Closer Public-private Dialogue Needed to Ensure Smooth Implementation of EU Deforestation Rules

Explanation from the EU side

The summary of Mr. Torres' explanation (including the Q&A session) is as follows:

• The items covered by the EUDR include palm oil, beef, timber, coffee, cocoa, rubber, soy and their derivatives (chocolate, furniture, tires, printed matter), which are specified in the schedule to the regulation. Automobiles, musical instruments, etc. which are not specified in the annex, are not covered.
• In Japan-EU trade relations, the operators of EUDR obligations are the importers in the EU, and while Japanese exporters are not legally obliged to comply with the obligations, they are asked to cooperate in providing information to enable importers to fulfil their obligations (displaying geographical indication of material origin, DD to ensure that the product is not deforesting and complies with local laws, attaching a DD declaration, etc.).
• The top export items from Japan to the EU (in 2023) that are subject to this requirement are: 1) rubber tires (525 million euros), 2) rubber products (157 million euros), and 3) paper and paper products (121 million euros).
• More than 11 interpretive guideline documents are currently being prepared (e.g. definition of agricultural development that constitutes deforestation, DD, third-party verification, compliance with local laws, etc.).
• An IT system for filing declarations will be prepared, with exercises possible as of late 2024.
• Mixed materials cannot be imported into the EU unless all of the materials can be proven as deforestation-free.
• (Penalties) It is the responsibility of the member states to set and enforce penalties, but in case of violation of this regulation, in accordance with the principle of proportionality (penalties are determined according to the severity of the violation), not only will a fine of up to 4% of the total annual sales within the EU be imposed, but in case of a serious violation, the product may be temporarily banned from being marketed or supplied within the EU, or from being exported from the EU.
• The enforcement date (which will apply to large companies from December 30, 2024, and to small and medium-sized enterprises from June 30, 2025) is specified in the EUDR (law), and an amendment to postpone it would require a proposal from the European Commission followed by approval by the European Council and the European Parliament, which is deemed unrealistic.
• (Cost increase) We understand that supply chain traceability incurs costs, but this is a one-time effort with long-term effectiveness. Balancing these cost against the benefit of preventing deforestation, which accounts for 11% of GHG emissions, is crucial.
• (Possibility of exemption/reduced obligation) For materials from countries classified as low risk in the categories to be announced in the future, simplified DD will suffice (information gathering only with no risk assessment required).
• (Relationship with certification labels) Industry certification labels such as Forest Stewardship Council (FSC) for paper and Roundtable on Sustainable Palm Oil (RSPO) for palm oil can be used, but it is important to note that operators are responsible for any errors in certification.

Industry Reactions

In response to the above information, the main comments from Japanese industry representatives were as follows:

Mr. Kadota (Japan Paper Association):

• It is extremely difficult to implement the DD as stipulated in the EUDR for wood residues, such as sawmill residues, which are an important raw material for paper manufacturing.
• There are concerns that concentrating on a limited number of traceable raw materials in order to comply with the obligation will lead to raw material shortages and rising costs around the world, and accelerated deforestation of natural and naturally regenerated forests outside the EU.
• In order to achieve the objectives of the EUDR, it is important not to impose excessive burdens on countries and companies that are not causing deforestation or forest degradation. Efforts should focus on encouraging improvements in countries, regions, and companies that are actually causing significant deforestation and forest degradation concerns.
• We urge the European Commission to consider appropriate measures to realize the principles of the EUDR, such as considering the establishment of preferential treatment for "low-risk" countries, companies, and products.

Ms. Itoh (Bridgestone):

• Compared to companies within the EU, companies outside the EU will need to take more advanced measures, considering factors such as transportation time; however, as there are still many uncertainties regarding the implementation by EU authorities before the December 2024 mandate is implemented, it is difficult to prepare adequately.
• For example, while tire manufacturers within the EU can continue to manufacture and supply tires even if they are EUDR non-compliant as long as the rubber is imported before December 30 of 2024, tire manufacturers outside the EU must manufacture EUDR compliant tires two months before then, taking into account the manufacturing period. This represents unfair treatment of foreign manufacturers.
• Non-EU companies may also be forced to physically separate their production lines for EU shipments, which may result in lower productivity and the overstocking of materials.

Impressions: Closer Public-private Dialogue between the EU and Japan

After listening to the above discussion, my impressions are as follows:

First, while stakeholders agree with the EU's stated goal of preventing deforestation, there appear to be many challenges to the practical implementation of the regulatory measures from the perspective of businesses.
From industry perspectives, it seems that the specifics of the regulations place an excessive burden on businesses that are obligated to comply. For example, the treatment of mixed materials is a notable issue.Under the EUDR, all constituent materials of a mixed material must be of deforestation-free origin. As Mr. Kadota pointed out, paper materials often contain sawmill residues, which are themselves a sustainable use of resources. However, such wood residues are collected from within a variety of supply chains, so it is difficult to trace them 100%.
Rules of origin on trade often include the de-minimis principle. This is a user-friendly rule that allows a small amount of non-originating materials to be disregarded when determining the country of origin, and the introduction of such a rule would likely be welcomed by industry.
Furthermore, while many of the EUDR's interpretation guideline documents are still being drafted the obligation will be imposed on large companies on December 30 of this year. For Japanese companies, which are known for their strong compliance history and meticulous attention to detail, this is a source of significant frustration as they are unsure of what steps to take or how to proceed.
Clear action by EU authorities to help businesses comply with the law would be beneficial.

Secondly, considering the situation, it is questionable whether in the process leading up to the establishment of the EUDR, the voices of affected industries were not sufficiently heard by the EU authorities. This is an issue both on the part of the EU authorities and the affected industries. The EU policy-making process is typically open and involves time-consuming formal and informal coordination between stakeholders (sometimes through member states or the EU Parliament), which often results in a reasonably balanced final decision. When regulations are introduced, it is standard practice to issue detailed guidance on how regulated parties can comply with the regulations. Furthermore, the implementation timelines are often set in phases, including a trial period to allow for adjustments.
For example, the Carbon Border Adjustment Mechanism (CBAM) is an example of an EU regulation that has garnered much attention around the world. In this case, the European Commission proposed a draft in July 2021, the regulation was enacted in May 2023, and business reporting obligations started in October 2023, marking a transitional phase, with full implementation (actual taxation) beginning in January 2026. European Commission officials have clearly stated that the period leading up to January 2026 is a preparatory period for collecting necessary information to ensure smooth operation of the system (statement by an official at the EUJC seminar in November 2023). In the current case, the affected industries appear to have submitted various opinions to the European Commission, but perhaps more effective dialogue could not have taken place.

Thirdly, in connection to this, following the webinar, the Financial Times reported that the U.S. government had formally requested that the European Commission postpone the implementation of the EUDR. This seems to be true as the European Commission has agreed, but the position of the U.S. government is interesting. According to the press report, the joint letter dated May 30 from Commerce Secretary Raymond, Agriculture Secretary Vilsack and the United States Trade Representative (USTR) Tai submitted a request to postpone the implementation of the regulation and the application of penalties. This action could be seen as a heavy-handed measure by the U.S. government in response to the wishes of U.S. industry, but the interesting point is that they are only requesting the postponement of the implementation of the rule, and not the modification of its content. This may reflect the Biden administration's environmental priorities, recognizing the goals of EUDR, while asking for time to adapt. The U.S. response is an important reference point for Japan. It will be interesting to see how the EU reacts to the EUDR-related requests as a precedent for addressing such concerns.

Fourth, the lesson of this case is that there should be an earlier and closer dialogue between the public and private sectors in Japan and the EU on what policy and regulatory measures should be taken to achieve the goal of global environmental protection, which is undeniably shared by all parties. The EU often leads the way in introducing new environmental regulations, which then spread throughout the world, a phenomenon known as the “Brussels Effect.”
I am confident that Japan and the EU, which share fundamental values, can lead the world by combining their strengths. The EU excels at proposing new rules based on idealistic principles and Japan is good at working out the details of specific practical actions. Together achieve this, close dialogue from an early stage in the policy-making process is effective and essential. For Japan, early engagement in the EU's decision-making process, with the understanding of the influence of the Brussels Effect, is essential. With this mindset, Japan can help shape rules based on a shared values and ensure that they are globally acceptable and efficient to implement. Such co-creation of rules and regulations between Japan and the EU could give Japanese industry a competitive advantage in the growing global market for businesses that are focused on solving societal challenges.

We hope that this webinar has provided an opportunity for effective dialogue on the establishment and operation of rules of global environmental importance. Such dialogue is an important function of the EU-Japan Green Alliance.

(Note) The statements made in the text are based on the author's understanding.