FLEGT AND TRADE What will the impacts be?

Transcription

1 FLEGT AND TRADE What will the impacts be? by Emily Fripp, Consultant (ERM) Environmental Resources Management (ERM) 8 Cavendish Square, London, W1G 0ER emily.fripp@erm.com Published by: Sustainable Development Programme Chatham House 10 St James Square, London SW1Y 4LE, UK November 2004 Royal Institute of International Affairs 2004 This material is offered free of charge for personal and non-commercial use, provided the source is acknowledged. For commercial or any other use, prior written permission must be obtained from the Royal Institute of International Affairs. In no case may this material be altered, sold or rented. Credit: Royal Institute of International Affairs 2004

2 Contents SUMMARY INTRODUCTION PURPOSE OF THE STUDY THE OBJECTIVES OF THE EU S FLEGT ACTION PLAN COMPONENTS OF THE ACTION PLAN APPROACH OF THIS STUDY LAYOUT OF THE REPORT TRADE REGULATIONS AND STANDARDS LESSONS FOR THE TIMBER TRADE LOG EXPORT BANS THE CATCH DOCUMENT SCHEME REGIONAL AND NATIONAL INITIATIVES REGIONAL INITIATIVES NATIONAL INITIATIVES GLOBAL TRADE PATTERNS AND TRENDS TRENDS IN THE GLOBAL WOOD BASED PRODUCTS TRADE KEY GLOBAL MARKETS POTENTIAL IMPACTS OF THE LEGALITY LICENCE SCHEME ON GLOBAL TRADE CASE STUDY PRODUCER COUNTRIES AND POTENTIAL IMPACTS BRAZIL INDONESIA CAMEROON CONCLUSIONS & POTENTIAL IMPACTS GENERIC POTENTIAL IMPACTS ON TRADE PATTERNS POTENTIAL IMPACTS FACTORS INFLUENCING THE POTENTIAL SIGNIFICANCE OF IMPACTS ANNEX I: GLOBAL TRENDS SUPPORTING GRAPHS...(AVAILABLE SEPARATELY) Page 2

3 Summary The purpose of this study is to assess the potential impact of the EU FLEGT Action Plan on the trade in wood-based products between the EU and the partner producer countries. To reiterate, the overall aim of the Action Plan is to influence trade in illegal wood-based products and to reduce the amount of illegal wood-based products consumed and the scale and significance of the associated illegal activities in the producer countries. The study takes the approach of a standard impact assessment, comparing the business-as-usual scenario with the situation that would result under the Action Plan, in particular the implementation of the legality licence scheme, through Voluntary Partnership Agreements. The assessment considers lessons from other trade-based regulations, current global trends, other market drivers affecting production, consumption and trade and a number of interviews held with a range of stakeholders actively involved in the trade of wood-based products. The study considers the potential impact with regard to three case-study countries: Indonesia, Brazil and Cameroon. Two trade-based regulations with lessons of relevance to the implementation of the legality licensing scheme are log export bans and the CCAMLR Catch Document Scheme. Log export bans are introduced for normally one of two reasons: either to encourage domestic processing and valueadding, or as an environmental tool, e.g. to reduce the amount of deforestation and over-logging. The impact of such bans has varied but includes an increase in the supply of logs to the domestic market, leading to a fall in market price, in effect providing subsidised raw material to the processing industry. Unless government enforcement is adequate there is a risk that log production will increase. However, the experience of the CCAMLR Catch Document Scheme shows that where the harvest area is defined and fish stocks are sufficiently reduced, with demand constant, prices for legally caught fish will increase. A price premium has emerged in the market place for legal toothfish. There are a number of other drivers (in addition to the EU FLEGT Action Plan) influencing the trade in wood-based products; these include regional FLEG processes and trade action plans, public procurement policies of EU member states, and a range of private sector and NGO initiatives such as supply chain management, business-to-business initiatives, producer and buyer groups, procurement policies and guidelines. Before assessing what the possible impacts may be, a review of the current trends in the market place provides a baseline, or business-as-usual, scenario. Key global trends include: the increasing demand for processed and engineered products such as paper; global consolidation of the industry; and increasing ownership and responsibility for supply chain issues. Globally Japan, China, the US and EU are the main markets for wood-based products and this trade is dominated by processed products. For two of the case-study countries, Indonesia and Brazil, the EU market is a smaller export market than that of Japan, China and the US, but it remains a desirable and higher value market. Although most of this trade is in processed products, such as pulp and paper and plywood, for the third casestudy country, Cameroon, exports are predominantly logs and sawnwood and the EU is a key market destination; China, however, is becoming increasingly important. In particular in Brazil, with more than 80 per cent of tropical products being consumed domestically and only a small share of production exported, the majority of exports going to the EU are processed plywood and pulp and paper and some sawnwood the legality licence in its initial form will only have a limited impact on both production and trade patterns. Page 3

4 In Indonesia, the legality licence is likely to have a limited impact in its initial form (logs and sawnwood only) on trade between the EU and Indonesia and may even cause a distortion in trade patterns away from the EU towards other less stringent markets, where strong trade partnerships already exists, for example to China and Japan. With a log export ban in place and excess demand in the domestic market a switch from export to domestic markets is also a possibility. Between 70 and 80 per cent of Cameroon s exports go to the EU, accounting for almost all sawnwood exports and 50 per cent of the log exports. China is the other main buyer of Cameroon s logs. Strong vertical linkages and traditional buying relationships exist between producers in Cameroon and buyers in the EU, especially in southern Europe. With a WWF GFTN Producer Group, a working group for certification, an independent observer, significant donor presence and private sector initiatives such as the UK TTF and SGS programmes, the legality licensing scheme will potentially have a significant impact. It will support and be supported by the existing trade and timber production initiatives currently in place. Generic potential impacts Potential generic impacts, as identified by stakeholders interviewed and based on global trends in the wood-based products trade, can be summarised under three broad groups: market substitution, product substitution and price impacts. There is a risk of market substitution for buyers although the overall impact is not clear. With current NGO activity putting pressure on buyers there is a reputational risk associated with buying from high-risk countries, and some traders and buyers have already withdrawn from such markets. However, the legality licence could put confidence back into the tropical timber markets and thus buyers may return to high-risk countries. For producers there is a risk of market substitution away from the EU to other less stringent markets. Where the costs of compliance are too high, or market conditions and requirements too stringent, alternative markets could be sought. This is more likely to affect those who are already trading with less stringent markets (they will increase the amount of exports to that market) or are less interested in maintaining a market presence in the EU. The EU market is, however, seen as a highly respected and valuable market which producers are keen to maintain supplying. Supplying alternative markets such as China is not always an attractive option, given often low prices and high freight costs. A switch from export to domestic markets is also possible. As with log export bans, the legality licence may encourage domestic processing of logs for export. Whilst increasing domestic valueadding of timber products, this will encourage the avoidance of the legality licence scheme if the scheme only covers logs and sawnwood. Product substitution is already occurring and may increase. It is already evident that product substitution away from tropical hardwood to either treated softwood or engineered products is occurring. This trend is likely to continue as the demand for engineered products increases, together with the increase in plantation-sourced products, etc. Tropical hardwood may well become a highvalue niche product. Thus the trend away from tropical hardwoods will limit the overall potential impact of the Action Plan, unless the Action Plan is inclusive of all timber, both temperate and tropical. Page 4

5 With all these possible market and product substitutions the impact on price is harder to predict. If the partner country is a significant supplier of logs or sawnwood to the international market, then the legality licensing scheme may well result in an increase in the international price as supply decreases. However this is unlikely to be the case for any of the producer countries in this study, as they do not supply sufficient volumes of tropical timber to the market to be able to influence international prices. In the long run it would be expected that the costs of compliance with the legality scheme for the producer would be passed on to the buyer through price increases. There is some agreement and expectation in the trade that this will be the case and that ultimately a price premium is a feasible outcome for logs and sawnwood with a legality licence in the EU. As in any market, ultimately the forces of demand and supply will determine the market price. A price premium for legal timber will be created as the demand for legally marked timber exceeds the supply. However the higher price is likely to act as an incentive for other suppliers to enter the market and thus the price may reduce once supply increases. Alternatively, the higher price may result in consumers seeking alternative products and thus falling demand. Factors influencing the scale and scope of impact The overall potential impacts of the legality licensing scheme will ultimately depend on the composition and implementation of the scheme itself the costs, levels of bureaucracy, coverage of products and markets, credibility, producer-country incentives to implement and the political willingness to support the scheme in both the producer and consumer countries. The Action Plan contains a component that will focus on the development of capacity of the relevant institutions in the producer countries in the bilateral agreements. This will go some way to reducing the costs of implementation and ensuring that the incentive to introduce the scheme is maintained. The study highlighted the significance of the role and influence of the buyer. In particular the role of pubic procurement policies of EU member states, driving the development of private sector procurement policies and supply chain management initiatives, is seen to be a key factor influencing the way in which trade in wood-based products is being carried out. The legality licensing scheme and the wider package of activities that will form the voluntary partnership agreements will be a key supporting tool and provide a wider policy framework to the market and policy initiatives already in place. It is, however, important that the wider package provides adequate support and incentives to the producer countries to ensure compliance and importantly that political support to the scheme is maintained. Collectively, as long as duplications of costs and procedures with other initiatives can be avoided, it is expected that the legality licence will have a positive influence on the trade in wood-based products as a supporting tool and framework, in achieving the overall objectives of the FLEGT Action Plan. Page 5

6 1 Introduction 1.1 Purpose of the study 1 The purpose of this paper is to analyse the potential impacts of the EU FLEGT Action Plan, in particular the legality licensing scheme, on the wood-based products trade between the EU and three case study countries: Cameroon, Brazil and Indonesia. This analysis will be based on lessons from other trade-related regulations, current trends in the forest sector and in trade patterns (at a global and producer-country case-study level) and the perspectives of stakeholders involved in the wood products trade. The assessment of potential impacts will identify whether the overall objectives of the EU FLEGT Action Plan are likely to be achieved and/or where the potential negative impacts may need to be mitigated. 1.2 The objectives of the EU s FLEGT Action Plan 2 The OECD estimates that the global trade in timber is worth over 150 billion per year. 1 It is generally accepted that approximately 10 per cent of the global trade is illegal. In this context illegality can mean a number of things including illegal origin, violation of regulations for forest production and evasion of taxes. 3 In response to growing global concerns regarding illegal logging and a series of international initiatives such as the G8 Action Plan on Forests, the EU Action Plan for Forest Law Enforcement, Governance and Trade (FLEGT) was developed in May 2003 and approved by the Council in October The Action Plan provides a strategic process and package through which the EU proposes to address the growing problem of illegal logging. The aims of the Action Plan are to: Reduce the amount of illegal timber in trade (it is currently not illegal in the EU to import illegally produced timber products); Reduce the amount of illegal timber consumed; and Reduce the scale and significance of illegal logging activities, currently prominent in some key producing countries. 1.3 Components of the Action Plan 4 Given the complexities of developing a multilateral agreement the Action Plan focuses on bilateral or regional actions. The Action Plan comprises the following sets of activities: Development cooperation with a focus on capacity-building and institutional strengthening; Trade in timber primarily through the application of legality licences; Public procurement; Private sector initiatives the encouragement of voluntary initiatives; and Financing and investment safeguards. 1 OECD Environmental Outlook, Paris Page 6

7 5 A key component of the Action Plan is the application of the legality licensing system to identify legal products in partner countries and license them for import to the EU, with unlicensed products being denied entry. The potential mechanics of the legality licence are discussed in this report s companion paper, A Licensing System for Legal Timber Options and considerations for a legality licence system under the EU FLEGT Action Plan. However, the overall aim is for the legality licensing scheme to be applied through voluntary bilateral agreements between the EU and the partner producer country. Initially the legality licence will be applied to only a limited range of products logs and rough sawnwood but this will be gradually extended to include other wood-based products. Following the production of the draft findings of this and other research the coverage of the legality licence was extended to include plywood and veneer; this final version of the report takes this into account where possible. 6 The licence will be applied at a national level in the producer country. It will be implemented in the EU by a new regulation to be developed and applied at the EU level. In addition the development of new legislation is being considered that will make it illegal to import illegally produced timber products into the EU, from any source, including producer countries which do not join the licensing scheme. 7 Imports to the EU of logs and sawnwood from countries not in the partnership agreements would not be required to have a legality licence, as this system would only apply to those producer countries which have negotiated an EU FLEGT Voluntary Partnership Agreement (VPA). The impact on trade could therefore create global trade distortions, creating the potential to trigger market substitution in the global trade. 1.4 Approach of this study 8 There are various sources available for guidance on how to undertake an impact assessment, be it for trade, environment or social impacts, for example, the European Commission s Communication on Impact Assessment (2002), and the UK Cabinet Office s Regulatory Impact Assessments (RIAs). 2 Such guidance tools tend to follow a series of steps: 1. Problem identification in this case, what is the scale and scope of illegal logging? 2. Objective of the proposal What are the objectives of the EU Action Plan, and in particular the legality licence objectives? 3. Baseline scenario against which the impact will be assessed What are the current trends facing the industry and, given these trends, what then will be the impact of the Action Plan? For example, if there is a current market shift away from tropical timber then any such change that occurs post-implementation of the Action Plan cannot be wholly attributed to the Action Plan. 4. Analysis of the impacts What will the impact of the Action Plan be on trade in wood-based products? 5. Follow-up reporting, targets, monitoring the impacts. This is beyond the scope of this study. 2 Further information on Regulatory Impact Assessments can be found on the Cabinet Office website, Page 7

8 9 In line with this approach, this study undertook a review of the current status and trends in the global wood-based products market and the key international, regional and national initiatives which are influencing the manner in which trade is being conducted. This provides a business as usual scenario that can then be compared with the with the EU Action Plan scenario to provide an assessment of the potential impact. 10 Interviews were held with stakeholders involved in the wood-based products trade to gain their perspective on the potential impacts of the legality licence and to discuss factors that will influence the likely size of the impacts. The information gathered was collated with lessons from other trade-related regulations, wood-based products trade trends and drivers at a global and case-study level. 11 An important part of any impact assessment is the monitoring and evaluation of the impacts over time (Step 5 above). Key indicators should be identified for monitoring the impacts after the introduction of the legality licence, along with ways to monitor and report on any impacts. Continuous monitoring and reporting of the impacts is key to ensuring that long-term positive impacts are enhanced and any negative impacts that may arise are addressed. The development of such monitoring and evaluation indicators, however, is beyond the scope of this study. 12 The EU and FLEGT Partners will need to consider, in the development of VPAs, how to identify indicators and undertake monitoring and reporting on the resulting impacts of the EU Action Plan and associated regulations. Such targets could include: Trade volume and value by countries within the partnership agreement and other trading partners to identify any market substitution that may occur. Changes in macro-economic data such as employment, forest-related tax revenues, or contribution to GDP. 1.5 Layout of the report 13 The remainder of the report is structured as follows: Section 2: Provides a brief summary of two main trade-based regulations that have potential lessons for the impact of the legality licence on the wood-based products trade the CCAMLR Catch Document Scheme and log export bans. Section 3: Outlines some of the regional and national initiatives currently driving change in the forest sector and in the way that trade in wood-based products occurs. Section 4: Summarises some of the key trends in the forest sector in general which are affecting the timber trade patterns. This provides an overview of the global level business-asusual scenario and highlights potential impacts that may arise from the introduction of the FLEGT Action Plan. Section 5: Focuses on the current situation and trends in each of the case study countries Indonesia, Brazil and Cameroon. This provides the benchmark against which the impacts of the Action Plan will be assessed. Section 6: Based on perspectives of stakeholders, global and producer-country specific situations, the potential impacts of the legality licence are presented. Factors that will influence the scale of any potential impacts are also described. Page 8

9 2 Trade regulations and standards lessons for the timber trade 14 Lessons can be drawn from other trade-based policies and regulations that are of relevance to the potential impact of the legality licence on the wood-based products trade. This section looks at the lessons from log export bans and the CCAMLR Catch Document Scheme. 2.1 Log export bans 15 Log export bans are normally introduced for one of two reasons, either: To encourage domestic processing and value-adding of the wood-based products; or To address environmental externalities, such as the damage caused by illegal logging. 16 Producer countries often argue that export bans will enable them to develop domestic log processing industries, foster economic development and lessen their need to over-exploit natural resources. As an environmental policy the export ban works on the assumption that by restricting trade in logs, deforestation will decrease as a result. Many developing countries therefore use timber trade restrictions as a means of achieving economic, environmental and social objectives. 17 The overall impact of a log export ban is heavily debated. Some impacts include: In the short term a log export ban is likely to result in an increase in the amount of logs available on the domestic market. This will result in a lowering of the domestic price, which in turn will stimulate the expansion of the domestic processing industry to capture more of the value of the logs. This helps to increase timber-derived income and possibly creates employment. However this is, in effect, providing a subsidy to the processing industry and may also lead to an increase in the rate of log production to meet the growing capacity of the domestic processing operators. The lower price undervalues the forest resource, making it difficult for legal log producers (who are assumed to pay all relevant taxes) to be financially sustainable. The undervalued prices of logs can result in inefficient and wasteful production processes of domestic producers, leading to decreasing competitiveness, due to the over-protection of the domestic industry. For effective implementation of the ban, there needs to be strong political will and enforcement. Successful application in achieving wider environmental policies is greatly enhanced by strong government support and enforcement. On the international market there will be a decline in the amount of logs available and a resulting increase in price, if the producing country is significant in its scale of exports, or is exporting a niche species. Ultimately if supply is sufficiently reduced there will be an increase in the price of logs. A long-term log export ban could limit the harvest as long as the ban is not temporary, but the fall in the log harvest will be less than the amount of banned exports because of the expansion of the domestic processing industry. There is a possibility that the log harvest will even increase if domestic processing expands beyond the sustainable levels of supply. Page 9

10 18 The impact of using a log export ban for forest conservation purposes has not been encouraging in practice. Only moderate success has been seen in South East Asia from the introduction of such policies. For example, although processing capacity expanded in Malaysia, Philippines and Indonesia it was achieved at high economic costs, both in terms of the direct costs of subsidy, and the additional costs of wasteful and inefficient processing operations. In 1999 Cameroon banned exports of some endangered hardwoods, though sapelli and ayous, which make up over 50 per cent of Cameroon s log production, are excluded from the ban In Indonesia during the Suharto era a log export ban was introduced to encourage domestic processing. However, this log export ban, while helping the processing industry, also succeeded in an overall fall in log production, which can predominantly be attributed to strong government control that was in place at the time. When the government control was later weakened, the industry was left with overcapacity in the processing sector and the freedom to increase log production. In October 2001, the log export ban was reintroduced as a means to control illegal logging by restricting demand rather than by attempting to use weakened government agencies to enforce confusing laws. 4 There is, however, no clear evidence that this log export ban will have the desired effect of reducing harvest pressure on forests. The outcome is dependent, in part, on the response of the domestic processors and logging concessions to temporary changes in log supplies and log prices which can be caused by the export ban The current log export ban in Indonesia has also had limited effectiveness in stopping exports as its implementation has been weak. It is conceivable that an effective log export ban, coupled with strong regulation of domestic milling capacity, could assist in controlling over-logging, but neither of these actions is likely under current circumstances. 21 Log export bans can be counterproductive, resulting in depressed prices, discouragement of sound forest management and efficient processing, and reductions in government export revenues. They too often reflect the government s failure to control forest activities properly and to put in place appropriate systems to protect revenues and improve forest management. Log export bans are often an inadequate solution to the problem of over-exploitation of the forest, as they do not address the issue of domestic companies responsibility for unrestrained tree-cutting. Lessons for the legality licence 22 To be effective in achieving the environmental policy, i.e., reducing the amount of logging, strong political support and enforcement is required. The use of verification, monitoring and enforcement are key components of the legality licensing scheme and will therefore help to ensure adequate enforcement and protection of the forest resource. 23 There is a risk that the legality licence will in practice have a similar effect to a log export ban in terms of encouraging a switch to the domestic market, away from exports, rather than increasing the amount of legal exports being traded with the EU. 3 Associated Press, 1 July 1999 ( 4 R. Dudley, Can a log export ban limit over-harvest and illegal logging? An example from Indonesia (Revised draft submitted for publication in System Dynamics Review, 2004). 5 Ibid, Page 10

11 2.2 The Catch Document Scheme 24 The Convention on the Conservation of Antarctic Marine Living Resources (CCAMLR) Catch Document Scheme for the Patagonian toothfish, a heavily (and frequently illegally) fished deep-sea species, became binding on all members in May The scheme is designed to track the landings and the trade flows of toothfish caught in the Convention area and, where possible, adjacent waters, and to limit the catches to the national allocation of catch areas and sizes. 6 Ultimately the scheme is designed to exclude illegally caught toothfish from international markets. 25 Signatories to the scheme include Argentina, Australia, the UK and Chile on the producer side, with the main importers being the US and Japan. Some processing and re-export to China also occurs. 26 The impacts of the scheme have included: Prior to the scheme in 1996/97, fish supply surged and prices crashed to about a quarter of their original level, and fish stocks diminished. Following the ban, as fish supply was reduced (supply has decreased by two-thirds in the last four years), and demand exceeded supply, the price increased. Legal toothfish now commands a price premium of 20 30%. 7 Lessons for the legality licence 27 Where global supply can be reduced the international price will increase. The removal of illegal operators resulted in a sharp decline in global supply and a corresponding increase in the global price. 28 For toothfish there is a well-defined area for fishing and the ban is on all illegal toothfish, not just that supplying a particular market; whereas for the legality licence for logs and sawnwood, other markets exist which do not demand the licence, and thus the impact on global supply and price will be less apparent. 6 Duncan Brack, A Licensing System for Legal Timber (RIIA, 2004). 7 D. Agnew, The drivers behind black markets: illegal and unregulated fishing (talk given to the RIIA workshop on International Environmental Crime, May 2002). Page 11

12 3 Regional and national initiatives 29 This assessment of the impacts of the EU FLEGT Action Plan, in particular the legality licence, takes into account other regional and national initiatives, in addition to the FLEGT itself. These initiatives are providing a policy framework to address the demands and concerns of stakeholders both driving and supporting change in the way that trade is conducted. They are already showing a potential to influence and change the way in which trade is conducted, in particular with the aim of reducing the amount of illegal wood-based products being traded. Private sector companies are beginning to review their supply chains with the aim of being in a position to meet the public procurement policies, for instance. 3.1 Regional initiatives 30 Regional FLEG (Forest Law Enforcement and Governance) Processes. While the FLEG processes themselves are not legally binding, and have no direct impact on trade, some bilateral agreements resulting from them may impact trade. For example, the Indonesia China MoU talks of the exchange of information on forest laws, regulations and enforcement, and enhancement of economic cooperation, with some possible indirect influence on trade rather than any direct impact on trade. The Japan Indonesia MoU is more directed at trade, detailing ways to develop, test and implement systems for verification of legal compliance, and the effective collaboration of enforcement agencies and networks which will affect the legality of products produced and traded. However, to date a lack of competencies and in some cases slow implementation have, limited the potential impacts of such bilateral agreements. 31 Regional Trade Action Plans. Where trade is significant within a geographical region, the impact of any trade-based initiative will be greater if it is applied at a regional rather than bilateral level. A regional process will reduce any negative trade impacts, e.g. potential market substitution, opportunities for processing in a third country, etc. Such regional plans are being recognised as key potential initiatives and actions to develop one in Asia are being discussed, as outlined in Box 3.1. Box 3.1 Regional initiatives Regional FLEG (Forest Law Enforcement and Governance) Processes. The Asia FLEG took place in September 2001 and brought together nearly 150 participants from twenty countries, representing government, international organisations, NGOs and the private sector. The meeting resulted in the adoption of a Ministerial Declaration which contained a number of commitments to tackle illegal logging. The Africa FLEG took place in October 2003 and the outcome of this process was again a Ministerial Declaration with associated actions for implementation at the national, regional and inter-regional levels. Regional Trade Action Plans. Regional trade plans have been recognised as a useful tool by the European Commission and in South East Asia, a regional trade action plan, the Trans-Regional EU ASEAN Trade Initiative (TREATI) will be developed. This action plan has the potential to play a key role in the prevention or mitigation of the trade and processing in third countries before entering the EU. For example, Indonesia s wood exports to Malaysia and Singapore before possible processing and re-export to the EU, which is not covered by the legality licence applied in a bilateral agreement, will be affected by the regional trade action plan. Page 12

13 3.2 National initiatives Public sector procurement 32 Public sector timber procurement policies are key drivers already influencing the wood products being traded. National level public procurement policies are under various stages of development for EU member states such as the UK, the Netherlands, France, Germany, and Denmark. 8 The public sector is a major market for all timber, including tropical, in these countries, and thus a procurement policy with the aim of buying only legal and sustainable timber and related products is already having an impact on the products being traded. The implementation of the French government s procurement policy is expected to come into effect in 2007 and will be a key driver for trade with and production in Central African countries. 33 For example, various sources estimate that the UK public sector accounts for approximately per cent of total timber trade. Its position as a bulk purchaser, largely for construction and refurbishment projects and office furniture, means that the government has significant buyer power in the market. 9 The players in the timber or wood-based products trade supplying the market are already responding to this initiative, driving traders, retailers and ultimately producers to take more ownership over their supply chains and ensuring that systems are being put in place that will permit them to meet requirements, especially in terms of proof of evidence of legality. 34 The licensing scheme, if credible, will be seen as a key tool to support the evidence to be provided by supplies to the public sector to meet public procurement requirements. Private sector initiatives and NGO drivers 35 In response to demands from consumers, NGOs, public procurement policies and corporate social responsibility pressures, the private sector is actively developing its own procurement policies, managing the potential risk in the supply chain (identifying risky countries that supply it and in some cases diverting trade to other sources), and in general taking more responsibility over its supply chains. Such initiatives are impacting not only on trade but also production. Examples are listed below with further information included in Box 3.2. Private sector procurement guidelines and policies: for example, the UK Timber Trade Federation is developing such guidelines in consultation with key stakeholders in Cameroon. Supply chain management and tracking: companies are increasingly taking ownership of their supply chains, building relationships with their suppliers and working to ensure legality of their timber sources. Business-to-business approaches, such as the Tropical Forest Trust. Producer and buyer groups established by WWF/GFTN. 8 Further details can be found in ERM, DEFRA Procurement of Timber Products from Legal and Sustainable Sources by Government and its Executive Agencies (Scoping Study Report, 2002) and Paul Toyne, Cliona O Brien and Rod Nelson, The Timber Footprint of the G8 and China (WWF, 2002). 9 Environmental Audit Committee, Buying Time for Forests: Timber Trade and Public Procurement Government Response to the Committee s 6 th Report (July 2003). Page 13

14 36 There has been an increasing role for civil society in forest monitoring and advocacy of sustainable forest management and legality. Civil society has been a key driver in forcing the timber trade, the EU and its member states to respond to the issues of sustainable forest management and more recently in forest governance, monitoring and transparency with regards to legality. For example Global Witness has been appointed as the official independent observer in Cameroon This activity is in general creating a change in the way that trade is being conducted, as companies involved in the trade are becoming more responsive, taking greater ownership over their supply chains in an attempt to minimise potential reputational risk. For example, as a result of the Greenpeace Partners in Crime report campaign, four large timber importers stopped buying Indonesia plywood. Box 3.2 Private Sector and NGO initiatives Development of guidelines by the UK Timber Trade Federation. The UK TTF is currently developing best practice guidelines as the basis for defining locally agreed (involving all stakeholders) baseline definitions of legality as a first step towards setting up a scheme for independent verification of legality and, ultimately, sustainable forest management in Cameroon. The Tropical Forest Trust (TFT) or business-to-business approach. This approach involves suppliers of hardwood products implementing wood origin control systems to identify legal sources of timber. A levy on the product is used to fund improvements in forest management in supplying forests, eventually leading to independent certification. The TFT administers the programme, provides independent audits of progress and technical support. Such an approach has an impact on trade and consumption and results in changes in forest management and production. A similar approach has been implemented by the WWF Global Forest and Trade Network (GFTN) Producer Group approaches. The WWF GFTN Producer Groups assist manufactures to implement mill action plans to ensure full traceability for products and the phasing out of wood from unwanted (including illegal) sources. A mixture of government aid agency and private sector sources fund the development and implementation of forest certification action plans leading to credible certification in source forests. The WWF GFTN is an affiliation of twenty-two national and regional Forest and Trade Networks (called Buyer and Producer Groups) in nearly thirty producer and consumer countries in Europe, Asia, Africa and the Americas that provide information, technical support, market and finance links and independent audits of progress to participating countries. WWF GFTN Buyer Groups in Southern Europe and Producer Groups globally. Demand-oriented Forest and Trade Networks, i.e. Buyer Groups, are made up primarily of retailers, distributors, end-users and specifiers of forest products committed to phasing out products from unknown and unwanted sources and sourcing ever-increasing quantities of credibly certified forest products. Buyer Groups are now operating in almost twenty countries and are widely recognised as having been a dominant force in generating demand for certified forest products in the 1990s. To increase the degree of influence in the trade with Central Africa, WWF/GFTN have established Buyer Groups in France (June 1999), Spain (January 1998) and Italy (October 2001) and Producer Groups in Ghana and Central Africa (October 2003). In Asia, WWF/GFTN is currently recruiting new companies in Japan, Hong Kong and mainland China, and have established Producer Groups in Indonesia, Malaysia. In the Americas, Producer Groups have been established in Central America and the Caribbean and Brazil and are under development in Bolivia and Peru. Page 14

15 4 Global trade patterns and trends 37 In order to assess the potential impact of the EU FLEGT Action Plan, an overview of current trade patterns and trends in the wood products trade i.e. the business-as-usual scenario is required. Any potential impacts of the Action Plan need to be considered in light of what would have happened anyway. An overview of the key trends in global trade patterns and the main buyers in the global market China, Japan, the US and the EU is presented here. The resulting potential impacts on trade patterns of the legality licensing scheme will then be highlighted. 4.1 Trends in the global wood based products trade 38 The OECD estimates that the global trade in timber is worth over 150 billion per year. Global trade in forest products grew from US$80 billion in 1985 to approximately US$180 billion 10 in In recent years, the industry has had to respond to a changing marketplace, in particular in terms of changes in the sources of timber (changing availability due to over-exploitation, the greater role of plantations, ethical sourcing), the demands of consumers and the growing role of civil society. The potential impacts of the legality licence are assessed in light of these global trends, of increasing demand for processed products, an increase in the use of plantation resources, the increasing role of business-to-business initiatives, with more responsibility over individual supply chains, and building relationships with suppliers. Key global trends 11 facing the forest industry are outlined below, with supporting graphs in Annex I. Increasing role of plantations in timber supply 39 Forest plantations are playing an increasing role in the production of timber, as shown in Figures 1.3 to 1.5, with increased emphasis on fast-growing species such as eucalyptus and pines, supplying industrial wood, particularly for pulp and paper. Currently 50 million hectares of fast-growing plantations produce 20 per cent of the wood harvest. 12 More than 10 million hectares of forest plantations have been established in China, Russia, the US, India and Japan, which collectively account for 67.5 per cent of global forest plantation resource. FAO estimates that plantations could be producing 1500 million m 3 by 2050, approximately per cent of projected total consumption This is also supported by a shift towards temperate sources as natural forest resources are declining and tropical timber is becoming a niche, higher valued product. Increasing demand for timber products, especially paper products 41 Demand for timber products, especially for paper and engineered products (such as veneer and particleboard), is continuing to grow, albeit at a slower rate than historically. Demand is fuelled by global economic growth, particularly rapidly increasing population in China and growth in 10 US$180 billion breaks down to: $80 billion as paper; $60 billion as timber (including wood chips but excluding wooden furniture), $20 billion as wooden furniture; and $20 billion as pulp (excluding that which is not based on virgin wood fibre, i.e. recycled). 11 The key trends represent the opinions of the authors, based on a rapid review of relevant background material and our own knowledge and understanding of the industry. 12 WWF, The Forest Industry in the 21st Century. 13 Ibid. Page 15

16 construction in transition economies, as shown in Figures 1.6 to China is increasing its imports of logs from Russia and Asia to support a move from other fibres, such as straw-based pulp to woodbased fibres in the production of paper, as discussed in the following section. Global consolidation of industry 42 Global consolidation of the industry is occurring, with the bigger forest product companies merging and continuing to expand. For example, Stora Enso processes a timber volume equal to the wood consumption of Italy and International Paper processes a comparable amount to the wood consumption of Germany and the UK with a turnover approaching US$30 billion. Approximately 50 per cent of the annual wood harvest is processed by the top fifty forest product companies, and the top fifty users of this wood consume 10 per cent of the total Global consolidation of the timber industry has resulted in increased buyer power exerted by a few conglomerates, able to exert influence over the market and production processes. These conglomerates have a potentially significant role to play in influencing trade and production. For example, strong links exist between southern European buyers and producers in Central Africa, either through traditional buying relationships or more formal vertical integration of the companies. Supply chain management and ethical sourcing 44 The recent rapid development of international initiatives such as FLEG, NGO pressures and the development of public sector procurement policies, are important drivers for the forest product markets, as discussed in Section 2. Producers and suppliers are having to modify their supply chains, management systems, etc., in order to meet the demands of their consumers and, importantly, in order to provide supporting documentary evidence for their products. Evidence exists (see Section 6) that some traders are moving away from high-risk producing countries, are they are unable to meet the demands of their end-users by continuing to trade with producers who are unable to provide the supporting evidence required. A result, producers and buyers are now working closer together to ensure the demands of the end user are met. 45 There is an increasing trend, in terms of volume and value of trade, in ethical sourcing 15 by timber processors. Although overall market share of certified timber is still modest, growth has been significant in recent years; the US retailer Home Depot, for example, in 2002 sold $250 million worth of FSC-certified products, up from only $15 million in Increasing use of engineered wood products 46 Technological changes and improved production efficiency have resulted in increasing demand for engineered, higher value wood products such as particle-board and laminates, typically produced from lower value trees, with more tree species being utilised. Production of particleboard worldwide grew by 50 per cent between 1983 and Producer countries are shifting from raw material-based products to secondary processed or recycled products for export, resulting in tropical log exports declining globally in recent years. This shift towards processed products is further explored in Section 14 WWF, The Forest Industry in the 21st Century. 15 Ethical sourcing means sourcing of timber and related products from legal sources and where possible, as certified products. Direct ethical sourcing enables processors to have more direct control and influence on their supply chains. 16 WWF, The Forest Industry in the 21st Century. Page 16

17 4.2 and has implications for the effectiveness of the legality licence if the licence only covers logs and sawnwood. 47 Producers are responding to increasing demands of the consumers, for instance with just-in-time delivery, seasonal demand for products, pre-packaged products such as door units, window-units, I- beams, etc. More often products are supplied as kits or finished products. 4.2 Key global markets 48 Overviews of the key global markets China, Japan, US and UK for wood-based products are provided here based on data for 2002 (a fairly representative year out of the previous few years). These overviews support the global trends identified above. The statistics highlight the relative importance of each market, in terms of buying power and ultimately the potential influence of the buyer on the production processes. The relative importance of the EU market is shown and resulting potential impacts of the legality licence on global trade patterns highlighted. 49 Globally, Japan and China are the leading importers of tropical timber China for logs and Japan for more processed products. 17 Between them, Japan and China currently account for roughly 40 per cent of the tropical timber trade (on a roundwood equivalent volume basis). These two markets are therefore fundamentally important if a global signal to producers is to be sent. Until these two markets are also working to similar standards and requirements as the EU, the overall impact on global production of the EU Action Plan will be limited. Imports to China Figure 1: Imports to China, Roundwood equivalent volume e (million cubic metres)) Paper Pulp Wood chips Other timber Plywood Sawn wood Logs 0 Brazil Cameroon China Indonesia Malaysia Russia Other Tropical Other - Timber Other - Paper Supplying Country Data Source: Eurostat, UNECE/FAO (compiled by James Hewitt) 17 UNECE/FAO Forest Products Annual Market Review, and GlobalTimber.org.uk Page 17

18 50 Total imports of wood-based products to China in 2003 were approximately 91 million m 3 roundwood equivalent (RWE). The main products imported are pulp, paper, logs and sawn wood. Pulp and paper are required to meet the growing demand from an increasing population and the logs and sawnwood feed the timber processing sector. 51 In 2002, logs and lumber massively dominated China s timber product imports, together accounting for about 85 per cent of volume and 80 per cent of value of total timber product imports. 18 Other key trends include 19 : Forest product imports more than doubled in RWE volume between 1997 and 2002, rising from 40.2 million to 95.1 million cubic metres. In value overall imports in the sector increased by 75 per cent during the same period, rising from US$6.4 billion to $11.2 billion. Preliminary data for 2003 show that the trend has continued rising to US$12.9 billion, RWE 106 million cubic metres; The doubling of timber imports over the period reflects the marked expansion of China s timber processing industry. This was driven not only by domestic demand but also by international demand for low-cost finished products, e.g., furniture; and Pulp and paper accounts for approximately 60 per cent of China s forest products imports by RWE volume. Demand for higher paper quality has resulted in a shift away from predominantly straw-based pulp and paper towards greater use of (often imported) wood fibres. 52 Tropical timber accounts for a large proportion of China s log, sawnwood and plywood imports. Indonesia supplies a substantial share of China s sawnwood, plywood and pulp imports, and Brazil supplies a small amount of pulp and some sawnwood. Although Cameroon supplies a very small amount of China s wood-based products imports, China is now the principal destination for log exports from Cameroon. 53 China has a growing role in the global trade of wood-based products, as a significant importer of raw material that is then processed and subsequently exported. The volume of China s timber product exports is rising rapidly. China s principal export markets in 2003 were: US (37%), Japan (17%), Hong Kong (14%), and the EU (10%).China s principal product exports were: wooden furniture (47%), plywood (20%), joinery (7%), and miscellaneous manufactured products (14%). China is a significant exporter of furniture, especially bedroom furniture to the US. China accounts for more than 50 per cent of furniture imports to the US. China also exports a mix of sawnwood, plywood, other timber, pulp and paper to Japan. Imports to Japan 54 Total imports of wood-based products to Japan in 2002 were approximately 86 million m 3 (RWE), with much of this trade being in processed products, not logs and sawnwood. 55 Indonesia is the major supplier of wood-based products to Japan, accounting for approximately 9 million m 3 (RWE) in Over half of this was tropical plywood. 18 Forest Trends, CIFOR and Centre for Chinese Agricultural Policy, China s Forest Product Import Trends, , Ibid. Page 18