The Price Of Free Trade

The 2016 ITTO Annual Market Discussions looked at the pros and cons of free-trade agreements for tropical timber. By Mike Adams, coordinator, Tropical Timber Market Information Service, and Frances Maplesden, consultant

ITTO Annual Market Discussions are arranged and presented by the Trade Advisory Group during sessions of the International Tropical Timber Council. 

The 2016 edition, which was held in Yokohama, Japan, in November and was co-chaired by Jorge Malleux (Peru) and Barney Chan (Malaysia), featured speakers from Mexico, Nigeria, Thailand, Peru, the European Union (EU) and the US. 

Their presentations are summarised below.

1)ETTF to capture benefits of open trade by promoting tropical timber 

Referring to free-trade agreements (FTAs) negotiated by the EU, André de Boer, the Secretary General of the European Timber Trade Federation (ETTF), said ‘the more the better’ (for importers). 

He noted, however, that European manufacturers—especially those relying of domestic markets—might have different points of view. The European Commission has clear aims for its FTAs, which it negotiates to strengthen the EU economy and create jobs by enabling European businesses to compete more effectively and export more. 

FTAs also increase access to raw materials and vital components from around the world. Mr de Boer outlined how the ETTF is capturing the benefits of open trade in tropical timber products through active promotion. 

Its efforts have been boosted by the EU Sustainable Tropical Timber Coalition (an alliance of industry, businesses, governments and non-governmental organizations created in 2013), which has the ambition and resources to stimulate an increase in EU imports of tropical timber products.

 

2)Peru must re-examine root causes of forest-sector problems 

Trade agreements can be powerful tools for boosting Peru’s timber exports, according to Erik Fisher Llanos, the President of the Forestry Committee of the Peruvian Association of Exporters. 

But, he said, this goal is not being achieved because the development of the timber sector in Peru is hampered by a misdiagnosis of the problems in Peru’s tropical forest sector. This, in turn, has resulted in an emphasis on fighting illegal logging and its associated trade at the expense of the fundamental cause of the problem—poverty. 

The present approach “is not enough to guarantee the sustainability of tropical forests”, said Mr Fisher. 

To address the challenges facing Peru, Mr Fisher recommended: 

• boosting forest governance and strengthening the management capacity of regional administrations, because these are the ones closest to the forest;

• improving the business climate to release domestic and international investment; 

• tackling the overregulation of the sector; and 

• improving communication to send signals to international markets, especially in those countries with which Peru has FTAs.

 

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US–Peru FTA boosts trade

The US–Peru Trade Promotion Agreement was signed in December 2007.

By 2013, Peru’s exports to the US had increased by 38 percent, to US$8.1 billion,while American businesses exported US$10.1 billion in merchandise toPeru in the same year.

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3)Increase in competitiveness of small enterprises needed in Mexico

Enrique Tellez Pacheco, president of the Mexican National Chamber of Wood Industry (CANAINMA), said he recognised the benefits to Mexico of the North American Free Trade Agreement (NAFTA) and other FTAs. 

Although such agreements might provide new export and import opportunities for tropical timber, much work is required to deliver such opportunities to the domestic tropical timber sector in Mexico, which is dominated by small and medium-sized enterprises (SMEs). The challenge, said Mr Tellez, is to increase the competitiveness of Mexican companies so they can take advantage of the FTAs. 

Achieving this will require the government and organizations such as CANAINMA to address the fragmentation of tropical timber production in the Mexican southeast, where only low-value-added products are manufactured. 

Efforts are needed, he said, to open up financing for replacing obsolete equipment, boosting skill levels, and increasing transparency in the sector as a way of tackling illegal logging. 

 

4)Nigerian consumers stranded by lack of purchasing power

FTAs had many pros and cons for the timber trade, according to Dr Labode Popoola, professor of Forest Economics/Sustainable Development at the University of Ibadan, Nigeria (he is also president of Nigeria’s Forestry Association). 

Although West African wood-product exports are significant, the production and trade of wood products is poorly integrated, reducing the economic benefits and the capacity of the sector to meet the needs of domestic and regional markets. 

An imbalance in purchasing power between international and domestic markets, and the resulting over-concentration of effort on the export trade, has left legitimate domestic wood demand—which is growing quickly—unaddressed. A common strategic framework is needed to generate meaningful data on local, national and transboundary trade and its impact in the sub-region.

Professor Popoola recommended more effective enforcement, negotiation and knowledge generation in the sector, and a greater sharing of knowledge and expertise among forest agencies in the sub-region. He said the value chain for forest products in the sub-region is still inefficient because of the continued use of obsolete technologies compounded by weak governance in the sector, and these issues need to be addressed. 

There is also an urgent need for comprehensive resource assessment; greater private-sector and community involvement in forest development; greater access to technologies and market information; a review of forestry and environmental laws; and more education and research. 

 

5)Change of government in US will affect trading environment 

The outcome of the presidential election in the US had just become known when Joe O’Donnell, Senior Manager for Government and Public Affairs at the US-based International Wood Products Association (IWPA), made his presentation. 

The outcome meant that the Trans-Pacific Partnership (TPP) would now not go ahead in the US, at least in the near term, he said. He indicated that the election result would likely have other impacts on the trade environment in the US, too, but that the IWPA is committed to working to keep trade flows open. 

The US has FTAs in effect encompassing 20 countries, reported Mr O’Donnell, and these have proven to be one of the best ways to open up foreign markets to US exporters. The reduction of trade barriers and the creation of a more stable and transparent trading and investment environment make it easier and cheaper for US companies to export their products and services to trading partner markets. 

The US is negotiating the TPP with Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Viet Nam. The US and the EU launched negotiations on the Transatlantic Trade and Investment Partnership in June 2013. 

 

6)Small enterprises in Thailand survive by creating culture of design and craft 

Jirawat Tangkijngamwong, chair of the Thai Timber Association and a director of Deesawat Industries and Deesawat Design, spoke about the way in which open trade drives finished-product exports and design opportunities. 

There are 1500 registered wood manufacturers in Thailand, of which only 52 would be considered large scale, a further 210 are medium-sized, and the balance—more than 1200—are small. 

A close look at the sector, said Mr Tangkijngamwong, reveals that there are also 8000 unregistered ‘micro industries’. SMEs in Thailand are slow and unproductive, and they cannot compete with larger domestic companies and certainly not with foreign rivals. To help them survive in the increasingly harsh competitive environment, said Mr Tangkijngamwong, the Thai industry is, unaided, using its entrepreneurial skills to adapt traditional crafts and designs to create products to attract international buyers.

 

Interventions & Discussion 

The presentations were followed by a lively discussion, moderated by Jorge Malleux, from Peru. 

A delegate from the EU noted that tropical producer countries face many challenges in the tropical timber trade, and he asked for comment on how best to develop advanced technologies and attract investment in wood processing and trade. 

Mr Pacheco responded by saying the problem is complex; in Mexico, the underlying issue is that many forest owners are indigenous communities, who manage forests according to customary procedures, and production is inefficient and small-scale. 

Achieving improvements in productivity requires engagement with these communities to design programmes and promote technologies appropriate to their needs and capabilities. 

Mr Pacheco said that building trust with forest communities is essential for any development programme in Mexico because forest communities have had bad experiences in the past. To attract investment in wood-processing industries, legal security is another fundamental requirement, he said. When investments involve communities living in or close to the forest it is necessary to ensure that benefits are fair and evenly distributed. 

Mr Pacheco noted that, in Mexico, despite the many challenges, forest communities welcome investment in forestry and wood processing. A delegate of Thailand noted that market transparency is key to sustainable forest management (SFM) and a legal trade, and that many speakers had noted the extent of illegal logging and trade in their respective countries. 

Against this background, he asked whether FTAs do indeed enhance transparency and help eliminate illegal trade. Professor Popoola responded that trade is motivated by profit and that investments flow to where profits can be made. He said government involvement is required to ensure equity in trade.

A delegate of the US outlined the many benefits she considered that the US– Peru Trade Promotion Agreement is providing and the positive changes that are occurring in the forest sector in Peru as a result. 

In the long term, she said, these changes should benefit the timber industry in Peru. A delegate of PNG noted the importance of clarity on what constitutes illegal logging, and countries need to define it to suit their own contexts. 

Mr de Boer responded that the EU Timber Regulation’s definition of legality is clear: EU importers must ensure that imports are in compliance with national laws in producing countries, and they are obliged to undertake due diligence to ensure that shipments are legal. Mr de Boer also noted that the conclusion of voluntary partnership agreements and the issuing of Forest Law Enforcement, Governance and Trade licences will ensure access to EU markets. 

A delegate of Guatemala acknowledged the role played by ITTO in enabling his country to invest in technologies to improve online timber market data and to develop an electronic verification system (known as SEINEF), which now provides a strong chain of custody. 

He said that, since its development in 2014, SEINEF has increased the availability of forest products and improved information on local markets. A delegate of Mexico commented that his government is introducing a strategy to promote SFM, with five goals: 1) social inclusiveness; 2) forest management for biodiversity conservation; 3) economic development; 4) monitoring; and 5) poverty reduction. 

The strategy is expected to support the expansion of legal trade in wood products. 

An observer asked whether FTAs are benefiting communities that depend on forests for their livelihoods. Is it possible, he asked, to improve FTAs so they are better able to reduce poverty and thereby to bring the informal and often illegal trade conducted by local people into the mainstream sector? 

None of the panelists responded directly to this question. A delegate of Germany commented that the movement of wood products across borders requires the verification of origin and species. 

Germany, he said, supports the Global Timber Tracking Network, which is facilitating and promoting the use of DNA and stable isotope markers and timber-tracking technologies as a tool to ensure legal timber trade. He suggested that the success in eliminating illegal timber trade achieved through the application of these technologies warrants wider replication. 

 

The Takeaways

Of the six speakers at the 2016 Annual Market Discussion, two were from consumer countries and four were from producers. The two consumers heaped praise on the FTAs negotiated by their governments, but the speakers from producer countries voiced reservations. If the discussion were a football match, the score would be 2:4 against! 

Bilateral and regional FTAs have proliferated in recent years as efforts to secure a global deal on trade liberalization through the World Trade Organization have stalled. 

But are exporters using them? If not, why not? What benefits do they provide? And what is the downside? 

The Annual Market Discussion heard from manufacturers, trade associations and academics, and the takeaway message was that FTAs, though well-intentioned, are not delivering equally for every partner. 

A recent analysis by HSBC Global Connections looked closely at the use of FTAs in Association of South East Asian Nations (ASEAN) countries, where exporters have no lack of options in their approach to FTAs because their governments have provided them with many choices. 

According to the HSBC analysis, however, “the choices may be rich, but utilisation is surprisingly low, with each FTA signed in ASEAN used, on average, by only one in four exporters”.

 

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