Jun 2, 2013

EU Timber Regulation - Trade barrier that we didn't fight?

Illegal timber logging is a problem. It is identified as a problem in all civilized countries. Most of them have domestic laws to deal with the issue of timber logging. E.g. India has extensive forest laws to stop illegal timber logging. It is argued that corruption and fraud is rampant in timber trade and the extent of illegal logging might vary from 25% to 50% of all timber logged (anecdotal evidence from Wikipedia). The same illegal timber enters international trade too, and efforts are on to stop such activities. Good intentions. 

European Union has come up with a regulation sometime ago called the EU Timber Regulation(EUTR) applicable from 3rd March 2013. The stated obligations run thus:
The regulation counters the trade in illegally harvested timber and timber products through three key obligations: 

1) It prohibits the placing on the EU market of illegally harvested timber and products derived from such timber;

2) It requires EU traders who place timber products on the EU market for the first time to exercise ‘due diligence’. 

Once on the market, the timber and timber products may be sold on and/or transformed before they reach the final consumer. To allow for the traceability of timber products economic operators in this part of the supply chain (referred to as traders in the regulation) have an obligation to

3) keep records of their suppliers and customers.
I have seen the requirement of traceability of drug suppliers being applied rigorously in the case of pharma products. It is understandable due to human lives involved directly. Each bottle/strip of drug can not only be traced back to the manufacturer, but also to the lot/batch that the drug belonged to, and to the date of production.

Applying such requirements to timber products is moot. There will be advocates of global warming and such, who would go great lengths in defense. This blog doesn't differ on the principle of bad effect of de-forestation. The larger question raised here is, why is EU getting into extra-terrestrial legislation? Does it believe that their piece of legislation will prevail over domestic laws and stop illegal logging? What is the reason to believe so? 

What appears here is simple. The countries exporting timber and timber derived products, will now have an additional cost. The cost of compliance in terms of certification, process verification and documentation. This will add to the cost of business. The 'due diligence' can always be twisted beyond the information, risk assessment and risk mitigation goals as stated in the legislation originally. And this will further increase the cost of doing business. This, in simple terms, is a non-tariff trade barrier. In plain language, it says that if your timber products do not follow EU's certification and standards, EU will ban your products. And to meet EU's requirements and processes, you will incur additional cost, which will decrease your competitive advantage/margins. 

There was a similar piece of legislation from Australia last year, which was being contested by Indonesia and Canada. You can read more about it from Srikar's blog here. He raises a lot of pertinent questions from WTO point of view. The same questions apply here too. Also, Why should we let EU take higher moral responsibility of protecting the environment? Doesn't it mean that we don't trust our foresters and Customs/Excise officials?  And is is this legislation purely non-commercial in nature?

Now, there was a news report at SME times yesterday that said that India has come up with a certification process to comply with EUTR. It is called VRIKSH. The news report says:
"VRIKSH will suffice the due diligence requirements of international regulations set by foreign countries and authenticate the procurement source as legal based on evidential proofs. It plans to accelerate advocacy, raise awareness and build capacity and propagate the scheme amongst the overseas buyers," the Export Promotion Council for Handicrafts (EPCH) said in a press release.
The Export Promotion Council means good. It is doing the job of helping small exporters in its sector. It cannot be faulted for this line of approach. It also gets the legitimacy from this notification of DGFT. However, what disturbed me was this news report, in which the Govt representative talks about 'reinventing foreign trade mechanism', whatever it means, to meet the requirements. The press might have misquoted or whatever, but I gathered that India doesn't seem to have any ideas of contesting this piece of legislation.

That brings me back to Srikar's blog. The comments section goes on and on about the details and the provisions in WTO to counter such legislation, reiterating my belief that WTO is lawyers's paradise. Not coming from legal side, I realize that this piece of legislation will surely increase transaction costs and will bring down traditional advantage we enjoyed. Isn't that reason enough to pick up a fight, even if the details do not support us? Has someone done any research as to how much would be the benchmark increase in cost due to this legislation? Will it affect employment? Is there any study on the capability or readiness of our domestic timber based industry to face this new threat? Why are we so keen on implementing this piece of requirement that is thrown at us randomly, without contesting?  What are we planning to reinvent in foreign trade mechanism to counter this? 

I get only questions in my mind, with very few or no answers at all.