Chairman’s Note

Private and Confidential
For SIIA Corporate Members and Advisors
April 2023

EU Deforestation

On 23 March 2023, we met with representatives of the European Commission in Brussels to discuss the EU’s forthcoming regulation on deforestation which will impact exports into Europe that may relate to deforestation.  We engaged the Directorate-General for Environment (DG-Env) and Energy (DG-Energy) directorates, which oversee the implementation of the rule. Our meeting was set in the context of the EU-Singapore Free Trade Agreement, for which I serve as the Singapore chair for trade and sustainability and the domestic advisory group established by the governments.

This brief summary is to offer some key take-aways from the meeting.

1. Context
The EU regulation on deforestation aims to ensure European consumption does not contribute to deforestation or forest degradation worldwide. ‘Deforestation-free’ products are promoted while production is affected on palm oil, cattle, soy, coffee, cocoa, timber and rubber and products derived from them. All importers must conduct enhanced due diligence on their imports and supply chains. The EU will rate the risk from source countries and regions as being lower or higher.

This has been controversial with some countries objecting. Malaysia for example, saw the Deputy Prime Minister Fadillah Yusof, decry the new regulation alleging that it was biased against small scale producers of palm oil in Malaysia and further called for the EU to end the discrimination against them. Potentially this impacts not only the products and sectors but can negatively colour wider ties between ASEAN and EU.

2. Outreach

EU officials acknowledge the controversy and objections but feel that these are unwarranted. They point out that the regulation will affect products linked to deforestation that has occurred only after 31^st December 2020. This means that where the land expansion or deforestation was done before that date, those products will not be affected.

Moreover, they believe there is scope given to adjust and comply.  Once the Regulation is in force, operators and traders will have 18 months to implement the new rules. Micro and small enterprises will enjoy a longer adaptation period, as well as other specific provisions.

The EC recognise that the law has created a certain level of frustration and a barrier to open dialogue. They would like to have more productive discussions within the region on a more fact-based approach.  DG-Env shared that they are in the process of doing outreach to some of the countries within South East Asia (SEA), and there have already been a few missions to SEA recently.

They believe that meetings with government officials in Malaysia and Indonesia have been productive. But they note and expressed some frustration that public responses and news have continued to be critical of the EU efforts.

3. Palm Not the Target

The EC shared that the deforestation regulation was not targeted at the palm oil sector and that the EC itself did not have any particular policies on palm oil. It was their position that these regulations would concern a number of sectors from manufactured goods through to farming. However, they recognised that as long as the regulation is seen as a “palm oil regulation”, having a constructive conversation will be difficult. In this regard they have tried to adjust their messaging to indicate that they are not targeting palm oil and in doing so trying to reduce the potential negative ripple effect through social media.

Palm oil has also not been a concern during discussions on FTAs between the EU and other ASEAN countries. They shared that they are negotiating a FTA with Indonesia that they intend to conclude at the end of year, a discussion that has dragged on for the last 7 years. While talks for an FTA with Malaysia had previously stalled because of the palm oil question, they feel recent discussions are more positive.

Furthermore, while the issue has engendered a lot of animosity in the ink spilled, it has not affected the flow of goods or the amount of trade between the EU and these countries. The EC believes that this is further evidence that they are clearly not targeting the palm oil sector.

4. Small Holders

A major complaint from Indonesian and Malaysian officials has been that the forthcoming EU deforestation regulation will have a particularly negative impact on smallholder farmers, who will be unable to meet the traceability and data reporting requirements set by the EU. The EC shared that they felt that smallholders as a whole would not face major issue to comply. The main concern is for small holders who are based in countries considered to be high-risk.

The EC said that where countries are considered high risk, there would be a process to notify them ahead of a public announcement. This would include consultations during which the country in question can provide evidence on why the risk should be reassessed and lowered. Moreover, such high-risk categorisation may not necessarily be for the whole country but could be limited to a particular region or particular companies that have been importing to the EU.

5. Next Steps

While not fully researched, we hope this “field note”, drafted by our Assistant Director (Sustainability) Andrew Wilfred, might be timely and be of interest to SIIA members looking at the issue or whose exports may be affected.

Malaysian and Indonesian government officials are due to visit Brussels in May and there may be movement on the issue. While some headlines may fan controversy, indications are that officials on both sides are trying to make progress on the new regulation’s acceptability.

The SIIA will continue to monitor the issue as part of our work for the Singapore Dialogue on Sustainable World Resources (SWR). The upcoming SWR plans to include the issue in a wider context about investment, trade and sustainability.

Yours sincerely,

Simon Tay
Chairman