Most Favoured Nation principles and is likely to be challenged. The regulations have proposed stiff penalties for violations such as fines of up to four percent of a firm's annual turnover in the EU, confiscation of product, confiscation of revenues gained from a transaction, and exclusion from public procurement processes.

Onus On Exporters

The EU-DR will significantly raise compliance costs for exporters. The EU will seek the farm address and farmer name in the name of supply chain transparency. The onus will be on exporters to prove supply chain integrity through an elaborate trace-and-track system from Indian farms to EU markets. Exporters must also ensure that produce complies with "relevant laws" like land use, labour, human rights, and so on in the country of origin.

Thus, it becomes imperative for exporters to conduct due diligence on products before sending them to the EU. This will include collecting the information, using this information to analyse risks in the supply chain, mitigating those risks, and submitting a due diligence statement to EU-based importers before exporting to the EU. Exporters would be advised to ship goods to the EU only after meeting these requirements. The information to be collected includes details of commodity, quantity, supplier, country of production, and address of plots of land where commodities were produced.

The compliance costs imposed by the EU-DR would further disadvantage small and medium-sized enterprises, undermining fair participation in global agricultural trade. Even exporters of high-quality products will be required to invest in expensive due diligence, making it difficult for small and medium-sized enterprises to comply.

India and other affected countries should consider taking the matter to the WTO, emphasizing the violation of the Most-Favoured-Nation and National Treatment principles. Furthermore, India can leverage its functioning blockchain-enabled trace-and-track system, currently employed for grape exports, to ensure transparency and compliance for all products covered by the EU-DR.
In conclusion, the EU's Deforestation Regulation disguises protectionism as environmental stewardship. The EU's aim to reduce imports and promote its agricultural exports under the guise of sustainability is concerning. India and other affected countries should consider taking the matter to the WTO, emphasizing the violation of the Most-Favoured-Nation and National Treatment principles. Furthermore, India can leverage its functioning blockchain-enabled trace-and-track system, currently employed for grape exports, to ensure transparency and compliance for all products covered by the EU-DR.

Ajay Srivastava is founder, Global Trade Research Initiative, a research group on trade and climate technology issues. Views are personal, and do not represent the stand of this publication.