EU deforestation law may push Southeast Asia toward China
Brussels’ regulatory imperialism may fail to save the trees and instead result in long-term isolation of Europe to the benefit of Beijing.
In a nutshell
- Indonesia and Malaysia have accused the EU of challenging their sovereignty
- EU extraterritorial regulations may push Southeast Asia to other markets
- China’s claims of noninterference may lure countries away from Europe
The European Union’s deforestation law, part of the “Green Deal” environmental package, aims to tackle climate change and loss of biodiversity. But, if implemented fully, it presents risks to European supply chains. The law’s use of extraterritorial regulations may push developing nations away from Europe and closer to China, leading to potential long-term shifts in global trade.
The Deforestation Regulations are a part of the EU’s broader carbon-reduction effort and require EU-based companies to ensure that all products they sell in the Single Market do not give rise to “imported deforestation.” This term refers to processed products or commodities whose industrialized production causes deforestation, forest degradation and loss of habitat for endangered wildlife such as orangutans. The law was implemented without sufficient multilateral engagement and risks disproportionately burdening small producers in developing countries currently supplying Europe. In that context, goods from agricultural and economic sectors crucial for everyday life and commerce, such as coffee, cattle, soybeans, palm oil, cocoa or rubber, may become scarcer in Europe, while also isolating the continent from global markets.
Although no commodities will be prohibited from import into the EU, businesses will only be permitted to sell products when their suppliers have provided information confirming the raw materials were not cultivated on land subject to deforestation since 2020. Businesses that fail to provide the required information will face fines of up to 4 percent of turnover in an EU member state. In some cases, they may face confiscation of products and associated revenues.
The law came into force in 2023. Its due diligence reporting requirements for large EU-based companies will come into force at the end of this year, and the obligations will extend to small- and medium-sized enterprises from December 31, 2025. Resistance to its implementation has already begun.
Pushback in Southeast Asia
In the early 1990s, Malaysia was the fiercest opponent of a legally binding forest convention, and at the erstwhile Earth Summit – an event in Rio de Janeiro to introduce forest management policies – Malaysia’s then Prime Minister Mahathir Mohamad was firmly opposed to such measures. He said the time to introduce a convention would be when “the North replants its forests … A convention would only be fair if we could also tell the North they could not have this or that factory.”
Thirty years on, the differences between Malaysia and the EU over how to manage tropical forest reserves have shifted and are now somewhat less openly acrimonious, yet still highly contentious. Tensions are visible in a growing conflict between the EU and Malaysia over the new law. But other EU regulations with extraterritorial effects are already a source of tension, including the Carbon Border Adjustment Mechanism (CBAM) and the Corporate Sustainability Due Diligence Directive (CSDDD).
The new law on deforestation threatens to limit Malaysia’s politically powerful palm oil-producing conglomerates’ access to the EU market. In retaliation, Malaysia has threatened to stop exporting the commodity to the Europe altogether. Instead, it will seek alternative growth markets in Asia, Africa and Latin America where demand is growing and trade barriers are not being established.
Threats of a challenge at the WTO
The deforestation law applies equally to other commodity producers in Southeast Asia and elsewhere, though its impact on Thailand and Vietnam, for example, will be less severe as they were mostly deforested prior to 2020. The law will principally apply to Indonesia and Malaysia; Indonesia still has the world’s third-largest untouched tropical rainforests. Together, the two countries account for over 85 percent of global palm oil production.
Thirty years on, the differences between Malaysia and the EU over how to manage tropical forests have shifted and are now somewhat less openly acrimonious, yet still highly contentious.
Like Malaysia, Indonesia has a number of politically powerful palm oil-producing companies that oppose the EU law on social and economic grounds. Nearly 3 million small palm oil producers account for 40 percent of the country’s production. Their representative associations have warned that members don’t have the resources to comply with the EU law’s requirement to prove where the commodities were cultivated.
Shortly following the law coming into force, Jakarta hit out at the EU. In May, the country’s deputy trade minister lambasted the regulation, claiming “it will clearly harm Indonesia’s important plantation and forestry communities, such as cocoa, coffee, rubber, wood products and palm oil.” Indonesia’s trade minister has also threatened to challenge the EU at the World Trade Organization (WTO), asserting that the law discriminates against developing economies.
Many against Brussels
As a sign of growing collective resistance to the EU law, Indonesia and Brazil led a group with 15 additional commodity-producing developing economies in issuing a joint letter of protest to Brussels. They claim the regulation fails to take account of local sustainable development capabilities and conditions, national legislative measures to preserve the environment, multilateral climate change commitments, ecological domestic certification mechanisms and various efforts to prevent deforestation.
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The collective statement also criticizes the EU for creating a benchmarking system that is discriminatory, punitive and potentially in violation of WTO provisions. The signatories claimed that the “one-size-fits-all” approach of the EU regulation’s due diligence and traceability model will disproportionately burden producer countries. They insist that the end result will be increased poverty, resource diversion and more obstacles to their sustainable development goals.
Backlash to EU trade protectionism
In addition to potential legal action and threats of discontinuing exports of some commodities to the EU, Southeast Asian producers have been eyeing alternative large-scale markets for palm oil. Currently, India and China are the world’s two largest importers of the product.
India, too, has been skeptical of the EU law, describing it as a disguised trade protectionist measure in the form of a non-tariff barrier. Roughly $1.3 billion of Indian commodity exports may be affected by the regulation, and Indian trade officials have likened the new law to CBAM’s extraterritoriality. In turn, New Delhi has proposed joining developing-world commodity producers in challenging the EU at the WTO.
China may be the winner
Beijing may look to exploit Southeast Asian regional commodity producers’ disaffection with the EU law from various perspectives, though the devil is in the details.
On one hand, China signed the COP26 Glasgow Declaration committing to combat deforestation in tandem with other nations. Beijing was viewed by the EU, especially during the administration of United States President Donald Trump, as its principal partner in co-leading cooperative multilateral efforts to tackle climate change.
On the other hand, the extent and means by which these commitments could be put into practice have recently been called into question, particularly in light of intensifying geopolitical and trade disputes between China and both the EU and the U.S.
Central to Beijing’s geopolitical concerns are issues relating to food security, which it has elevated to a key national priority as part of its broader securitization strategy. China has called for greater dependence on agricultural commodity imports from key producers in its international strategic partnership network – including several neighboring Southeast Asian states.
Accordingly, the region’s palm oil producers will most likely be major beneficiaries of the Chinese government’s food policy outreach and the country’s currently surging demand for palm oil. This type of government-to-government initiated trade will likely lead to Indonesian and Malaysian palm oil conglomerates cozying up to Chinese state-owned trading enterprises. It seems implicit that such arrangements will inevitably contribute to the further alignment of several Southeast Asian capitals with Beijing.
The lure of China’s noninterference policy
The obvious extraterritorial dimension of the EU’s deforestation law also contrasts with China’s claims of noninterference in other countries’ domestic affairs, which could potentially bring Southeast Asian states still closer to Beijing. Noninterference is a key principle applied across the 10-member community of the Association of Southeast Asian Nations (ASEAN), leading to heterogeneous forms of national governance which are not challenged within the bloc, although Myanmar has become an exception.
From China’s point of view, Europe’s introduction of measures that might impose extraterritorial controls, such as a requirement for zero-deforestation supply chains, could be viewed as undue interference in other countries’ sovereignty. It is unlikely, therefore, that China would implement any measures on imported deforestation in the foreseeable future, even steps related to COP26 obligations. And considering other measures that the EU is rolling out with an extraterritorial element, this could further tilt much of Southeast Asia into China’s orbit, at the expense of the EU.
Scenarios
Most likely: Southeast Asia increasingly aligns with the Global South
The EU’s deforestation law cannot be viewed in isolation from several extraterritorial measures which have been issued by Brussels, impacting not only Southeast Asian palm oil producers, but also commodity producers in developing economies at large. This particular EU regulation may be a catalyst for an increasingly coherent alliance of regional Southeast Asian interests in opposition to expanding EU extraterritoriality.
The proactive campaigning of several Southeast Asian states against the EU deforestation law, among other EU regulations impacting regional economies, may transform into a broader international movement. This could be led by large Southeast Asian states, such as Indonesia, who can leverage their expanding influence in the developing world to galvanize common interests. At some point, temporary groupings to oppose the EU on specific issues, such as the EU’s deforestation law, may evolve into more permanent institutionalized structures. These could include the possibility of regional or global palm oil institutions or perhaps developing world organizations made up of the broader commodity space.
In any event, given the EU’s propensity for extraterritoriality in rulemaking, most Southeast Asian economies are likely to find a greater commonality of interests with the broader Global South, which would contribute towards an accelerating drift away from Europe.
Somewhat likely: Southeast Asia increasingly aligns with China
The growing largesse of Chinese demand for palm oil will provide a medium- to long-term opportunity for Southeast Asia’s commodity producers to find an alternative market to the EU. Given the political influence palm oil conglomerates have in some Southeast Asian economies, this is likely to translate into tilting some countries politically closer to Beijing. Of course, China is already the largest trading partner and foreign investor for most Southeast Asian countries, and so any closer geopolitical relations the region develops with Beijing beyond ties already in place will be largely incremental.
As the EU continues to introduce and apply more protective trade measures, including through its extraterritorial regulations such as the deforestation law, it stands to reason that Beijing’s noninterference policy will be attractive to most Southeast Asian states; serving to accelerate the region’s alignment with China.
This is notwithstanding the conflicting South China Sea sovereignty claims, amid ongoing violent incidents – a fraught issue that will continue to impede many Southeast Asian governments’ willingness to more fully harmonize their interests with those of Beijing.
Least likely: Southeast Asia increasingly aligns with the EU
Indonesia and Malaysia have been particularly critical of the EU’s approach to developing its deforestation law. The centerpiece of their criticism revolves around Brussels’ unwillingness to engage in constructive dialogue throughout the regulation’s various stages of development. This applies equally to other extraterritorial laws that are having an impact on the region. In the current environment of downwardly spiraling EU regulatory and trade protectionism, there seems to be limited potential for Southeast Asia to pursue closer alignment with the EU.
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