IEU CEPA becomes Indonesia’s weapon against Europe’s anti-deforestation regulation

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Investor Daily - IEU CEPA jadi senjata Indonesia lawan UU Eropa antideforestasi

5 June 2023

By: Leonard AL Cahyoputra & Eva Fitriani

Jakarta - The Indonesia-European Union Comprehensive Economic Partnership Agreement (IEU-CEPA) could become a weapon for Indonesia to overcome the negative impacts of the implementation of the European Union Deforestation-Free Regulation (EUDR) on plantation and forestry commodities, such as cocoa, coffee, rubber, wood products, and palm oil. 

“The IEU CEPA needs to be built more intensively with the European Union to make it more bilateral. That is the solution. Because if we were to oppose the resolution they adopted, it seems that [the resolution] is final and applies to products from all over the world that will enter Europe,” said Chairman of the Presidium of the Indonesian Furniture and Craft Industry Association (Himki) Abdul Sobur to Investor Daily recently. 

He believes that, by using a bilateral approach through the IEU CEPA negotiation clause, Indonesia could receive different treatment. “Because a trade agreement is basically a win-win solution. What they protect is exchanged for what we protect, so that trade relations continue to run smoothly,” he said. 

On 16 May 2023, the European Union, which consists of 27 member countries, officially adopted and enforced the EUDR. Under this new regulation, companies that supply palm oil, livestock (especially cattle), wood, coffee, cocoa, rubber, and soybeans, along with their derivative products such as chocolate, household furniture, printing paper, and cosmetics to the European Union must pass due diligence on anti-deforestation and forest damage since 2021. 

The regulation outlines that only products resulting from land that is not subject to deforestation or forest degradation after 31 December 2020 are permitted to circulate on the European Union market or be exported to the region. 

Sobur said, Indonesian furniture products are one of the commodities that will be negatively affected by the EUDR implementation. Due to this regulation, the furniture industry is estimated to incur hundreds of millions of US dollars in potential losses if an immediate solution is not found.  

“The European Union is an important market for Indonesia’s furniture and crafts industry. This region contributes 32-35% to the total furniture and footwear exports nationally, following the United States which contributes 51%. The rest comes from the Asian region, Middle East, and Africa,” he said. 

Sobur revealed that furniture export to Europe have been under pressure due to the prolonged Russia-Ukraine geopolitical conflict and the weakening economy in the region. It is now exacerbated by the enforcement of the EUDR.

Postpone IEU CEPA 

Meanwhile, during his visit to Brussels on Wednesday (31/05/2023), Indonesia’s Coordinating Minister for Economic Affairs Airlangga Hartarto said that the EUDR policy benefits large or multinational companies. Indonesia, which has been negotiating with the European Union on the IEU CEPA for seven years, stated that the discussions would not resume until there is further relaxation for palm oil producers in the new EU regulation. 

“We can wait another seven years,” Airlangga said as quoted by the Financial Times. 

Coordinator for Deputy Chairperson 3 for Maritime, Investment, and Foreign Affairs of the Indonesian Chamber of Commerce and Industry (Kadin) Shinta W. Kamdani said the government’s intention to postpone the IEU CEPA negotiation process was understandable in the business world because there were many changes in the European Union market which increasingly may harm the competitiveness of Indonesian products in the future. 

“These changes started when the European Union issued the Green Deal policy, in which they sought to avoid carbon emissions ‘leakage’ or to disincentivise increased emissions in third-world countries. Unfortunately, the way it is implemented greatly discriminates against goods and services from developing countries, which clearly have more limited ability to make the transition to net zero,” Shinta told Investor Daily last weekend. 

The EUDR, she continued, will further affect the competitiveness of all Indonesian agricultural, plantation, and forestry export products because the calculation is based on land use conversion. In fact, all export products (raw or finished) resulting from land converted after 2020 (from forest to other uses) could be subject to trade barriers (discrimination or cannot be exported at all) according to this law. 

“This is very detrimental to our exports from the agricultural, plantation, forestry, and related derivative industries, such as the food and beverage and furniture industries, which have a large share of exports to the European Union,” said Shinta. 

However, she did not deny that the IEU CEPA remains highly necessary as a trade agreement that can provide various advantages for Indonesia, including in handling non-tariff barriers based on regulations like this. 

Regarding the lobby to the European Union, Shinta emphasised, the Indonesian Chamber of Commerce and Industry supports the government’s efforts to hold open and constructive discussions with the stakeholders of this anti-deforestation law. It is intended to find the best solution so that Indonesian products would not receive discrimination or punishment due to this law. 

“We will see how it would take form. Whether it is possible for Indonesia to obtain exceptions or whether there is another way, such as establishing cooperation on certification recognition as we did with FLEGT [Forest Law Enforcement, Governance, and Trade] when our exports were confronted with the issue of illegal logging,” said Shinta.

Strong protest 

The Indonesian government immediately expressed a strong reaction to the European Union’s policy to start implementing the EUDR. Between events of the G7 Summit in Hiroshima, Japan from 19-21 May 2023, President Jokowi highlighted this issue seriously. 

President Jokowi emphasised to European Commission President Ursula von der Leyen that his government strongly protests the EU policy because Indonesia has succeeded in reducing the deforestation rate by up to 75% to 115 thousand hectares in the 2019-2020 period. 

On a different occasion, Head of the Indonesian Palm Oil Association (IPOA) Eddy Martono said that Indonesia has taken numerous actions to suppress and/or avoid deforestation, including by stopping the issuance of new oil palm permits in natural forests and peat swamp forests and requiring Indonesia Sustainable Palm Oil (ISPO) certification. Therefore, the EUDR should be repealed. 

“The law [EUDR] should be repealed because this is one-sided,” said Eddy to Investor Daily recently.