EU's Deforestation Regulation to Impact Exports of 479 Indian Agriculture Items

The European Union (EU) has recently introduced the EU-DR, which has significant implications for Indian exporters. The regulation, which covers approximately 479 products, including meat, leather hide, wood furniture, paper, and coffee, is expected to affect exports worth around USD 1.3 billion annually. However, concerns have been raised about the regulation's compliance costs and potential disadvantages for smaller firms.

Ajay Srivastava, Co-founder of the Global Trade Research Initiative (GTRI), believes that the EU-DR reflects a desire to boost local production and exports while reducing imports. He also raises concerns about the regulation's discriminatory nature and the potential disadvantage it may pose for smaller businesses. Under the EU-DR, Indian exporters to the EU must ensure that the identified products have been grown on land that has not been deforested after December 31, 2020.

Non-compliance with the regulation could result in penalties, including fines of up to 4 percent of a firm's annual turnover in the EU, confiscation of products, confiscation of revenues from a transaction, and exclusion from public procurement processes. It is essential for India to stay vigilant as more items could be added to the regulated list in the future.

To prevent issues related to non-compliance, a report suggests adopting a blockchain-enabled trace and track system similar to the one being implemented by the Agricultural and Processed Food Products Export Development Authority (APEDA) for grape exports to the EU and other regions. The report emphasizes the need to raise awareness among exporters about the compliance requirements.

Moreover, the report suggests that India and other affected countries should consider raising the issue at the World Trade Organization (WTO) since the EU-DR potentially violates the principles of Most-Favoured Nation (MFN) treatment and national treatment.

The new rules will initially apply to large firms from December 2024, with small firms expected to comply by June 2025. When combined with the EU's Carbon Border Adjustment Mechanism, which imposes carbon taxes on items like steel and aluminum starting from 2026, the EU's share in India's global exports amounts to 23.6 percent. These two measures combined are projected to have an adverse impact on Indian exports worth USD 9.5 billion, according to the report.

Srivastava raises an important point regarding the EU's efforts to promote "deforestation-free" products. He argues that the EU's narrative appears deceptive, as the bloc has significantly expanded agricultural land by clearing primary forests. The EU's primary forests currently account for less than 0.7 percent of its total forest area, while the global average stands at 33 percent. Srivastava emphasizes that many countries, facing the need to convert primary forests into cultivable land to feed growing populations, have a much higher percentage of primary forest. Thus, the EU aims to prevent others from following a similar path while having already done so in the past.

In addition to India, several other countries, including Malaysia, Indonesia, Brazil, Argentina, Ecuador, Peru, Guatemala, Costa Rica, Colombia, Cote d'Ivoire, and Vietnam, will also be adversely affected by the EU-DR, as highlighted in the report.