Can Europe See the Forest for the Trees

Commentary by William Alan Reinsch

Published October 7, 2024

Last week, under considerable pressure from just about everybody except environmentalists, the European Commission announced it would delay the implementation of its Regulation on Deforestation-Free Products (EUDR), which was supposed to take effect on December 30. If the European Parliament and European Council approve the postponement, the parties affected by it will have another year to get ready, with small ones having six months beyond that.

The regulation has been harshly criticized for its vagueness, which makes it difficult to explain exactly how it would work. It is intended to discourage the export or import of products that exporters or importers cannot prove are not linked to deforestation. It focuses on seven products-cattle, cocoa, coffee, palm oil, rubber, soya, and wood-and items that contain them. It appears that the regulation would operate a lot like the U.S. Uyghur Forced Labor Prevention Act (UFLPA) in that it would put the burden of proof on the private importer or exporter rather than requiring the government to prove the linkage, and providing such proof would essentially require tracing the origin of the shipment through its supply chain back to its beginning.

That is, in theory, easier for commodities than manufactured products, since the supply chains are presumably simpler, but it ignores the difficulty of data gathering in these sectors. Several non-EU governments that have objected have pointed out that proving their "innocence," as it were, would require the countries' landowners or farmers to provide information that would violate national laws on data sharing and privacy.

The law has also been criticized as effectively discriminating against small farmers and landowners, who are generally the last to become aware of new rules, especially those in a foreign jurisdiction, and do not have the technology or resources needed to comply. Large agribusinesses that have seen this coming and are well resourced are in a much more advantageous position. There is an irony here. Much of the European Union's regulation recently has gone after big companies, particularly in the high-tech sector, in the name of helping smaller companies compete more effectively. So, while the European Commission seems determined to strike a blow against Big Tech, particularly when it is American, the deforestation regulation would help Big Farm at the expense of the little guy. For example, Nestlé, Unilever, Mondelēz International, and Mars Wrigley support the regulation, and ADM, or the Archer-Daniels-Midland Company, has announced that it already has a verifiable supply chain for soybean oil and meal.

There also is little question that the regulation would be inflationary. As with any regulation that requires a review and potential change of supply chains, just conducting the review costs money. Changing suppliers will cost even more because the rule injects a noneconomic variable into supply chain managers' calculations, so, instead of maximizing efficiency and minimizing cost, they will have to spend time and money looking deeply into the provenance of their existing supply chains and then find new ones if the old ones come up short.

That, by the way, is similar to what the United States' emphasis on supply chain resilience is attempting. In both cases, the injection of noneconomic variables into supply chain management will increase costs, which will inevitably be passed on to consumers. It will also take much longer than the regulators think. The people who write these rules seem to believe that companies can make these changes quickly-that alternative sources of supply that meet the regulation's standards already exist, can be easily identified, and that companies can quickly switch over to them. In fact, the opposite is usually the case.

The deforestation regulation appears to be yet another case of the European Commission trying to seize the first-mover advantage in regulation in the hope of making its system the global default. That may prove difficult in this case because of the broad opposition from developing countries, developed countries, including the United States, which supported a delay, and from within Europe itself, since the regulation would apply to European farmers and to manufacturers who use the targeted commodities in their products. According to Reuters, 20 EU member states have asked that the regulation be scaled back or delayed.

There is also a larger issue here that goes beyond European regulation-the growing tendency to use trade as a cudgel to force social change in other countries. The United States has become a practitioner of this, as can be seen in the UFLPA, in the administration's insistence on environment and worker rights provisions in its trade negotiations, and in Congress' apparent determination to add additional human rights criteria to the Generalized System of Preferences program.

These are all good ideas, and the motivation for them is sincere, but they are an easy demand for Europe and the United States, who have already built these values into their economies and social structures and have the resources to implement them. They are a much harder ask for developing countries trying to reduce poverty and create more jobs. The deforestation regulation will likely cost poor farmers in these countries dearly. To say that progress in fighting climate change demands regulation may be true, but it is no comfort to the small farmer who will no longer be able to sell their produce and cannot remedy the situation themselves by undoing the deforestation. The European Commission's decision to delay the regulation for a year is a sign that commissioners are beginning to see the forest instead of the trees, which is a good thing.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

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