Malaysia’s international trade continues to pick up according to the Ministry of International Trade and Industry (MITI).
In January 2022, external trade rose almost 25 percent compared to January 2021. Exports increased 24 percent in January 2022, the sixth month of double-digit expansion, while imports increased 26 percent.
The Ministry said export growth was supported by high global demand especially for electrical products as well as palm oil and palm oil-based products. Malaysia posted higher exports to most major markets, namely ASEAN, China, the US, the EU and Japan.
Sabah timber exports jump
Sabah’s timber exports grew by 25 percent year-on-year between January and November 2021 contributing about five percent to Malaysia’s total timber exports. The Malaysian Timber Industry Board (MTIB) said this growth was significant despite Malaysian enterprises suffering the impact of Covid control measures.
Upstream timber products still dominate Sabah’s timber exports.
The MTIB has programmes such as the Forest Plantation Development Programme, Bamboo Community Farming Programme and Human Capital Development which can benefit the timber industry.
Sarawak timber earnings edge up
Sarawak recorded RM3.89 billion from timber exports last year, a four percent increase compared to 2020 according to Sarawak Deputy Chief Minister, Awang Tengah Ali Hasan. However, this was below the RM4.7 billion earned in 2019.
Plywood was the main export product in 2021 accounting for over 50 percent (RM2.15 billion) of total timber exports followed by logs at RM509 million, sawnwood (RM381 million), fibreboard (RM334 million) and other wood products (RM213 million).
Japan was the main importer at RM2.04 billion last year.
Other significant markets were India (RM476 million), Taiwan (RM206 million), the Philippines (RM179 million), China (RM175 million) and South Korea (RM123 million).
Awang Tengah reported the Sarawak Timber Industry Development Corp (STIDC) has drafted a ‘Sarawak Timber Industry Reformation and Transformation Plan’ to promote the growth of the industry. The plan is in line with 12th Malaysia Plan to achieve exports of RM8 billion by 2030.
Furniture the most important sub-sector
A recent report by Hong Leong Investment Bank Research (HLIB Research) provides a positive outlook for the Malaysian furniture industry this year although it continues to face some challenges.
The general bullish outlook is due to a number of factors that include the relaxation of movement restrictions which allows furniture manufacturers resume operations and address their supply chain issues.
There is robust demand in North America driven by work-from-home arrangements and the trade diversion from the US-China trade dispute.
However, challenges such as rising raw material costs, persistent labour shortage and concerns on labour practices continue to cloud the outlook, says HLIB Research.
Also, due to severe flooding in parts of Peninsular Malaysia in mid-December 2021 rubberwood harvesting and transport is still disrupted so prices for logs and sawnwood are likely to rise.
The research unit notes that the country’s wooden furniture export earnings in the first 10 months of 2021 declined by almost three percent year-on-year to RM8.15 billion due to the lower production from June to mid-September last year as a result of movement restrictions.
The US continues to be the largest export market, making up 62.8 percent of the total export value. Costs of raw materials (rubber wood, glue, steel, foam, leather and packing materials) had been on an increasing trend since the fourth quarter of 2020.
Sharjah Ports deal to strengthen trade ties
The Malaysian Timber Council has announced the Timber Exporters’ Association signed a Memorandum of Understanding (MoU) with the Sharjah Ports Authority in the United Arab Emirates which it says will help increase partnerships between the timber industry in Malaysia and the UAE through logistics services.
The MTC says the MoU will encourage Malaysian timber companies to capitalise on Sharjah Ports’ sought-after logistics services as well as its strategic location in the Middle East, a market that is growing exponentially.
Kelantan state halts certification
The domestic press has said according to Sahabat Alam, an environmental watchdog, the Kelantan state government had suspended a certification system that required logging companies to meet sustainable forest management standards.
A programme under the Malaysian Timber Certification System was introduced as a way to bind logging firms to sustainable practices by reserving licences for only those that meet the certification standards.
It appears that the state administration has repeatedly insisted that logging in the state is safe for the Critics, however, say data and studies on logging in the state suggest the opposite and are often played down or dismissed by state officials.
Regional Comprehensive Economic Partnership (RCEP)
The timber industry is looking at RCEP as a new driver of Malaysian domestic and international business activities in the post-pandemic period. Malaysia is likely to be the 12th RCEP signatory as the Instrument of Ratification was submitted to the ASEAN Secretariat on 17 January.
RCEP will enter into force for Malaysia on18 March 2022 as Malaysia joins 11 other signatories Singapore, China, Japan, Brunei, Cambodia, Laos, Thailand, Vietnam, Australia, New Zealand and South Korea.
Malaysia is expected to be a major beneficiary of the RCEP agreement in terms of gains in exports, with a projected US$200 mil. increase. These gains would result from tariff eliminations and price reductions for merchandise goods.
Forestry Ministry seeks APHI partnership for SFM Agus Justianto, Director General of Sustainable Forest Management at the Ministry of Environment and Forestry has said it expects the Association of Indonesia Concession Holders (APHI) to become the government's partner in achieving the five pillars of sustainable forest management.
The five pillars are securing forestry areas, increasing business productivity, optimising forest land, diversifying forestry products and increasing product competitiveness.
The DG also urged forestry business to adopt the multi-business scheme set out in the government’s Job Creation initiative. He reported there are 14 forest utilisation business proposals for the application of the forestry multi-business scheme.
The chairman of APHI, Indroyono Soesilo, said that facilitation of the Forest Utilisation Business Permit (PBPH) is among the association’s seven strategic programmes. The other programmes include accelerating the implementation of the Job Creation Law, facilitating the fulfilment of APHI members’ obligations regarding forest management and deregulating taxes and levies.
Also included is strengthening marketing of wood products, strengthening cooperation in the investment sector and facilitating overlapping PBPH implementation with non-forestry activities.
Concern on UK’s sustainability regulations
Coordinating Minister for Economic Affairs, Airlangga Hartarto, recently met with the UK Ambassador to Indonesia and several senior UK representatives and expressed the hope of the Indonesia government is that the UK plan for implementing sustainability standards on a number of agricultural, plantation and forestry commodities will not hinder the bilateral trade.
Airlangga said it is important to aligning the Indonesian timber certification system with whatever plans the UK has.
Forest biomass for power generation
The President of PT Protech Mitra Perkasa Tbk and Deputy Chairman of the Indonesian Chamber of Commerce and Industry, Bobby Gafur Umar, believes that Indonesia has great potential for biomass energy production which would help achieve national energy security.
The area of Energy Plantation Forests (HTE) in Indonesia is almost 1.3 million hectares and at least 32 business units are ready to play a role in ‘processing’ this vast area of THE.
Furniture factories going under as shipping costs soar
Container costs continue to rise and this has become critical for furniture exporter pushing many SMEs into bankruptcy.
Data compiled by the Indonesian Furniture and Crafts Industry Association (HIMKI) shows the cost of container shipments have risen 900 percent with the current cost for shipping a 40 ft. container to the US is US$19,100 whereas in 2020 it was only US$2,000.
The cost for shipping a 20 ft. container is US$15,100, up 907 percent from 2020 which was only US$1,500.
Container shipping cost also increased for the EU market +900%, Middle East +400%, Japan +350%, Australia +500%. There are difficulties regarding the availability of containers, especially to America.
At these costs, it is not profitable to ship the products.
It has been estimated by the HIMKI that around 25 percent of the 2,500 businesses registered as HIMKI members have gone bankrupt as a result of the high cost of shipping.
Indonesia's exports of ‘Light Wood’ products can grow even more
According to Setyo Wisnu Broto, Chairman of the Indonesian Lightwood Association (ILWA), Indonesian exporters have benefitted from the shift by buyers in N. America from China to Indonesia.
He said two major US buyers are able to absorb as many as 2,500 containers per month. He said that the highest demand for ‘Light Wood Products’ is in America and is said to be worth IDR172 billion of which Indonesia only supplied a fraction. This must be increased said Setyo but much will depend on the availability of raw materials.
Economic recovery appears on track
Febrio Kacaribu, Head of the Fiscal Policy Agency at the Ministry of Finance, has said the successful control of the pandemic, public participation in implementing health protocols and vaccinations, the effectiveness of fiscal stimulus policies by the government and good coordination between ministries has helped accelerate economic recovery.
In 2021 the Indonesian economy grew by 3.69 percent which was close to the forecast by the Ministry of Finance.
In related news the Minister of Finance, Sri Mulyani Indrawati, expressed optimism that Indonesia’s economy will grow strongly in the first quarter of 2022 despite the increase in Omicron infections.
She said "If the health protocols are maintained the impact of the pandemic on the economy will not be as severe as seen in the first quarter of 2021.”
Social forestry is the way forward for Indonesia: Ministry
Erna Rosdiana, Secretary at the Directorate General of Social Forestry and Environment Partnership in the Ministry of Environment and Forestry, has said social forestry is the future of Indonesia's forestry.
Social forestry has opened opportunities for many parties after legal access was provided for the people, she noted.
Anticipated rise in domestic demand for furniture
The Ministry of Industry anticipates there will be an increase demand for furniture in the domestic market this year.
The Director of Forest and Plantations Product in the Ministry, Emil Satria, reported that, to service the domestic market, the Indonesian Furniture and Craft Industry Association (HIMKI) will open more sales outlets.
However, international markets are the foundation of the domestic furniture industry. The industry's challenges still revolve around the supply of raw materials, both wood and rattan, capital and labour, said Emil.
Singapore banks tough on timber trade transactions
According to timber exporters, banks in Singapore have adopted tough measures to stop timber related financial transactions. Singapore is known as a financial hub for Myanmar businesses.
Last year, Singapore banks started to halt transaction to Myanmar if it believed they were payment for timber exports.
Initially, when EU and USA announced the sanction on Myanmar Timber Enterprise and the Forest Joint Venture Corporation, Singapore banks stopped the transaction and asked the remitters many questions.
Recently, companies whose records show financial transactions related to the timber trade have been asked to close their accounts.
In related news, it has been reported that the EU has adopted further sanctions in view of the intensifying human rights violations in Myanmar. The new restrictions target companies providing substantive resources to the current administration.
Myanmar urged to adopt ASEAN ‘Five-Point Consensus’
The Cambodian and Malaysian Prime Ministers called for the ‘timely and effective implementation’ of ASEAN’s Five-Point Consensus on Myanmar.
According to the statement, the two leaders “underscored the critical importance of ensuring the effective and timely implementation of the Five-Point Consensus,” which was reached at a summit of ASEAN leaders in April last year.
The consensus calls for an immediate cessation of violence in Myanmar and the facilitation of dialogue between all parties to the conflict, mediated by the regional bloc’s special envoy, among other steps.
High frequency indicators showing positive signs
KPMG in India has published its latest edition of “Indian Economy Insights”. In introducing this publication, Neeraj Bansal, a senior partner, provides a snapshot of the state of the economy.
He writes, “The Indian economy is gaining momentum, driven by the recovery in industrial output, growth in core sectors, coupled with fairly focused government initiatives and policies. While the economy is reviving on the back of ebbing effects of the second wave and rapid vaccination drive, it is also witnessing a gradual momentum in some of the highly distressed sectors.
Recent high frequency indicators are showing positive signs, raising both business and consumer optimism.
Factors such as rail and freight activity, passenger traffic, power consumption, e-way bills and Goods and Services Tax (GST) collections are following a rising trend says KPMG.
With a revival in demand and improvement in industrial indices, the economy is observing positive sentiment among financial institutions. Both Reserve Bank of India (RBI) and International Monetary Fund (IMF) have projected a 9.5 percent GDP growth for the country in FY22”.
Vietnam: Wood and Wood Product (W and WP) trade highlights
According to Vietnam Customs in January 2022 W and WP export turnover amounted to US$1.5 billion, up 8.3 percent compared to December 2021 and 14.3 percent compared to January 2021.
In particular, the WP export reached US$1.15 billion, up 6.8 percent compared to December 2021 and six percent compared to January 2021.
W and WP exports to the UK in January 2022 totalled US$30.7 million, up 11.6 percent compared to December 2021 and 48 percent compared to January 2021. The share of exports to the UK accounted for two percent of Vietnam's total W and WP export turnover, up 0.5 percent compared to January 2021.
In January 2022, exports of office furniture from Vietnam valued at US$ 43 million, up 7.5 percent compared to December 2021, but down 10 percent compared to January 2021.
In January 2022, W and WP imports into Vietnam reached US$ 250.1 million, up 13.3 percent compared to December 2021, but down 10.3 percent compared to January 2021.
In January 2022, Vietnam imported 49.2 thousand cubic metres of pine wood, worth US$ 15.3 million, down 9.3 percent in volume and 8 percent in value compared to December 2021; compared to January 2021, it increased by 6.7 percent in volume and 59 percent in value.
The imports of wood from Southeast Asia to Vietnam in December 2021 reached 87.0 thousand cubic metres, worth US$29.68 million, down 40 percent in volume and 55 percent in value compared to November 2021 but increased by 1.7 percent in value compared to December 2020.
In 2021, Vietnam imported 960,330 cubic metres from Southeast Asia, worth US$338.28 million, up 5 percent in volume and 49 percent in value compared to 2020.
Imports from Southeast Asia increased slightly in 2021
Imports of wood from Southeast Asia to Vietnam in December 2021 reached 87.0 thousand cubic metres, with the value of US$ 29.68 million, down 39.9 percent in volume and 55 percent in value compared to November 2021; down 18 percent in volume, but increased by 1.7 percent in value compared to December 2020.
In 2021, imports of wood from Southeast Asia reached 960.33 thousand cubic metres, with the value US$338.28, up 5.1 percent in volume and 48.8 percent in value compared to 2020.
In 2021, the increase of wood imports from Southeast Asia comes mostly from Cambodia and Laos. The growth of imports from Laos accounted for 269 percent of the total increase in imports of wood from this region.
In contrast, imports of wood from other sources such as Thailand, Malaysia and Indonesia decreased against 2020. The imports of wood from Cambodia and Laos are risky for Vietnam's wood industry.
This risk is serious especially in the context of VPA/FLEGT implementation with Vietnam’s commitment to the EU to avoid illegally sourced wood from the supply chain and the Vietnam-US Agreement to improve wood legality.
Under VNTLAS, while importing wood from risky sources, importers need to submit additional documents to prove the legality of imported wood. They have to exercise DDS to assess possible risks and take countermeasures to assure legality of imported wood.
Thailand: Thailand is one of the major suppliers of wood based panels to Vietnam. Imports of this type of product from Thailand in December 2021 reached 54,940 cubic metres, with a value of US$13.15 million, up 5 percent in volume and 15 percent in value compared to November 2021; down 19 percent in volume and 3 percent in value compared to December 2020.
In 2021, imports of wood of various types from Thailand amounted to 504,290 cubic metres, with a value of US$119.30 million, down 12.5 percent in volume, but up 8.6 percent in value compared to 2020.
Wood imported from Thailand is mainly of fibreboard and particleboard, accounting for 96 percent of the total import from this market.
In 2021, fibreboard imports from Thailand reached 312,200 cubic metres, with a value of US$81.39 million, down 16 percent in volume, but up two percent in value compared to 2020; particleoard imports volumed at 171,850 cubic metres, with a value of US$30.42 million, down 11 percent in volume and 19 percent in value.
Laos: Imports of logs and sawnwood from Laos in December 2021 were reported at 20,670 cubic metres, with a value of US$12.70 million, down 74 percent in volume and 75 percent in value compared to November 2021; up 35 percent in volume and 34 percent in value compared to December 2020.
In 2021, imports of wood from Laos reached 223,780 cubic metres, with a value of US$140.81 million, up 127 percent in volume and 154 percent in value compared to 2020.
In 2021, sawnwood imports contributed 90 percent of total imports from Laos reaching 201,000 cubic metres, with a value of US$136.19 million, up 152 percent in volume and 160.6 percent in value compared to 2020; imports of log reached 17,090 cubic metres, with a value of US$3.39 million up 35 percent in volume and 63 percent in value compared to 2020.
Malaysia: In December 2021 imports of wood from Malaysia were reported at 6,010 cubic metres, with a value of US$1.98 million, up 2.4 percent in volume and 8 percent in value compared to November 2021; down 45.9 percent in volume and 29.1 percent in value compared to December 2020. In 2021, imports of raw wood from Malaysia totaled at 143.56 thousand cubic metres, with a value of US$ 48.77 million, down 5.4 percent in volume, but up 39.6 percent in value compared to 2020.
Particleboard and sawnwood were the major wood products accounting for 93 percent of the total wood imports from Malaysia to Vietnam in 2021.
Sawnwood imports, alone from Malaysia in 2021 reached 82,280 cubic metres, with a value of US$33.52 million, up 290 percent in volume and 234 percent in value compared to 2020; particleboard imports reached 51,190 cubic metres, with a value of US$32.52 million, up 290 percent in volume and 234 percent in value.
Industry sets an export target of US$17.5-18 billion for 2022
Despite many challenges, the Vietnam Timber and Forest Product Association has set a target for exports of US$17.5-18 billion in 2022.
The Vietnam Timber and Forest Products Association pointed out that the five main export groups of the wood industry have good growth prospects in 2022.
“In 2022, the goal of the export wood industry will reach 17.5-18 billion USD. To achieve the goal of exporting the wood industry in 2022, the main determined are still commodity groups, in which, wooden chair will reach US$4.1 billion; wooden furniture will reach US$10 billion and a number of other key commodity groups,” said Chairman of the Vietnam Wood and Forest Products Association.
According to the Ministry of Agriculture and Rural Development, in order to achieve the new export target in the face of rising raw material prices and increasing logistics costs, domestic planted forests need to improve productivity and quality to participate in the supply chain.
“The government issued Resolution 84 to implement a sustainable forestry development programme. This is the most important thing for the industry. If input is not much, it must be sourced domestically. Assessment Forest quality is important,” emphasised Deputy Minister of Agriculture and Rural Development.
In addition, the wood industry is planning to solve the problem of transportation costs by increasing the value of each container according to packaging specifications and brands. In addition, efforts to reduce the risk of origin evasion and strictly implement the Legal Timber Trade Agreement between Vietnam and the United States should also be prioritised to promote export growth.
Forecast decline in growth in Q1
Prominent economists have suggested the Japanese economic growth is likely to decline in the first quarter of 2022 because the latest surge in Omicron cases has dented prospects.
The number of reported covid cases in Japan topped 100,000 in early February as the country struggles to contain a sixth wave of infections driven by the Omicron variant.
The total number of coronavirus cases reported in Japan is around four million.
Consumer confidence fell in January suggesting consumer had cut back on spending. In addition, prospects for manufacturing output weakened with one of the top car makers saying it had cut production. The general view is that until the booster shot programme is speeded up confidence will be undermined.
GDP had a roller coaster ride in 2021 falling an annualised 2.9 percent in January–March 2021 after which it recovered growing two percent in April–June quarter, but fell back again in the July–September quarter only to move back into positive numbers in the fourth quarter of the year as restrictions were lifted and the chip and parts supply issue was partially overcome.
In fiscal 2022 GDP is forecast to increase around three percent, but the full impact of the Omicron variant has not been factored into this estimate.
Real estate downturn and inflation the greatest challenges this year
China’s economy saw many challenges in 2021 due to the ongoing China/U.S. trade dispute, COVID-19 restrictions, power shortages and weakness in the real estate sector.
The Chinese government has prioritised economic stability for 2022. Han Wenxiu, Deputy Director of the Office of the Central Committee for Finance and Economics, is on record as saying introducing policies that may have an economic tightening effect should be avoided.
2022 will be tough, the World Bank forecasts China’s 2022 growth at 5.1 percent, a much slower pace of growth than average in previous decades.
While the economy will continue to be impacted by the ongoing trade dispute and the likelihood of the widespread Omicron infections it will be the real estate downturn and inflation that will present the greatest challenge.
In response, China is likely to boost GDP by investing in infrastructure.
2020 output of wood-based panels
In 2020, despite the effects of the pandemic, China's wood-based panel industry quickly resumed production such that output was maintained at pre-pandemic levels.
The output of China’s wood-based panel sector in 2020 rose almost one percent to 311 million cubic metres, a record high. Plywood was the main contributor to the increase rising 12 percent to 256 million cubic metres.
Domestic consumption of wood-based panels in 2020 was 296 million cubic metres. Plywood was the largest category accounting for 63 percent of total consumption of wood-based panels.
Exports were 11.94 million cubic metres with an export value of US$5.218 billion in 2020, down six percent year-on-year.
Wood-based panel imported totalled 1.51 million cubic metres at US$496 million.
The structural reform of China's wood-based panel industry continues and the elimination of outdated production capacity accelerated in 2020. 17,500 plywood manufacturers had stopped production by the end of 2020. 781 fibreboard production lines had been closed, dismantled or suspended and 33.16 million cubic metres of outdated production capacity had cut.
A total of 1,123 particleboard production lines were closed, dismantled or suspended and 27.72 million cubic metres of outdated production capacity was cut.
At the end of 2020 China had 136 continuous flat-pressed fibreboard production lines with an annual production capacity of 26.92 million cubic metres accounting for around half of the national total fibreboard production capacity.
There were 73 continuous flat-press particleboard production lines by the end of 2020 with a total production capacity of 17.63 million cubic metres. Some large automated plywood production lines have been put into operation and continuous plywood production lines were under construction.
Green innovation helped Chinese wood-based panel enterprises to further improve their market competitiveness.
Functional wood-based panel products continue to develop and explore and low-density and high-performance wood-based panel products become the focus of market attention.
Formaldehyde-free wood-based panel products continue to be recognised in the custom home furnishing market.
In 2020, the supply of wood-based panel materials in China was increasingly tight due to raw material supply issues. Fast-growing plantation of eucalyptus and poplar are still the main raw materials for wood-based panel production in China.
The proportion of waste wood recycling is expanding and the use of non-wood materials such as straw and reed is further mature.
There are wood-based panel production in 26 provinces (autonomous regions and municipalities), among which seven provinces, namely Shandong, Jiangsu, Guangxi, Anhui, Hebei, He’nan and Guangdong each produce more than 10 million cubic metres of wood-based panel products.
The output of wood-based panels in China will remain stable during the 14th Five-Year Plan period. The proportion of low- or formaldehyde-free wood-based panel products is increasing. The biggest problem in 2020 and at present is the supply of raw materials.
South Korea joins RCEP
The General Administration of Customs has announced that South Korea is now a member of the Regional Comprehensive Economic Partnership (RCEP).
RCEP entered into force on 1 January 2022 with six ASEAN member countries, Brunei, Cambodia, Laos, Singapore, Thailand and Vietnam and four non-ASEAN member countries, China, Japan, New Zealand and Australia.
Man Wah to build factory in Mexico
In a press statement Man Wah Holdings Limited has reported the purchase 339,000 square metres of land in Mexico where a factory will be built.
This company says this will help them address the risk of global sea freight fluctuations, reduce related logistics costs and create better opportunities in the North American market.
Since its establishment in Hong Kong in 1992 Man Wah Holdings Ltd together with its subsidiaries has been mainly engaged in services of sofas, mattresses and smart homes.
EU's deforestation-free regulatory proposal sparks intense debate
Intense negotiations are ongoing as the draft EU law on ‘deforestation-free’ and ‘forest degradation-free’ products, published by the European Commission (EC) on 17 November last year, navigates the various stages of the EU law-making process.
The draft law is planned to replace the EU Timber Regulation (EUTR) while at the same time extending regulations to a range of ‘forest risk’ agricultural commodities, including beef, cocoa, coffee, palm oil and soy together with derived products.
To become law the final text must be adopted jointly by the European Parliament and the European Council of Ministers. At this stage, drawing on views expressed by Agriculture Ministers of Member States at their Council meeting on 21 February there seems to be broad endorsement across all EU member states of the law's objectives and agreement that due diligence by producers and importers placing regulated products on the EU market should be the basis of the regulation.
On the other hand, there is a variation in views across Member States on the details of the regulation, particularly the definitions of ‘"deforestation’ and ‘forest degradation’ and the controversial proposal that the law should ban commodities derived from land that is legally deforested (i.e., as part of a nationally approved land use plan) as well as illegally deforested.
There is also widespread concern across Member States over the complexity of enforcement, the costs and potential discriminatory consequences for smallholders and SMEs and the impact on consumer food prices and global competitiveness of European producers in the global forest products and agricultural commodities trade.
The Agriculture Council meeting indicated that there is a way to go before Member States reach consensus on this legislation with some calling for more product specific impact assessments to extend the assessment already undertaken by the EC.
This process may take some time, despite the clear stated priority attached to passage of the law by the current French Presidency of the EU Council, which runs for the first six months of this year.
France has expressed ambitions to adopt conclusions in March while the European Parliament plans to adopt its position before July. Time is of the essence for France's Council presidency as it could be severely curtailed by April’s election when President Macron is expected to seek re-election.
Further insights into the extent of EU-wide consensus on the deforestation regulation will come when EU Environment Ministers discuss the proposal at their next Council meeting on 17 March.
But as things stand, the original timetable set out by France seems optimistic. The actual timing may well hinge on the priority attached to the legislation by the countries holding the subsequent six-month rotating presidencies, the Czech Republic followed by Sweden.
Major implications for FLEGT VPAs
The implications of any potential delay in the EU reaching some form of consensus on the new law, irrespective of whether the EU eventually decides to adopt something similar to the existing text, or to reject it altogether, are significant for those tropical countries that are signatories to existing FLEGT VPAs.
There is now considerable uncertainty over the future policy direction in the EU raising concerns about a hiatus in implementation of existing agreements.
The uncertainty is particularly problematic for Indonesia, the only country to have achieved FLEGT licencing, and which is looking to the EU to fulfil its obligations under Article 13 of the VPA.
This requires that the EU "shall promote a favourable position" in the EU market for licenced timber, including through "public and private procurement policies that recognise a supply of and ensure a market for legally harvested timber products; and a more favourable perception of FLEGT-licenced products on the Union market".
If the draft deforestation legislation is passed into law in its current form, the scope for the EU to promote ‘a favourable position’ for FLEGT licenced timber in the EU market would be constrained.
While the regulatory proposal includes a provision declaring wood covered by a FLEGT licence to have fulfilled the legality requirement there is no provision for FLEGT licences to meet the ‘deforestation-free’ or ‘degradation-free’ requirement.
This creates a situation whereby EU operators could reject FLEGT-licenced timber on grounds that, while it is entirely legal, it does not fulfil the EU’s definitions of ‘deforestation-free’ or ‘degradation-free timber’.
Any suggestion that FLEGT licenced timber may not meet these definitions would contradict the EU’s obligation to promote “a more favourable perception of FLEGT-licenced products on the Union market”.
The draft legislation provides one potential route out of this dilemma, through the proposed country benchmarking. The draft legislation enables the European Commission to assess the risk of commodity-driven deforestation and forest degradation by country and to categorise each country (or sub-national region) as ‘low’, ‘standard’ and ‘high risk’.
Operators would be permitted to implement ‘simplified due diligence’ procedures excluding the requirement for risk assessment and mitigation for all commodities from countries assessed to be ‘low risk’.
The far-reaching forest reform process undertaken as part of the VPA should better position Indonesia to achieve a ‘low-risk’ status. However, according to the current draft regulation, achieving such a status would require that Indonesia demonstrates that no forest-risk commodities with potential to enter EU supply chains derive from any forest land cleared after 31 December 2020, irrespective of whether the clearance is legal or illegal.
All timber products would also be required to meet a definition of ‘degradation-free’ which is regarded, even by some governments of EU member states, to be highly problematic and likely to conflict with national forest policies.
While the EU and Indonesia may yet negotiate a way around the looming roadblock for FLEGT licenced timber created by the new regulation it is hard to escape the conclusion that this ratcheting up of requirements only five years after FLEGT licencing became operational is not what Indonesia signed up for through the VPA, nor is it likely to be viewed in Indonesia as an adequate return in terms of a favourable position in the EU market after a decade of forest reform.
The on-going negotiations around the new deforestation regulation in the EU have implications for the recent rebranding campaign for the SVLK standard, which forms the basis for the FLEGT licencing system, as a sustainable forestry standard.
The campaign developed by the Indonesian Ministry of Environment and Forestry (MoEF) through a multistakeholder process supported by the UK government has the expressed aim to ensure that SVLK certification meets the sustainability requirements of even the world’s most environmentally sensitive markets.
The SVLK rebranding is explicitly designed to address increasing demand for sustainably produced timber products and deforestation-free supply chains. It also addresses the reluctance among the timber trade to promote the concept of ‘legal timber’, which is now considered a basic requirement in regulated consumer markets and not an add-on that should be specifically promoted or highlighted.
Besides sustainability aspects, the Indonesian promotion campaign intends to highlight the strengths of Indonesian timber products identified through stakeholder consultations in Indonesia and other research and surveys, including trade surveys by the FLEGT Independent Market Monitor, an ITTO project funded by the EU, in EU countries and (until 2021) the UK.
To ensure that the market benefits of Indonesia's delivery of FLEGT licencing after a decade of forest reform are not lost during this period of uncertainty, there is a clear need now for dialogue between Indonesia and the EU to resolve potential differences of interpretation in relation to definitions of deforestation, forest degradation and sustainability.
FLEGT in relation to changes in wider EU policy environment
All tropical timber supplying countries need now to consider that the overall thrust of both the draft deforestation law and FLEGT Fitness Check published by the EC at the same time in November last year suggests that the concept of FLEGT licences and of VPAs focussed on timber products may be dropped or substantially amended.
In their place, the EU has indicated an intent to promote broader Forest Partnerships to deliver on European Green Deal priorities, particularly in relation to zero carbon, as well as the EU’s development cooperation objectives including poverty alleviation and human rights.
With respect to VPAs the draft deforestation regulation only states that "some VPA components might be integrated where feasible and agreed by the partners into specific cooperation programmes, like Forest Partnerships or others to further support forest governance".
The political background to negotiation of the new Forest Partnerships is also very different compared to when the FLEGT VPAs were being negotiated in the decade between 2007 and 2017.
During that period, there was strong emphasis on development and trade recognition of forestry standards decided in the partner country through a stakeholder consultation process.
As noted in a recent paper for the European Centre for Development Policy Management (ECDPM), "By focusing on legality as defined by the law in producer countries rather than by imposing European standards, FLEGT ensures respect for territorial rights and World Trade Organization (WTO) rules, while avoiding politically sensitive sovereignty concerns in partner countries and thereby increasing the likelihood of their participation in the FLEGT scheme."
This consensus-based approach was combined with a positive trade incentive through provision of ‘green lane’ access in the EUTR and other commitments by the EU to promote a favourable market position for FLEGT licenced timber.
In contrast, discussions over the new deforestation law, and negotiations towards the new Forest Partnerships, are set within the context of an EU that is becoming "more assertively defensive in its trade policy", according to POLITICO, the independent EU-based policy news organisation.
This is illustrated by a comment made by the French Agriculture Minister Julien Denormandie in January, that “Europe must impose its standards on others and not have others’ standards imposed on it.”
In this respect the draft deforestation regulation proposal aligns closely with another ambition of the French Presidency of the EU Council to ensure the introduction of so-called ‘mirror clauses’ in all EU trade agreements.
As a condition of agreement these would demand that trade partners mirror the EU's own production standards and not be allowed to undercut European workers through laxer environmental rules.
The new deforestation proposal also aligns with the proposal for a Carbon Border Adjustment Mechanism (CBAM), published by the EC on 21 July last year and another priority of the French Presidency.
This mechanism is seen as necessary to reduce the risk of European climate policies leading to ‘carbon leakage’. That is a rise in offshoring of production of carbon-intensive goods outside the EU, and re-importation of these goods to the European single market.
The aim of the CBAM is that goods imported into the EU should be covered by equivalent carbon pricing to that applicable to production of the same goods within the EU, under the Emissions Trading System (ETS).
While the ultimate objective is that there should be broad product coverage in CBAM, for practical reasons, only the five emissions-intensive, trade-exposed industries under EU ETS are targeted in the current proposal: cement, fertilisers, iron and steel, aluminium, and electricity (CBAM goods).
Under the proposal EU importers must purchase CBAM certificates, where one CBAM certificate will correspond to one tonne of GHG emissions measured in the concerned CBAM goods. In essence, the number of CBAM certificates must be equal to the total embedded emissions in the CBAM goods imported.
The proposal states that the Commission will consider a broadening of the CBAM scope in terms of targeted sectors, indirect emissions, transportation services and downstream industries before 2026.
Relevant to the forest sector is that pulp, paper, and paperboard, are identified as likely to be included in the next tranche of products.
In this wider context, the draft deforestation law can be seen as a measure by the EU to prevent ‘carbon leakage’ in the agricultural and forest products sector.
It's about raising barriers to products considered to have inferior environmental standards to those produced in the EU. This is a different proposition to the FLEGT VPAs where the objective was to support partner countries in ensuring compliance with their own forest laws.
For the advocates of the new law, deforestation of any kind in third countries is unacceptable, irrespective of whether or not legally sanctioned.
Nor is there scope for the EU to actively promote products from third countries inside the EU unless they explicitly contribute to achievement of the EU's zero carbon goal.