As the monumental task of compliance with the Deforestation Regulation is becoming apparent to importers and exporters, the practical implications for trade and the potential damage to overseas development by cutting off EU markets to those unable to comply are becoming clearer.
The Regulation was adopted in June 2023 and is currently in a transition phase, where the centralised database and national enforcement provisions are being prepared and the Commission is developing a means of assigning countries as ‘high risk’ if they don't (in the Commission's view) have adequate deforestation safeguards in place. Meanwhile, the many industries affected await guidance from the European Commission on several of the details of the Regulation which remain opaque.
Inventory management will be key for importers, due to the risk of supplies that were produced after the date the Regulation came into force this June, but which remain in stock or awaiting EU customs clearance past next December, not being accompanied by the necessary due diligence statement to allow them to be sold on the EU market or re-exported. Goods which are non-compliant will need to be donated to charity or if that is not feasible sent for recycling or disposal as waste. The potential losses are plain to see.
It means that any in-scope products made since 29 June 2023 that sellers are now supplying to buyers for entry to the EU market, will (if there is a chance of them remaining on the shelves past the end of next year) already need to be fully traceable to precise plots of land on which any of the seven commodities subject to the Regulation that they were made from was grown or raised. (The seven commodities are coffee, cattle, cocoa, soy, oil palm, rubber and wood.) None of the plots can have been deforested after December 2020.
So not only will the impact of the Regulation be felt outside the EU's borders, but it also includes an element of retroactive application, which makes this Regulation unusual.
Whilst the admirable goal is to cut any link from EU production and trade back to deforestation or illegal production in the country of origin, many of the commodities covered grow principally in non-EU countries with emerging economies, where farming methods may involve collectives of small scale farmers rather than big agricultural enterprises. It is probable that complying with the increased requirements coming back to them through the supply chain will prove problematic.
The consequence may be, as some have already suggested, that rather than address deforestation, this new Regulation gives rise instead to a two-tier system of trade in consignments capable of being sold in the EU and those associated with ongoing deforestation which are diverted elsewhere. It is of course too early to call, but the signs appear ominous.