EU Regulations to Combat Deforestation and Impact on Vietnam

The implementation of new EU regulations aimed at combating deforestation could have a significant impact on Vietnam’s agricultural exports to Europe. However, the implications can be viewed from both positive and negative perspectives. Let’s delve into the potential outcomes.

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On April 19, the European Parliament passed a historic law aimed at preventing deforestation and degradation. The newly passed regulations dictate that companies exporting goods to the EU must provide a due diligence statement and verifiable assurances affirming that their products have not originated from deforested land after December 31, 2020.

This is another in a series of laws passed in crucial export markets that hold the potential to impact Vietnam’s primary exports. Alongside the forthcoming global minimum tax and carbon border adjustment mechanisms, the EU Deforestation-free regulations also have implications for Vietnamese exporters. These implications can be viewed as both positive and negative.

On the one hand, firms may encounter challenges in implementing measures to meet these new requirements. However, on the other hand, this situation could foster increased competitiveness and further efforts to curtail deforestation and degradation in Vietnam.

Affected goods under the EU regulations to combat deforestation and environmental degradation

The newly implemented regulations target a range of products that have been identified as significant drivers of deforestation due to agricultural practices. These goods include soy, beef, palm oil, wood, cocoa, coffee, rubber, and charcoal, as well as derivatives such as leather, chocolate, and furniture. It’s important to note that the list of impacted commodities is subject to regular updates and may change over time.

The legislation is expected to enter into force in mid-2023. Large enterprises will have 18 months to ensure compliance with the regulations, while smaller firms may be granted an extension of up to 24 months. Furthermore, within 18 months of the regulations coming into force, the EU Commission (EC) will classify countries into three categories based on risk levels: low risk, standard risk, and high risk. This classification will determine the extent of evaluation that an enterprise will undergo.

How the regulations will be implemented

The EU’s deforestation-limiting regulations mandate that exporters must provide a due diligence statement as evidence that their products have not contributed to deforestation or forest degradation after December 31, 2020. European authorities will carefully examine the evidence submitted by companies, including location coordinates, to ensure compliance with the new regulations.

Companies attempting to circumvent the evaluation process may face legal repercussions, including fines and export bans. The regulations also empower the public and civil society organizations to report concerns to enforcement agencies in EU member states if they suspect a company has violated the rules. Non-compliant organizations may be subject to penalties of up to four percent of their annual revenues within an EU member state, and their offending products may be removed from the EU market.

To meet the EU’s requirements, Vietnamese companies will need to invest more effort in tracking and tracing the origins of their export goods. Even if a company’s manufacturing process meets international quality standards, it will still be evaluated based on the origin of its raw materials. This necessitates financial investments in implementing advanced technological measures, which may pose a burden for small and medium-sized enterprises.

Furthermore, the EU Parliament has emphasized that companies must also verify compliance with relevant legislation in the country where the goods are produced, including laws pertaining to human rights and the rights of indigenous peoples. This requirement may pose a challenge for Vietnamese agriculture, as the sector has been associated with relatively high rates of child labor utilization.

Advantages of higher environmental compliance thresholds

In the past year, Vietnam has made gradual progress in building a legal framework and strengthening international collaboration to address deforestation. Consequently, Vietnamese enterprises are better positioned to navigate challenges posed by new regulations in foreign markets, including the EU, potentially giving them a competitive advantage.

As a result, “Vietnam is not in a significant danger of deforestation thanks to forest protection policies,” according to Rui Ludovino, First Counselor for Policies on Climate, Environment, Employment and Social Affairs Delegation of the European Union (EC) in Vietnam.

Voluntary Partnership Agreement on Forest Law Enforcement, Governance, and Trade (VPA/FLEGT)

VPA/FLEGT is a joint effort between Vietnam and the EU aimed at combating illegal logging and promoting the trade of legal wood and wood products. Both parties are committed to ensuring the sustainable management of Vietnam’s forests, and this objective will be achieved through the establishment of the Vietnam Legal Timber Assurance System (VNTLAS).

To support this effort, the Government of Vietnam has issued Decree No. 102/2020/ND-CP outlining a legal timber guarantee system in Vietnam. The Decree provides detailed instructions for businesses to harvest, transport, trade, and process wood in accordance with regulations on the management and traceability of forest products.

The VPA/FLEGT Agreement is designed to help Vietnam simultaneously tackle illegal logging, improve regulations in the wood industry, increase accountability among wood trading businesses, and provide export opportunities for Vietnamese wood products in the EU. Moreover, this agreement can serve as a model for other industries, including rubber and coffee, to learn from, ultimately leading to broader environmental safeguards.

Glasgow Leaders’ Declaration on Forests and Land Use

Vietnam is an engaged member of the global community in forest conservation and development. Along with 140 countries, Vietnam joined the Glasgow Leaders’ Declaration on Forests and Land Use at the COP26 conference. This commitment aims to prevent and reverse deforestation by 2030.

Forest Law on prohibiting deforestation

Vietnam’s anti-deforestation policies and rules prioritize the protection of existing forest areas, replanting in lost forest areas, planting new forests, and banning the trade of illegal wood products.

According to the Vietnam Forestry Law, destroying forest resources, forest ecosystems, or forest protection and development works is strictly prohibited. The act of illegally clearing forested areas can be administratively sanctioned (as defined in Article 20 of Decree 35/2019/ND-CP) or examined for penal liability depending on the seriousness of the violation (stipulated in Clause 63, Article 1 of the Criminal Law 2017).

These regulations have helped to prevent deforestation in order to produce export goods, according to Ngo Si Hoai, the Vice President and General Secretary of the Vietnam Timber and Forest Product Association.

How businesses can prepare for the EU regulations combating deforestation

There are a number of steps foreign firms can take to prepare for the new EU regulations to limit deforestation.

• Firms should ensure they have a clear understanding of the regulations, regulated product lists, and the implementation timelines of the legislation in order to respond proactively.
• Businesses need to have a tracking system in place to ensure that agricultural products produced in their supply chains are not linked to deforestation or ecosystem degradation.
• Businesses should invest resources in developing new technologies that meet the standards of the deforestation-limiting regulations. At the same time, they should also engage with farmers and encourage them to adopt sustainable practices and standards.

Key takeaways

The new EU regulations on trade of deforestation-free products have generated various challenges for firms in Vietnam. Notably, firms must take steps to control the source of raw materials, ensuring that goods are not grown on deforested land.

That said, Vietnam may have a competitive edge over other nations in fulfilling the requirements set out by the EU. This is due to pre-emptive efforts to improve the legislative framework, as well as establishing international collaboration aimed at eliminating deforestation and promoting the development of sustainable forests.

Foreign firms in Vietnam that need assistance developing their supply chains and understanding import and export rules and regulations should contact the business advisory team at Dezan Shira and Associates.

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