UK’s Due Diligence Approach is Popular: Will the EU Follow Suit?

The UK sticks to legality

Two significant developments took place last week. The first was that the UK moved closer to a legality standard for preventing commodity imports associated with illegal deforestation. The second was that some details of the EU’s approach to due diligence and addressing deforestation were leaked to media outlets.

A debate and vote in the UK House of Lords demonstrated how London appears to have settled on a ‘legality’ approach rather than a ‘sustainability’ approach regarding the new rules.

Despite this, Baron Randall in the House of Lords sought to push through amendments to the Environment Bill (the legislation that contains the Due Diligence measure) that sought to ban product imports associated with all deforestation – not just illegal deforestation.

The amendments were knocked back.

Lord Goldsmith, the government Minister who has been a key sponsor of the Bill, stated: “Our legality-based approach allows us to lead the charge on tackling illegal deforestation, while working in partnership with producer country Governments and communities and respecting their laws.”

As we’ve pointed out before, the reasons for legality are reasonably straightforward.

First, attempting to define sustainability and how it might be implemented is difficult at best. It would require a complex negotiation between the UK and its trading partners. It’s also apparent that the global consensus on sustainability goals – the SDGs – isn’t necessarily a set of implementing measures; these are defined by governments and implementing agencies.

Second, attempting to impose a blanket deforestation approach would run into considerable problems with exporting nations – and this has been debated before regarding measures to reduce carbon emissions. What is the baseline year? Do small farmers come under the same scrutiny as large companies? Should compensation be paid? What if forests are being cleared to support food production in poor nations? Is a recent baseline year equitable if Europeans cleared their forests in the 19th century?

Third, for the above reasons and others, this will likely run into problems with global trade rules. The most obvious of these that if a country is seeking to solve an environmental problem in another country, it should find the most direct means of addressing the problem, rather than imposing a trade restriction. Why? Because it can be ineffective. If, for example, the UK banned palm oil that came from ‘deforested’ areas, that palm oil would more than likely get exported to countries that don’t have the same regulations.

These arguments have been discussed for more than a decade.

But finally, Lord Goldsmith’s view that there needs to be a respect for the legal frameworks of partner countries has led to positive reactions from trade partners, including palm oil producing nations Indonesia and Malaysia. Imposing laws by sheer will wins no friends in international trade. Consulting with and listening to trade partners does. The contrast with how Jakarta and Kuala Lumpur have responded to recent EU initiatives – suing the bloc at the WTO over the RED biofuels directive springs to mind – is very telling.

There are remaining questions for the UK – particularly DEFRA – including whether and how to implement the recognition of national standards such as ISPO.

But perhaps the bigger question is whether Brussels will heed the obvious takeaway: that engagement works better than antagonism.

Will the EU follow suit?

Also last week, information around the EU’s proposals on deforestation risk were – possibly strategically – leaked to the media.

According to reports in The Guardian, the proposed regulation is likely to be focused on beef, palm oil, soy, wood, cocoa and coffee.

It will classify economies into high, standard and low risk of deforestation associated with each commodity.

From our reading, importers will likely have to undertake due diligence that is correlated with the country and the commodity, accordingly.

There will be two big questions facing exporters and importers of palm oil products going forward: How the risk status will be determined for each economy; and, what the appropriate form of risk mitigation will actually be.

Based on the EU’s historical approach to palm oil, it’s highly likely that there will be a push for any country producing palm oil to be considered ‘high risk’.

But because this isn’t just about palm oil, but also about other commodities, the EU will need to tread very carefully. They will need to introduce a measure that at least allows for a regulatory pathway for commodities, otherwise face considerable problems not just with the WTO, but with trade relations more broadly.

This leads to the second point. It will likely mean – as we’ve written before – that sustainability standards and other standards will need to provide a pathway for exports out of forested countries as a means of risk mitigation.

This is, however, unlike the RED. The RED was originally designed to support EU-based oilseed producers and biodiesel production; it failed spectacularly, hence the need eventually to revise the Directive to ban palm oil.

Now that Due Diligence is focused on all commodity imports for all end-uses, the situation is different. The EU isn’t able to grow its own coffee or cocoa. It can’t produce enough animal feed to support its own herds. It still requires imported vegetable oil to support its own food manufacturing and production.

Again, the question for Brussels is what it wants to recognise in its risk frameworks. National standards such as Indonesia’s ISPO require that all laws are followed – including the deforestation moratorium.

Will Brussels accept this, in the way that London has done?

Or will it risk alienating its trading partners once again – and, perhaps most significantly from the point of view of Brussels, will it risk giving away a competitive advantage to its recently-departed member?

The recent Australian submarine deal demonstrated that the UK is willing, given the right circumstances, to pounce on European hesitation in Asia-Pacific and advance its own interests in the region. If Brussels does pursue an arbitrary Due Diligence, harming its own economic interests, it will be another feather in Boris Johnson’s cap in the region.