EU's Deforestation Regulation: Impact on Indonesia’s Commodities Export

The European Union (EU) has taken a bold step in addressing the pressing issue of deforestation and forest degradation with the enactment of the new Deforestation Regulation (EUDR). How will this impact Indonesia?

This comprehensive legislation, which will take effect as of 30 December 2024, targets key commodities such as soy, beef, palm oil, wood, cocoa, coffee, and rubber − all recognized as major drivers of deforestation. Under the EUDR, products sourced from areas affected by deforestation or forest degradation practices will no longer be permitted for sale within the EU.

The EUDR extends its impact beyond the EU borders with its proactive approach in fostering international cooperation to address deforestation on a global scale. Article 30 of the EUDR outlines a collaborative effort between the EU, its Member States, and producer countries to tackle deforestation and forest degradation through coordinated partnerships and mechanisms.

The EU seeks to collaborate with major consuming countries to encourage them to adopt measures that minimize their contribution to deforestation, thus creating a level playing field for global trade. By promoting sustainable agricultural production and transparent supply chains, the EU aims to set a precedent for responsible trade practices worldwide. The EUDR outlines rules for identifying products free from deforestation and obliges companies to, among others, adopt sustainable sourcing methods and traceability system to prevent their supply chains from causing deforestation.

However, the implementation of the EUDR has raised concerns, particularly in countries heavily reliant on its plantation industries included in the target commodities. The enactment of restrictive regulations by the EU threatens to disrupt economies that are reliant on the impacted commodities, which includes Indonesia. Indonesia currently sits among the top 5 cocoa,¹ coffee,² rubber³ and most prominently, palm oil⁴ producers in the world. In 2022 alone, Indonesia exported 335,266 tons of CPO to Europe, totaling to US$330,895,000 in revenue.⁵ The enactment of restrictive regulations by the EU would affect Indonesia's palm oil industry and significantly impact its economy.

The implementation of EUDR can have a negative economic impact due to the domino effect, where changes in one area affect the others. If there is a decline in export numbers of the aforementioned commodities, it will have a significant impact on the industry down to its roots. The domino effect theory in question is as follows: fewer exports; the country's revenue decreases; market prices will fall; as market prices fall, farmers' incomes will also decrease; with the decline in farmers' incomes, there is a potential that their earnings will not cover operational costs, technical constraints, or force majeure situations. Therefore, we can see that palm farmers are significantly impacted because they are at the upstream part of the industry and have limited capital.

Meanwhile, Indonesia along with the EU and Malaysia have established a taskforce in the spirit of implementing EUDR. The latest meeting of the Ad Hoc Joint Task Force (JTF) on the European Union Deforestation Regulation (EUDR) took place on 2 February 2024 in Putrajaya, Malaysia, with representatives from the relevant five commodities: palm oil, rubber, cocoa, timber, and coffee. Co-chaired by officials from Malaysia, Indonesia, and the European Commission, the meeting aimed to address the challenges and implications of the EUDR on these sectors. Discussions covered various workstreams, including the inclusion of smallholders in the supply chain, certification schemes, traceability systems, scientific data on deforestation, and data privacy concerns. The meeting resulted in the formation of dedicated teams and timelines to advance these workstreams, with further progress to be reviewed at the next meeting in September 2024 in Brussels.

In hindsight, while the EU's Deforestation Regulation represents a commendable effort to address environmental concerns and promote sustainability, its impact on global trade dynamics and diplomatic relations cannot be overlooked. Balancing environmental objectives with economic considerations and international trade obligations remains a complex challenge. Moving forward, constructive dialogue, collaboration, and adaptive policy making will be essential to navigate these challenges effectively and achieve the shared goal of sustainable development on a global scale.

¹ https://worldpopulationreview.com/country-rankings/cocoa-producing-countries

² https://worldpopulationreview.com/country-rankings/coffee-producing-countries

³ https://worldpopulationreview.com/country-rankings/rubber-production-by-country

⁴ https://fas.usda.gov/data/production/commodity/4243000

⁵ https://www.bps.go.id/id/publication/2023/11/30/160f211bfc4f91e1b77974e1/statistik-kelapa-sawit-indonesia-2022.html

By: Harri Hazwar, Nicole Huang and Justin Huang

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