New European environmental legislation should concern Brazil – 05/11/2023 – Market

On April 19, 2023, the European Parliament passed legislation banning the import of “dirty commodities” by members of the European Union, making it mandatory to carry out due diligence in the supply chains of certain agricultural commodities commonly associated with deforestation.

The objective is to ensure that commodities produced from December 31, 2020 and sold in Europe do not come from illegally deforested areas in their countries of origin. The legislation, which is still pending approval by the Council of Europe, also requires that commodities be produced in compliance with international human rights rules and with respect for the rights of indigenous peoples and their territories.

The commodities covered by the measure are cattle, soy, cocoa, coffee, rubber, palm oil, wood and cellulose and derivatives, such as soy oil, leather, furniture and chocolate, which will impact a wide range of agro-exporting countries. For Brazil, one of the main consequences is the classification of exporting countries by the European Commission according to their degree of risk, based on an assessment 18 months after the entry into force of the measure.

The justification for the measure is the global fight against illegal deforestation, based on art. XX (b) and (g) of the General Agreement on Trade and Tariffs (GATT), under the umbrella of the World Trade Organization. Although it is a reason aligned with the principles of ESG, environmental protection and sustainable development, the measure may constitute a non-tariff barrier to trade, impacting mainly Brazil.

A first legal controversy is that the measure has an extraterritorial nature, since EU legislation affects activities outside its territory. Furthermore, although the measure is also applicable to EU producers, in practice there is a risk of veiled discrimination against imported products, which could lead to WTO penalties. By the way, note that the measure is focused on products originating from tropical forests – which the EU curiously does not have.

For Brazilian agro-exporters, the measure has obvious impacts and must be carefully studied, under the risk of slowing down their export performance. However, such a rule may also imply opportunities for the national industry, especially in sectors where it is competitive, such as agribusiness and non-durable consumer goods. Such sectors have already been anticipating such rules and adopting adaptation measures to combat deforestation, through private standards and voluntary sustainability norms.

In this sense, the attention of the Brazilian private sector must focus on the potentially protectionist nature of European rules. First, such requirements are stricter than international environmental protection standards: for example, the law will not only punish illegal deforestation, but also land-use conversion, which is normally allowed.

It is also not clear how European bodies will classify the risk level of the exporting country. If Brazil is categorized as high risk, this could even jeopardize its negotiations for future trade agreements.

On the other hand, initiatives in opposition to this measure have been aired in Brazil. This is the case of the so-called Environmental Reciprocity Law, whose project provides for the creation of barriers to products from the European bloc if there are obstacles to Brazilian exports. However, such a measure could hinder Brazil’s efforts to reinsert itself into the global diplomatic stage, deepening discrimination on a vicious scale.

Trade restrictions do not always work as a means to achieve environmental ends, as in addition to not being necessarily effective, they tend to give rise to a spiral of economic distortions. Brazil should be concerned about the measure and whether it will inspire similar rules in the future: for that, coordinated action between the government and the private sector is needed in monitoring, analyzing and questioning such initiatives.