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SUSTAINABILITY IMPACT ASSESSMENT OF PROPOSED WTO NEGOTIATIONS

FINAL REPORT FOR THE FOREST SECTOR STUDY

Prepared by Marko Katila and Markku Simula

Savcor Indufor Oy, Finland

In association with Impact Assessment Research Centre

Institute for Development Policy and Management University of Manchester, UK

19 June 2005

Personal data in this document have been redacted according to the General Data Protection Regulation 2016/679 and the European Commission Internal Data Protection

Regulation 2018/1725

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This report was prepared with financial assistance from the Commission of the European

Communities. The views expressed herein are those of the Contractor, and do not represent any official view of the Commission.

This Report has been prepared for the European Commission under Framework Contract No Trade 01/F3-1 (Sustainability Impact Assessment of Proposed WTO Negotiations)

Specific Agreement No. 3.

Project Reports and information about the project are available from the project website:

http://www.sia-trade.org

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TABLE OF CONTENTS

ABBREVIATIONS ............................................................................................................................. III EXECUTIVE SUMMARY: KEY FINDINGS FOR POLICYMAKERS........................................V

Summary and Conclusions..........................................................................................................v Recommendations Regarding Mitigation and Enhancement Measures .................................. viii

1. INTRODUCTION.....................................................................................................................1 1.1 Background and Objectives .........................................................................................1 1.2 Study Qualifications.....................................................................................................1

2. METHODOLOGY....................................................................................................................2 2.1 Scenarios ......................................................................................................................2 2.2 Impact Significance and Sustainability Indicators.......................................................3 2.3 Causal Chain Analysis and Conceptual Framework....................................................4 2.4 Country Groupings and Case Studies ..........................................................................5 2.5 Mitigation and Enhancement Measures.......................................................................7

3. BASELINE TRENDS IN THE FOREST SECTOR ..............................................................7 3.1 Trends in Forest Resources ..........................................................................................7 3.2 Production and Consumption Trends...........................................................................9

3.2.1 Production.......................................................................................... 9 3.2.2 Consumption...................................................................................... 9

3.3 Trends in International Trade in Forest Products.......................................................10 3.3.2 Overview of Trade in Forest Products ................................................ 10 3.3.2 Export Trends................................................................................... 10 3.3.3 Import Trends................................................................................... 11 3.3.4 International and Intra-regional Trade Flows ...................................... 12

3.4 Baseline Tariffs and Non-Tariff Measures Concerning Forest Products...................16 3.4.1 Current Tariffs on Forest Products ..................................................... 16 3.4.2 Non-Tariff Measures Influencing Trade in Forest Products.................. 18

4. SUMMARY OF CASE STUDY FINDINGS ........................................................................22 4.1 Overview of Sustainability Impacts ...........................................................................22 4.2 Case of China.............................................................................................................24

5. SUSTAINABILITY ASSESSMENT .....................................................................................26 5.1 Baseline Forestry Trends ...........................................................................................26 5.2 Global Impacts ...........................................................................................................28

5.2.1 Causal Chains of Economic Impacts .................................................. 28 5.2.3 Production and Trade Impacts ........................................................... 29 5.2.4 Economic Impacts ............................................................................ 30 5.2.5 Social and Environmental Impacts ..................................................... 31 5.2.6 Process Impacts ................................................................................ 31

5.3 Economic Impacts by Country Groupings.................................................................32 5.3.1 European Union................................................................................ 32 5.3.2 Non-EU Developed Countries ........................................................... 33 5.3.3 Developing and Least Developed Countries ....................................... 33

5.4 Environmental Impacts by Country Groupings .........................................................34 5.4.1 European Union and Non-EU Developed Countries ............................ 34 5.4.2 Developing and Least Developed Countries ....................................... 36

5.5 Social Impacts by Country Groupings .......................................................................38 5.5.1 European Union and Non-EU Developed Countries ............................ 38 5.5.2 Developing and Least-Developed Countries ....................................... 39

5.6 Cross-cutting Impacts ................................................................................................40 5.7 Impact Summary........................................................................................................42

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6. ASSESSMENT OF MITIGATION AND ENHANCEMENT MEASURES......................45 6.1 Trade-Related M&E Measures ..................................................................................45 6.2 Non-trade Related Mitigation and Enhancement Measures.......................................49

REFERENCES AND RELEVANT LITERATURE.........................................................................50 List of Figures Figure 1 Basic Principles of the Causal Chain Analysis....................................................... 5 Figure 2 Global Distribution of Forests .............................................................................. 8 Figure 3 Share of Wood Product Exports (rwe) of Total Roundwood Production in

1961–2000........................................................................................................ 11 Figure 4 Import Shares in Tropical Logs in 1980-2000...................................................... 12 Figure 5 Inter-regional and Intra-regional Net Trade of Forest Products in 2000 ................. 13 Figure 6 Interregional Net Trade in Wood Pulp in 2000 .................................................... 13 Figure 7 Interregional Net Trade in Paper in 2000 ............................................................ 14 Figure 8 Interregional Net Trade in Wood-based Panels in 2000........................................ 14 Figure 9 Interregional Net Trade in Sawnwood in 2000..................................................... 15 Figure 10 Tariff Escalation: Wood Products in Developed Markets ..................................... 17 Figure 11 Tariff Escalation: Wood Products in Developing Markets .................................... 17 Figure 12 NTMs Facing Developing Country Wood Product Exports .................................. 20 Figure 13 NTMs Facing Developed Country Paper Article Exports ..................................... 20 List of Tables Table 1 Sustainability Indicators ...................................................................................... 4 Table 2 Impact Summary Matrix...................................................................................... 4 Table 3 Main Wood Product Trade Flows Between Regions ............................................ 16 Table 4 Agreed Tariff Rates for Developed Countries Pre- and Post-Uruguay

(Weighted MFN and GSP Rates)........................................................................ 17 Table 5 Agreed EU MFN Tariff Rates by Main Wood Product Category .......................... 18 Table 6 Trends in Individual Trade Measures Affecting Forest Products Trade.................. 19 Table 7 NTMs Related to Tropical Timber and Their Impacts .......................................... 21 Table 8 Summary of Case Study Findings....................................................................... 23 Table 9 Sustainability Impacts in the Forest Sector due China’s WTO Accession .............. 25 Table 11 Actual and Projected World Consumption of Forest Products up to 2010 .............. 27 Table 12 Production, Consumption and Trade Projections for Europe in 2000-2020 ............ 27 Table 13 Comparison of Baseline and Full Liberalisation (FL) Impacts on Global

Production, Consumption and Trade in Forest Products ....................................... 30 Table 14 Projected Change in Timber Harvesting in 2010 by Region, Compared to

Baseline............................................................................................................ 35 Table 15 Impact Summary by Type and Country Grouping................................................ 42 Table 16 Analysis of M&E Measures ............................................................................... 48 List of Annexes Annex 1 Conceptual Framework for SIA in Forestry Annex 2 Data on Forest and Conservation Areas and Certified Forests Annex 2 Forest Product Production and Consumption Trends Annex 4 Import Tariff Rates in Selected Developed and Developing Countries Annex 5 Case Studies

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ABBREVIATIONS

ACP African, Caribbean and Pacific States AFTA ASEAN Free Trade Agreement AIMEX Associação das Indústrias Exportadoras de Madeiras do Estado do Pará APEC Asia-Pacific Economic Co-operation APKINDO Association of Indonesian Plywood Producers ASEAN Asian Association of South East Asian Nations ATL Accelerated Trade Liberalisation C&I Criteria and indicators CBD Convention on Biological Diversity CCA Causal chain analysis CEC Commission of the European Communities or Commission for Environmental Cooperation (NAFTA) CEEC Central and Eastern European countries (CEEC) CEPT Common Effective Preferential Tariff (CEPT) CGE Computable general equilibrium CIF Cost, insurance and freight CIFOR Center for International Forestry Research CIS Commonwealth of the Independent States CITES Convention on International Trade in Endangered Species CoC Chain of Custody COM Communication from the Commission to the Council and the European CSA Canada's National Standard on Sustainable Forest Management Standard CTE Committee on Trade and Environment cum cubic meter DDA Doha Development Agenda DFID Department for International Development DG Directorate General EBA Everything But Arms Initiative (EU) EC European Commission EST Environmentally sustainable technology EU European Union FAO Food and Agriculture Organisation of the United Nations FCCC Framework Convention on Climate Change FERN Forests and the European Union Resource Network FLEGT Forest Law Enforcement Governance and Trade FOB Free on Board FRA Forest Resource Assessment FWI Forest Watch Indonesia GATS General Agreement on Trade Services GATT General Agreement on Tariffs and Trade GFW Global Forest Watch GPA Government Procurement Agreement GSP Generalised System of Preferences IA Impact assessment IBAMA Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis IBGE Instituto Brasileiro de Geografia e Estatística ICEL Indonesian Center For Environmental Law ICMS Imposto sobre Operações Relativas à Circulação de Mercadorias e sobre Serviços de

Transporte Interestadual e Intermunicipal e de Comunicação, ainda que as Operações se Iniciem no Exterior

IFF Intergovernmental Forum on Forests IIED International Institute on Environment and Development IDPM Institute of Development Policy and Management IMF International Monetary Fund IPF Intergovernmental Panel on Forests

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IPR Intellectual property rights IR Irreversible impact ISO International Organization for Standardization ISPM International Standard for Sanitary and Phytosanitary Measures ITTA International Tropical Timber Agreement ITTO International Tropical Timber Organisation LDC Least Developed Countries M&E Monitoring and Evaluation m3 Cubic meter MEA Multilateral Environmental Agreement MERCOSUR Mercaso Comun del Sur MFN Most Favoured Nation MNRT Ministry of Natural Resources and Tourism (Tanzania) n.a. Not available NAFTA North American Free Trade Association nc non-coniferous NFP National Forest Programme NIC Newly industrialised countries NTM Non-tariff-measure NWFP Non-wood forest products OECD Organisation for Economic Cooperation and Development PEFC and Pan European Forest Certification Scheme PNG Papua New Guinea PPM Process and production method (under WTO) PRS Poverty Reduction Strategies RTA Regional trade agreement rwe Roundwood equivalent volume basis SAP Structural adjustment programme SEI Stockholm Environmental Institute SFI Sustainable Forestry Initiative (SFI) program, SFM Sustainable Forest Management SIA Sustainability impact assessment SME Small and medium sized enterprises Spp. Species SPS Sanitary and Phytosanitary Measure SPWP Secondary processed wood product SSA Saharan Africa TBT Technical Barriers to Trade TNC Transnational corporation TRIPS Trade-Related Aspects of Intellectual Property Rights UK United Kingdom UN United Nations UNCED United Nations Conference on Environment and Development UNCTAD United Nations Conference on Trade and Development UNECE United Nations Economic Commission for Europe UNEP United Nations Environmental Programme UNFCCC United Nations Framework Convention on Climate Change UNFF United Nations Forum on Forests USA United States of America USD United States Dollar WALHI Wahana Lingkungan Hidup Indonesia WTO World Trade Organisation WWF World Wide Fund for Nature

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EXECUTIVE SUMMARY: KEY FINDINGS FOR POLICYMAKERS

Summary and Conclusions

Further reduction of tariffs as the result of Doha negotiations would result in overall economic gains; while environmental and social impacts would be ambiguous. Trade liberalisation is not likely to influence forest product consumption and production much in aggregate, but it would result in increased trade. The already low import tariffs and relatively small share of forest products traded internationally explain the expected small aggregate impacts of full liberalisation on forest product consumption levels. Further, the majority of trade in forest products takes place within EU, NAFTA, APEC, and under other various regional trade agreements, which may already apply zero or close to zero tariffs. However, there would be considerable differences between different countries in terms of their response to the changing terms of trade and what economic, environmental and social impacts may result from further trade liberalisation. Impacts can be either positive or negative, or a combination of both. At the world level, the incremental impacts in wood harvesting are likely to be small compared to the impacts due to economic growth, population growth and price development of forest products. Trade liberalisation will naturally have impacts on sustainability, but in most contexts, increased trade alone is unlikely to cause significant direct negative sustainability impacts. However, further trade liberalisation can accentuate negative sustainability trends unless appropriate forest governance systems are in place and enforced. Because of cumulative impacts and the threshold effect, in principle small incremental changes can result in significant negative sustainability impacts in individual countries with sustainability and governance problems. Also, in biodiversity hotspot countries, such as Brazil, Indonesia, Congo Basin countries, and Papua New Guinea, possible negative impacts on biodiversity can be irreversible. Developing countries, which have established forest industries protected by high import tariffs, may incur considerable environmental and social costs due to downsizing of the industrial capacity and closing some industries entirely. Sometimes social costs may outweigh short-term economic gains unless adequate safeguards are adopted. Consequently, in selected countries like these, it would be wise to adopt a precautionary approach to trade liberalisation, e.g. using a phased approach, and/or addressing these issues and associated mitigation measures in bilateral negotiations and agreements. The implications of the findings for impacts on the Millennium Development Goals are discussed in the overall project report for the SIA studies. Economic impacts: There would be both positive and negative producer and consumer welfare impacts depending on whether the country has forest resources and is already export-oriented, and whether it has the capacity to benefit from improved markets access. Some of the main predicted economic impacts are: • Global (aggregate) production and consumption of forest products, including roundwood, would

change only a little because of elimination of import tariffs. Global roundwood production is predicted to increase only by about 0.5% compared to the baseline.

• The impacts on harvesting volumes would not be uniform. The small overall increase in the production of industrial roundwood is a result of both reductions and increases in production in different countries. The aggregate figure hides considerable variation in production from –2.7 to 5.8%. Some of the significant increases in production would be in those countries, which at present suffer from deforestation and forest degradation, while at the same time there would also be increased in sustainable production.

• Liberalisation would affect trade more than production and consumption; aggregate trade is predicted to increase by about 2% compared to the baseline. Changes in trade vary from about 1% (woodpulp) to an increase of more than 6% (wood-based panels).

• Full liberalisation would contribute to the long-term trend toward increasing importance of trade in value added products; trade in industrial roundwood would decline.

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• Due to prevalent tariff escalation especially in developing countries, full trade liberalisation would lead to increased production and trade in products which have been under “tariff protection” in the past e.g. in South Asian countries.

• Inter-regional and intra-regional trade flows would be strengthened. Especially South-to-South trade is predicted to increase within Asia within South America, and from South America to Asia (Japan, China, Taiwan, Republic of Korea and South Asian countries), because the import tariffs and tariff escalation are the highest in developing and newly industrialised countries. Further, most of the developing countries already face low or no tariffs at all for their exports to developed countries. One can also expect that trade from Asia to Latin and Central America would increase (e.g. plywood exports to Mexico).

• Employment impacts would vary depending on the industry and the location, where the production increase or decrease would take place. No attempt to estimate these impacts at a global level was made because the projected increases in production are limited in relation to the base scenario, ranging from –0.1% reduction for wood-based panels to 0.5% increase for roundwood.

Social and environmental impacts: The net effect on social and environmental sustainability impact of possible trade liberalisation under Doha agenda is ambiguous (positive in some areas and negative in others). In most contexts - both in developed countries and in developing countries - trade liberalisation alone is unlikely to cause significant direct negative sustainability impacts. However, it can accentuate negative trends in countries such as Brazil, Indonesia, and Papua New Guinea where forest governance systems are still relatively weak. It is likely that the most serious negative environmental impacts are likely to be experienced in countries, which contain regionally and globally unique biodiversity resources, but which suffer currently from sustainability and governance problems. • Developing countries and also some of the transitional economies that have problems with forest

governance may face considerable environmental and social costs, which could offset economic gains from further trade liberalisation unless adequate safeguards are adopted.

• All of the case study countries are likely to suffer negative social and environmental impacts from liberalisation.

• Trade liberalisation would likely be a magnifier of existing policy and institutional strengths and weaknesses rather than a major driver of forest governance change as such.

• The negative impacts on biodiversity and soil erosion would in most cases result from unsustainable harvesting, which can be associated both with illegal logging and legal logging.

• Unsustainable forest exploitation may also cause social conflicts and infringe on indigenous people’s rights. These incremental impacts may be relatively small compared to the impacts of agricultural trade liberalisation and the on-going processes that are causing deforestation and forest degradation, including factors such as population growth, economic growth, infrastructure development, subsidies, product pricing policies and macro-economic reforms.

• Especially in developing countries, there would likely be negative impacts on equity. Most of the benefits from trade liberalisation are likely to accrue to large companies often located close to urban centres. Small and medium-sized enterprises in developing countries would not find it as easy to benefit from new trade opportunities as larger companies. In fact, in many developing countries (e.g. in Eastern Africa, India, Vietnam) one can expect many small companies to succumb to increased competition due to imports.

• Consumers and producers in developing countries are likely to benefit from cheaper and better quality exports. The incremented benefits in each case would depend on the past level of tariffs.

Affected countries and products: • Countries with competitive advantage in terms of technological know-how, labour costs and e.g.

access to capital (e.g. through increased foreign direct investment) will benefit from trade liberalisation.

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• Trade liberalisation in the forest sector would benefit more developed forest-rich-export-oriented countries such as Canada, the United States, Finland, Sweden and New Zealand than developing countries.

• Especially paper products would benefit most from trade liberalisation in these countries. • New EU members and accession countries as well as the CIS and other CEEC countries are likely

to increase their sawnwood production and share of the European market. • A number of developing countries with considerable forest resources or potential for fast-growing

plantation development, (Indonesia, Malaysia, Brazil, Chile, etc.) are expected to benefit in economic terms.

• Some forest-rich developing countries such as Papua New Guinea and the Congo Basin countries are not in a good position to gain large benefits from trade liberalisation because of poor access to capital, inadequate infrastructure, low rates of foreign investment, shortage of skilled people and technological know. However, these countries may increase their log and sawnwood exports, and in some cases also export of panels.

• Many of the developing and emerging countries that would gain from trade liberalisation in economic terms are the same ones that suffer from deforestation and forest degradation e.g. because of illegal logging. Many of the Western African countries, Brazil, Indonesia, Papua New Guinea, Malaysia (Sabah and Sarawak), amongst many others, have problems with forest governance, which may be accentuated by further trade liberalisation.

• Wood-based panels and sawnwood and some paper products would be exported increasingly. Production and exports of wooden furniture and secondary processed wood products (SPWPs) would increase in countries such as China, Malaysia, Thailand and Brazil.

• Benefits from further trade liberalisation would likely accrue to those forest-rich developing countries that already enjoy good market access, and have competitive advantage in terms of infrastructure, technology, research capacity, and information, low labour costs, skilled people, political stability and access to capital. These countries are likely to attract foreign direct investment, which will help to improve efficiency in production, make the industry more competitive, and provide more employment.

• Pulp and paper industries and panel industries in these countries would become increasingly global, and would compete against European and North American exports especially in the Asian market. These industries would increasingly have to rely on forest plantations. Without an adequate and sustainable plantation resource base modern forest industries cannot properly compete in an international market.

• Untapped opportunities also exist in finding markets for products made of sustainably managed high value tropical hardwoods.

Non-tariff measures: Non-tariff measures such as standards and technical regulations as well as non-tariff measures (NTMs) promoting environmental objectives are increasing. The only NTMs that were analysed as part of the trade liberalisation scenario were reduction or elimination of log export bans and prohibitive log export taxes. The impacts of their removal would be mixed. Trade in roundwood would increase both in the temperate and tropical zones, resulting in economic gains. On the other hand, totally free trade of logs in poor governance conditions is likely to have adverse environmental impacts and to promote illegal logging and trade negative in countries, which have inadequate control systems and insufficient capacity to process value-added products (e.g. Shimamoto et al. 2004). Increased trade due to removal of exports restrictions would not automatically result in negative environmental impacts; impacts would depend on the quality of forest management in areas, where harvesting takes place. Despite economic inefficiency, a ban on log exports may be justified as a temporary solution on environmental grounds in an environment, where control of corruption and illegal logging is not yet possible (Tumaneng-Diet et al. (2005). From an economic viewpoint, the best alternative would be to promote efficient wood pricing possibly combined with domestic resource taxes to ensure that export and domestic markets are treated equally and that incentives for making the best use of sustainably produced wood would be created. The problem is that various types of trade restrictions, introduced with good intentions e.g. to protect the environment, can distort the market signals needed to promote

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sustainable practices. Country-specific studies could help with better understanding of the associated economic and environmental trade-offs in different contexts. An increasing range of NTMs aimed at meeting environmental and safety objectives makes it more difficult (or costly) for many developing country producers and also for small and medium scale enterprises in developed countries to enter the international. However, legitimate NTMs do not yet appear to be major constraints to trade. Sometimes, they offer opportunities to access new markets or maintain existing ones, based on environmentally sound practices, as is demonstrated by forest certification. To enable poorer developing countries, small producers and communities to benefit more e.g. from forest certification, phased approaches to certification and more support are needed. Cross-cutting issues: The environmental and social impacts of agricultural trade liberalisation, especially through land-use change, are possibly much larger than the effects resulting from forest product trade liberalisation partly because the protection rates and subsidies of agricultural products are several times higher than for forest products. Increases in agricultural production are often made possible by clearing forest to expand the area under agriculture. E.g. in the case of Brazil, a significant increase in soybean production is forecast, much of which might well occur through an expansion in the tilled area on the margins of the Amazon. This will put increased pressure on areas with unusually high biodiversity. Expansion of beef exports can also be expected to accelerate deforestation. It is important that mitigation and enhancement measures proposed as part of the SIA of the agricultural trade liberalisation will address cross-sectoral linkages with forestry. The mitigation measures should be designed in keeping in mind that liberalisation of trade affecting especially edible oils (oil palm, soybean), beef and associated animal feed such as soybean, cocoa, and coffee is likely to pose risks in countries such as Brazil, Indonesia and West African countries. In the Doha negotiations it is important to view possible combined impacts of simultaneous trade liberalisation under NAMA and agriculture. There are likely to be cumulative impacts resulting from agriculture trade liberalisation, which together with trade liberalisation affecting forest products can exacerbate forest destruction further with negative consequences both for biodiversity and for social well-being of forest-dependent people. Recommendations Regarding Mitigation and Enhancement Measures

A number of trade-related measures to promote trade in sustainably produced and legal forest products were identified in Chapters 6.1 and 6.2. All of them can have positive sustainability impacts, but their effectiveness would greatly depend on complementary measures. Out of the trade-related measures voluntary forest certification is one of tools that can link trade and environmental objectives by providing financial incentives for improving forest management (Simula et al. 2004). Voluntary import licensing schemes can also be effective as long as the scope of agreements can be enhanced to cover more countries and wider product scope (not only roundwood). This could be complemented by support to voluntary (third party) legal compliance schemes at national level as well as verification of legal origin (requiring possibly third party services). If schemes such as a unilateral ban on imports of logs and wood products not verified as coming from a sustainably managed source, or from an illegal source, are seriously considered they need to be evaluated with same intensity and resources as the licensing scheme. A wide range of technical standards and regulations and lack of internationally accepted methods of compliance or recognition of testing are limiting access to markets in some cases. It appears that technical barriers to trade (TBTs) have not yet become serious constraints in trade, but they add to production and marketing costs, and may accelerate undue substitution of other materials for wood. Due to increasing number and complexity of technical and safety requirements, there may be a need to carry out a comprehensive review of TBTs. The already existing TBT and SPS Agreements provide a forum for dealing with these issues. The following actions could be considered in other appropriate

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fora (e.g. in regional trade agreements, bilateral memorandum of understandings) to facilitate trade while ensuring compliance with safety and environmental standards: • Increase harmonisation on standards; the International Standard of for Phytosanitary Measures

(ISPM 15) and EU’s CE marking set positive examples. • Increase mutual recognition of testing systems and move more towards performance-based

standards. • Provide technical assistance and resources to help less developed countries to develop national

standards and infrastructure, and introduce schemes to help especially small end medium enterprises (SMEs) to meet with various technical requirements.

Most of the trade-related measures do not address the main causes for illegal logging and unsustainable forestry. Trade-related measures would have to be complemented by other measures that strengthen capacity in forest management and control in developing countries. The review of sustainability conditions, analysis of sustainability impacts, and the case studies suggest that measures, which address the domestic factors influencing sustainability in the forest sector, should receive a high priority. Many of the proposed non-trade related M&E measures are similar to the support that is needed in general to improve forest governance, create the enabling environment for sustainable forest management, and strengthen capacity in developing and least developed countries. These measures would also help in alleviating the negative impacts of trade liberalisation and enhancing its positive impacts. One of the key issues is the timing or phasing of the reforms and support measures. The implementation of these measures would take time before an enabling environment for trade liberalisation can be created in countries that are currently vulnerable to negative impacts in the forest and agricultural sectors. It is important to provide support to strengthening of institutions in countries with capacity constraints and governance problems but which have the necessary political will. In these cases, one should consider phasing trade liberalisation over a longer period of time to ensure smooth adaptation. It is important to recognize that significant improvement in quality of governance systems may take time.

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1. INTRODUCTION

1.1 Background and Objectives

Further liberalisation of trade in products and services is part of the WTO Doha Development Agenda. Forest products are not separately on the agenda, but are part of the overall negotiations, under Market Access for Non-agricultural Products. The European Commission (EC) has selected forestry, together with agriculture and distribution services, for a detailed sector assessment. The overall objectives of the SIA study in forestry are: • Assess the potential economic, social and environmental impacts on forests of the WTO Doha

trade negotiations: - describe the baseline situation (trade flows, current tariff and non-tariff measures,

sustainability issues, etc.). - analyse the changes in trade flows under different scenarios covering possible additional tariff

reductions, changes in non-tariff-measures (NTMs), and reduction of tariff escalation for processed products.

- assess quantitatively and/or qualitatively the economic, social and environmental impacts of potential outcomes under specified scenarios and by prioritised geographical areas or potentially affected social groups.

- analyse cross-cutting effects, paying special attention to agriculture.

• Identify and assess (policy) measures aimed at enhancing positive impacts while mitigating negative impacts of trade liberalisation; some of the complementary measures which are the subject of the current debate include: - licensing of timber supply on a bilateral basis. - unilateral preferential markets access for products that originate from sustainably managed

forests. - unilateral bans on timber not certified as sustainably managed or coming from a legal source. - a multilateral Kimberley-like ban on all timber from specified areas at risk to illegal logging.

The study was undertaken in three phases: Inception Phase, Analysis and Case Study Phase, and Finalisation Phase, the phases coinciding with the completion of the Inception Report, Mid-term Report and Final Report. The Inception Report was presented to the Steering Committee on April 20, 2004 and to the Civil Society on 11 May 2004. The Mid-term Report (MTR) (http://www.sia-trade.org/wto) was presented to the Steering Committee and the Civil Society on September 14, 2004. This Final Report makes references to earlier reports rather than repeating them. Compared to the MTR, the main additions of the Final Report phase are:

• analysis of those forestry-related NTMs, including export restrictions, which are on the DDA, as

part of the trade liberalisation scenario; • integration of findings from the agriculture SIA to address the cross-sectoral effects; • analysis of the identified key mitigation and enhancement measures; and • related policy recommendations. The Final Report focuses on the main findings and identifying action recommendations.

1.2 Study Qualifications

The analysis of trade liberalisation impacts in the forest sector faces challenges and limitations, which need to be recognised when interpreting the findings. The main challenges are methodological, combined with scarcity of data and prior analysis that would enable reliably (scientifically) assessing forest products trade and its social and environmental impacts. Because these impacts are mostly felt at a local level, respective studies would ideally have been carried out at that level, which has rarely been possible in this study. For example, to be able to assess the impacts on biodiversity, one should


be able to determine in what kind of ecosystems or landscapes incremental harvesting caused by trade liberalisation would take place. Some of the main challenges faced in the SIA in forestry include: • It is difficult to distinguish between the effects of trade liberalisation and other measures, reforms

and development trends, which drive forestry production and trade systems. Changes in production methods and consumer preferences, population and economic growth, interest rates and access to capital, substitution trends as well as changes in logistic and other costs all influence forest production and trade. Trade reforms are also commonly undertaken simultaneously with other reforms such as privatisation, devaluation, monetary and fiscal reforms, etc., as part of structural adjustment programmes (SAPs) as has been the case e.g. in Indonesia and Tanzania. The evidence has shown that these measures can greatly influence forestry production and trade (Kaimowitz et al. 1998, Rice et al. 2000, Barr 2001, Wunder & Verbist 2003).

• It is in many cases difficult to quantify it or even establish a correlation between a change in an economic production-related variable and environmental and social impacts.

• Economic modelling and simulation of global forest products trade flows allow reasonably reliable scenario analysis indicating global-level economic impacts and general effects on trade flows. These models are much less useful when studying impacts at the level of individual countries, disaggregated sectors, or trade flows between countries or regions.

• Global trade models, including those used in this study, depend on assumptions concerning price elasticities of supply, which vary considerably between products and countries.

• Thorough and participatory case studies, including consultation at a country level can provide a valuable contribution to the SIA and these were tried as part of this study. However, to be able to cover an adequate number of representative countries following a “best-practice approach” (or even a “second-best“) would require a more considerable amount of time and resources than was possible in this assessment.

• Obtaining informed views on possible impacts of trade liberalisation from various stakeholders is difficult because the issues are complex. Participatory SIA involving key impacted countries and their main stakeholder groups is a laudable goal. This would however require a lot of time and capacity building.

2. METHODOLOGY

2.1 Scenarios

The negotiations on the Market Access for Non-agricultural Products aim at reducing or eliminating tariffs on a range of products and also reduce non-tariff measures that act as barriers to trade while paying due attention to the promotion of sustainable development. Product coverage is to be comprehensive and without a priori exclusions, focusing both on tariffs and NTMs. EU specifically proposes a compression mechanism: eliminating tariff peaks and high tariffs, and significantly reducing tariff escalation, all issues of relevance to the forest sector. Forest products are not separately on the agenda. Two scenarios under the Market Access for Non-agricultural Products were assessed: • Base scenario: implementation of the Uruguay Round Agreements concerning tariffs (the base

scenario is a dynamic scenario even without any further liberalisation; consumption and trade projections are based on the current terms of trade, which are influenced also by other factors and initiatives in addition to the Uruguay Agreements).

• Full liberalisation scenario: adoption of zero tariff rate for forest products, and possible elimination of various export restrictions such as log export bans or export taxes.

An intermediate tariff-reduction scenario was considered, but the idea was rejected, because the average trade-weighted tariffs for forest products are already low (less than 5%). In a number of


countries tariff escalation is common, and import tariffs for selected processed products can exceed 20% and even 30%. NTMs are an integral part of the Doha negotiations. There is such a wide range of NTMs applicable to the forest sector that it will not be possible to analyse all of them, as they are very product and country specific. Various export restrictions, standards, phytosanitary measures, government procurement, and certification are most relevant in terms of potential impacts on trade (WTO database on NTMs, Burke (2002), Rytkönen (2002), ITTO (2004)). The discussion on subsidies has not been concerned with forestry. Discussions on trade facilitation will tackle burdensome import, export and transit procedures on a horizontal basis (EC 2003, EC 2004). These will have an indirect impact on trade in forest products, but there is no a priori reason to treat forest products separately from other manufactured products when it comes e.g. to import clearance. The use of standards and sanitary and phytosanitary measures could in principle be reviewed as part of the application of the existing TBT and SPS agreements, respectively. Government procurement and renegotiating SPS and TBT are not on the current Doha agenda. Voluntary certification and labelling will also not be addressed as part of formal negotiations. Consequently, export restrictions (export bans, quotas, duties) remain as an important NTM category that is both relevant in the forest sector (in terms of potential scale of impacts) and is on the Doha negotiation agenda (EC 2003, EC 2004). The APEC study (Forest Research 1999), ITTO (2004) and e.g. Maplesden & Clarke (2000) identify export bans, quotas, and licenses as NTMs, which have the most significant impacts on forest product trade. It is possible that e.g. export restrictions will be addressed under Non-agricultural Market Access, and consequently the trade liberalisation scenario will include an assessment of the impacts of reducing export restrictions on forest products. Measures to control illegal trade, promotion of forest certification1 and eco-labelling are treated in this report as mitigating and enhancement measures. This is consistent with the fact that environmental NTMs have the potential to have positive influences on trade and resource management. 2.2 Impact Significance and Sustainability Indicators

The SIA in forestry has adopted the general sustainability definition comprising the economic, environmental and social dimensions, similar to the prior SIA studies (e.g. Kirkpatrick & Lee 2002). Also, the same set of nine core indicators for sustainability impacts and two process indicators for effects on sustainable development will be adopted. For each of the core indicators second tier indicators have been proposed to specify in more detail the core indicators. In the case of forest industry, sustainability concept and impacts do not differ much from other respective industrial sectors. The second tier indicators for forestry can be derived from the sustainability concept (see forestry SIA Inception Report). In addition, forest governance2 was used a process indicator describing the overall capacity to move towards sustainable development in the forest sector. This broad, multidimensional indicator measure to what extent the negative impacts of trade liberalisation may be accentuated and what is the likelihood of a country applying various mitigation and enhancement measures successfully.

1 Forest certification is a means of protecting forests by promoting environmentally responsible forestry

practices. Forests are evaluated according to international standards and certified as well managed by a qualified independent auditor (or certifier). Wood or wood products from those forests are then labelled so that consumers can identify them. Forest Stewardship Council (FSC), Sustainable Forestry Initiative (SFI) program, and Pan European Forest Certification Scheme (PEFC), Canada's National Standard on Sustainable Forest Management Standard (CSA) are the most important certification systems in terms of area coverage.

2 Here used in a meaning to cover forest sector policy, forest legislation, harvesting code, sustainable forest management rules, criteria and indicators for sustainability. In a broad sense it covers the rules, including decision making structure, that control forest management, as well as timber production, processing and trade (FAO 2004).


Table 1 Sustainability Indicators

Sustainability dimension Core indicator Second tier indicator Economic Real income, fixed capital

formation, employment - Quantity and value of wood and non-wood forest

products’ production and trade - Changes in trade flows - Share of harvest from areas with management plans - Changes in the level of income and employment

Environmental Biodiversity, environmental quality, natural resource stocks

- Deforestation rate; changes in the protected ecosystems or number of endangered species

- Changes in gene stocks - Changes in the forest area managed primarily for the

protection of soil and water - Extent of harvesting from environmentally sensitive

areas - Maintenance of conservation forests

Social Poverty, health and education

- Employment and income distribution (e.g. by gender) - Number of forest dependent people - Land tenure and user rights - Community relations and workers rights - Participation by local communities and indigenous

people - Health and safety of forest workers

When it was not possible to get quantitative information on an indicator, the study at least tried to identify the direction of the impact and flag the importance of obtaining additional information. For example, there are still definitional problems concerning e.g. defining and measuring biodiversity. Also, it is difficult to define and quantify causal links between trade measures and e.g. health and education and when there are reasons to suspect that an impact may be irreversible, a precautionary approach is recommended. Impact assessment findings will be summarised by country groups using the form as shown in Table 2. Table 2 Impact Summary Matrix

Country grouping/ Type of country affected*

Economic impacts/ Countries affected

Social impacts/ Countries affected

Environmental impacts/ Countries affected

**

EU Non-EU Developed Countries Developing Countries Least Developed Countries (LDCs * These are the main categories; relevant typologies based on e.g. export and import dependence will be used. 2.3 Causal Chain Analysis and Conceptual Framework

Causal chain analysis (CCA) was used both in the overall forest sector SIA and country case studies. CCA aims first at (i) linking changes in a trade measure to changes in the incentives (prices) and opportunities (expanded market access), which can influence the production system and trade flows; and then at (ii) linking changes in the production system to sustainability impacts. In this study, the CCA drew on • economic theory, evidence from earlier studies and data analysis; • economic (trade) models, based on available computable general equilibrium (CGE) models and

spatial trade model applications; • qualitative analysis based on the analysis of anticipated changes in the production system and trade

flows as a result of tariff reductions and identification of possible impacts of changes in NTMs; and • case studies, consultations and expert opinions.


CCA was applied using the conceptual framework developed during the inception phase (Annex 2), which pays specific attention to direct and underlying causes influencing sustainability in the sector Figure 1). Successful application of the causal chain method requires separating the trade-related causes from other causes, which implies adopting a “systems model” of all the main factors affecting sustainability of forestry. A conceptual framework for the SIA in the forest sector was developed and is presented in a graphical form in Annex 1 (see also the Inception Report). Figure 1 Basic Principles of the Causal Chain Analysis3

Trade measure or scenario:changes in tariffs and NTMs

Changes in the productionsystem

Initial economic impactsinfluencing relative prices,

incentives and opportunities

CCA

CCA

Economicimpacts

Env. impacts Social impacts Governanceimpacts

SUSTAINABILITY

CCA CCA CCA

2.4 Country Groupings and Case Studies

Any global or regional level aggregation hides variations in sustainability impacts between countries. Importer and exporters countries are likely to respond in different ways, e.g. depending on their competitive position. On the other hand, some poor countries, with limited forest resources, may be particularly vulnerable to increased product prices. Especially the environmental and social dimensions are relevant at the local level. The country groups (Table 2) are relevant but they can also hide a lot of variation in relation to forestry issues. For example, the EU includes some of the leading forest product exporting countries (e.g. Sweden, Finland, Germany, Austria) and also major importers (e.g. Germany, the United Kingdom, Italy, France, the Netherlands, Belgium). Also, amongst the developing countries there are major forest product producers and exporters and also import-dependent forest-poor countries. Therefore, the SIA looked at the impacts by following country groupings:

3 Note that governance can also be viewed at a higher level, where it would influence the production system and

associated economic, social and environmental impacts.


• Major developed forest product importer: EU, the United States and Japan. • Major developed country forest product exporter: e.g. the United States, Canada, Austria, Finland,

Sweden, Norway and New Zealand. • Developing country exporter/producer: Indonesia, Malaysia, China (also a major importer), Brazil,

Cameroon, Democratic Republic of Congo, Papua New Guinea, etc. • Developing countries with poorly developed forest sector (very limited exports): Sudan, Ethiopia,

Somalia, Tanzania, North African or Middle Eastern countries. The emphasis of the analysis was on the developing countries for two main reasons. First, the tariffs are already very low or non-existent in developed countries while in developing countries tariffs can still be high. Second, the main sustainability issues (deforestation and forest degradation) are major issues especially in developing countries. The screening phase indicated that the main impacts due to further trade liberalisation are likely to be felt in developing countries. To capture potential differences in impacts between different countries or groups of countries a number of case studies were undertaken. The following criteria were used in the selection of the countries: • importance of countries as producers, importers or exporters of forest products; • the trade structure of the country (taking into account the export or import dependence); • regional coverage; the case studies should represent different continents; • sustainability issues: major forestry countries, where deforestation and unsustainable forestry are of

special concern, should be covered to the extent resources allow; and • availability of data and overall feasibility with regard to time and funding resources available. The following five countries were selected: Brazil, Indonesia, Tanzania, Mexico and Ecuador. Stakeholder consultations were carried out in Brazil and Indonesia. Sixty-seven (67) stakeholders in Brazil and twenty-seven (27) in Indonesia, representing industry associations, environmental NGOs, government departments and research organizations, were contacted using emails, phone calls and personal interviews. Personal contact was the most common way of consultation in Indonesia (see MTR Annex 6 for the list of contacted stakeholders). Stakeholders were identified using the past FLEGT consultation stakeholder list as a starting point complemented with Savcor Indufor’s own contacts and stakeholders proposed e.g. by national government agencies and NGOs. It is important to note that especially in Brazil most contacted stakeholders did not respond 8even after repeat contacts) due to various reasons. In general, stakeholders, even in government departments, found trade liberalisation issues quite complex, and had consequently difficulties in responding to questions. Many mentioned that they were too busy to respond properly. For a number of contacted NGOs trade liberalisation issues appeared to be remote; their agendas were more about national and local environmental issues. It is apparent that proper stakeholder consultation in an area as difficult and complex as trade liberalisation, will require enhanced awareness and capacity building and more time to enable stakeholder dialogue. No stakeholder consultations were carried out in Mexico, Ecuador and Tanzania but extensive use was made of already existing case studies and other information on these countries collected. The available case studies had involved stakeholder consultations, including workshops and interviews, which means that also these desktop case studies contain stakeholder perspectives. Brazil and Indonesia (representing the Developing Country Group) cover two continents, are amongst top producers and exporters of tropical wood products, and cover the entire range of forest products from roundwood to paper and secondary processed wood products (SPWPs). Further, they contain a large proportion of the world’s tropical forests and remaining biodiversity. They also experience some of the highest rates of deforestation and forest degradation in the world. Indonesia’s wood production is driven very much by exports while in Brazil most of the production is destined for domestic consumption.


Tanzania represents the Least Developing Country group and a country with a weak industrial structure, very limited exports and dependence on value-added products. Tanzania also contains valuable biodiversity e.g. in the Eastern Arc region (Usambaras). Mexico represents Central America and a group of developing countries with a forest sector driven mainly by domestic consumption and experiencing problems with deforestation and forest degradation and forest governance. Ecuador represents a small, forested country with limited international trade. Both Mexico and Ecuador have particularly valuable biodiversity resources, which are threatened by deforestation and forest degradation. The authors are fully aware of the need to include more case studies in order to obtain a better understanding of possible sustainability impacts in various local situations. The resources made available for the exercise did not, however, allow for this. Russia and China and possibly Baltic countries would be good candidates for additional case study countries. Such additional information would unlikely change the main conclusions of this SIA but it would be particularly useful when support programmes and measures are designed to strengthen national governance systems to mitigate any negative and enhance any positive environmental and social impacts in specific countries. 2.5 Mitigation and Enhancement Measures

Mitigation and enhancement measures are categorised as follows: • trade-related measures, which can be integrated into the trade agreement or regional/ bilateral trade

agreements; • international and regional measures to improve the policy environment and strengthen national

regulatory capacity in forest-related trade and sustainable forest management in general (improving forest governance);

• national sectoral policy measures to remedy market imperfections; and • national extra-sectoral policy measures aimed e.g. at improving the functioning of the markets and

eliminating perverse incentives. 3. BASELINE TRENDS IN THE FOREST SECTOR

3.1 Trends in Forest Resources

The Inception Report and Mid-term Report and Chapters 3.2, 3.3, 3.4 and 5.1 contain descriptions of baseline economic and trade as well as sustainability trends. In below, a summary description of forest resource trends is provided. The forestry sector produces a multitude of end-products, intermediate products (raw material) and a wide range of services to meet both local and global needs. Products range from wood and non-wood forest products used to meet subsistence/household needs to value-added products such as joinery, furniture and high quality special papers. Forests also provide various environmental (biodiversity, carbon sequestration, soil and water conservation, etc.) and social as well as cultural and spiritual services, whose importance and associated threats and opportunities vary between countries and between regions and groups even within countries. Forests occupy a large share of the world’s land area (30%). The world has about 3.9 billion ha of forests, of which 95% are natural and 5% are plantations. The largest proportion of the world’s forests is in the tropical zone (47%), followed by the boreal (33%), temperate (11%) and sub-tropical (9%) zones (Figure 2). The area of planted forests has increased rapidly since the early 1980s, and in 2000 covered about 187 million hectares. About 62% of the plantations are in Asia, 17% in Europe, 9% in North and Central


America, 6% in South America, and 5% in Africa (FAO 2003). Plantations are an increasingly important source of industrial roundwood despite the relatively small area covered by plantations. Globally about 50% of the plantations are for industrial uses and one quarter for fuelwood, soil conservation, etc. Figure 2 Global Distribution of Forests

Africa16%

Asia14%

North and CentralAm erica

14%

Oceania5%

South America25%

Europe27%

Source: FAO (2002) Countries with most natural forests include Russia, Brazil, Canada, the United States, China and Indonesia. Most of the tropical rain forests are in South America (58%), followed by Africa (24%) and Asia (17%). Nearly all temperate and boreal forests are located in Europe, North and Central America and Asia (FAO 2000). Within the tropical zone, three countries – Brazil, Indonesia and the Democratic Republic of Congo – account for more than 50% of the closed natural forest area and regarded as biodiversity hotspots. These countries are actively involved in international forest product trade, and are thus of special concern to this study. Increasing forest areas have been put aside for conservation and protection purposes. The share of protected forests of total forest area range from 7.5% to 13.5% depending on the definition of a forest and a protected area (Annex 2). Deforestation and forest degradation are recognised amongst the most important global and regional environmental problems (UNCED 1992, Dudley et al. 1995). The reduction in the forest cover, i.e. deforestation, can be used as a sustainability indicator (a relatively crude but still quite a telling proxy). Deforestation is related – although not always closely - to the capability of forest resources to provide timber and non-wood forest products (NWFPs), and various environmental services and social benefits, including biodiversity and watershed conservation. Impacts of deforestation and forest degradation include: • generation carbon dioxide equivalent to 20% of the global emissions from fossil fuels (IPPC 2000); • major causes of biodiversity loss worldwide; the bulk of the global biodiversity is in forests

(Rodgers 1996); • deterioration of soil and water resources; and • reduction in the long-term productive capacity of land causing economic losses, endangering

sustained (bio) energy supply and threatening the livelihoods of hundreds of millions of forest-dependent people.

The global annual average deforestation rate is about 9.4 million hectares or 0.22% per year contrasted with 0.46% in the tropics (FAO 2001). In non-tropical areas, such as the USA, China, Europe, Russia, Japan and Canada, the forest area expanded annually about 2.9 million ha in the 1990s.


The extent of certified forest areas managed sustainably is one indicator of the quality (sustainability) of forest management. The area under certification has increased rapidly. As of June 2004, certified forests amounted to an estimated 183 million hectares in total, equalling about 5% of the total forest area. Most of the certified forests (more than 90%) are in developed countries. The least progress has been made in countries, which are at most risk from unsustainable utilisation. These countries may also be more vulnerable to the possible negative impacts of forest products trade liberalisation. 3.2 Production and Consumption Trends

3.2.1 Production

Forest-based products are divided into (i) wood and wood-based products, and (ii) non-wood forest products (NWFPs). Wood-based products are traded as roundwood or chips; sawnwood; wood-based panels; pulp and paper products; and further processed, or secondary processed wood products (SPWPs), e.g. wooden furniture and builders’ joinery and carpentry. In 2000, the world production of roundwood was 3.35 billion m3. The share fuelwood was 53% and industrial roundwood 47% of the total production (FAO 2002). In 2000, industrial roundwood production reached about 1.6 billion m3. The largest producers of industrial roundwood are the United States, Europe, Canada and South America. Production in tropical countries has gown faster than in non-tropical countries increasing their share of total production from 8% in 1961 to 18% in 2000 (FAO 2004). The production of forest products, measured in roundwood equivalent (rwe), has grown steadily at 1.1% since the 1960s. The growth has been fastest in paper and panel products. The share of value-added products of total production as a whole has been increasing in the 1990s, reflecting increased income levels. Most of the traded wood originates from natural and semi-natural managed forests, but plantations are becoming an increasingly important source of supply (e.g. Sedjo & Simpson 1999). In the year 2000 forest plantations were estimated to supply 35% of global roundwood. The share can increase to 44% by 2020 according to ABARE & Jaakko Pöyry (1999). Developed countries dominate the global production of industrial forest products. North America, few European countries, China and Japan dominate the global production of industrial forest products, North America being the leading producer and exporter. The EU (mainly due to the Nordic countries) is also a major global centre of production. Brazil and Indonesia are major industrial producers among the developing countries. About two thirds of industrial wood comes from temperate forests. New Zealand, Australia, South Africa, Chile, Brazil and Indonesia supply large quantities of wood from industrial plantations. Brazil, Indonesia, China and Malaysia are major producers of industrial forest products, including further processed forest products, among the developing countries. 3.2.2 Consumption

The consumption of all forest products has steadily increased during the last 40 years. The growth has been fastest in wood-based panels and paper products. Industrial roundwood consumption has increased in all geographical areas, except in the former USSR and Japan. The relative growth has been fastest in South America, Sub-Saharan Africa (SSA) and Oceania. Developed countries account for over 65% of industrial roundwood consumption and 70% to 75% of product consumption. North America and Asia each account for just over one-third of current global forest products consumption. Europe follows closely (25%), while South America, Africa and Oceania are currently relatively insignificant consumer regions.


The two OECD members in Asia (Japan and Republic of Korea) account for one-third of Asia's total consumption, and China for one-third, where the growth has been rapid (UNECE/FAO 2002, 2004). The country’s huge population base, combined with a rapid economic growth and limited forest resources, will create a challenge for meeting its growing needs. Despite considerable cross-trade, the majority of the global forest product production is consumed locally, and this is even more so, when fuelwood is included in the analysis. In many countries, informal (which can be legal but not accounted for in statistics) and illegal logging exceed legal production (Brack et al. 2002). Although illegal logging is mainly for domestic consumption, in several export-oriented countries such as Indonesia, Papua New Guinea, Cambodia, Myanmar, it is a major source of exported wood (Brack et al. 2002, Contreras-Hermosilla 2002, WWF 2004). Logs from Indonesia are smuggled to serve international markets e.g. in Malaysia, Singapore, and China. China appears to have become a major target for illegal logs, its supplies originating from Indonesia, Malaysia, Burma, Laos, and the Russian Far East (e.g. Bun et al. 2004, Chunquan et al. 2004, see also the MTR). 3.3 Trends in International Trade in Forest Products

3.3.2 Overview of Trade in Forest Products

The international trade in all forest products has increased slowly but steadily during the recent decades, based increasingly on plantation wood and secondary forests. Forest products trade has doubled in 20 years, increasing from about 0.3 billion m3 (rwe) in 1980 to more than 0.6 billion m3 in 2000. The value of trade is estimated at about USD 170 billion, with about two thirds in pulp and paper (Rytkönen 2003) (Annex 3). The difference between industrial roundwood production and forest product consumption is balanced by net trade flows. The international trade in forest products has grown faster than global production (Annex 4). In 1961 the estimated proportion of processed wood production that entered international trade was between 12% and 17% depending on the product. In 2000 about 30% of production of sawnwood, panels and paper, and 20% of pulp entered international trade (FAO 2004, FAOSTAT 2004). The number of countries exporting and importing has grown, but still five leading countries account for more than 50% of the global trade. Most of the main importers are also exporters. The EU is a major net importer although it includes some of the leading producers and exporters in the world of especially paper and paperboard products. Developing countries have increased value-added production and reduced the export of sawnwood and logs (UNECE/FAO 2002, ITTO 2004). Countries such as Brazil, Chile, Uruguay and Indonesia have become important exporters of pulp and paper. Indonesia, Brazil and Malaysia are also major panel exporters. 3.3.2 Export Trends

Most of the processed exports of forest products, except wood-based panels, originate from developed countries, especially from North America, Sweden, Finland and Germany. Canada is the world’s largest exporter of forest products, accounting approximately for 19% of global forest product exports, followed by the United States. Exports from tropical countries have been relatively static as a whole, but the composition has changed from raw materials towards produced products. Tropical industrial roundwood accounts for 16%, sawnwood and pulp and paper 13%, and panels 39% of the global export value (Annex 4).


While only about 7% of roundwood harvested in tropical countries enters international trade (Sarre 2003), this hides considerable variation between countries. Figure 3 shows that the share of exports in total roundwood production has increased up to about 30% for the non-tropical wood exports and, in the case of tropical products, the share has remained more or less at the same level at 5%. In Indonesia, Malaysia, and several West and Central African countries, the proportion traded is high. Malaysia, Gabon and Papua New Guinea are the three largest exporters of tropical logs (UNECE/FAO 2002). Africa continues to export a significant volume of logs (34% of log production and 48% of total export volume). Malaysia, Indonesia, Brazil and Cameroon dominate tropical sawnwood exports. Malaysia is the leading tropical veneer exporter, followed by West African countries (mainly Ghana and Cameroon). Indonesia, Malaysia (Sabah and Sarawak) and Brazil account for most of the tropical plywood exports. The export of secondary processed wood products (SPWPs) has grown faster than that of primary products and this is predicted to continue (UNECE/FAO 2002). China, Indonesia, Malaysia, Thailand, Brazil and the Philippines are leading exporters of tropical SPWPs. China has emerged as a major exporter of wooden furniture and many other wooden SPWPs (UNECE/FAO 2004). China has also emerged as a significant exporter of plywood, e.g. to the United Kingdom, based on imported logs and sawnwood. Questions have been raised about the sustainability and legality of some of the log imports to China (Bun et al. 2004, Forest Trends 2004). Figure 3 Share of Wood Product Exports (rwe) of Total Roundwood Production

in 1961–2000

0%

5%

10%

15%

20%

25%

30%

35%

1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000

Non-tropical

Tropical

Source: IIED (2003) based on the FAOSTAT on-line database Source: FAO based on the FAOSTAT on-line database (2002) 3.3.3 Import Trends

The total (import) value of global trade in (primary) forest products was at USD 127 billion in 2001 and the value of traded SPWPs about USD 40 billion. The developed countries dominate international trade, the Unites States, Japan, and Canada accounting for two thirds of the global imports. Non-tropical countries remain net importers of wood products despite significant exports. EU is a major net importer of forest products and West and Central Africa are the main sources of its tropical log supply. EU is the second largest market for sawnwood and plywood from Asia (FAOSTAT 2002).


EU accounts for almost 50% of the Russia’s trade in sawnwood and plywood. The importance of imported tropical logs for EU has been declining rapidly (Figure 4). EU imports the majority of logs from Russia while only 30% is tropical. Total tropical sawnwood imports by EU countries declined by almost 11% in 2000. The Netherlands is the largest importer of tropical sawnwood in the EU (UNECE/FAO 2002). China has emerged as the world’s largest importer of industrial roundwood and tropical sawnwood (UNECE/FAO 2004). Between 1997 and 2002, the annual import value of forest products more than doubled and the volume tripled. The total imports of timber, pulp and paper products raised in volume from 40.2 million m3 in 1997 to 95.1 million m3 in 2002. The largest importer of industrial roundwood in the world since 2001, China is now second only to the United States in total imports of forest products. Some of the increase in imports is attributed to reduced import tariffs (Forest Trends 2004). Japan and China account for about 40% of the tropical timber trade (rwe). The main log sources for Japan are Canada, the United States, Russia and Malaysia. China gets most of its logs from Russia, Malaysia, New Zealand, Papua New Guinea and Gabon (FAOSTAT 2002, Forest Trends 2004). Figure 4 demonstrates the declining import share of tropical logs in the EU and Japan, and the increasing role of China from a global perspective. China, Thailand, Japan, and the Netherlands are the leading importers of tropical sawnwood (ITTO 2002, FAOSTAT 2002). Indonesia, Russia and Malaysia are main sources of sawnwood for China. The same countries, together with North America, supply most of the sawnwood to Japan. The official statistics do not include illegally traded (smuggled) logs. In addition, part of the reported trade also comes from illegal sources. According to SCA & WRI (2004) illegal logging may represent about 8 to 10% of the global production and trade of wood products (coming from suspicious and therefore likely illegal sources). The same source estimated respective output value at USD 22.5 billion and the trade value at about USD 4.9 billion (imports). Trade value was relatively evenly shared between roundwood, sawnwood and plywood. The recent impact assessment of the EU’s Action Plan for Forest Law Enforcement, Governance and Trade (FLEGT) timber licensing scheme concluded that annual illegal log supply to the EU could be in the range of 2.6 to 4 million m3 (Indufor 2004). Figure 4 Import Shares in Tropical Logs in 1980-2000

0

1 0

2 0

3 0

4 0

5 0

6 0

1 9 8 0 1 9 8 2 1 9 8 4 1 9 8 6 1 9 8 8 1 9 9 0 1 9 9 2 1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0

%J a p a nC h in aE UO t h e r

Source: Rytkönen (2003) based on Annual Reviews and Assessments of ITTO, FAOSTAT 3.3.4 International and Intra-regional Trade Flows

The largest trade flows are between Canada and the United States; from North America to Asia and Oceania; and from Europe to Asia and Oceania. In Asia and Oceania, a large proportion of the imports into the region is accounted for by imports into Japan and China. The Pacific Rim is the main area where developing countries export their forest products to developed countries. The volume of exports


of forest products from African countries is small in comparison to this trade. Figures 5-9 display interregional forest products trade flows by main product categories. Much of the trade in forest products is intra-regional, fuelled by the proximity of markets and regional trade agreements such as NAFTA, MERCOSUR, the Closer Economic Relations Agreement (between Australia and New Zealand) and the expansion of the EU. Intra-regional trade in forest products is increasing in all continents. About 80% of Europe’s trade is between European countries, 80% of North American trade is within the region, and 85% of the exports from Asian countries are to other Asian countries. Figure 5 Inter-regional and Intra-regional Net Trade of Forest Products in 2000

[in million USD] © Foreco Oy

Source: UN Comtrade, WFSE/EFI, FAOSTAT Figure 6 Interregional Net Trade in Wood Pulp in 2000


Source: UN Comtrade, WFSE/EFI, FAOSTAT


Figure 7 Interregional Net Trade in Paper in 2000


Source: UN Comtrade, WFSE/EFI, FAOSTAT Figure 8 Interregional Net Trade in Wood-based Panels in 2000


Source: UN Comtrade, WFSE/EFI, FAOSTAT


Figure 9 Interregional Net Trade in Sawnwood in 2000

Source: UN Comtrade, WFSE/EFI, FAOSTAT The largest trade flow of industrial roundwood occurs between countries on the Pacific Rim. Six countries (the United States, Russia, Chile, Australia, Malaysia and New Zealand) export industrial roundwood mainly to Japan, China and Republic of Korea. The other major industrial roundwood trade flows are from the United States to Canada and from Russia to the Nordic countries. In 2001, the three largest trade flows of tropical logs were from Malaysia to China and to Japan, and from Indonesia to China. Sawnwood exports from Canada to the United States, from North America to Japan, and from Sweden and Finland to the rest of Europe account for most of the world trade. Russia and Malaysia are significant non-OECD sawnwood exporters. Largest trade flows of tropical sawnwood are from Indonesia to China, and from Malaysia to Thailand and China. In wood-based panels two trade flows are significant: from Malaysia and Indonesia to China, Japan and Republic of Korea (mostly plywood); and from Canada to the United States (mostly particleboard). Trade in tropical plywood and veneer is primarily between Asian countries, with imports by Japan from Indonesia and Malaysia accounting for 46% of the world total (FAOSTAT 2002, UNECE/FAO 2002). The trading patterns for pulp are complex. The largest individual trade flow is from Canada to the United States. Significant trade flows also occur between these two countries and Europe; and Sweden and Finland and the rest of Europe. Canada, the United States, Brazil and Chile are major exporters to Asia. Brazil and Chile are also significant exporters to the United States.

The trade patterns in paper products are largely similar to the trade flows in sawnwood: Canada exporting to the United States; North America to Europe, and Finland and Sweden to the rest of Europe. Japan, China and India are major consumers but these counties are also important producers. Industrial roundwood and paper products can be regarded both as intra-regionally and inter-regionally traded products. Particleboard and fibreboard are mainly local products, and when traded it is mainly intra-regional. Veneer, plywood and sawnwood are mainly intra-regional products (Table 3).


Table 3 Main Wood Product Trade Flows Between Regions

Product category Main trade flows (based on volume) Industrial roundwood Intra-Europe

Former USSR to Europe Former USSR to East and South Asia Increasing intra-regional trade from other Asian countries to China

Sawnwood Intra-North America Intra-Europe Intra-East and South Asia

Panels Intra-East and South Asia Intra-Europe Intra-North America

Paper North America to East and South Asia Intra-Europe Intra-North America

Source: FAO 2004 based on Peck (2001) and FAOSTAT (2002) 3.4 Baseline Tariffs and Non-Tariff Measures Concerning Forest Products

There are in principle three types of trade restrictions: tariffs, non-tariff measures (NTMs), and trade impediments, which include export restrictions (Bourke & Leitch 2000, 2003). The discussion on international trade regime in forest products tends to focus on tariff and non-tariff measures especially in relation to the WTO (previously GATT) trade negotiations. In addition to the WTO agreements there are also other instruments such as multilateral environmental agreements, commodity agreements (e.g. ITTA), regional and bilateral trade agreements, and various EU trade policies and instruments, which together form the forest-related trade regime. Regional trade and economic agreements tend to have similar impacts as liberalisation through WTO. 3.4.1 Current Tariffs on Forest Products

The import tariff rates on forest products were already about 50% below the average for industrial products before the Uruguay Round (Table 4). The Uruguay Agreement brought the trade weighted average tariff further down from 3.5% to 1.1% in 1994 (Barbier 1996). Separate forest product negotiations, carried out during the Uruguay Round, resulted in a zero-for-zero agreement to eliminate tariff on pulp and paper products by 2004. This initiative was agreed by the United States, the European Union, Finland (later a member of EU), Canada, Japan Korea, Austria, New Zealand, Hong Kong and Singapore. For all furniture, including wooden furniture, key countries reached a zero-for-zero agreement. In summary, the tariff rates faced by developing countries in developed countries and the rates faced by traders in the developed countries are low. Further, most developing countries enjoy trade benefits provided by GSP schemes and are members of bilateral and regional trade agreements. There are, however, exceptions depending on the product and country. The rates for e.g. panel products and SPWPs can still be more than 5% in developed countries and even 20-35% in developing countries (e.g. India, Malaysia and Thailand). Developing countries themselves often have high rates for products of industries that they have wanted to protect. Tariff escalation is still common both in the developed and developing (e.g. Bourke & Leitch 2000, Rice et al. 2000, Rytkönen 2003). The extent of tariff escalation is country and product specific. Value added products (panel products such as plywood, paper products, and especially builders’ joinery and carpentry) still face, on average, higher tariffs than less processed products such as logs, sawnwood and veneer in developed countries (Figure 10 and Figure 11). GSP benefits, in principle, do not apply to those forest products that still have higher tariffs, adding to the tariff escalation problem.


Table 4 Agreed Tariff Rates for Developed Countries Pre- and Post-Uruguay (Weighted MFN and GSP Rates)

Product Pre-Uruguay rate %

Post-Uruguay rate* %

Reduction %

Wood products (weighted avg.) 2.0 1.1 43 Wood in rough 0.0 0.0 0 Wood-based panels 9.4 6.5 31 Semi-manufactures 0.9 0.4 50 Wood articles 4.7 1.6 67 Paper products (weighted avg.) 3.5 0.0 99 Pulp and waste 0.0 0.0 0 Paper and paperboard 5.3 0.0 100 Printed matter 1.7 0.3 83 Paper articles 7.3 0.0 100 *To be implemented by 2004 Source: Bourke & Leitch 1998 Figure 10 Tariff Escalation: Wood Products in Developed Markets

US

A

Can

ada

EU

-15

Japa

n

Oce

ania

ra w m a t e r ia lss e m i-fin is h e d

fin is h e d05

1 01 5

2 0

2 5

3 0

3 5

4 0

%

Source: Rytkönen (2003) based on UNCTAD TRAINS (applied tariff rates) Figure 11 Tariff Escalation: Wood Products in Developing Markets

Sout

h As

ia

N.A

fr &M

.Eas

t

Latin

Am

eric

a

Sub

-S. A

frica

Asia

n N

IC

ra w m a te ria lss e m i-fin is h e d

fin is h e d05

1 01 52 02 53 03 54 0

%

Source: Rytkönen (2003) based on UNCTAD TRAINS (applied tariff rates)


As a conclusion, considerable room still exists for tariff liberalisation especially in manufactured products. However, the scope for tariff reductions in the developed countries is rather limited, contrary to most developing countries, which still restrict trade of both raw materials and processed products. The overall level of applied tariffs is clearly higher in developing countries than in the industrialised regions. South Asia, North Africa and Middle East have the highest rates. For example India has tariffs rising from 5% for unprocessed wood to 25% and 35% for semi-processed and processed wood (ITTO 2004). If tariff escalation is eliminated or removed, it would likely have more impact on South-to-South trade, because of larger reductions in tariffs and because many developing countries already enjoy low preferential tariffs or no tariffs at all for their exports to developed countries including EU (Table 5). However, these benefits may not accrue to all forest-rich developing countries, because of differences in access to capital (including foreign investment), transport infrastructure, and available technology. Malaysia, Indonesia, Thailand and Brazil appear to enjoy a competitive edge, because their exports are already well established in many developed countries. Table 5 Agreed EU MFN Tariff Rates by Main Wood Product Category

Product 1997 2004* Sawlogs and pulpwood 1.0 0.7 Sawnwood 2.0 1.3 Veneer and plywood 8.2 5.5 Particleboard 8.2 5.5 Fibreboard 8.2 5.5 Newsprint 4.5 0.0 Printing and writing paper 7.2 0.0 Other paper and paperboard 5.7 0.0 *Based on the Uruguay round commitments Source: Zhu et al. 2002 3.4.2 Non-Tariff Measures Influencing Trade in Forest Products

Whilst great progress has been made in reducing import tariffs, the use of non-tariff measures (NTMs) has increased over time. Because import tariffs for forest products are already, on average, low, various NTMs have become relatively more influential in impacting trade. NTMs include both formal institutional measures (policies, laws, regulations, practices) designed to control trade, and other (than tariff) restrictions that aim at controlling trade to meet various objectives. A broad definition includes also subsidies that directly or indirectly impact trade. NTMs are quite difficult to deal with, because there are so many of them; they vary by country, by product and even over time; and their application is not always transparent and consistent (ITTO 2004a). It is important to recognise legitimate regulatory measures based on policy objectives such as public safety or environment and the use of measures to establish unjustified barriers to trade. The Uruguay Round advanced rules applicable to NTMs, specifically the agreements on Technical Barriers to Trade (TBT), Sanitary and Phytosanitary Standards (SPS), and Subsidies and Countervailing Measures (Subsidies Agreement) to bring some clarity and uniformity on how NTMs are applied. The following NTMs have been introduced largely because of environmental or safety objectives:

• sanitary and phytosanitary measures; • voluntary certification and labelling; • technical standards and regulations (e.g. to ensure adequate strength properties for construction; • government procurement e.g. to ensure that wood used in public constructions works originates

from a sustainable source; and • log export bans to protect harvesting natural forests (separate from log export bans to stimulate the

expansion of domestic capacity in value-added production).


A comprehensive study on NTMs by APEC (Forest Research 1999) concluded that export bans, quotas and licenses have the largest impact on forest products trade. According to this study, environmentally motivated NTMs have constrained trade but not yet to a significant degree. A recent WTO report suggests that NTMs in the forest sector are not more common than in any other sector (WTO 2003). Based on the review of the WTO database both developed and developing countries “complain” about some NTMs restricting unnecessarily trade in forest products. NTMs have been growing and becoming more diverse and wide-ranging (Table 6). There are differences between regions and groups of countries in terms of what kind of NTMs are used: • Developed countries: standards (e.g. Japanese Agricultural and Industrial Standards), government

procurement (e.g. the Netherlands, Germany, the United Kingdom, some states in the United States), labelling (Canada, the Unites States, EU, Japan, Australia), sanitary and phytosanitary measures especially for softwood and non-wood forest products (e.g. Australia, New Zealand, the United States, Canada, EU), quotas (EU, the United States).

• Developing countries: export taxes (e.g. Indonesia, Cameroon, Ghana), log export bans (e.g. Brazil, Philippines, Thailand, Cambodia, India, Laos, Sri Lanka), import charges and licensing (e.g. India, South Korea), quotas on log exports (e.g. Cameroon, Gabon, Malaysia).

Figures 12 and 13 illustrate that NTMs in developed and developing countries can be frequent. Developing countries have a steeper NTM barrier to climb to have access to markets than developed. This is especially true for developing countries trying to trade with the rich Quad (Canada, EU, Japan and USA) markets. Table 6 Trends in Individual Trade Measures Affecting Forest Products Trade

Direction of movement

1960s-1979 1979-1985 1985 – 1992 1993 to 2002 Import Regulations Tariff Declining Declining Declining Declining Tariff-quota Increasing Static Static Static Total prohibition Increasing Static Static/increasing Static/declining Conditional prohibition Increasing Static Static/increasing Static/declining Quota Increasing Static Static/increasing Static Import licence Increasing Static Static/increasing Static Import procedures Increasing Static/increasing Static/increasing Static Variable levy N.A. N.A. N.A. N.A. Anti-dumping/countervailing duties Increasing Increasing Static Static* Voluntary export restraints N.A N.A N.A. N.A. Price controls N.A N.A N.A. N.A. Standards Increasing Static/declining Increasing Increasing Government procurement Increasing Static Declining Increasing Marking and packing Increasing Static/declining Static/increasing Increasing Export Regulation Price controls, levies, taxes, etc. Increasing Increasing Increasing Static/Increasing Quotas Increasing Increasing Increasing Static/Increasing Prohibitions (bans) Increasing Static Increasing Increasing

Two new anti-dumping cases related to China have emerged recently: China’s export of bedroom furniture to the USA and okoume plywood to the EU N.A.= little or no importance Source: Based on Bourke 2002


Figure 12 NTMs Facing Developing Country Wood Product Exports

0

5

1 0

1 5

2 0

2 5

3 0

Quad c

ountr

ies *

Latin

Ameri

ca

South

Asia

E.Asia

& P

acific

M.East &

N.A

frica

Europe

& C

.Asia

S-Sah

aran A

frica

[% Frequency of non-tariff measures]

Source: Bora, et al. 2002

Figure 13 NTMs Facing Developed Country Paper Article Exports

0

5

10

15

20

25

30

Quad c

ountr

ies *

Latin

Ameri

ca

South

Asia

E.Asia

& P

acific

M.Eas

t & N

.Afric

a

Europe

& C

.Asia

S-Sah

aran A

frica

[% Frequency of non-tariff measures]

Source: Bora, et al. 2002 Log export bans and prohibitive export taxes, whose removal is part of the full trade liberalisation scenario (as an option), can be found in a number of countries e.g.: • Cameroon, Ghana, in Africa, China, Philippines, Thailand, Cambodia, India, Laos, Sri Lanka in

Asia, Brazil. There is an export restriction on logs and sawnwood in Canada, and log export ban from state lands in the United States.

• In Europe and Oceania there are no log export bans. According to a recent comprehensive ITTO report (2004a) on NTMs from the viewpoint of tropical forest product producers, revealed that most of the interviewed producers felt that technical barriers to trade and environmental market requirements are increasing. The study could not find evidence that TBTs are used intentionally as a barrier to trade e.g. to protect local industries on such a scale that it would be easily recognisable. However, producers felt that tropical timber producing countries are disadvantaged in meeting the requirements for new TBTs and especially for certification. Lack of harmonisation of standards, building codes and other requirements create difficulties in meeting varying requirements and reduce competitiveness of tropical forest products.


Apart from Malaysia, Brazil and Indonesia, most tropical timber producing countries are relatively small and dominated by small and medium sized firms. They have difficulties in meeting international requirements, which may result both in closing down such enterprises and diverting exports to less discerning countries. Producers are also concerned of increasing government/public sector procurement policies and rules that accept only FSC certified forest products. There are three main difficulties with standards, building codes, quality certification and other requirements. First, not knowing early enough about requirements to influence them. Second, differing requirements among importing countries. Third, not having sufficient technical capacity and infrastructure either at a national or firm level to deal with the requirement. International standards such as International Standards for Phytosanitary Measures (ISPM) 15 are making it easier to meet requirements because country requirements are becoming more uniform (Table 7). Table 7 NTMs Related to Tropical Timber and Their Impacts

Non-tariff measures Products affected Capacity to deal with NTM Consuming Region: North America

- Grade stamp certification - Phytosanitary measures ISPM 15 - Government procurement policies

favouring FSC-certification, or not using tropical hardwoods

- Increased security measures in the US affecting customs procedures

- Sawnwood and panel products

- Wood packaging and crating material

- All products used especially in construction

- All products

European Union

- CE marking based on the Construction Products Directive

- SPS ISPM 15 - Government procurement policies

favouring FSC-certification or any single standard

- Construction products - Packaging and crating lumber - Especially wooden

construction products

Japan - JAS standard for formaldehyde emissions

- Japan Industrial Standards (JIS) on fibreboard and particleboard

- Plywood, particleboard, MDF, structural panels, flooring

- Fibreboard and particleboard

Australia - Public sector procurement policies favouring FSC-certification, or not using tropical hardwoods

- PSP ISPM

- Wooden construction products

- Packaging and crating lumber

China - China has basically no tariffs or NTMs affecting logs but they apply for value-added products

- Furniture labelling scheme

- Wooden furniture

Producer Region: Latin America

Brazilian industry feels that a number of TBTs such as variety of building codes and standards are impeding trade

Major producers such as Brazil and Chile have capacity to deal with new requirements; smaller countries and in general SMEs lack capacity (accreditation systems, laboratories, etc.)

Africa Most African producers have not been greatly affected by new TBT because they export mainly logs or sawnwood. Ghana sees CE marking as a problem

- CE marking in EU affects mainly plywood

- Public sector procurement is having some impact on log exports

- TBTs will pose more challenges when countries move towards value-added processing

- Only few countries (e.g. Ghana) have adequate capacity to deal with all new requirements. Some countries are shifting exports to less demanding markets (China)

- Support will be needed targeted at less advanced countries and especially SMEs

Asia Producers see CE marking , British Standards for structural plywood, and public sector procurement polices as problematic; Japanese JIS and JAS standards

- At present mainly plywood; later on other structural products

- Procurement rules presenting concern mainly logs and sawnwood

Malaysia and Indonesia have the capacity to deal with new TBTs although these add to costs. Other countries (e.g. PNG) do not have adequate capacity (quality assurance systems, laboratories, technical know-how)

Source: ITTO (2004a)


4. SUMMARY OF CASE STUDY FINDINGS

4.1 Overview of Sustainability Impacts

The MTR contained a comprehensive description of five case studies on Brazil, Ecuador, Mexico, Indonesia, and Tanzania. In this chapter the main conclusions and recommendations are presented in a matrix form. Additionally, the case of China is discussed in Section 4.2. The case studies are described in detail in Annex 5.

The main conclusion from the case studies may sound trivial but it reflects the complexity of the situation: it is difficult to generalise impacts of further trade liberalisation because countries differ so much in terms of quality of forest governance, availability of forest resources, potential to benefit from trade liberalisation, etc. This means that also the mitigation and enhancement (M&E) measures that should be adopted would depend on the context. The case studies suggest that it may not be wise to adopt a uniform approach to trade liberalisation. The way the case study countries were selected allows drawing some conclusions regarding the impacts and some common M&E measures.

Key findings are:

• Economic effects. Increases in production (scale) due to liberalisation of trade appear to be largest in producer countries that are already in actively exporting. Indonesia and Brazil are both major producer countries, but impacts on production would be larger in Indonesia because domestic markets largely drive Brazilian production. All case study countries have tariff escalation. Removal of tariff escalation would result in closing down inefficient smaller mills. In Brazil, Indonesia, Malaysia and Thailand increase in value-added production for export would more than compensate for production losses due to increased competition from imports. Countries such as Tanzania are likely to experience overall reduction in production levels. Log export bans or high export taxes have reduced export of roundwood and promoted establishment of value-added industries (e.g. plywood in Indonesia) but also lead to inefficiency.

• Environmental effects. Environmental effects are linked to the changes in production, level of technology and especially quality of forest governance. In all the case study countries trade liberalisation magnified existing problems (e.g., illegal logging in Indonesia and parts of Brazil and Mexico). However, technologically more advanced developing countries (such as Brazil) with access to domestic capital and FDI can expand industrial production and reduce emissions and effluents by adopting environmentally friendly and more efficient production technology. Most adverse impacts are associated with overexploitation of forests (both through illegal and legal logging) resulting e.g. in biodiversity losses and soil erosion. However, in all case study countries the main causes for unsustainable development in the forest sector were primarily due to other than trade-related factors.

• Social effects. Positive impacts associated with increased trade are associated with the expansion of large and medium-scale value-added industries (Brazil, Indonesia) and increase in consumer welfare due to reduced product prices. Negative social impacts are mainly due to increased unemployment and social conflicts related to illegal logging. Based on the case studies, trade liberalisation appears to provide more benefits to larger enterprises than to SMEs.

• Cross-sectoral effects. Important linkages to agriculture trade liberalisation were identified in three out of five case study countries. In Brazil and Indonesia, the negative impacts on sustainability of forestry are so pronounced that they may well exceed impacts of trade liberalisation in forest products. The situation is likely to be similar in West African countries with export-oriented agriculture.

• M&E measures. Supporting forest certification, voluntary import licensing schemes, and providing support to strengthening forest governance systems are common to most case study countries. Environmental impacts of log export bans or prohibitive export taxes have been mixed. Paradoxically, in countries such as Indonesia, export bans and prohibitive export taxes have reduced (official) harvesting for (official) export of logs, but at the same time increased domestic demand for logs, which has resulted in forest degradation and deforestation.

• Countries and products affected. Those countries that already have value-added production and enjoy respective comparative advantage are also in the best position to benefit from further trade liberalisation. Most of the expected increase in trade would be in value-added products (panels, SPWPs and paper products) while impacts on roundwood appear limited.


Table 8 Summary of Case Study Findings

Brazil Ecuador Mexico Indonesia Tanzania Economic effects

- Impacts limited because forest sector production mainly driven by domestic demand and RTAs have already liberalised trade

- Small increases in production and export of sawnwood, pulp and plywood

- Increased trade to southern countries e.g. in Asia

No major positive or negative impacts because domestic market constraints have limited opportunities to gain from liberalisation

- Overall impacts likely small because NAFTA already liberalised trade

- Small incremental increases in imports of sawnwood and paper

- Lower consumer prices - Increased trade deficit - No major changes in production

levels

- Domestic log prices increase - Increase in industrial roundwood

production - Increased imports (e.g. pulp) and

exports (plywood, paper, pulp, ships)

- Increased trade with Asian countries

- Improvement in industry productivity

- Most economic effects insignificant or small

- New investment in production technology increase industry productivity

- Increase in imports, especially of value-added products such as paper

Environmental effects

Small impacts on biodiversity because of incremental illegal logging

Impacts uncertain but likely limited

Impacts uncertain but local increases in production due to exports may cause deforestation and deforestation in limited areas

- Negative impacts on biodiversity and soil conservation due to increased harvesting and land clearing for plantations

- Environmental impacts of log export ban unclear

- Small impacts because production impacts are small

- Possibly some increase in illegal logging causing forest degradation

Social effects - Increased employment and income in export-oriented industries

- Benefits would flow mainly to large mills

- Small SPWP mills may be closed causing unemployment

- Infringement of indigenous peoples’ rights possible if illegal logging increases

- Increased consumer welfare because of lower prices

- Other impacts uncertain but likely limited

- Positive welfare impacts because of lower products prices

- Increases in employment in export-oriented industries but also reductions in employment because of increased import competition

- Increased employment in plywood and paper industry (not necessarily in long-term)

- More benefits to large-scale industry; small enterprises

- Increased social conflicts and infringement of indigenous people’s rights due to overexploitation of forests

- Plantations may displace communities

- Increases in consumer and producer welfare because of lower import prices

- Increased employment in export-oriented industry but reduced employment because of some mill closures; net effect uncertain

- Encroachment of local people’s rights if forest exploited illegally for exports

Governance effects

Risk for small increase in illegal logging without governance strengthening

Impacts uncertain - Both positive and negative impacts

- In northern and central parts increased trade may aggravate illegal logging

- Significant increase in illegal logging

- Increased corruption - Trade liberalisation would

magnify existing problems

Impacts uncertain but some negative impact possible without M&E measures

Cross-cutting effects

Considerable negative impacts on sustainability of forestry due to conversion of forest land to agriculture as result of agriculture trade liberalisation (soy bean, beef)

Impacts uncertain - Increase in agricultural trade due to liberalisation has caused deforestation in some areas but also marginal lands can be returned to forestry due to lack of competitiveness in agriculture

Major cross-sectoral impacts due to agriculture trade liberalisation (oil palm, cocoa, bogus, plantation projects)

Impacts uncertain but agriculture expansion will likely involve forest conversion

M&E measures

- Strengthening of forest control systems and forest law enforcement

- Promotion of forest certification - Voluntary timber/forest products

licensing schemes - Sustainability - Impact monitoring

- Promotion of forest certification - Strengthening of enforcement

- Strengthening of national forest governance systems

- Monitoring of impacts of trade liberalisation

- Promotion of forest certification

- Voluntary licensing schemes - Strengthening of forest control

systems and law enforcement - Promotion of forest certification - Sustainability impact monitoring

- Strengthening of law enforcement and governance

- Promotion of forest certification - Sustainability impact monitoring


4.2 Case of China

In 2000 China had about 163 million hectares of forests, giving a forest cover of 17.5%. The share of plantations is about 47 million hectares. During the last 15 years the forest cover has been increasingly largely because of intensive plantation programmes. Despite the expansion of the plantation resource base, wood production in China has been declining since the mid-1990s mainly because of the depletion of natural forests. In 2003, domestic wood production amounted to 48 million m3. The widening gap between the domestic supply of wood and the demand for wood has been met through increasing imports of both unprocessed and process forest products. China is a major player in the global forest products market, both as a producer and importer. China is also exporting forest products (e.g. wooden furniture, panels) increasingly. China’s domestic industrial forest product market is the second largest in the world after the United States, consuming about 138 million m3 of wood (RWE) in 2003. In addition, the volume of export amounted in 2003 to an additional 35 million m3 (Chunquan et al. 2004). Exports of plywood and wooden furniture are largely based on imported logs and sawnwood. The huge population base and very rapidly growing economy and rising living standards have increased the demand for forest products especially in housing (including furniture) and infrastructure. To meet the demand for industrial forest products, China has rapidly increased its imports. In 1993-2003, China tripled its timber import volume (in RWE) up 94 million m3. Logs and sawnwood dominate the imports although also the import of pulp and paper has increased. Russia, Malaysia and Indonesia are there largest timber suppliers. New Zealand, Canada and the United States are major developed country supplier. China is increasingly sourcing wood also from countries such as Malaysia, Myanmar, Thailand, Laos, Papua New Guinea, Gabon, Cameroon, Liberia, etc. China’s trade in forest products has been primarily affected by participation in APEC, accession to the WTO, and the opening and expansion of its economy in general. Consistent with the APEC commitments, China has gradually reduced its import tariffs on forest products. China joined WTO in 2001. At the same time import quotas and licenses were revoked. Tariffs for logs, sawnwood and pulp have now been reduced to zero. However, China maintained its tariffs on processed goods such as wooden furniture resulting in tariff escalation; the more processed the good, the higher the import tariff. Tariffs for paper and paperboard range between 10% and 22% and for fibreboards and particleboard between 6.2% and 9.6% (Chunquan et al. 2004). The rapid increase in demand for forest products, introduction of a logging ban affecting more than 60 million hectares of natural forest and trade liberalisation have all influenced the import demand. China is now the world’s largest importer of industrial roundwood and tropical sawnwood and the second largest importer of forest products (UNECE/FAO 2004). How much of this increase in trade can be attributed to trade liberalisation associated with WTO membership is difficult to assess because trade was increasing very rapidly even before the accession. However, there is no question that at least some of the increase in imports is attributed to reduced import tariffs and elimination of import quotas and licensing (Forest Trends 2004). An environmental impact assessment in the forest sector of China’s WTO accession was carried out in 2004 (IISD 2004). The main findings of this assessment are summarised in Table 9 and it can be assumed that further trade liberalisation would have similar impacts. The IISD assessment considers reduced pressure on China’s own natural forests as a positive impact of trade liberalisation. Forest degradation and deforestation have definitely slowed down; increased imports have more than compensated the reduced wood supply from natural forests. However, recent announcement by the Chinese officials acknowledges that forests are still being harvested unsustainably in China resulting e.g. in floods.


Table 9 Sustainability Impacts in the Forest Sector due China’s WTO Accession

Economic effects • Increase in domestic and foreign investment in forest industry (especially in pulp and paper and wooden furniture and other SPWPs)

• Significant increase in imports of forest products (logs, pulpwood, semi-processed products)

• Manifold increase in production and export of wooden furniture • More efficient and productive forest industry due to economies of scale, and

upgrading of technology Social effects • Increased employment especially in export-oriented forest industry

• Negative social impacts (e.g. impoverishment of forest dependent communities) in countries which log illegally to export wood to China

• Reduction in employment in obsolete straw-based pulp and paper mills which are shut down for competitiveness and environmental reasons

Environmental effects

• Increased imports have reduced the pressure on China’s own natural forests (the pressure has been “transported” to other countries)

• The forests “saved” in China due to increased forest products imports have helped to maintain water resources and soil conservation services (indirect impact, pressure transferred to other countries)

• Despite more efficient and environmentally friendly forest industries, total increase in production has possible increased emissions and effluents but a more significant reduction in emissions is likely due to gradual shut-downs of polluting straw-based pulp mills

• Increased risk of alien species invasion because of increased imports of roundwood and sawnwood

• Forest degradation and deforestation with associated losses in biodiversity in some countries exporting wood to China

Governance effects • There appear to be no negative governance impact in China but increased wood imports have stimulated unsustainable forestry practices and illegal trade in forest products e.g. in Myanmar, Papua New Guinea, Indonesia, Malaysia, Africa and the Russian Far East

• The problems with illegal trade and unsustainable forestry apply only to countries which already have problems with forest governance; increased trade with China is not necessarily creating new problems but aggravating existing ones

Cross-cutting effects

• No significant cross-sectoral effects identified

Source: Based on IISD (2004) and the authors’ assessment It is difficult to generalize the sustainability impacts in the supplier countries of the increasing Chinese imports. Logs, sawnwood, chips and process products such as pulp and paper originate from countries with good track record in sustainable forest management, including e.g. the United States and New Zealand. Sustainable forest product supplies originate also from countries such as Malaysia, Brazil and Indonesia. Chunquan et al. (2004) conclude that much of China’s current offshore wood supply comes from countries where the overall forest estate is in decline. Trade statistics and various reports suggest that China is one of the major destinations for wood that may be illegal, either at a source or somewhere along the supply chain. China is gradually recognizing the problem. It has started working with Myanmar, Indonesia and Russia to control illegal trade in forest products (AFP January 18, 2005). Possible further trade liberalisation would not magnify all the same impacts, which resulted through accession to WTO. Full trade liberalisation would mean elimination of tariff escalation. This would reduce import of roundwood and sawnwood to China relative to import of value-added products. However, China’s strong local competitiveness (low labour costs, trained labour, good infrastructure, relatively high level of technology) still continues to make it difficult for developing country producers such as Gabon, Myanmar, and Papua New Guinea to benefit from increased trade with China in value added products. The main beneficiaries would be countries such as New Zealand, the United States, Chile, Indonesia and Malaysia.


5. SUSTAINABILITY ASSESSMENT

5.1 Baseline Forestry Trends

Sustainability impact assessment of WTO Doha negotiations in forestry requires establishing a baseline outlook for forest product consumption, production and trade as well as for the sustainability conditions. There are considerable problems in describing the baseline trends regarding sustainability because of huge variations in the sustainability contexts between regions and countries and even within countries; actual changes in biodiversity; and factors influencing directly and indirectly sustainability in the forest sector. As a generalization, one can conclude that e.g. in terms of biodiversity, the base line development is negative especially in tropical developing countries. The following general baseline trends in production, consumption and trade can be assumed (Barbier 1996, FAO 1999, Brooks et al. 2001, Kangas & Baudin 2003, UNECE/FAO 2003, UNECE/FAO 2003, FAO 2004): • Production, domestic consumption and trade will continue to rise but growth rates in consumption

of forest products will continue to decline especially in developed countries. • Trade in forest products will continue to grow faster than production. • Substitution of wood for other material will continue in some end-use markets, and factors

impeding increased use of wood are difficult to change (e.g. standards and building codes). In many developed countries, municipalities and cities are imposing standards for environmental reasons, which favour the use of other materials than wood e.g. in public construction. Changes in consumer preferences may also favour materials such as plastic and metal e.g. in the furniture market.

• Trade in roundwood will continue to decline and trade in value-added products will continue to increase (although there will be regional differences).

• Consumption will be driven mainly by population and economic growth, changes in consumer preferences (including environmental quality, e.g. demand for certified forest products), and competitiveness of forest products against substitutes.

• China will continue to increase both its consumption and exports of forest products; tropical timber markets will be increasingly driven by China’s imports of logs and other wood raw materials.

• Deforestation is likely to continue more or less at the same rate as in the past (0.22%/a in the non-tropics and 0.46%/a in the tropics with associated environmental impacts (losses in biodiversity including species and habitats, fragmentation of habitats, reduced soil conservation services, etc.).

• The importance of plantations as a source of wood will continue to increase (see Chapter 2.2). • Limited change in real prices of forest products (Buongiorno et al. 1999, FAO 1999); however

prices may increase both as a result of increasing scarcity (wood from natural forests) and if ways of incorporating the externalities in the wood price can be found.

The baseline trends for main forest products are: • Industrial roundwood. Global industrial roundwood trade in the future will continue to be

concentrated around the Pacific Rim. China, Japan, and the Republic of Korea will continue to have significant levels of demand for imported industrial roundwood. The weight of the various exporting countries is expected to shift from the United States to the Russian Federation in the northern hemisphere and from South-East Asia and developed Oceania to less developed Oceania and South America.

• Sawnwood. No major changes in the trade flows of sawnwood are expected during this decade. Most international trade in sawnwood will continue to take place between developed countries. A greater share of exports to China is also likely to come from outside Asia.

• Wood-based panels. Trading patterns in wood-based panels are also expected to remain more or less the same in 2010.

• Pulp and paper. Pulp and paper exports from South America (Chile, Argentina and Brazil) will continue to Asia and the developed countries. In Asia, Indonesia has the industrial capacity but suffers from wood scarcity. China’s share of global production and consumption of pulp is


predicted to increase from about 15% in 1996 to about 18% in 2010. In terms of value, pulp and paper industry will continue to attract most of the FDI in the forestry sector. Investments from North to North (e.g. Nordic companies in Europe and the United States) and North to South (especially American and Nordic companies in South-East Asia and Latin America). Recently there have also been South to South and South to North investments (e.g. South African pulp and paper companies expanding their operations in the global market). An Indonesian pulp and paper company has also invested into a joint venture in China. FDI will increase in Russia.

Forest product demand forecasts are available to form a baseline scenario, assuming no further trade liberalisation (Zhu et al. 1998, Brooks et al. 2001, Zhu et al. 2002, Kangas & Baudin 2003). The projections are not fully comparable because of differences in GDP growth assumptions and modelling periods and methods. However, the results are quite robust with similar basic conclusions. The global demand for all forest products is expected to increase but at a lower rate than in the past varying from 1%/a (sawnwood) to 4% (paper) until 2010 (see Table 10 based on Zhu et al. 2002). The UNECE/FAO projections for the EU in 2000-2020 range between 0.8% and 2.1%/a, depending on the product (Table 11). Table 10 Actual and Projected World Consumption of Forest Products up to 2010

Product 1997 Actual mill. m3

2000 Projected mill m3

2010 Projected mill. m3

Annual growth rate 1997-2010

% Industrial roundwood 1 537 1 667 1 872 2.2 Sawnwood 442 459 530 1.4 Wood-based panels 154 168 231 3.2 Paper and paperboard 294 331 500 4.2

Source: Zhu et al. 2002 Table 11 Production, Consumption and Trade Projections for Europe in 2000-2020

EU/EFTA CEEC CIS GDP growth, %/a 2.2 4.3 4.6 Consumption growth (%/a) Sawnwood Wood-based panels Paper and paperboard

0.8 1.6 2.1

2.0 3.0 4.2

4.4 5.1 5.2

Production growth (%/a) Sawnwood Wood-based panels Paper and paperboard

0.9 1.8 1.8

2.0 2.8 3.8

4.5 5.0 5.2

Net trade, million Sawnwood (m3) Wood-based panels (m3) Paper and paperboard (mt)

-7.7 0.5 3.6

14.8 1.6 -4.9

32.5 4.3 6.8

Source: Kangas & Baudin 2003 The tendency is towards declining growth rates for most forest products because forest product markets in developed countries are considered largely mature. However, average rates hide variation between countries. Many developing countries will continue to experience dynamic growth. China, with a huge population base, low per capita consumption and rapid economic growth, represents a case for high relative and absolute growth in demand for most forest products. Regionally, the growth will be fastest in Asia. However, in absolute terms, the United States, China, Japan and the EU dominate wood consumption. In many parts of the world, the growth will be fastest for panels followed by paper products.


In Europe the demand for forest products is growing the fastest in the Central and Eastern European countries (CEEC) and Commonwealth of the Independent States (CIS) countries; almost double the rate in the EU/EFTA4. These countries are projected to increase production to meet the domestic and export demand in sectors where they have comparative advantage. They will, within 20 years, produce more than 50% of the sawnwood consumed in EU/EFTA, CEEC, and CIS combined. Several of the CEEC countries are now EU members resulting in increasing intra-regional trade, especially in sawnwood and panels. Consumption of paper and paperboard in Europe is projected to grow faster than production, which means that net exports of these products will decline from this region as a whole. It is important to recognise that the baseline forecasts entail positive and negative sustainability impacts. This means that there will be new (incremental) impacts compared to the present situation even without new trade agreements. 5.2 Global Impacts

5.2.1 Causal Chains of Economic Impacts

The net economic impacts of trade liberalisation in the forest sector are beneficial, as a whole, both according to the economic theory (based on comparative advantage and specialisation), empirical evidence, and economic modelling (e.g. Sedjo & Simpson 1999). However, the theory does not say much about distribution of positive and negative impacts or about social and environmental impacts (Tomberlin et al. 1998, Rice et al. 2000). Even in economic terms, there will be both winners and losers. For most countries and the world as a whole, the welfare gain of consumers would exceed the welfare loss of producers due to trade liberalisation. The question is: are there specific disadvantaged or vulnerable countries, groups or industrial sectors, which would suffer? Further trade liberalisation as a result of import tariff elimination would result in changes in the relative forest product prices, which can affect the terms of trade between countries or changes in the relative profitability of land-uses within countries. Prices will decline in those consumer markets, which have been protected by tariffs, thus increasing demand for forest products, depending on price elasticity. In export-oriented countries with a comparative advantage, prices are expected to rise. When producers adjust to new prices, there will be changes in the production system, and the levels and directions of forest product trade flows. Comparative advantage in technology, resource endowments, and input costs will drive countries to specialise in forest products that they can produce efficiently. However, the use of log export bans may distort resource allocation by artificially favouring value-added production. New export opportunities will emerge in those producer countries, where the overall demand and forest product prices have been suppressed because of trade impediments. On the other hand, less-efficient producers will suffer at least in the short term until the economy has adjusted (Repetto 1994, Tomberlin et al. 1998). Changes in the production system and trade flows will have environmental and social impacts, which can be both positive and negative and vary between stakeholder groups. Because tariffs are higher for processed products than for roundwood and sawnwood (which face practically zero tariffs in most markets), trade liberalisation will increase export of value added products, including SPWPs. Increased net export of forest products will increase the demand for roundwood and increase the stumpage price. Increased stumpage price will provide incentives for new forestry investments but also for illegal logging. How large the price impacts will be, will depend on the share of exports in relation to domestic demand, and the competitiveness of the market. The increased forest product prices are often only partly passed to roundwood suppliers, because industry wants to increase its profitability. 4 CEEC refers to Albania, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland,

Romania, Slovakia, Slovenia, Macedonia, and Yugoslavia. CIS refers to Russia, Ukraine, Belarus, and Republic of Moldova. EU/EFTA countries include all 15 EU countries and Iceland, Norway and Switzerland.


Commercial logging is driven by the profit-maximisation behaviour of both private and public sector operators. When international forest product prices increase, stumpage values are likely to rise in major export-oriented producer countries. Higher prices will stimulate wood supply, when forest owners and managers increase production from the existing forest lands as a short-term response. Their response will depend on the price elasticity of supply. In the longer term, more funds will be invested in intensifying forest management (aiming at shorter rotations and higher yields) and establishment of forest plantations. 5.2.3 Production and Trade Impacts

There are two major studies that have assessed in detail the impacts of so called accelerated trade liberalisation (ATL) proposal put forward by APEC countries in 1998 (reported in USTR 1999, FAO 1999, Brooks et al. 2001, Perez-Garcia 2001, Zhu et al. 2001). The models used in the analysis differ but offer valid, comparable and complementary ways to examine the likely impacts of trade liberalisation. These models were used only to assess the impact of tariff reductions, and they cannot thus be used to assess NTMs and e.g. removal of log export bans. The Global Forest Product Model (GFPM) simulates dynamic market equilibrium based on a theory of spatial equilibrium in competitive markets and using a price-endogenous linear programming system. The model generates market equilibrium projections of quantities produced, consumed, imported and exported by 180 countries and by 14 commodity groups up to 2010. The model also projects world equilibrium prices (Zhu et al. 2002). The second model is so called CINTRAFOR Global Trade Model (CGTM) that is also a spatial equilibrium model. This model has a more detailed description of the solid wood sector, allowing e.g. separating impacts on softwood plywood or sawnwood sector versus hardwood-based industry. On the other hand, CGTM does not cover the pulp and paper industry and does not provide separate representation of all countries in all regions (USTR 1999). Comparison of simulation results between GFPM and CGTM indicates that they produce similar results with similar assumptions on world economic and population growth and tariff cuts (USTR 1999). Under the ATL proposal, tariffs for all forest products would have been eliminated following an accelerated schedule. The full liberalisation scenario of this study is similar to the ATL proposal, but it does not contain any schedule and can be phased (not accelerated). Keeping these caveats in mind, one can use these earlier, comprehensive studies to represent the full liberalisation scenario. The overall impacts under the full liberalisation scenario are predicted to be small in comparison with the baseline scenario (implementation of the Uruguay Round tariff reductions) (Table 12). The incremental impacts are likely to be : • Global (aggregate) production and consumption of forest products would change only a little

because of elimination of import tariffs. • Global roundwood production would increase only by 0.5%, amounting to a 10 million m3

compared to the base scenario. In terms of the share of total baseline consumption in 2010 this increase would represent less than 1%. However, if log export bans and prohibitive export taxes were removed, the increase both in production and trade in roundwood would be larger.

• The impacts on harvesting volumes would not be uniform. The small overall increase in the production of industrial roundwood is a result of both reductions and increases in production in different countries. The aggregate figure hides considerable variation in production from –2.7% to 5.8%.

• Liberalisation would affect trade more than production and consumption; aggregate trade is predicted to increase by about 2%. World import of manufactured forest products would increase. Changes in trade vary from about 1% (woodpulp) to an increase of more than 6% (wood-based panels).

• There would be changes in commodity composition and in geographic pattern of production and trade. Full liberalisation would contribute to the long-term trend toward increasing importance of trade in value added products; trade in industrial roundwood would decline.


Table 12 Comparison of Baseline and Full Liberalisation (FL) Impacts on Global Production, Consumption and Trade in Forest Products

Product Base 2000 Base 2010 FL Scenario 2000

FL Scenario 2010

Difference %

Industrial roundwood, mill m3 Consumption Production Import Export

1 705 1 690

139 125

2 044 2 030

165 151

1 705 1 691

139 125 015

2 053 2 039

156 142

0.4 0.5 -5.5 -6.0

Sawnwood, mill. m3 Consumption Production Import Export

459 456 116 113

530 527 130 127

459 456 117 114

532 529 136 133

0.3 0.3 4.5 4.6

Wood-based panels, mill. m3 Consumption Production Import Export

168 170 53 55

23

233 69 71

168 170 53 55

231 233 73 75

-0.1 -0.1 6.3 6.1

Woodpulp, mill. tons Consumption Production Import Export

173 174 35 36

216

216768 38,989 40,180

173 174 35 36

216 217 39 40

0.3 0.2 1.1 0.7

Paper and paperboard, mill. tons Consumption Production Import Export

331 335 87 91

500 505 115 119

331 335 87 92

500 504 116 121

0.0 0.2 1.7 1.7

Source: Zhu et al. 2002 These results are consistent with the analysis of Sedjo and Simpson (1999) and with the experiences obtained from the Uruguay Round (Barbier 1996, 1999). Brown (1997) found that gains of trade strictly due to the Uruguay Round would be relatively small for the Asia-Pacific countries. The relatively small impact on world trade in forest products is due to the fact that tariffs were low already before the Uruguay Round. The limited international versus domestic trade puts into context the extent to which further liberalisation of international trade might be expected to influence sustainable forest management. Globalisation of the forest sector is driven largely by other factors than tariff reductions.5 The effects of economic growth, exchange rates, macro-economic policies and population growth appear to be substantially greater than those originating from tariff reductions. 5.2.4 Economic Impacts

Reductions in import tariffs and export taxes (or dismantling of log export bans) would stimulate trade; there would be increased in production in some countries. Changes in production levels would affect income and employment in wood production and processing. There would also be efficiency gains through improved production factor allocation. Gains in welfare would be realised because of reduced prices for intermediate and final products in countries, where tariffs were to be reduced. Especially the reduction of tariffs for wood-based panels and SPWPs is expected to provide benefits to consumers and in the long term improve the efficiency in countries, where industry has operated under protective import tariffs. The aggregate economic impacts would not be very large because the absolute changes in tariffs would be small and impacts would partly cancel out each other. There would be both positive and negative producer and consumer welfare impacts depending on whether the country has forest resources and is involved in export, and whether it has the capacity to benefit

5 See e.g. Sande (2001) and Leitch (2003) for a review of globalisation of the forest industry.


from improved markets access. Because the reduction of export taxes on roundwood would reduce the price in importing countries, one can assume some increase in international demand for logs. The employment impacts would vary depending on the industry and the location, where the production increase or decrease would take place. However, no attempt to estimate these impacts at a global level was made because the projected increases in production are limited, ranging from –0.1% reduction for wood-based panels to 0.5% increase for roundwood. The scale of aggregate positive employment impacts is likely to be so small that annual increases in labour productivity would “hide” these impacts. However, the impacts can be significant, when they are viewed from a perspective of specific countries or products. The already low import tariffs and relatively small share of forest products traded internationally explain the small aggregate impacts of full liberalisation on forest product consumption levels. In addition, demand price elasticities for those products, which on average have higher tariffs, are low. In fact, it is possible that the impacts are even overstated, because the majority of trade in forest products takes place within EU, NAFTA, APEC, and other RTAs, which may already apply zero or close to zero tariffs. E.g. full global trade liberalisation in the forest sector would not have much influence on trade between Mexico, the United States and Canada because virtually all North American tariffs on wood and wood products would be eliminated already under NAFTA (CEC 2002). 5.2.5 Social and Environmental Impacts

The analysis of social and environmental impacts at a global level is difficult because of the “aggregation problem”. The changes in aggregate forest product production and consumption levels are so small that it would be difficult to attach any significant impacts to these changes. Social and environmental impacts are felt at a local level, and they vary depending on the socio-economic context, the environmental situation and type of forest industry generations. Impacts on biodiversity and climate can have a global dimension, but again these impacts (externalities) would result from local action. NTMs, including log export bans and taxes are also country specific, and their impacts are best analysed at a country level. While many of the environmental impacts can be negative, positive relationships between trade liberalisation and environment through e.g. improved access to environmentally friendly goods and services (including more efficient production technologies), increasing competition leading to more efficient factor-use and consumption patterns, and reducing poverty (WTO 1997). 5.2.6 Process Impacts

Several process impacts can be identified: • In some countries trade liberalisation may promote sustainable forest management and have an

indirect impact on forest governance by reducing unnecessary controls, which stimulate corruption; and forcing domestic production to compete with imports thus lowering rent-seeking opportunities as indicated by the case studies.

• In other countries trade liberalisation may have negative impact on governance by “rewarding” illegal activities because of higher prices; expanding the economic harvesting area without corresponding increase in the capacity to regulate; and enhancing the power of the private sector before regulatory capacity of the state has been strengthened. Many of the countries with weak governance are those who are likely to experience increases in production as a result of liberalisation.

• The impacts on forest governance of trade liberalisation are positive, where there is already good governance, and negative where governance is weak. It is not always possible to generalise these impacts even at a country level as the Mexico case study pointed out.

• Forest governance is influenced by a number of factors, most of them non-trade-related as is demonstrated by the study framework (Annex 2) and the case studies (e.g. Indonesia). Trade-


governance impacts depend on what other reforms and processes are taking place simultaneously, e.g. state downsizing, decentralisation, deregulation, privatisation, concession management and forest taxation, and the capacity and will of the government to implement policies.

• Problems concerning governance and their intensity vary considerably between regions and countries, and sometimes even within countries (e.g. in Russia). Weak governance is a problem more common to developing countries than to developed countries but there are problems everywhere (e.g. Ottitsch et al. 2004). Governance problems may be accentuated, when combined with government decentralisation policies as has happened in Indonesia and Tanzania (Gregersen et al. 2003, FAO 2004). Trade liberalisation can have significant adverse economic, social and environmental impacts in countries such as Indonesia, Papua New Guinea and African countries (e.g. Ghana, Nigeria, Cameroon), where the regulatory capacity to monitor and enforce compliance, including protection of property rights, is weak. Some of the transitional economies also appear to have problems with governance, if for example incidences of illegal logging reported by WWF and Greenpeace are used as an indicator (e.g. in Russia).

In summary, trade appears to be a magnifier of existing policy and institutional strengths and weaknesses rather than a major driver of forest governance change. In some cases, trade liberalisation can magnify the prevailing weaknesses in governance with negative impacts on sustainability. However, both freer trade and trade restrictions can make things worse, if underlying policy and market failures are not tackled in time (Sizer et al. 1999, Rice et al. 2000, Rytkönen 2003, FAO 2004). 5.3 Economic Impacts by Country Groupings

5.3.1 European Union

Since there are no log export bans or prohibitive log export taxes in the EU, the full liberalisation scenario applies only to import tariff reductions. The impacts would differ depending on whether the country is a net exporter (e.g. Finland, Sweden, Norway, Austria) or a net importer (most of the other EU countries) and on the product. The following impacts have been identified6: • New market opportunities would open opportunities especially for the forest resource-rich, major

net exporter countries such as Finland and Sweden, which are predicted to increase export of paper and paperboard. Austria and Germany would also increase export of value-added products.

• Product-wise, export of paper and paperboard from the EU would increase, but the EU would remain a net importer of forest products.

• The elimination of tariff escalation would reduce the competitive advantage of plywood and veneer industry and wooden furniture and SPWP sectors in the EU. There is no quantitative data available but one can expect that imports of these products from e.g. Indonesia, Malaysia and China would continue to increase. It can also be expected that European manufacturers depending on tropical hardwood supplies would increasingly relocate close to the raw material source, like has already happened in the case of wooden garden furniture.

• New EU members and accession countries with considerable forest resources would benefit from trade liberalisation. However, the impacts of trade liberalisation related to WTO in these countries, but they are likely to be relatively small compared to the overall growth rates induced by economic integration. The trade liberalisation scenario predicts 0.4–0.8% higher production and consumption rates compared to the baseline scenario (UNECE/FAO 2003).

• The current trend of EU/EFTA countries gradually losing market shares e.g. in sawnwood to CIS and CEEC countries would be accentuated.

• Consumers in the importing countries would gain in terms of welfare because of lower forest product prices as a result of liberalisation but it is also associated with economic integration.

6 Sedjo & Simpson (1999), Perez-Garcia (2001), Brooks et al. (2002), Zhu et al. (2003), and UNECE/FAO

(2003).


• Changes in employment and value-added would be correlated with the predicted changes in production. Since the overall changes in production levels are predicted to be relatively small, impacts on employment and the forest sector’s contribution to GDP growth would remain small, on average.

5.3.2 Non-EU Developed Countries

The economic effects would be mixed, like in the case of EU, because some countries and sectors gain and some lose. Forest industries in Canada, the United States and New Zealand would gain most and producers in Japan would lose. More specifically, in the case of softwood sawnwood, a tariff elimination scenario would result in a greater international demand for North American and European products, raising domestic prices and lowering domestic consumption. The reduction in North American and European domestic consumption would outweigh consumption gains e.g. in Japan and Mexico, where tariff elimination would occur (Perez-Garcia 2001). • The impacts on the U.S. imports and production would be limited, because only small consumption

increases are predicted. The largest increase in the U.S. imports is likely to be in wood-based panels. Japan would increase imports of most processed forest products unless trade is constrained by non-tariff measures.

• Sawnwood production would increase especially in the United States and Canada. • The impacts on the overall harvest levels in the U.S. are projected to be small because, although

exports of some processed products (sawnwood and other paper and board) are projected to increase, the export of logs, particleboard and printing and writing paper are projected to decline.

• The impacts on harvest levels in non-EU developed countries are projected to be on average small with an exception of New Zealand and Australia (increased production from plantations).

• The main beneficiaries from improved trade access include Canada, the United States, Oceania and also Norway. Canada is likely to increase exports especially to Asia. The total volume of exports from the U.S. will not increase much, but the export of paper and paperboard, some panel products and sawnwood would increase. Imports to Europe and the United States are projected to increase, but impacts may remain small, because tariffs do not restrict trade. Oceania would increase exports of all forest products except wood pulp.

• Consumers in the importing countries would gain in terms of welfare, because they would face lower prices as a result of liberalisation. The gains would be relatively small, because tariffs are already very low or non-existent for the majority of imports.

• Russia is predicted to increase production and export, particularly in wood-based panels and woodpulp.

• The removal of log export restrictions would increase trade in roundwood. For example, the export of logs from Canada to the Unites States and Asia would increase. At the same time there would be increases in production efficiency especially in the sawmilling industry. Log export restrictions have been found to be economically inefficient although they have benefited domestic industries (e.g. Perez-Garcia 1997).

• The removal of sawnwood export taxes would increase export of sawnwood from Canada (Boyd et al. 1993).

5.3.3 Developing and Least Developed Countries

Based on the available modelling efforts and statistics, it is not possible to assess economic, social and environmental impacts making a distinction between developing and least developed countries (LDCs). Whether the developing country is forest rich export-oriented or has only limited forest resources makes the difference in impacts. Producers in poor countries with limited forest resources, small domestic markets, and limited technological and human resource capacity are likely to succumb to competition from imports as demonstrated by the case studies on Tanzania and Mexico. This may result in domestic industries


closing down leading to increasing unemployment. In this type of countries, at least in the short term, the benefits accruing to consumers in a form of lower prices and better quality forest products are unlikely to compensate for the costs. • Developing countries are likely to benefit from tariff reductions in forest products, because of

increased trade in value-added products to developed countries and increased South-to-South trade (which includes both developing and developed countries). However, the incremental benefits to LDCs from tariff reductions in the EU are likely to be limited, because they enjoy benefits from GSP, Lome/Cotonou and e.g. EU’s Everything But Arms Initiative (EBA), which will eliminate all duties and quotas for all products originating from the LDCs.

• Further reduction of tariffs as a result of the Doha negotiations would open opportunities for the forest resource-rich countries, such as Brazil, Indonesia, Malaysia and China (except that China’s huge domestic demand will limit export opportunities) and also some West and Central African countries.

• Developing countries would not equally benefit from improved market access as a result of elimination of tariff escalation. The responses will likely be largest in areas with highest concentration of good quality forest resources and high price elasticity of supply. Inadequate transport infrastructure, political instability, poor access to capital, limited domestic market, as well as inadequate technological and human resource capacity are likely to limit the potential for value-added processing e.g. in poorer African countries. On the other hand, countries such as Brazil, Chile, China, Indonesia and Malaysia are better positioned to capture new market opportunities for value added products, including paper and paperboard and SPWPs, because they enjoy various competitive advantages relative to other forest rich countries e.g. in West of Central Africa.

• Developing countries apply on average higher import tariffs than developed countries (cf. Chapter 2.4.2). Consumers in the importing countries would gain in terms of welfare because they would face lower prices as a result of liberalisation. Because tariff escalation for forest products is the highest in South Asia and Middle East and North Africa, they would also experience largest consumer gains (Figure 11).

• Consumers in importing countries are likely to benefit also through better quality of forest products, because increased international trade and competition drive qualitative changes.

• Producers depending on imported raw materials would also gain through lower intermediate product prices (see the Tanzania case study).

• Trade in tropical logs is likely to be reduced due to import tariff reductions, which would be larger for processed goods. However, removal of log export restrictions as part of the full trade liberalisation scenario would have a contradictory impact by increasing the trade in roundwood.

• Forest product prices are likely to rise especially in export-oriented developing countries, where consumers would have to pay more for finished products.

• There would be losses in tariff revenue to the developing country governments but fiscal revenue from other sources is likely to increase (Value Added Tax, income and capital gains tax on expanded industrial production) in those countries, which enjoy a comparative advantage in manufacturing of e.g. wood-based panels or SPWPs.

• The removal of log export restrictions would gradually improve the production efficiency of especially the sawmilling industry and the plywood industry, because there would be increasing competition for raw material.

5.4 Environmental Impacts by Country Groupings

5.4.1 European Union and Non-EU Developed Countries

Full trade liberalisation would especially affect the composition of production but the changes would depend on the country. Different industries and manufacturing process have different impacts in terms of air pollution, effluents and other emissions. Trade liberalisation is predicted to strengthen ongoing trends in restructuring the forest industries towards more value-added production. There is no reason to assume that trade liberalisation would result in any significant incremental environmental impacts in forest industries in developed countries,


which already have widely adopted environmental standards and are effectively regulated. This would apply also to increase in trade in logs, if log export restrictions were removed. Harvesting is here used as a proxy for assessing environmental impacts in forestry in spite of the weaknesses of the approach. The main problem is that changes in harvesting volume do not tell much about impacts, because harvesting can be done sustainably or unsustainably; one cannot equate harvesting with adverse impacts only, as trade can accelerate use of environmentally sound technology. Neither does the volume change tell from which type of forest the increased wood comes from (e.g. natural forests vs. forest plantations). It was not possible to distinguish impacts between the EU and other developed countries as they depend more on the country context than a region or trade block. Table 13 summarises projected changes in harvesting volumes by region. In aggregate, there will be almost no change in the harvesting volume in developed countries; while growth would be clearly faster in the developing world. However, environmental impacts would not be distributed evenly. Table 13 Projected Change in Timber Harvesting in 2010 by Region, Compared to

Baseline

Region Million m3 Percent Africa -734 -0.9 North and Central America -5 858 -0.4 South America 1 580 0.9 Asia 4 976 1.1 Oceania 3 313 5.8 Europe 6 337 1.7 Former USSR* -3 476 -2.7 Developed countries 1 106 0.1 Developing countries 8 032 1.2 World 9 138 0.5 Source: Brooks (2003) and Zhu et al. (2002) *This econometric result is counterintuitive and against current evidence. In the northern hemisphere, production increases are likely to be modest with an exception of New Zealand and Australia where incremental wood production will almost solely be based on plantation supplies. Harvesting is predicted to increase also in Finland and Sweden (from managed semi-natural forests). In the United States the harvest level would remain stable and in Canada harvesting is likely to decline. Environmental impacts in these two major forestry countries would therefore remain limited. All these developed countries have high forest management standards, which are being improved. In spite of some specific issues on which stakeholder views differ (e.g. harvesting in old-growth forest in Canada and Finland) forest management is generally of good quality. Present standards are far above those in developing countries. These countries also contain most of the certified forests in the world (Annex 3). In developed countries the relative changes in harvest levels due to trade liberalisation are small, e.g. in Europe (excluding Russia) about 2%. Such relatively small incremental harvesting in these countries is likely to have limited impacts because of comprehensive forest and environmental regulations, good forest management standards and practices, efficient enforcement of regulations, and emphasis on multiple-use management, all part of sustainable forest management. This does not mean that there would be no negative impacts; there will always be environmental impacts, when forests are harvested.


Russia and some accession countries may prove to be exceptions. These countries are experiencing problems with illegal logging7, which could be worsened because of increased export opportunities. Most sources suggest that 20-30% of the Russian log production is illegal because of improper or non-existent felling licences or cutting in excess of permitted volumes but the most recent estimates are lower or 15-20% with a higher percentage (15%) in log exports (Seneca Creek & Wood Resources International 2004). The combination of reduced import tariffs in China (after joining WTO) and insatiable demand for wood is already at present stimulating both legal and illegal supply of wood from the Russian Far East. Possible other environmental impacts include the following: • Incremental negative environmental impacts will be caused by increased international transport

both by sea and road. These impacts should be directly proportional to the changes in international trade, which suggests that incremental impacts will be very small (maximum 2%) compared to baseline and especially to the overall trade volume.

• Expanding trade will enhance the risk of introducing destructive alien species including insects and fungi, which may affect especially the health of coniferous forests. The impacts associated with incremental trade volume are, however, likely to be small. The existing measures under SPS Agreement appear to be adequate to deal with any additional risks due to full trade liberalisation.

5.4.2 Developing and Least Developed Countries

Environmental impacts under the full liberalisation scenario will vary across countries depending on the predicted impact on harvesting volumes and the quality of forest management and forest governance. The impacts will also differ considerably depending on the availability and uniqueness (value of biodiversity). Countries such as Indonesia, Papua New Guinea, Malaysia (especially Sabah and Sarawak) and Brazil as well as countries in the Congo Basin are known as “hot spots” for biodiversity. Production can increase in these countries through expanding sustainable plantation production or sustainable management of natural forests. However, based on past evidence there are considerable risks that wood production is increased by exploiting remaining natural forests, which are often less accessible and contain more biodiversity. A reliable analysis of biodiversity impacts would require linking trade liberalisation to production increases and then being able to identify at eco-system level where incremental harvesting would take place. This kind of analysis was not possible. Wood production is likely to increase much more in developing countries that in developed countries and the following impacts can be identified: • Enhanced trade may magnify the negative environmental impacts and result in further

unsustainable exploitation of forest resources. Negative impacts may include deforestation and forest degradation with losses in biodiversity, carbon sequestration services and soil conservation services (see the Indonesia case study). The extent of these impacts would depend on the local context and it is not possible to predict what e.g. the trade-related biodiversity losses may be.

• Wood production is projected to increase, particularly in Indonesia, Malaysia (Sabah, Sarawak) and China and in South America, all suffering from governance problems. It can thus be expected that further trade liberalisation in these countries will add pressure on the remaining natural forests and may exacerbate existing sustainability problems also in similar conditions elsewhere, including countries in the Congo Basin, Papua New Guinea, Thailand, the Philippines and Myanmar.

• Higher wood prices due to trade liberalisation may expand the economically accessible area of wood procurement and bring previously unutilised remote forests under exploitation, which could increase erosion (if harvesting takes place on too steep slopes) and aggravate losses in biodiversity. Econometric analyses have demonstrated that higher log prices are associated with higher rates of logging in tropical areas (Kaimowitz & Angelsen 1998).

7 WWF and other NGOs have prepared a number of reports on illegal logging and trade in Russia and Baltic

countries (e.g. WWF 2002, WWF 2003). These reports provide enough evidence to highlight the seriousness of the issue although they do not adequately describe the methods used to derive the estimates.


• Higher wood prices may also provide improved incentives for forest plantation development, especially in countries with secure land tenure. This can be positive as long as plantations are sustainably managed and are not established on appropriate lands. Higher wood prices could also make forestry a more profitable land use and improve the incentives for adopting sustainable forest management practices.

• Impacts on environment will also depend on to what extent plantation production will substitute for production from natural forests. International trade is already accelerating the shift in supply from less competitive natural forests to intensively managed high-yield plantations. If plantation establishment would require clearing of natural forests, there would be negative impacts on biodiversity.

• Trade liberalisation, especially elimination of tariff escalation, would affect the composition of production towards more value-added products, which in principle should reduce the pressure on natural forests. However, if trade liberalisation were to increase production and export of a value-added products when past harvesting levels are already unsustainable, the incremental environmental impact would be negative. This situation would be relevant for Indonesia and its plywood industry but may not be always the case.

• Incremental negative environmental impacts would be caused by increased international transport, but these impacts would be small compared to overall increase in trade and transport.

Impacts on biodiversity would vary considerably across regions and countries. Indonesia, Brazil and the Congo Basin account for the majority of the world’s tropical forest area. Aside being major sources of wood these forests contain medicinal plants and other non-wood forest products. The Amazon basin and Indonesia are classified as the most biologically diverse regions on the planet, as well as one of the most threatened. Few species of vertebrate are lost entirely when a rainforest is logged unless the entire ecosystem is destroyed. Species that fare least well are those with highly specific food needs such as birds. In Indonesia commercial logging has threatened national pals such as Leuser in Sumatra and Tanjung Putting in Kalimantan. However, it is not easy to attribute these negative trends solely to trade liberalisation. In the case of Indonesia, there are also arguments that export restrictions are partly to be blamed for over-capacity in the plywood industry and consequent increase pressure on natural forests. The impacts on environment of removing log export bans or reducing export taxes are uncertain or mixed. Possible removal of log export restrictions would increase trade in roundwood, but the overall impact on wood production levels is uncertain. In most cases, log export bans and restrictions do not appear to be effective in achieving environmental goals or the environmental impacts are ambiguous. In fact, review of literature could not find scientific evidence demonstrating the effectiveness of log export bans in protecting the environment. Log export bans and other restrictions result in economic inefficiency (Constantino 1988, Vincent 1992, Barbier 1994, Tumaneng-Diete et al. 2005). In fact, a number of studies have indicated that log export restrictions (e.g. in Indonesia) have increased domestic demand for wood. This has stimulated the domestic industry to expand its capacity by relying increasingly on undervalued domestic wood, having thus an adverse impact on the environment (Gillis & Repetto 1988, London Environmental Economics Centre 1993, Manurung & Buongiorno 1993, Barbier et al. 1995). The introduction of logging bans and log export ban can also transfer the problem to the other countries like has happened with China (IISD 2004). The effectiveness of log export ban and high export tax is reduced in situations where unsustainable forestry is mainly driven by the domestic market and weaknesses in the national economic and policy environment. On the other hand, the possible abrupt elimination of the log export ban as part of trade liberalisation poses also environmental risks as illegal logging is likely to continue because of the weak governance system. When roundwood export volumes increase, it will also be easier for illegal loggers to export wood without detection. When the log export taxes were drastically reduced in Indonesia, both legal and illegal log exports grew rapidly with adverse impacts on the environment (Brann 2002). The elimination of the log export ban would likely have a similar impact although there would be economic gains through improved production efficiency. Clearly, there are trade-offs


between economic and environmental objectives in adopting trade-related measures to mitigate environmental impacts of trade liberalisation. The impacts of forest product trade liberalisation are mingled with the impacts caused by general economic development (economic growth and equity); macro-economic policies (including taxation, structural adjustment programmes and interest rates); and policies dealing with land tenure, environmental management, resettlement, infrastructure development and especially agriculture. The case studies on Brazil and Indonesia provide a clear demonstration of how e.g. cattle ranching, oil palm plantation development or soybean cultivation drive deforestation (see also the Chapter 5.6). There have been concerns that foreign direct investment (FDI) and transnational corporations (TNCs) operating in the forest sector would take advantage of lower environmental standards and their lax enforcement in developing countries. There are recent examples of e.g. Malaysian, Korean and Chinese forestry companies exploiting forest resources unsustainably outside their own borders. There have also been a number of conflicts in connection with foreign-financed large-scale plantation development (Dudley et al. 1995, Sizer & Plouvier 2000, Sizer et al. 1999, FAO 2004). However, these conflicts are not necessarily linked to trade liberalisation. This was also the conclusion of a major international review of environmental linkages between trade and environment organised by the Commission for Environmental Cooperation of North America (CEC) in 2000 (CEC 2002). It is clear that not all FDI brings along environmentally responsible practices, in fact there is evidence that some TNCs (not only Westerns companies but also Asian) have been involved with unsustainable operations. However, there is evidence that North American or European owned or joint ventures tend to have higher environmental standards than local firms, or Asian TNCs. One reason is that they use usually higher standards and technology adopted by the overseas parent company. Another impetus comes from the fact that they export to environmentally sensitive markets and do not want to tarnish their reputation, which may affect shareholder value (Panayotou 1997 in IPCC 2000, Chudnovsky & Lopez 1999). In the pulp and paper industry, evidence on positive correlation between FDI and improved environmental practices in the industry has been found, e.g., in Chile (Chudnovsky & Lopez 1999). This is often due to the fact that when constructing state-of-the-art modern large-scale pulp and paper mills, environmentally sustainable technology is usually not a separate investment. It is transferred as “part of the package” which is competitive in a global scale and which should meet the needs of future environmental regulations (Puustjärvi et al. 2003). One argument in favour of further liberalisation in forest products trade is that increased exports from producing developing countries will increase economic growth and income, which can increase the demand for environmental services supplied by the forest (environmental Kuznets curve). At low income levels, increasing income would be associated with deforestation while deforestation would decrease at high income levels (Vincent et al. 1997, Tomberlin et al. 1998). However, there is no strong evidence on the existence of an environmental Kuznets curve in the forest sector (Kaimowitz & Angelsen 1998). Demand for environmental services and capacity to pay for these services will increase at higher income levels. However, it will take time for a developing country to move to such a stage is so long that irreversible environmental losses may take place meanwhile. 5.5 Social Impacts by Country Groupings

5.5.1 European Union and Non-EU Developed Countries

The predicted incremental changes in forest product production in developed countries are so small that it is difficult to attribute any incremental social impacts to further trade liberalisation. Employment impacts would be positive (but small) in those countries and sectors that can tap into increasing export opportunities. The Russian Federation is, however, an example of a country where expanding production could bring forest harvesting to new areas where it may, if appropriately


implemented, be in conflict with the social functions of the forest, particularly those related to indigenous people. 5.5.2 Developing and Least-Developed Countries

Trade's net effect on social sustainability is not clear and uniform. It is not possible to discern any major differences in social impacts between developing and least-developed countries. The types of impacts and their distribution depend on how developed the society and its forest sector already are and what is the quantity and quality of available forest resources. The competitive position of a country will also affect the degree to which one can benefit from trade liberalisation. Some of the likely impacts are: • Increased trade in forest products will stimulate growth in production and employment in exporting

countries such as Indonesia, Malaysia, Chile, Brazil and Chile and possibly in selected African countries (e.g. South Africa, Ghana, the Congo Basin).

• Reduction of tariff escalation would increase markets for value-added products from developing countries, which would generate economic growth and provide opportunities to employ skilled labour with higher wages.

• Producers in countries, which have benefited from the protection by tariff escalation, would face increasing competition. It is possible that production and employment will shrink in such countries in South Asia (e.g. India) and Middle-East but also in Africa and e.g. in Vietnam. This may result in social costs such as unemployment due to closing down mills that cannot compete against better quality and cheaper imports from other developing nations. Negative country impacts can partly be reduced by re-orienting production and substituting for other materials.

• In the importing LDCs consumers can gain in welfare through reduced product prices. • In the exporting developing countries, the benefits from market expansion may not be distributed

evenly. Large companies that can exploit economies of scale benefit more from improved market access and higher (export) prices than smaller and more medium-sized enterprises often located in remote rural areas.

• Forest plantation development e.g. in Malaysia (Sarawak and Sabah), Indonesia, Thailand and Brazil has sometimes resulted in land-related social conflicts. Traditional land-use rights have not always been respected at the expense of the livelihoods of forest-dependent people.

• The working standards and salaries are higher in export-oriented forest industries than in small local industries serving the domestic market only. Transnational companies have also brought domestic standards in the manufacturing industry closer to international standards as part of corporate social responsibility (CSR). International companies are also under more scrutiny so they are under pressure to adopt higher social and safety standards (e.g. Utting 2002) than locally operating firms.

• Women traditionally collect fuelwood and non-wood forest products, which can play a significant role in the livelihoods of forest-dependent people. If trade liberalisation leads locally to forest degradation and deforestation or displace rural people (e.g. because of large-scale plantations), women would be the first to suffer with indirect economic and social implications.

It is not possible to establish reliable causal relationships and quantify any recognisable impacts related to health (life expectancy, nutrient-levels, mortality rates) and education (literary rate, school enrolment rates) indicators. It is also very difficult to assess gender-related impacts because of inadequate data. In some forestry and wood industry activities female employment is often significant (e.g. nurseries, plywood). However, as a whole, the impacts in scale of production because of trade liberalisation can be expected to be largely gender neutral.


5.6 Cross-cutting Impacts

Forest-based products do not appear to raise issues, which differ from those raised by other sectors (Arkell and Johnson 2004). However, it is possible that liberalisation of distribution services will increase the spread of multinational large-scale retailers, who pay attention to environmental standards and corporate social responsibility in general. This may result in increased demand for certified wood and, vice versa, reduce the demand for products from unsustainable sources. This will affect international trade but also domestic markets if companies (e.g. Ikea) directly invest in developing countries or countries-in-transition. There are especially strong linkages between forestry and agriculture in some countries (e.g. Brazil, Ghana, Indonesia). These sustainability impacts are likely to mainly flow from agriculture to forestry (Katila & Simula 2004, Morrissey et al. 2004, 2005). General equilibrium and partial equilibrium analyses of impacts of agricultural trade liberalisation have indicated that world market prices, and thus export prices from developing countries, will increase (CBD 2002). Reduction of imports tariff combined with significant reductions in subsidies would result in contraction of agricultural production in some areas and expansion in other areas. Contraction of production in Western Europe and North America and expansion in many developing countries are well underway because of structural changes and macro-economic developments. Further trade liberalisation would likely accentuate these trends resulting in geographical shifts in production (CEC 2001). This will make agriculture more profitable in developing countries providing incentives to increase production and exports. The increase in production can take place through extensification or intensification. According to Agriculture SIA MTR, in most countries, increases in agriculture production will be achieved by intensification – application of technology and better quality inputs to increase land yields (Morrissey et al. 2005b). In poor countries (with weak extension services and inadequate access to fertilizers, better quality seeds and capital) production is often increased by clearing of forest for arable land (CEC 2001, CBD 2002, FAO 2003). Farmers or livestock producers will respond to improved profitability by expanding the area under cash crops and grazing. However, it is important to recognise that policies encouraging land clearing often have more influence on the sustainability of forestry development than trade policies (CBD 2002). Accumulated scientific knowledge clearly show that land use change and habitat loss represent the most important underlying causes of biodiversity loss because of habitat loss and fragmentation. Since trade liberalisation is expected to entrench locational shifts in production that are already occurring in favour of developing countries, the impacts on biodiversity – especially in tropical developing countries – can expected to be high in those countries where agricultural production is increased mainly through expanding the area under cultivation (CEC 2001). The forestry case studies provide an indication of what kind countries and products may have the strongest cross-sectoral linkages. In Indonesia and Brazil export-oriented agriculture is a major cause of deforestation and forest degradation, often preceded by commercial forest clearing. In these two countries as well as in Tanzania and Mexico there were also strong linkages between forestry and commercial and subsistence agriculture. Agriculture SIA case studies resulted in similar conclusions (Morrissey et al. 2005 a,b). In the case of Brazil, a significant increase in soybean production is forecast, much of which might well occur through an expansion in the tilled area on the margins of the Amazon. This will put increased pressure on areas with unusually high biodiversity. Expansion of beef exports can also be expected to accelerate deforestation. The 2004 forest cover statistics for Brazil indicate that deforestation has continued unabated and in the Amazon region most of the forest has been turned into soy bean production and cattle grazing. In Ghana, the principal export crops contributing to further deforestation are export products such as cocoa, oil palm, coffee and rubber. Their production is likely to increase as a result of liberalisation of agricultural trade, which may result in negative environmental impacts unless adequate safeguards are in place.


Similar effects can be expected to occur in many other countries. In those with high agricultural export subsidies the effects will be ameliorated, but the overall effect expected is one of increased agricultural exports and increased pressure on land clearance (Morrissey et al. 2005a). The relation between agricultural expansion and deforestation is not uniform across countries and continents: • In developed countries, the reduction of various agricultural subsidies will reduce crop production

in the absence of a comparative advantage. As a result, some agricultural land is converted into forests or left as fallow (regenerating slowly into a forest).

• In many Latin American countries deforested or degraded forest land ends up as pastures in extensive cattle ranching or are used to produce soybean or other cash crops (see the case study on Brazil).

• In Southeast Asia (e.g. Indonesia and Malaysia) and West and Central Africa forests have been cut and then converted to cash and estate crops such oil palm (see case study on Indonesia), cocoa, and coffee.

• In countries where large areas of natural vegetation still exist, increased agricultural production is likely to lead to clearing of forests with consequent impacts for biodiversity, greenhouse gas emissions and soil erosion (Morrissey et al. 2005b).

Liberalisation of agricultural trade and land-use and agricultural policies ( particularly export subsidies for cash crops), warrant thus special attention in the forestry and agriculture sectors. The environmental and social impacts of agricultural trade liberalisation, especially through land-use change, are possibly much larger than the effects resulting from forest product trade liberalisation. For example, the single greatest source of biodiversity loss is linked to the loss of habitats and ecosystems, associated often with deforestation and forest degradation, which are again primarily linked to agricultural expansion and only secondarily to wood exploitation (Vaughan & Patterson 2001). Because the protection rates and subsidies of agricultural products are several times higher than for forest products, tariff reductions for agricultural products are likely to have a large impact on land use development. This study and the agriculture SIA (Morrissey et al. 2005 a,b) have identified liberalisation of trade in the following agricultural products as having the greatest impacts on forestry sustainability: • edible oils (oil palm, soybean); • beef and associated animal feed such as soybean; • cassava; • cocoa; and • coffee. These same products (excluding cassava) were also identified in a recent study as commodities, whose expansion in the tropics is threatening native habitats and the biological diversity they harbour. (Conservation International 2004). It is recommended that these products would be regarded as sensitive products during the agricultural negotiations. They should receive special attention e.g. in bilateral discussions. In the Doha negotiations it is important to view sustainability impacts of simultaneous trade liberalisation under NAMA and agriculture. There are likely to be cumulative impacts resulting from agriculture trade liberalisation, which together with trade liberalisation affecting forest products, can exacerbate forest destruction further with negative consequences both for biodiversity and for social well-being of forest-dependent people. The above discussion has concentrated on impacts in developing countries. Contraction in farm production and land abandonment e.g. in Europe can result in an increase in forest cover. There is evidence that some forests are making a natural transition to broadleaf forests. Idle farmland may also be planted with trees. It is difficult to compare the changes between biodiversity under farming and forestry on such converted lands.


The final agriculture SIA report is to identify M&E measures, which will also address cross-sectoral impacts (on forestry). 5.7 Impact Summary

Sustainability impacts of possible further trade liberalisation are summarised in Table 14. Table 14 Impact Summary by Type and Country Grouping

Country grouping Description of impact Type of countries or products affected

Factors affecting significance

*

Economic Impacts EU - Producer/exporter - Mainly importer

• Increased production and

income • More investment in value

added production • Lower prices for processors

using intermediate inputs • Reduced production • Lower prices for consumers

Finland, Sweden, Austria, Germany; especially paper and paperboard Especially SPWPs, some panel products

Variation in price elasticity of import demand, import-export balance; net exporters likely to have net gains Degree of competitiveness

△▲ △ △ ∇ △

Non-EU Developed Countries - Producer/exporter - Mainly importer


income • More investment in value

added production • Lower prices for processors

using intermediate inputs • Reduced production • Lower prices for consumers

Canada, the United States, Australia, New Zealand, Norway; paper and paperboard, sawnwood and some panel products Especially SPWPs, some panel products

Variation in price elasticity of import demand, import-export balance; net exporters likely to have net gains Degree of competitiveness

△▲ △ △ ∇ △

Developing Countries - Producer/exporter - Mainly importer


exports; increased income • More investment in value

added production • Losses in tariff revenue • Cheaper imports benefit

consumers and producers • Losses in tariff revenue

E.g. Indonesia, Malaysia, Brazil, Chile, selected West African countries E.g. China, Brazil, Malaysia, Thailand to increase SPWPs production and exports E.g. countries in Near East, North Africa, and African Horn

Benefits depend on the strength of manufacturing base and overall competitiveness Price elasticity of demand for imports Price elasticity of demand for imports

△ ▲ △ ▲ ∇ △ ∇

Least Developed Countries (LDCs) - Producer/exporter - Mainly importer

• Increased income from

exports • Reduced production in less

competitive industries • Losses in tariff revenue • Positive income effect due

to lower prices for consumers

• Losses in tariff revenue • Reduced production due to

cheaper and better quality imports

E.g. countries in the Congo basin, Papua New Guinea, Laos, Cambodia, Burma E.g. countries in Near East, North Africa, and African Horn

Reduced preferential treatment benefits limit benefits Strength of manufacturing base and degree of protection Price elasticity of demand for imports Price elasticity of demand for imports Strength of manufacturing base

△ ∇ ∇ △ ▲ ∇ ∇▼




*

Environmental Impacts EU - Producer/exporter - Mainly importer

• Increased harvesting with

limited impacts on biodiversity and other env. services

• Changes in industrial

pollution • Some agricultural land may

be converted into forest • Possibly reduced pressure

on forests

E.g. Sweden, Finland, accession countries E.g. UK, accession countries

Quality of regulation Degree of agricultural liberalisation, including reduction of subsidies

Blank or ∇ Blank Blank Blank


• Stable or slightly increasing

harvests with impacts on biodiversity and other env. services

• Changes in industrial pollution

• Possibly reduced pressure on forests

Blank or ∇ Blank Blank or ∇


• Increased harvesting

associated with deforestation and forest degradation

• Losses in biodiversity; reduced soil conservation services; harvesting inside protected areas

• Increased conversion of forest into agricultural & livestock use

• Changes in industrial pollution

• Improved efficiency of

wood use • Reduced harvesting • Improved efficiency of

wood use

Depending on the context, biodiversity impacts can be irreversible

Quality of forest governance (policy and legal framework, law enforcement, etc.) Economic development and extra-sectoral policies e.g. in agriculture (incentive framework incl. perverse incentives)

∇▼ ∇▼ ∇▼ ? ? Blank ?


• Increased harvesting

associated with deforestation and forest degradation

• Losses in biodiversity; harvesting inside protected areas

• Increased conversion of forest into agricultural & livestock use

• Improved efficiency of wood use

• Reduced harvesting

E.g. countries in the Congo Basin, Papua New Guinea, Laos, Cambodia, Burma Depending on the context biodiversity impacts can be irreversible See above

Quality of forest governance (policy and legal framework, law enforcement, etc.) Economic development and extra-sectoral policies e.g. in agriculture (incentive framework incl. perverse incentives)

∇▼ ∇▼ ∇▼ ? Blank

Social Impacts EU - Producer/exporter - Mainly importer

• In aggregate, no visible social impacts

• Employment re-allocation within the sector

• Reduced employment in

limited industries • Positive income effect

through lower prices

Wooden furniture, SPWPs, plywood

Employment impacts limited because value-added industry not labour-intensive; production increase through productivity growth Competitiveness against imports Usually a short-term impact. Long-term impact depends on the flexibility of the labour market in the sector

Blank ? ∇? △




*


• In aggregate, no visible social impacts

• Employment re-allocation within the sector

• Increased employment in some countries

• Positive income effect through lower prices

• Positive income effect through lower prices

Russia, former CIS countries

Employment impacts limited because value-added industry not labour-intensive; production increase through productivity growth

△ ? △ △ △


• Increased employment and

wages for skilled labour • Employment may benefit

more urban and semi-urban areas and larger companies

• Social conflicts/problems with community relations

• Short-run social effects due

to reduced employment in selected industries

• Lower prices for consumers • Worsening poverty and

inequality

E.g. Indonesia, Malaysia, Brazil Chile, Uruguay See earlier list

△ ? ∇▼ ∇▼ △ ∇▼


• Increased employment • Employment may benefit

more urban and semi-urban areas and larger companies

• Social conflicts/problems with community relations

• Short-run social effects due

to reduced employment in selected industries

• Lower prices for consumers

See earlier list See above

△ ▲▼ ∇▼ ∇▼ △

Cross-cutting Impacts from Agriculture Trade Liberalisation EU

Contraction in agricultural production may result in reforestation or natural regeneration of abandoned farm lands

Finland, Sweden, Germany, others

Government policies and subsidies facilitating tree growing

?

Non-EU Developed Countries

Contraction in agricultural production may result in reforestation or natural regeneration of abandoned farm lands

The United States ?

Developing and Least Developed Countries (LDCs)Countries

Export oriented countries may increase agricultural production by

West African countries, Brazil and some other Latin American countries, Indonesia, Malaysia, Thailand, Vietnam Edible oils (oil palm, soybean); beef and associated animal feed such as soybean; cassava; cocoa; and coffee.

Access to credit Access to new technology and better quality seeds Security of land tenure

▼

Key Non-significant compared to base situation △ Positive minor significant impact ∇ Negative minor significant impact ▲ Positive major significant impact ▼ Negative major significant impact △∇ Minor positive and negative impacts likely to be experienced according to context ▲▼ Major positive and negative impacts likely to be experienced according to context ? Uncertain impact

Table 13 summarised only the impacts of liberalising trade in forest products. From the viewpoint of a wood-producing developing country, the analysis of trade impacts is complicated by simultaneous and sometimes opposite impacts caused by the developments in the agriculture sector. The global reduction of agricultural subsidies is likely to result in higher producer prices in developing countries making agriculture a relatively more profitable land use and providing consequently an incentive to


convert forest land into agricultural or livestock uses. However, trade liberalisation is also likely to increase wood prices enhancing the profitability of forestry as a land use. Trade liberalisation may result in increasing pressure on natural forests, but part of the pressure could also be reduced, because removal of trade restrictions will make environmentally sustainable technology (EST) and more efficient processing technology more easily available (Puustjärvi et al. 2003). At the end, some of these impacts may cancel each other. A lot will depend on the national policies and the way agriculture and forestry (including conservation) are treated in national policies. 6. ASSESSMENT OF MITIGATION AND ENHANCEMENT

MEASURES

6.1 Trade-Related M&E Measures

Those M&E measures that have more universal relevance can be regarded as fact non-tariff measures which are being regulated for example under SPS, TBT and Subsidies Agreements (cf. Chapter 2.4.3). Environmental and technical standards have been introduced to enhance safety and quality of environment, and any action that improve the use of these measures, e.g. by helping developing countries to meet higher standards, will contribute to the mitigation of impacts from trade liberalisation. The focus of the M&E assessment will be on the measures identified in the terms of reference. In addition, forest certification and labelling as well as phytosanitary standards are briefly assessed. It is emphasised here that if schemes such as a unilateral ban on imports of logs and wood products not verified as coming from a sustainably managed source, or from an illegal source, are seriously considered they need to be evaluated with same intensity and resources as the licensing scheme. The impact assessment of the FLEGT licensing scheme alone had a budget more than 50% higher than the budget for the entire forestry SIA. Therefore, it should be understandable that this forestry SIA is not the right place for such a comprehensive assessment of alternative mitigation schemes, which constitute only one part of the SIA study. The following analysis should be treated as an indicative one to help with screening those M&E measures with best potential. • Introduction of a licensing scheme to secure that only legal timber enters a country or a region

through a series of voluntary partnerships with wood-producing countries. The impacts of the EU Action Plan for FLEGT have recently been assessed (Indufor 2004). The scheme was found to be effective in ensuring that the supplies to EU would come from a legal source; it would thus promote sustainable forestry and would result both in positive environmental and social impacts. The scheme would also likely reduce illegal activities. The establishment of schemes to verify legality, including the chain of custody and necessary customs controls, were found to be technically and financially feasible. The benefits of the proposed licensing scheme are assessed to exceed the costs. Comprehensive implementation of the licensing scheme would have to deal with the issue of sovereignty and the associated problem of defining legality in different countries. Because the amount of wood exported from potential partner countries would be small in relation to the illegal production of wood, the overall impacts of the EU scheme on illegal logging and trade may remain limited unless also other major importing countries adopt similar schemes. The impacts would be greatest in countries, which export significant amounts of logs. Diversion of illegal timber to third countries may dilute but not eliminate the positive impacts of the scheme. The more this type of bilateral (or even a multilateral agreement/convention) agreements, the more effective the scheme. Effective implementation would require changes in national legislation in a number of EU countries and finding out a cost-effective way to expand the scheme to cover a broader range of processed products.


• Preferential tariff treatment. Granting preferential tariffs for wood and wood products that are certified or are otherwise confirmed to come from a sustainable source is an attractive alternative, because it places the administrative burden of proving compliance on the importing company. It would also provide an incentive to voluntarily adopt forest certification and chain of custody procedures. However, effectiveness would be limited by a number of factors: (i) the capacity of developing countries to meet the needed standards is limited and (ii) one would have to agree on sustainability/legality standards. Finally, (iii) the overall reduction of tariffs and the existing GSP schemes would reduce the relevance of this option.

• Unilateral ban on imports of logs and wood products not verified as coming from a sustainably managed source. This alternative is related to the licensing and certification schemes and would have the same environmental and social benefits. Ideally, it would result in an increase in the area of certified forests, while allowing exports to continue. It would thus promote sustainable forest management. Certification, combined with a chain of custody, is the only available option for verifying sustainability of supply. In practice, an outright ban on both logs and processed products not verified as coming from a sustainably managed source would likely cause market disruptions and unintended negative impacts, because global supply of certified forest products is very limited (see Chapter 2.1). At present, only a minor share of certified forests can be found in the tropics. The ban would favour developed, temperate-zone countries; species such as oak and beech would gain a competitive advantage against tropical hardwoods Tropical developing countries would face much greater challenges in raising the standard of forest management up to a certifiable level. To avoid economic losses and social costs because of declined production for the export market, tropical countries may divert exports to less discerning markets. Importing country consumers and manufacturers e.g. in Europe could face higher import prices because, by definition, all imports would have to be verified/certified, which implies higher costs. Imposing a ban in itself would not help allocating resources to promote sustainable forest management. A ban may promote substitution of other materials for wood and reduce the price of wood, making forestry a less attractive land use, which again would promote deforestation, especially in developing countries with growing land-pressure.

• Unilateral ban on imports of logs and wood products at a risk of coming from an illegal source. Many of the positive and negative impacts would be the same as described above in the case of an unilateral ban on imports of logs and wood products not verified as coming from a sustainably managed source. It is important to note that legality does not ensure sustainability of wood exported or used for manufacture of exported products. The implementation of this measure would require

- Establishing what is legal and illegal in a producer country (without producer countries relaxing regulations to ensure legality at a cost to sustainability requirements).

- Strengthening law enforcement in producer countries and creating incentives to enforce such a system effectively.

- Having a national system of issuing a “legality licence”. - Developing both a cost-effective and tamper-proof log tracking system that would cover both

logs and processed products (which in most cases are made of wood from multiple sources). - Having a third-party legal verification scheme similar to forest certification. Effective control

of legality would require independent control to secure both (i) legal origin and (ii) legal compliance. The former requires credible verification whether the logs or timber products are legally purchased and transferred down the chain of custody to the point of reference of the certificate, and conformity with the legal requirements to pay royalties and taxes. The legal compliance implies ensuring that management is compliant with specified national legislation and regulations regarding forest management, harvesting, transport and processing. Independent third-party verification of legality is still incipient.

- Linking this measure to the voluntary licensing scheme such as the one proposed under FLEGT.

Legality requirement would add to production costs, which can sometimes be seen as a way of internalising externalities and sometimes as just an additional cost. Unless developing countries with limited capacity to improve the quality of forest management and institute verification schemes and log tracking systems get support, producers in these countries may divert exports to


countries, which do not apply legality requirements. Requirements to improve forest legislation and law enforcement can be interpreted by some producer countries as an attempt by developed countries to interfere with national matters.

• A multilateral Kimberley-like ban on all timber from specified areas at risk to illegal logging is similar to the previous option. The Kimberley Process to eliminate trade in conflict diamonds is a scheme devised to ensure international certification for rough diamonds based primarily on national certification schemes and on agreed minimum standards. National authorities are to issue certificates, and these would be cross-checked at point of import; internal controls involve industry participants allowing third-party auditing and verification of their actions. This scheme appears to work well for diamonds and can have some potential also for wood products but several factors reduce its feasibility: (i) wood products are bulky goods and volumes transported are huge compared to diamonds, (ii) there are a large number of exporters and importers (co-operation is difficult), and (iii) transport of logs or sawnwood in only tamper-proof containers would be impractical or impossible for bulk goods. The application of a scheme similar to Kimberley-like ban would require new legislation based on an international agreement to control illegal logging and trade in forest products. Such an agreement would be difficult to achieve because of the large number of involved countries, fragmented industry and slow progress in negotiations on the global forestry convention (Brack et al. 2002)

• Labelling and certification have been long used in promoting trade in sustainable forest products and improving incentives for SFM. Chain-of-custody schemes would also be crucial in verifying the legality of wood production. Voluntary (non-government imposed and driven) labelling and certification schemes can be made more effective M&E tools, if more forest areas and production in developing countries could be brought under certification e.g. through increasing international support to sustainable forest management and promoting its certification. There is a need to create convergence between various schemes to avoid confusion in the markets and possible erosion in the management standards. It will also be important to provide more information to developing countries on various labelling schemes and associated requirements. Labelling and certification will not be negotiated under DDA.

• Log export bans and prohibitive export taxes have been assessed in Chapter 5.

• Government procurement. Several countries in the EU (e.g. the United Kingdom, Germany, France and Denmark) have put in place, or are in the process of developing, government procurement rules with reference to legal and sustainable supplies of wood. Such policies could be used to give preference to legally produced timber. These rules would also increase the demand for certified wood, because the public sector provides an important market for tropical timber in many countries. Government procurement is dealt with under the WTO Government Procurement Agreement (GPA), which is based on the principle of non-discrimination between like products from foreign and domestic suppliers. Article XXIII allows an exception to this on the grounds of protection of human, animal and plant life. It appears that government procurement will not be on the DDA.

• Sanitary and phytosanitary (SPS) measures. Further trade liberalisation would increase the volume of internationally traded wood, which would increase the risk of ‘bio-invasions’ having potentially harmful impacts on forestry. SPS measures minimise risks associated with trade in logs and sawnwood. SPS measures are important also in addressing health risks associated with trade in NWFPs such as mushrooms and nuts and products that may be used in the pharmaceutical industries. Because most developing countries have limited capacity to meet the SPS-related standards, it will be important to provide support to them. Under the DDA the substance of the WTO SPS Agreement is likely to be kept untouched.


Table 15 Analysis of M&E Measures

Measure Economic impacts Environmental impacts

Social impacts Affected countries/ Need for support

Preferential tariff treatment

- Overall reduction of tariffs would reduce effectiveness

- Positive impacts Would promote SFM, but would not directly address factors underlying illegal operations and unsustainable forestry

- Positive impacts due to SFM

- Favours larger managers and plantation forestry

- Countries that already enjoy GSP preferences

- Developing countries with export-oriented forest need support to expand certification

Voluntary import licensing schemes

- Overall impact limited unless large number of schemes and wider product coverage

- Schemes technically and financially feasible

- Positive impacts - Impacts greatest on

countries exporting logs

- Can divert illegal products to third countries

- Positive impacts due to verification

- Favours larger management units and plantation forestry

- Relevant for all major tropical countries exporting forest products and exporting CIS/EU accession countries

Unilateral ban on imports of logs and wood products not verified as coming from a sustainably managed source

- Effectiveness limited because of relatively small amount of logs entering international trade

- Taking to an extreme this would disrupt global timber markets

- Economic losses - Substitution of other

materials for wood - Cost implications of

the scheme relatively low

- Positive impacts because promotes trade in legal products

- Impacts may be limited, because measure does not address underlying causes of unsustainable forestry

- Diverting trade to third countries

- Increased illegal logging and trade

- Increased unemployment

- Loss of forest revenue

- Favours larger management units and plantation forestry

- Ban would affect all countries, but developing countries and SMEs would be affected the most

- Favours temperate zone countries

- Developing countries would need huge amounts of support to improve forest mgmt. and have forests certified

Unilateral ban on imports of logs and wood products at a risk of coming from an illegal source

- Effectiveness limited because of relatively small amount of logs entering international trade and difficulties in tracing origin of fibre

- Taking to an extreme this could disrupt global forest product markets

- Economic losses - Substitution of other

materials for wood - Cost implications of

the scheme low in relation to price of tropical hardwood logs

- Positive impacts because promotes trade in legal products

- Impacts may be limited, because measure does not address underlying causes of unsustainable forestry

- Can drive trade to third countries

- Increased illegal logging and trade often lead to forest degradation

- Increased unemployment in Europe because some mills using imported wood would close down

- Loss of forest revenue

- Favours larger managers and plantation forestry

- Ban would affect all countries, but developing countries and SMEs would be affected the most

- Financial and technical support to (i) establish a national licensing scheme and strengthen law enforcement; (ii) improve the legislative framework; (iii) improve internal monitoring and control systems; and (iv) and clarify/harmonise customs procedures and improve customs capacity

Labelling and certification

No major impacts on production volumes and trade flows

Positive impacts on biodiversity and soils

Positive social impacts in certified areas

Important to target export-oriented developing countries Technical assistance and financial support to improve forest mgmt. Standards and achieve compliance Smallholders and communities need special support

A multilateral Kimberley-like ban on all timber from specified areas at risk to illegal logging

Impacts likely limited due to difficulties in implementation

Limited impacts Limited impacts


6.2 Non-trade Related Mitigation and Enhancement Measures

The mitigation measures can include any action aimed at supporting national forest governance, including improvement of the legal framework and strengthening sustainable forest management, monitoring and enforcement capacity. Technical and financial assistance should cover the following: Non-trade related domestic M&E measures: • Support to national forest programmes (nfp) and improving the formulation and implementation of

national forest policies and legislation. In addition to creating an enabling environment for sustainable forest management, a properly formulated nfp (linked to poverty reduction strategies) can contribute to addressing the security of land tenure, livelihoods of local people, and cross-sectoral effects e.g. due to agricultural trade liberalisation. Nfp processes can also offer a platform for negotiating solutions to trade-related forest governance issues.

• Clarifying the legal framework concerning illegal acts in forestry and specifying the mandates in forest sector monitoring and law enforcement.

• Introducing more transparent and competitive log sales and concession allocation systems aimed at reducing corruption, collusion and monopolistic behaviour and improving rent capture.

• Developing wood pricing systems that fully account for environmental costs and benefits (internalising the externalities) and create incentives to use forest products more efficiently.

• Eliminating monopolies in production, harvesting and transport, and processing of wood to improve efficiency of pricing and provide improved incentives for SFM to forest managers.

• Promoting more transparent and participatory institutional arrangements concerning decision-making in the forest sector.

• Promoting forest certification and development of verification schemes and capacity. • Clarifying and strengthening land tenure (property rights). • Using policy and legal instruments to ensure more equal distribution of benefits from trade

liberalisation and to empower weaker sections of society to deal with outside pressures. Other external support:

(a) Providing advice on improving the policy and legal framework governing SFM and illegal forestry activities.

(b) Providing support to regulatory capacity building, including development of forest sector control systems and strengthening forest-related as enforcement, and, in general, strengthening public forest administration. Environmental governance could also be improved by strengthening of compliance and dispute settlement mechanisms within multilateral environmental agreements (MEAs).

(c) Providing support to help developing countries and LDCs develop standards and meet the standards, regulated under the TBT and SPS Agreements.

(d) Supporting the preparation and implementation of national forest programmes (nfps). Nfp processes offer a platform for negotiating solutions to trade-related forest governance issues. Practice has shown, however, that these tend to function only when the underlying policy and legal framework on land ownership and tenure has been properly established, and when the society at large has the governance capacity to enforce these properly (FAO 2004).

(e) Provide support to developing countries to build up local capacity to implement SFM and meet certification requirements through provision of technical assistance and financing.

(f) Enhance transfer of environmentally sound technology (EST), e.g. under UNFF and UNFCC.


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Annex 1


CONCEPTUAL FRAMEWORK FOR THE SIA IN FORESTRY

SFM(deforestation/

degradation)

Commercial andsubsistence logging

- commercial for exportand domestic market

- subsistence use, e.g.,fuelwood

Infrastructuredevelopment

- new roads- settlements- dams, mines- public services- colonisation projects

Trade liberalisation- forestry &agriculture- domestic trade- international trade- technology transfer- investments

National forest policy- product pricing- benefit sharing- forest resource tenure- subsidies, taxation- bans & other

restrictions- NFPs

Extra-sectoral policies- economic policies (SAP)- settlement policies- agricultural subsidies- property rights- law enforcement- privatisation- decentralisation- environmental policies- public sector financing- PRS

Economicdevelopment

- economic growth- income growth- income distribution- wealth/asset

distribution

MEAs and voluntaryenvironmental

measures- IPRs- trade bans- certification & labeling

Population

- growth- density- migration

Forest products markets- demand changes- wood and forest products prices- input prices- international competitiveness- relative profitability of land uses- incentive framework for SFM- market failures- market access

Technological change- productivity in agriculture &

forestry- improved efficiency in harvesting

and wood utilization- access to EST- changes in production methods

and quality of products

Institutions- forest governance, including

accountability, degree ofcorruption, and capacity toenforce and monitor

- capacity (human and financialresources) of institutions to bothsupport and regulate SFM

Agricultural crop andpasture expansion

- shifting cultivation- permanent cultivation- ranching

Agricultural markets- demand changes- product prices- input prices- international competitiveness- relative profitability of land uses- market access

Mitigationand

enhancementmeasures

- international

- national

- externalsupport

Annex 2


DATA ON FOREST AND CONSERVATION AREAS AND CERTIFIED FORESTS

Table 2/1 Estimated Forest and Protected Areas by Continent in 2000

Continent Land area Forest area % of forests % of protectedTotal Protected % of Total Protected % of of total forests of total

1 000 ha total 1 000 ha total land area protected areaAfrica 2 978 394 149 325 5,0 649 866 75 867 11,7 21,8 50,8Asia 3 084 746 147 134 4,8 547 793 64 396 11,8 17,8 43,8Oceania 849 096 99 834 11,8 197 623 27 708 14,0 23,3 27,8Europe 2 259 957 120 549 5,3 1 039 251 67 279 6,5 46,0 55,8North and Central America

2 136 966 301 772 14,1 549 304 117 251 21,3 25,7 38,9

South America 1 754 741 112 801 6,4 885 618 168 151 19,0 50,5 149,1World total 13 063 900 931 416 7,1 3 869 455 520 653 13,5 29,6 55,9

Sources: UNEP-WCMC 1996, FAO 2000 Table 2/2 Areas Certified as Sustainably Managed by Region

Region Area certified, mill. ha Percent of total forest cover (%) Europe total 78.1 7.5 North America 93.0 19.8 Latin America 4.9 0.5 Africa 3.2 0.5 Asia 4.6 0.8 Oceania 0.9 0.5 Total 184.8 4.8

Source: Indufor database June 2003 Note: The problem with the “certification indicator” is that the progress made in certifying forests

does not necessarily reflect real improvements in sustainability. Most areas that are certified have been usually well-managed already in the past. More than 50% of the certified forests are plantations or semi-natural forests (Indufor database 2003). Well-managed forest areas that have not applied for certification are not captured by this data. As certification is still after ten years of implementation at an early stage, changes in the certified area indicator do not necessarily reflect overall improvement in forest management on the ground. In spite of its weaknesses, the indicator is probably the best option to measure improvement.

Annex 3


FOREST PRODUCT PRODUCTION AND CONSUMPTION TRENDS 1. PRODUCTION TRENDS In 2000 the world production of roundwood was 3.35 billion m3. The share fuelwood was 53% and industrial roundwood 47% of the total production (FAO 2002). Both the industrial and fuelwood production have been growing at an average rate of 1%/a during the last four decades. Fuelwood is mainly consumed locally and often does not even enter local markets; its share of international trade volume is very low. On average, about 80% of wood harvested in developing countries are used as fuel, but there are considerable regional and country differences. Fuelwood production is very important in dry African countries as well as in countries such as India, Pakistan and Nepal. In some countries especially in Europe, there is a growing interest in the international trade in bio-energy (wood-fuel), because the trade can provide biofuels at lower prices, larger quantities and better quality than domestic alternatives. In the future, both the use and the trade of wood-fuel are expected to increase (Hillring 2003). In 2000 industrial roundwood production reached about 1.6 billion m3 (Figure 3/1). The largest industrial roundwood producers are: the United States, Canada, Russia, Brazil, and China. The share of Europe (without Russia) of the global industrial roundwood production is about 20%. Finland, Sweden, France and Germany are the largest producers. The most important round wood producer countries in Africa are: South Africa (mainly plantation wood), Nigeria, Democratic Republic of Congo, Cameroon, and Ivory Coast. In Asia, China, Indonesia, Malaysia, and India dominate. In Latin America, Brazil and Chile (mainly plantations) are the largest producers of roundwood. All regions and countries, with an exception of Japan and Russia, have increased industrial roundwood production over the years. The growth has been fastest in tropical countries based on fellings in hardwood natural forests and recently, increasingly in industrial forest plantations (Table 3/1). Figure 3/1 Global Volume of Roundwood Production in 1961-2000

0

500

1,000

1,500

2,000

2,500

1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000

RW

E (M

illio

ns)

Non-tropical

Tropical

Source: FAO 2004

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The production of industrial forest products has been increasing steadily, with an exception of sawnwood. During the last ten years the growth has been fastest in paper products. The share of value-added products of total production as a whole has been increasing in the1990s, reflecting increased income levels (Figure 3/2). Figure 3/2 Trends in World Production of Processed Wood Products in 1961–2000

0

100,000,000

200,000,000

300,000,000

400,000,000

500,000,000

600,000,000

1961 1966 1971 1976 1981 1986 1991 1996

Vol

ume

cubi

c m

etre

s or m

etric

tonn

es

Sawnwood

Panels

PulpPaper

Source: IIED 2004 Table 3/1 Global Distribution of Industrial Roundwood Production in 1961–2000

Region 1961 1991 2000 1961–2000

million m3 %/a CAC 6 11 13 1.93 ESA 26 87 68 2.38 Europe 23 267 325 0.94 NENA 8 9 13 1.43 Oceania 30 81 83 2.61 South America 28 114 153 4.35 SSA 24 54 67 2.59 Former USSR 253 275 139 -1.48 Canada 87 153 183 1.88 China 35 90 96 2.53 Japan 49 28 18 -2.49 USA 248 388 428 1.37 Tropical 116 354 367 2.92 Non-tropical 902 1,204 1,219 0.76 Total 1 017 1 558 1 587 1.12

Source: FAO 2004 based on FAOSTAT (2002)

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2. CONSUMPTION TRENDS Table 3/2 Average Annual Change in Volume of Apparent Consumption in 1961-2000 Region Industrial

roundwood Sawnwood Panels Pulp Paper

CAC 2.06 2.68 5.91 3.18 6.18 ESA 1.21 1.44 5.20 5.94 5.25 Europe 1.10 0.71 5.04 2.39 3.35 NENA 1.68 3.83 8.41 6.22 6.39 Oceania 2.74 0.03 6.63 4.87 4.98 South America 4.32 2.43 7.79 5.41 4.59 SSA 2.91 2.03 5.57 5.07 4.26 Former USSR -2.29 -4.44 2.48 0.84 0.71 Canada 1.98 2.44 3.37 1.58 3.26 China 2.23 -0.58 10.80 4.81 6.47 Japan -1.35 -0.10 5.47 3.10 4.66 USA 1.30 1.63 4.10 2.29 2.50 Total 1.12 0.50 5.11 2.59 3.64 Source: FAO 2004 based on FAOSTAT on-line database (2002) 3. EXPORT TRENDS Table 3/3 Regional Export Volumes of Industrial Roundwood in 1961–2000,

1961 1971 1981 1991 2000 Annual changeRegion

m3 % CAC 331 600 388 600 27 800 21 916 56 029 -4.35 ESA 3 100 800 11 518 000 16 343 700 21 556 569 8 396 486 2.52 Europe 12 861 800 13 178 300 18 977 750 23 157 048 29 190 263 2.07 NENA 16 100 36 300 38 000 3 190 4 485 -3.14 Oceania 5 017 500 21 831 400 10 277 200 5 495 491 10 583 422 1.88 S. America 391 000 315 500 463 100 2 341 384 2 198 872 4.41 SSA 4 756 000 6 762 500 4 925 400 4 057 714 6 101 652 0.62 Former USSR 5 481 500 14 301 900 13 335 900 10 623 643 42 112 075 5.23 Canada 3 501 500 2 872 500 1 972 600 1 355 948 2 947 000 -0.43 China 42 600 123 000 59 100 773 613 781 184 7.54 Japan 23 800 22 600 31 800 34 065 3 800 -4.48 USA 2 636 100 10 718 700 12 593 800 20 700 384 11 968 000 3.85 Tropical 13 276 000 38 802 200 30 790 500 27 343 016 18 847 921 0.88 Non-tropical 24 884 300 43 267 100 48 255 650 62 777 949 95 495 347 3.42

Total 38 160 300 82 069 300 79 046 150 90 120 965 114 343 268 2.78 Source: FAO 2004 based FAOSTAT on-line database (2002)

Annex 3


Table 3/4 Value of Global Wood-based Products Exports in 2001

Products Global exports FOB USD mill.

Share of tropical wood of global (ITTO producing) (%)

Industrial roundwood 7 530 27.1 Softwood 3 529 1.4 Hardwood 4 001 49.7

Sawnwood 21 837 13.3 Softwood 15 526 2.1 Hardwood 6 311 40.8

Plywood and veneer 9 109 45.6 Sub-total 38 476 23.6 Fibreboard 3 474 11.5 Particle board 3 947 4.0 Sub-total 7 421 7.5 Pulp, paper and paperboard 80 909 5.4 Grand total 126 806 11.1

Sources: FAOSTAT (2002) Figure 3/3 Proportion of Processed Wood Production Entering International Trade

in 1961–2000

0%

5%

10%

15%

20%

25%

30%

35%

1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000

PanelsSawnwoodPaperPulp

Source: IIED (2003) based on the FAOSTAT on-line database

Annex 3


Figure 3/4 Global Exports of Hardwood Sawnwood in 1980-2000

Estimated Gross Export

0

5

10

15

20

25

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

Million cum

Tropical* Other Hardwood

* Tropical includes ITTO members only Source: Annual Reviews and Assessments of ITTO, FAOSTAT

Figure 3/5 Global Export of Plywood in 1980-2000

Estimated Gross

0

5

10

15

20

25

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

Million

Tropical* Other

* Tropical includes ITTO members Source: Annual Reviews and Assessments of ITTO, FAOSTAT

Annex 3


Table 3/5 EU Forest Product Trade Pattern in 2002

Production Imports Exports Consumption Imports share of consumption

Products

1 000 m3 % Industrial roundwood 234 080 48 904 14 517 268 466 18.2 Softwood 189 799 27 081 9 335 207 545 13.0 Hardwood 44 280 21 822 5 182 60 921 35.8 Sawnwood 79 662 39 168 34 864 83 967 46.6 Softwood 72 746 32 168 32 837 72 077 44.6 Hardwood 6 916 7 000 2 026 11 890 58.9 Plywood and veneer 4 510 5 826 2 997 7 338 79.4 Sub-total 318 251 93 898 52 378 359 771 26.1 Fibreboard 10 244 5 985 7 374 8 855 67.6 Particle board 30 106 6 944 9 631 27 419 25.3 Sub-total 40 350 12 929 17 006 36 273 35.6 Pulp, paper and paperboard 119 6461) 56 3901) 58 4921) 117 5441) 48.0 1) 1 000 Mt Source: FAOSTAT 4. IMPORT TRENDS Table 3/6 Global Imports of Industrial Roundwood in 1961–2000

1961 2000 Annual Change Region

1 000 m3 % CAC 43 101 2.2 ESA 451 10 612 8.2 Europe 21 317 63 479 2.8 NENA 576 2 458 3.7 Oceania 206 773 3.4 S. America 367 150 -2.2 SSA 52 284 4.3 Former USSR 152 1 004 4.8 Canada 1 291 4 967 3.4 China 637 15 532 8.3 Japan 9 040 15 948 1.4 USA 3 866 1 511 -2.3 Tropical 325 5 003 7.1 Non-tropical 37 673 111 817 2.8 Total 37 998 500 116 820 2.9

Source: FAO 2004 based on FAOSTAT on-line database (2002)

Annex 3


Figure 3/6 Major Importers of Secondary Wood Products 2000, USD million

World.ITTO Prod.ITTO Cons

USAGermany

JapanUnited Kingdom

FranceNetherlands

Belgium/Lux.

Switzerland

AustriaChina

0

2000

4000

6000

8000

10000

12000

14000

Source: Rytkönen (2003) based on Annual Review and Assessments of ITTO 2001 Table 3/8 Value of Wood-based Products Imports to EU in 2001

Global imports EU imports EU imports from ITTO producer countries

Products

CIF value (USD mill.) Industrial roundwood 9 446 2 803 475

Softwood 4 474 1 261 3 Hardwood 4 972 1 543 472

Sawnwood 23 451 7 675 1 182 Softwood 16 088 4 729 43 Hardwood 7 363 2 902 1 139

Plywood and veneer 9 500 3 103 824 Sub-total 42 396 13 581 2 481 Fibreboard 3 464 1 251 15 Particle board 3 886 1 366 1 Sub-total 7 350 2 617 16 Pulp, paper and paperboard 80 909 36 652 936 Grand total 130 655 52 849 3 433 Sources: FAO, EUROSTAT

Annex 4


IMPORT TARIFF RATES IN SELECTED DEVELOPED AND DEVELOPING COUNTRIES Table 4/1 Tariff Rates for Forest Products in Selected Developed Countries

Australia EU Japan USA Canada New Zealand SITC MFN GSP MFN GSP MFN GSP MFN GSP MFN GSP MFN GSP

44 SOLID WOOD 44.01 Chips and particles 5 0 0 0 0 0 0 44.03 Wood in rough (i.e. logs) 0, 5 0 0 0 0 0 whether or not roughly … squared 44.07 Wood sawn lengthwise 0- 5 0- 4 0 (C) 0 4.8- 7 0 0 0 0, 7 5.5 sliced or peeled or planed 0- 2.5 7.6 ( NC) 0 44.08 Veneer 0, 5 0 3, 4(C) 0 5 0, 2.5 0 0 0, 6.5 ,7 5, 5.5 44.09 5 4 0.0 4.1- 6.3 0 0, 4.9 0 0, 3.5 0 0,5 4

Wood-tongued, grooved, beadings, mouldings etc.

44.10 Particleboard and similar 5 7 4.9 6.3 0 0 0 0, 2.5 0 5 4 44.11 Fibreboard 5 4, 5 7 4.9 2.8- 3.6 0 0 0 0, 6 0 5 4 44.12 Plywood and laminated 5 4, 5 6- 10 4.2- 7 7.5 (C) 0, 6 (C) 0- 8 (C) 0 9.5 (C) 3 (C) 7 5.5 wood 7.4-12 0- 10 (T) 0- 8 0 0, 5 (NC) 0,3 (NC) 44.15 Packing cases, drums, pallets etc. 5 4 3 0 3.4- 4.7 0 0, 10.7 0 0, 9.5 0, 3, 5 0, 7 5.5 44.18 Builders' joinery and carpentry 5 4 0- 3 0- 2.1 2.8- 6.3 0 0- 4.8 0 0- 8 0 6.5 5 47 PULP AND WASTE PAPER 47.01 Wood pulp (mechanical) 0 0 0 0 0 47.02-05 Wood pulp (chemical) 0 0 0 0 0 47.07 Waste paper 0 0 0 0 0 48 PAPER 48.01 Newsprint 5 2.5 0 0 0 0 0- 6.5 5 48.04 5 0- 5 3.5 0 1.8- 2.5 0 0 0 0 0 0- 7 5.5

Uncoated kraft paper in rolls or sheets

48.08 Corrugated paper and board etc. 0,5 6, 10 0 2.4- 2.9 0 0-.5 0 0 7 5.5 in rolls or sheets 48.10 Coated paper (printing) 0,5 7.2 0 2.9 0 0 0 0 0- 6.7 5 in rolls or sheets 94 FURNITURE 94.01 Seats with wooden frames 5 0 0 0 0, 9.5 0- 6 7 5.5 94.03 Furniture of wood 5 0- 2.7 0 0 0 0, 9.5 0 7 5.5 Table 4/2 Tariff Rates for Forest Products in Selected Developing Countries

Annex 4


SITC China India Indonesia Korea, R Malaysia Thailand Chile S. Africa Brazil Mexico Taiwan 44 SOLID WOOD 44.01 Chips and particles 0 5 0 2 20 1 7 0 4.5 10 0 44.03 Wood in rough (i.e. logs) 0 5 0 2 0 1 7 0 4.5 10 0 whether or not roughly squared 44.07 Wood sawn lengthwise 0 25 0- 10 5 0 1,5 7 0 8.5 10, 15 0 sliced or peeled or planed 44.08 Veneer 5- 8 35 5 5 0, 20 10 7 0 8.5 10 0 44.09 Wood-tongued, grooved, 15 35 0 8 20 20 7 0 12.5 10, 20 0 beadings, mouldings etc 44.10 Particleboard and similar 16, 18 35 5 8 20 20 7 15 12.5 15, 20 0, 3 44.11 Fibreboard 11- 18 35 5, 10 8 20 20 7 10 12.5 15 3, 5 44.12 Plywood and laminated 15 35 15 8 25- 40 20 7 10 12.5 18 (C) 4- 15 (C) wood 23 (NC) 10,15 44.15 Packing cases, drums, 10 35 10 8 20 20 7 10 12.5 23 2 pallets etc 44.18 Builders' joinery and carpentry 16 35 15 8 20 20 7 15 16.5 23 2 47 PULP AND WASTE PAPER 47.01 Wood pulp (mechanical) 0 5 0 0 0 5 7 0 6.5 5 0 47.02-05 Wood pulp (chemical) 0 5 0 0, 2 0 5 7 0 6.5 3, 5 0, 1 47.07 Waste paper 0 5 0, 20 2 0 1 7 0 6.5 3 0 48 PAPER 48.01 Newsprint 3- 45 15 5 7.5 5 10 7 10 12 18 0 48.04 Uncoated kraft 10, 15 35 0- 10 3- 7.5 0, 15 10 7 9 16.5 13 4.5 in rolls or sheets 48.08 Corrugated paper and board etc. 12 35 10 7.5 15, 25 10 7 9 14.5 13 2.2- 5 in rolls or sheets 48.10 Coated paper (printing) 15 35 0- 10 7.5 0- 15 10 7 9 16.5 13 5, 6.3 in rolls or sheets 7 94 FURNITURE 94.01 Seats with wooden frames 8 30 20 7 20 20.5 18 94.03 Furniture of wood 22 35 10- 20 8 30 20 7 20 20.5 23, 25 1.25- 10 Key source: Rytkönen (2003) MFN Most Favoured Nation (C) Coniferous (T) Tropical GSP Generalised System of Preferences (NC) Non-coniferous

Annex 5


CASE STUDIES

1 BRAZIL 1.1 Background Brazil has a surface area of 8.5 million km² making it the world’s fifth biggest country. Brazil has a population of 170 million, which is growing by 1.6% per year. In addition to a mix of various ethnic groups, there are some 400 000 indigenous people speaking 180 different languages. Brazil is the world’s eighth biggest economy, with a GNP of USD 750 billion (ITTO 2002). Brazil is one of the major forestry countries in the world. The total forest area of Brazil covers 5.44 million km², corresponding to 14% of the world’s forests, 30% of the world’s tropical forests, 61% of the South American forests, and about 64% of Brazil’s land cover. Brazil has an estimated 5 million ha of plantation forests, representing about 1% of the total forest area. Most natural forests are found in the Northern and Central Western Regions and only limited areas in the South. Plantations are mainly located in the southern regions (ITTO 2003). The forest-based sector is crucial to Brazil’s national economy. Forest sector accounts for about 7% of the GNP and represents about 2% of total taxes collected by the Brazilian government. Locally, the forest-based sector provides work and income to many communities. Forest sector employs officially about 1.5 million people. Of this silviculture and forest management activities account for approximately 40% and industrial activities for the remaining 60%. Informal employment is estimated to be 4.5 million people. About 6 million people are employed in the forest sector, representing 5.6% of the economically active population (ITTO 2002, Macqueen et al. 2003). In addition to industrial wood production, forests are a main source of energy in rural areas and for selected industries (in particular pig iron); about 60% of total wood production goes to energy uses. The Brazilian forest sector also provides a range of environmental services of both national and global importance. Brazil possesses possibly the richest biodiversity in the world. Brazil has more species of animal and plant than any other country, approximately 10-20% of all species catalogued to date. The Brazilian Amazon has been ranked as one of the top ten global hot spots by number of endemic species. Protection of soil and water through sustainable forest management in the Amazon has both global and local impacts through hydrological and climatic cycles. Owing to its enormous geographical extent, the Amazon forest is also critical to global carbon balances (ITTO 2002, Macqueen et al. 2003). 1.2 Production and Trade Trends The Brazilian forest sector depends primarily on the domestic markets, which account for some 85% of total industrial production. Except for the reconstituted wood panels industry, the number of operating industries in Brazil declined in the last decades, reflecting a trend towards industries with larger capacities. The importance of export markets for plantation wood has been increasing steadily. The Brazilian forest industry depends practically entirely on domestic wood supply. Out of the total estimated industrial log consumption (around 170 million m³ per year) almost 70% is eucalyptus and pine logs produced in fast-growing plantations. These plantations supply the logs consumed by the pulp and paper industry, steel industry (charcoal), the wood panel and the sawmilling industry. The rest (around 30%) come from natural forest, including from the Amazon. Logs from natural forests are mostly used for charcoal, veneer and sawn wood production (ITTO 2002). Brazil is a major global producer of forest products, but it consumes most of its production despite increasing export trends (Table 5/1). In 2002 the share of exports of total production was in: roundwood 0.9% sawnwood 12.3%, panels 37.8%, pulp 43.1%, and paper and paperboard 19.1%. In 1990 the

Annex 5


corresponding shares were roundwood 0.04%, sawnwood 0.3%, panels 21.3%, pulp 24.0% and paper and paperboard 17.3% (FAOSTAT 2002). Brazil has the world's largest domestic market for tropical timber. The country is the second largest producer of tropical logs after Indonesia, but also the second largest consumer of tropical logs. It is the world's largest producer of tropical sawnwood (9.86 million m³) and also the largest consumer of tropical sawnwood. It is the third largest producer of veneer (0.15million m³) and the fifth largest producer of tropical plywood (1.1 million m³). While Brazil exports only a small percentage of total timber production, the country is still the second largest exporter of tropical sawnwood, the fifth largest exporter of tropical veneer, and the third largest exporter of tropical plywood. Brazil is also a major exporter of secondary wood products (Table 5/2). Brazil imports mainly paper products, but the import volumes are small (FAOSTAT 2000, Macqueen et al. 2003). Table 5/1 Brazilian Forest Product Production and Trade in 2002

Product Production Consumption Exports Imports Export share of production

%

Imports share of consumption

% Roundwood (1 ,000 m³) 102 994 102 127 18 885 0.9 0.0 Sawn wood (1 000 m³) 22 800 19 628 2 814 143 12.3 0.7 Wood-based panels (1 000 m³) 5 893 3 773 2 229 41 37.8 1.1 Pulp (1 000 t) 8 000 4 591 3 450 373 43.1 8.1 Paper & Paperboard (1 ,000 t) 7 600 6 375 1 450 560 19.1 8.8 Source: STCP and FAOSTAT The European Union and the United States are the main export destinations for all products except paper. Paper is primarily exported within the South American region. The Near East and North Africa are also important importers of Brazilian veneer. Japan and, to a lesser extent, China are significant markets for Brazilian pulp. Asia, Sub-Saharan Africa, Oceania, Central America and the Caribbean are relatively insignificant (FAOSTAT 2002, Macqueen at al. 2003). Table 5/2 Distribution of Forest Product Exports from Brazil in 2001

Importing country Roundwood Sawnwood Wood-based panels Pulp, paper & board 1 000 m³ % 1 000 m³ % 1 000 m³ % 1 000 t % EU 510 88.8 650 30.1 835 49.5 1 413 35.2 United States * 0.2 837 38.7 400 23.7 940 23.4 China * 0.1 156 7.2 8 0.5 472 11.8 Japan * 0.0 21 0.9 10 0.6 323 8.0 Venezuela 0.0 22 1.0 65 3.9 19 0.5 Argentina 0.0 30 1.4 27 1.6 294 7.3 Thailand 0.0 58 2.7 1 0.1 12 0.3 Republic of Korea 0.0 * 0.0 12 0.7 119 3.0 Other 62 10.9 439 20.3 422 25.0 733 18.3 Total 575 100.0 2 162 100.0 1 689 100.0 4 013 100.0 * Less than 1000 Source: FAOSTAT

Annex 5


1.3 Trade Conditions 1.3.1 Impacts of Past Liberalisation Efforts Up to the beginning of the 1990s, very high tariff and non-tariff protection, currency exchange controls and exchange rate devaluations were the instruments used by the Brazilian government to protect the domestic industry (Bonelli & Brito 1997). As a result, the vast majority of equipment necessary to run a forest industry enterprise was put beyond the reach of most Brazilian industries. In 1990, all of the non-tariff measures that had no legal basis were removed. The tariffs on equipment produced outside Brazil, for example, were reduced to zero (Muendler 2000). Additionally, the government drafted the Kandir Act, reformulating ICMS – “Imposto sobre Circulação de Bens e Serviços” (Tax on the Circulation of Goods and Services). The enactment of this law exempted from the payment of ICMS such items as the exports of primary and semi-finished products, the acquisition of capital goods, consumed energy and company usage and consumption of goods. As a result, exports leaped. The reform of international trade laws had a great impact on Brazil. First, high-quality technology became importable and directly increased the productivity of the companies. Second, the (partial) elimination of tariff measures increased competition on the product side, forcing especially the export-oriented industry to modify production processes and increase efficiency. Third, increased competition eliminated the less efficient companies from the market. However, this applied mainly to the export-oriented industry. Relatively high import tariffs (as indicated in Tables 5/1 and 5/2 in Annex 5) have reduced competition in the domestic market, which explains the relatively undeveloped domestic market-oriented forest industry, dominated by small operations using inefficient machinery and wasteful processing technology. 1.3.2 Current Tariff Measures Brazil faces relatively low tariffs in Europe and North America. Rates for most products are below 5% and the remainder below 10%. On the other hand, Brazil imposes tariffs on its own imports ranging from 12.5% to 20.5%. Brazil also applies tariff escalation, having low rates for raw materials and higher rates for more value-added products. In the following, tariffs faced by Brazil are applied by main market area: • The European Union: Since May 2003 the wood products (Chapter 44) have been gradually removed

from the Generalised System of Preferences (GSP) of the European Community. Preferences have been suppressed in approximately 50% of the items in November 2003, and in 100% as from May 1st 2004. In case Mercosur reaches a free market agreement with the European Union, it is probable that such tariff measures are not effective anymore.

• The United States: Brazil is beneficiary of the US GSP scheme, until December 2006. The industrial products are in principle given duty-free treatment. However, most wood products are excluded from the GSP or subject to ceilings.

• MERCOSUR: From 1991 to 1994, 95% of intra-regional trade was liberalised, with the virtual elimination of tariff and non-tariff measures for most products. Non-tariff barriers are currently being subject to an elimination process.

• China: The wood products trade with China were liberalised in 2004, i.e. three years after China’s accession to the WTO. After this, trade of most roundwood, sawnwood and plywood products are now liberalised. Also China’s average tariff on furniture (22%) were completely eliminated, on January 1, 2005.

• Japan: Brazil is beneficiary of Japan’s GSP scheme, until March 31, 2011. The industrial products are in principle given duty-free treatment. However, most wood products are excluded from the GSP or subject to ceilings. Most of the plywood products are completely excluded from Japan’s GSP system.

Annex 5


1.3.3 Non-tariff Measures • Brazil: There are no export tariffs on Brazilian timber products. However, log exports are forbidden. • The European Union’s most significant and comprehensive non-tariff measure to wood products is

related to standards and conformity assessment within the New Approach Harmonisation System. The EC recently approved a EUR 4 million project to facilitate the free circulation of products between the Mercosur member countries (Brazil, Argentina, Uruguay, and Paraguay) and between Mercosur and the European Union. The programme focuses on reducing technical barriers to trade (TBT), which are currently based on national technical rules and conformity assessments and harmonising standardisation and verification practices in the Mercosur region, in line with the European or international rules.

• In the United States several cities and states have adopted, or are considering, the adoption of regulations forbidding government procurement of timber products coming from tropical forests and/or requiring wood to be certified.

• In Japan wood products for construction are subject to technical regulations, based on specifications and quality. They are also subject to voluntary marking, based on JAS (Japan Agricultural Standards) concerning formaldehyde release.

1.4 Overview of Sustainability Conditions Deforestation and forest degradation are major sustainability issues, with serious economic, social and environmental implications. Because of the size of the forest resources and associated biodiversity, the sustainability issues are also of great international importance. FAO (2001) reports that in 1990-2000, Brazil lost 23 million ha of its forest area, contributing nearly 25% to the worldwide loss in the same period. Brazil has by far the largest deforestation area in the world, followed by Indonesia. Deforestation and forest degradation in the Amazon are the result of several activities, most of them related to land conversion associated with frontier agriculture, human settlements and export-oriented agriculture. Deforestation process is aided by the domestic market for logs which readily accepts timber from converted areas. This may have significant implications considering impacts of agricultural trade liberalisation under DDA. The main causes of deforestation and forest degradation are summarised below. • Cattle ranching is the leading cause of deforestation in the Brazilian Amazon. This has been the case

since at least the 1970s. • Commercial export-oriented agriculture. Soybean is an important export crop in Brazil and the EU is a

major market for exports. Soybean production has become one of the most important contributors to deforestation in the Amazon and other parts of Brazil. Soybean farms cause some forest clearing directly but also spreads to savanna and transitional forests, thereby pushing ranchers and slash-and-burn farmers ever deeper into the forest. Soybean farming also provides a key economic and political impetus for new highways and infrastructure projects, which opens up forest lands for other actors (Butler 2004).

• Subsistence agricultural production and colonisation policies. A significant amount of deforestation is caused by the subsistence activities of poor farmers who are encouraged to settle on forest lands by government land policies.

• Infrastructure development. Road construction in the Amazon can also lead to deforestation. Roads provide access to logging and mining sites while opening frontier forest land to exploitation by farmers. After the construction of the Trans-Amazonian highway, Brazilian deforestation accelerated to levels never seen before and vast forest areas were cleared for subsistence farmers and cattle-ranching schemes (Butler 2004).

Annex 5


• Unsustainable and illegal logging. Annual timber production (industrial roundwood) in the Amazon region is estimated to be around 28 million m³. Only a small part of it (7.1%) is reported to come from areas under approved forest management plans. Statistics on illegal logging do not exist in Brazil. The share of illegal harvesting is estimated to be about 20%, down from earlier levels of 66-80% reported in the Amazon region (ITTO 2002, Macqueen et al. 2003, Indufor 2004)8.

Some of the main impacts of deforestation and forest degradation are (ITTO 2002): • severe erosion, flooding, droughts and loss of biodiversity, damaging roads, energy and water supply

and frequently interrupting industrial production • carbon emission from deforestation; Brazil is the largest current emitter of carbon from deforestation • 70% of Brazilians live in regions suffering from severe consequences of almost complete deforestation The forest sector is an important employer; employment generated by the timber industry often provides the lifeline for many local communities. The quality of employment is, however, far from satisfactory. Health and occupational safety in the commercial utilisation of the Amazon forests are major concerns for workers and rural dwellers. The industry lacks awareness, skills and resources to make rapid progress in this area. The occupational safety and health of workers are not understood as a productivity factor as long as its costs are not internalised and the long-term positive effects on labour force and productivity are not demonstrated. It appears that salaries and labour standards are better in urban areas and export-oriented forest industries (ITTO 2002). 1.5 Impacts on Sustainability 1.5.1 Economic Effects No trade models and econometric studies were available to provide quantitative information on impacts on the production system, prices and trade flows due to trade liberalisation. Therefore, it is difficult to make firm conclusions about the economic effects. The only major study looking at the impacts of full trade liberalisation in the forest sector, did not project any major changes in wood production (harvesting levels) in Brazil (Brooks et al. 2001). The domestic market largely drives the Brazilian forest sector; not exports. Also Brazil already enjoys free trade or very low tariffs with many of its trading partners because of separate trade agreements. These factors will limit the incremental impacts of further trade liberalisation under DDA in terms of increases in production and exports. Full trade liberalisation would also mean increased competition in the Brazilian forest sector, because industry has been allowed to operate protected by relatively high import tariffs. In addition, tariffs have been higher for processed imported forest products. Export-oriented modern industries, including panel producers and pulp and paper industries, are likely to be competitive enough and can thus benefit from improved market access. Domestic industries targeting mainly local markets and using often outdated technology and inefficient machinery may suffer from reduced profitability because of lower product prices due to increased competition. Production may even decline as a result. The economic impacts can be summarised as follows: • An overall increase in trade in forest products (both imports and exports) • Small increases in production and export of pulp, plywood and sawnwood (export opportunities limited

by wood scarcity and competitiveness of the Brazilian forest industry)

8 The reduction is mainly due to a recent amendment of legislation related to forest conversion for agricultural

production (Indufor 2004).

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• Relatively limited increase in forest products export due to trade liberalisation implies limited impacts on harvesting

• Increased trade (imports and exports) with Asia, and an overall increase in South-to-South trade 1.5.2 Environmental Effects • Wood production in Brazil is very much dominated by the domestic market as indicated by the earlier

sections. Pulp, paper and plywood production are the main export products that would benefit from trade liberalisation. Their processing is mainly based on plantation-grown wood, which means that the extent and nature of environmental impacts would depend on the quality of forest plantation establishment and management. Brazil has the know-how and the policy and regulatory environment needed for establishing environmentally and socially sound forest plantations.

• However, the current plantation forests will be insufficient to meet the growing demand for industrial roundwood in Brazil, which will put an increasing pressure on the remaining natural forests especially in the Amazon region.

• Illegal wood production (concentrating on specific valuable species) may increase. • Increased exports based on modern, export-oriented pulp and paper industry is likely to have less

negative environmental impacts (e.g. effluent flows and air pollution) than production in the smaller mills targeting the domestic markets. This is because new investments in the Brazilian pulp and paper industry are based on the state-of-the-art environmentally sustainable technology.

1.5.3 Social Effects • Increased employment and wage income especially in export-oriented industries (pulp, sawnwood, and

panels) • Trade liberalisation can have positive impacts on labour standards, because employment conditions

are, on average, better in the export-oriented companies than in companies targeting local markets • Trade liberalisation would likely benefit more large-scale export-oriented industries than small and

medium-scale producers. • Inefficient producers especially involved in the panel, SPWPs and wooden furniture processing are

likely to suffer from increasing competition (e.g. better quality and cheaper imports), if protective tariffs ranging between 10 and 20% were removed.

• Increased competition due to trade liberalisation may result in mill closures and unemployment while the overall economic structure of the sector would be improved through consolidation.

• There is a risk of increased social conflicts and infringement of indigenous people’s rights (disputes over land, displaced people), if illegal logging increases and plantations are established in areas, where there are problems with land tenure arrangements (cf. current problems with Veracel). As there is in general shortage of land in many areas, conflicts are often driven by local political aspirations.

1.6 Cross-cutting Impacts Based on the analysis of factors contributing to forest degradation and deforestation, agricultural trade liberalisation is likely to have a larger impact on environmental sustainability than liberalisation of trade in forest products. According to the latest Ministry of Environment statistics soybean cultivation and cattle ranching are the main direct cause of deforestation in Brazil. Any policies, be they of domestic origin, or international such as trade liberalisation through WTO or RTAs, which would increase prices of meat and soybean are likely to have negative impacts on sustainability in the Brazilian forest sector:

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• Meat production and exports. According to CIFOR, between 1990 and 2001 the percentage of Europe's processed meat imports originating from Brazil rose from 40 to 74 percent and in 2003 for the first time ever, the growth in Brazilian cattle production, 80 percent of which was in the Amazon, was largely export driven (Butler 2004).

• Soybean production and exports. Brazil is on the verge of supplanting the United States as the world's leading exporter of soybeans. Higher international prices act as an impetus to expanding soybean cultivation, which is taking place through extensification rather than intensification of land use.

1.7 Mitigation and Enhancement Measures Because most of the sustainability problems in the Brazilian forest sector are associated with the domestic markets and sometimes “perverse” extra-sectoral agricultural and infrastructure policies (creating incentives for forest clearing), it is important to emphasise domestic mitigation and enhancement (M&E) measures. Such measures could include: • Supporting the implementation of already existing forest policies and legislation e.g. through the

National Forest Program (NFP), paying special attention to the Amazon region. • Simplifying and reinforcing the existing regulatory framework to ensure more efficient and transparent

enforcement, including control of illegal operations. • Strengthening the forest management and timber flow control systems, covering also small-scale

producers which dominate forest resource utilisation in the Amazon region. Trade-related measures include: • Promotion of markets for legally/sustainably produced timber by accelerating the process of

certification of both forest management and chain of custody. Brazil has high ambitions to expand exports to markets, which increasingly require a demonstration of the fact that timber comes from “legal sources” which are sustainably managed. The role of the domestic market for certification is crucial and could be enhanced by promotional campaigns and further action by key buyers of Amazon timbers.

• A timber (or a forest product) licensing scheme to secure that only legal timber enters the EU or any other market (through a series of voluntary partnerships with wood-producing countries) can be considered as a complementary M&E measure. However, the impact on illegal production and trade may be limited, because illegal operations are mostly driven by the land conversion process and domestic markets (Indufor 2004).

2 INDONESIA 2.1 Background Indonesia is the world's largest archipelago with a land area of 1.9 million km². Its population is 211.7 million making it the fourth most populous country in the world. Annual population growth is 1.3%. Gross national income per capita was USD 710 in 2002. Despite all the economic turmoil, the Indonesian GDP has grown by more than 7% a year during the last two decades. At the same time, the incidence of poverty has declined. Indonesia’s tropical forests are of global importance and rank third behind Brazil and the Democratic Republic of Congo in area. The forest area is reported to be about 110 million ha but the actual figure of area under forest cover is lower. Forests are very diverse and represent about 10 percent of all tropical forests of the world. Indonesia also houses the most extensive mangrove forests in the world, estimated at

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4.25 million hectares in the early 1990s. The country has also established significant plantation forests amounting to about 9.9 million ha (FAO 2001). Indonesia’s forestry sector generates a large number of jobs in harvesting, primary processing and secondary processing enterprises. Forestry is also of great importance to smallholder livelihoods and meeting subsistence household needs. The official share of forest sector of the GDP was 3.6% in 2000. Approximately 52 000 people were employed in the country’s licensed sawmills and 208 000 in plymills in 1995. Unlicensed sawmills employed an estimated 30 000-40 000 people (NRM 2000). The pulp industry employs an estimated 100 000 people (IIED 2003). It is not known, how many of the jobs in forest industries are sustainable in the long term because these resources are being depleted. The range of benefits provided by Indonesia’s forests extends far beyond forest products. The country is a “mega-diversity” country with over 10 percent of the world’s biological diversity. Indonesia has a network of around 250 protected areas, covering more than 20 million hectares. More than 16 million people live in the country’s 15 largest watersheds. Their forests help protect freshwater supplies by stabilising soil on slopes and regulating the speed and timing of river flow. Indonesia’s forests also store large quantities of carbon. Millions of people use forest plants and herbs known for their medicinal properties and nutritional value. Estimates of the number of people in the informal sector, who depend on forests for their livelihood vary from 30 million to 65 million (FWI/GFW 2002). 2.2 Production and Trade Trends 2.2.1 Production and Exports The development of Indonesia’s forest industry since the early 1980s can be characterised as a long-term boom that has contributed both to economic development and worsening environmental conditions. The boom started with the rapid expansion of the plywood sector fuelled by a ban on log exports and protective tariffs. The production rose from 624 000 m3

in 1979 to nearly 4.9 million m³ in 1985, then doubled to 10 million m3

in 1993, most of it for export. Rapid expansion of the pulp and paper industry followed in the late 1980s and 1990s. Installed annual pulp production capacity grew from 1 million tons in 1990 to nearly 5 million tons in 2000 and was more than 6 million tons in 2001. Annual paper processing capacity increased from 1.2 million tons to 8.3 million tons over the same period. Investment in plywood, pulp, and paper processing capacity has far outpaced efforts to develop adequate supply from plantations, and the industry’s expansion has come largely at the expense of the country’s natural forests. Total potential wood demand in Indonesia is presently estimated at 76-80 million m3, but the annual allowable cut from natural forests only at 5-7 million m³ (Brann 2002, FWI/GFW 2002). Most of the wood production is still for the domestic market, but the importance of international trade has increased yearly. In 2001, the export value of forest products, of which a majority was harvested from natural production forest, accounted for USD 4.45 billion, representing 10.2% of the total value of exports. Forest product exports ranked third after electronics and textiles (excluding oil exports). In 2002, Indonesia produced an estimated 33.0 million m³ of industrial roundwood, but only 1.5% was exported (excluding illegal exports) (Table 5/3). Sawnwood production accounted for 6.5 million m3, of which about 31% was exported. The production of plywood and veneer was 11.9 million m3 with an export share of 46% and the production of pulp, paper and paperboard was 12.5 million tons of which 37% was exported (FAOSTAT 2004). There is no reliable information on illegal log exports or exports of forest products based on illegal or unsustainable wood production. The Ministry of Forestry reported in a press conference in 2004 that illegal logs exported illegally accounted for 10 million m³ per year.

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Indonesia exports a range of forest products to a variety of nations around the world. China, Japan, the Republic of Korea, the United States and the European Union are major importers of Indonesian products. The EU absorbs about 7% of total exports on well behind China and Japan. Table 5/3 Indonesian Forest Product Production and Trade in 2002

Production Imports Exports Consumption Exports of production

Imports of consumption

Products

1 000 m3 %

Industrial roundwood 32 997 180 502 32 675 1.5 0.6 Softwood 206 24 2 228 0.9 10.7 Hardwood 32 791 156 500 32 447 1.5 0.5 Sawnwood 6 500 144 2 016 4 628 31.0 3.1 Softwood 0 107 16 91 118.0 Hardwood 6 500 37 2 000 4 537 30.8 0.8 Plywood and veneer 11 911 12 5 524 6 399 46.4 0.2 Fibreboard 427 96.2 302 221 70.7 43.5 Particle board 297 21 171 146 57.7 14.1 Pulp, paper and paperboard (1 000 t)

12 477 1 085 4 592 8 969 36.8 12.1

Source: FAOSTAT Indonesia has increased trade with the Association of South East Asian Nations (ASEAN) countries in recent years because of the implementation of the ASEAN Free Trade Agreement (AFTA). Malaysia, the Philippines and Thailand are the most important ASEAN countries importing forest products from Indonesia (Table 5/4). China is by far Indonesia’s single most important trading partner. More than half of Indonesian exports is shipped to China. Only in plywood and veneer, do exports to Japan exceed those of China (FAOSTAT 2004). Table 5/4 Distribution of Exports from Indonesia in 2001

Importing country Roundwood (nc) Sawnwood (nc) Plywood & veneer Pulp, paper & board

1 000 m³ % 1 000 m³ % 1 000 m³ % 1 000 t % China 1 131 50.8 1 373 59.2 646 9.6 1 739 35.0Japan 155 6.9 261 11.3 2 932 43.7 330 6.7EU 3 0.1 65 2.8 702 10.5 550 11.1United States 45 2.0 25 1.1 598 8.9 80 1.6Republic of Korea 66 3.0 164 7.1 441 6.6 643 12.9Malaysia 645 28.9 341 14.7 23 0.3 450 9.1Philippines 77 3.4 1 0.1 4 0.1 72 1.4Thailand 105 4.7 9 0.4 17 0.2 54 1.1Other 23 0.1 78 3.4 1 341 20.0 1 049 21.1Total 2 229 100.0 2 319 100.0 6 705 100.0 4 966 100.0Source: FAOSTAT (figures rounded) Non-wood forest products, including especially bamboo and rattan, play a very important role in the national and local economies, but they are also major export commodities. The total value of exports of “wildlife and plants” for the 1999-2000 fiscal year was more than USD 1.5 billion (FWI/GFW 2002).

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2.2.2 Trade Conditions Throughout the 1970s and early 1980s Indonesia had bans or prohibitive tariffs on the export of roundwood. In 1985 a log export ban was introduced. In 1992 the ban was replaced by prohibitively high export taxes (200% on logs). The objective was to expand especially the plywood sector and increase the share of Indonesian processed wood products in the global market. In the late 1990s, following the Asian financial crisis, Indonesia attempted to liberalise its trade and dramatically dropped its export tariffs on roundwood as part of the structural adjustment programme supported by the International Monetary Fund (IMF). This, however, was not supported by appropriate domestic government regulation and enforcement, stimulating unsustainable harvesting. In late 2001 the Indonesian Ministry of Forestry, in conjunction with the Ministry of Industry and Trade, re-introduced an export ban on logs from the country’s forests (Brann 2002). 2.2.3 Tariff Measures The general import tariff rates for forest products are still relatively high compared to developed countries and tariff escalation is common. Tariffs for value added products, which are important for Indonesia (e.g. plywood, joinery products, wooden furniture, selected paper products) range between 10 and 15 percent while tariff rates for raw materials (logs, pulp) are between zero and five percent. Tariff rates faced by Indonesia in its major markets are listed in Tables 5/1 and 5/2. Indonesia is increasingly trading with other Asian countries because of the proximity of rapidly growing markets (especially China) and reduced tariffs among ASEAN countries. The Agreement on the Common Effective Preferential Tariff (CEPT) Scheme for the AFTA requires that tariff rates levied on a wide range of products traded within the region be reduced to no more than five percent. Quantitative restrictions and other non-tariff measures are to be gradually eliminated. Table 5/5 demonstrates the impact on tariffs of trade liberalisation within ASEAN. These reductions are more or less along the Uruguay Round Agreement, but the target is full reduction of tariffs in the future. Table 5/5 CEPT Reduction for Wood and Wood Articles in ASEAN Countries

1996 1997 1998 1999 2000 2001 2002 2003 Country %

Wood and Wood Articles Indonesia 13.02 13.02 11.10 9.30 7.54 6.46 5.38 4.30 Malaysia 13.72 12.36 11.26 9.10 6.89 6.13 5.12 4.94 Philippines 12.99 12.27 9.70 8.14 6.35 5.44 4.73 3.88 Thailand 13.41 13.41 11.60 11.60 8.48 8.48 6.33 4.18 ASEAN 12.93 11.83 10.60 8.75 6.67 5.92 4.92 4.58 Pulp and Paper Indonesia 11.24 11.24 7.78 7.64 4.69 4.69 4.67 4.64 Malaysia 8.11 7.41 6.94 6.31 5.78 5.19 4.92 3.51 Philippines 8.79 8.66 6.25 5.78 4.43 4.08 3.78 3.60 Thailand 15.21 15.21 12.72 12.72 9.50 9.50 7.14 4.82 ASEAN 7.99 7.83 6.36 6.17 4.69 4.54 3.88 3.00 2.2.4 Non-tariff Measures Indonesia has re-introduced a log export ban in 2001. There is also a 15% export tax on sleepers, sawnwood and veneer. At present there is no export tax for processed wood products such as plywood, woodpulp and woodworking products (including mouldings).

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2.4 Overview of Sustainability Conditions Deforestation, forest degradation and habitat fragmentation are significant problems in Indonesia. More than 70 percent of Indonesia’s original frontier forests have been lost, and over half of those that remain are under threat. The rate of forest loss is accelerating. In the 1980s about 1 million ha of forest were cleared per year. In the early 1990s the figure rose to 1.7 million ha per year and since 1996, deforestation has increased to an average of 2 million ha per year (FWI/GFW 2002, FAO 2003). Indonesia has lost 40 million hectares of forest in the last three decades. The causes of deforestation are many and various, including population growth, political and economic instability, climate factors contributing to forest fires and inappropriate government policies promoting unsustainable expansion of forest industries, agricultural production, and resettlements. Underlying many of these causes is a corrupt political and economic system that has regarded forests as a source of revenue to be exploited for political ends and personal gain. It is important to make a distinction between direct and indirect causes of deforestation (cf. Annex 2). According to Wunder& Verbist (2003) estate and perennial crops accounted for about 52%, forestry expansion 13%, and food crops (incl. shifting cultivation) 35% of total deforestation in 1980-2000. • Expansion of palm oil and rubber plantations by large-scale commercial operators (estates) and

smallholders. Indonesia is the second largest producer of oil palm. The area under oil palm plantations has expanded rapidly as a result of increased export demand. In 1985, oil palm plantations covered 600,000 hectares in Indonesia. By 1996 they extended over some 2.2 million hectares. More recent figures suggest that there are now 5.2 million hectares of oil palm plantations (Indonesian Oil Palm Commission). Not all plantation development is unsustainable. However, the production of oil palm has increased deforestation and it has also been blamed for the severe forest fires that ravaged the country. Conway (1998) states that the single largest impact of monoculture on biodiversity has been the clearing of forest land for oil palm. Indonesia is also second largest producer of natural rubber, the third largest producer of cocoa and the fourth largest producer of coffee. Small-scale farmers grow the majority of these products. Small-scale tree crop production has grown rapidly in recent years from an already large base as farmers sought to increase their income and establish a hedge against volatile crop prices. Tree crops are often established in forest clearing near agricultural fields contributing to deforestation. The production of these crops by smallholders is often linked to government resettlement and transmigration programmes. (Sunderlin & Resosudarmo 1996, Conway 1998, Casson 2000, Kartodihardjo & Supriono 2000, FWI/GFW 2002).

• Illegal logging is a significant cause of deforestation and forest degradation, and is now recognised as one of the most critical forestry problems. Besides the outright loss of forest cover, illegal logging also leads to increasing degradation of the forest resource in terms of quantity and quality of stocking, species composition, and habitat fragmentation. Deforestation and forest degradation do not affect only production forest but important watersheds and other protection forests and natural parks. Illegal logging occurs for many social and economic reasons The huge expansion of Indonesia’s wood processing industry has been one of the primary factors driving the increase in illegal logging in the late 1990s. A large part of the illegal timber supply comes from land clearing and harvesting that exceeds legal limits. The annual allowable cut at the national level has recently been reduced to 5.8 million m3/a while the current industrial roundwood consumption has been estimated at 64 million m3/a (MoF 2003). There is no reliable data on the extent of illegal logging and how much of that is exported. Most of the domestic consumption is assumed to be from illegal sources (World Bank 2001). The recent FLEGT impact study adopted a share of illegal logging of 70% of total harvest and assumed that this rate would also apply to the volume of exports. Most of Indonesia’s exports may be illegal (or at least unsustainable). Malaysia, China, Vietnam and India have been implicated as main targets for smuggled timber (Indufor 2004).

• Subsistence agricultural production by smallholders. Production for subsistence use, including shifting cultivation, is also a major contributor to deforestation and forest degradation. Shifting cultivation may

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account up to 20% of deforestation (Sunderlin & Resosudarmo 1996, FWI/GFW 2002). Shifting cultivation is also often associated with resettlement schemes.

• Expansion of forest plantations. Forest plantations have become an important source of wood supply to the Indonesian forest industry. They offer a productive way of making use of scarce land. Forest plantations have been established on prior natural forest land or marginal grasslands. Part of forest conversion is authorised but often associated with corruption. Natural forest is first cleared and logs are used by plywood and pulp and paper industry, after which it is converted into a plantation. Possibly 20-25% of forest plantations have been established by converting natural forests (Sunderlin & Resosudarmo 1996, Kartodihardjo & Supriono 2000, FWI/GFW 2002). Bogus plantations are also a serious problem; a permission is obtained to clear a degraded natural forest to establish a plantation, that is never realized.

• Fire. Large-scale plantation owners have turned to the use of fire as a cheap and easy means of clearing forest to expand e.g. oil palm plantation for export. In the 1990s, deliberate fire-setting, in combination with unusually dry conditions caused by El Niño events, led to uncontrolled wildfires of unprecedented extent and intensity. More than 5 million ha of forest burned in 1994 and another 4.6 million ha burned in 1997-98 with significant impacts on the economy and the environment (Conway 1998, WRI 2000, FWI/GFW 2002, FAO 2004).

• Infrastructure development. Mining, construction of roads and clearing of forest under resettlement (transmigration) programmes have directly contributed to deforestation. Their indirect impacts on the surrounding forests have possibly been even greater (see above).

Underlying causes include: • Resettlement and transmigration policies have been a major source of deforestation and forest

degradation. In addition, illegal migration and settlement by pioneer farmers at the margins of logging concessions, along roads, and even in national parks has greatly accelerated since 1997. Associated land conversion has lead to loss of forest cover and released large volumes of timber for the market.

• Forest governance. The Indonesian forest sector is in a crisis and lacks effective management. Corruption and illegal logging and trade in forest products are rampant. Forest and environmental policies are not implemented, logging concession agreements are not respected, wood is under priced, forest revenue is not collected efficiently, etc. Ongoing decentralisation policy has resulted in increasing lawlessness, because regional and local governments do not have the capacity or the will to promote sustainable forest management but are mainly interested in revenue generation. The division of responsibility, authority and rights over forests between the central, provincial and district governments is not clear, which is one of the underlying reasons for governance problems. These issues are mainly related to the domestic factors, but international trade, especially in plywood, and increasing demand for logs from Malaysia and China have worsened the situation (FWI/GFW 2002, FAO 2004). The governance problems are not unique to the forest sector but are symptomatic of the entire economy. Political and economic instability, inadequate enforcement capacity and poor commitment and incentives to implement the policies and enforce legislation are common drivers of governance problems in Indonesia (Barr 2001, World Bank 2001, FWI/GFW 2002, Gregersen et al. 2003, FAO 2004).

• Economic policies with cross-cutting impacts, including currency devaluation, have favoured export of agricultural crops such as oil palm and cocoa by increasing real producer prices. Promotion of foreign estate crop investment (without adequate controls) and the system of granting “deforestation licenses” for development of export crops have also contributed to loss of forests. The impact of Structural Adjustment Programmes (SAP) in Indonesia has been mixed. Devaluation has increased forest clearing at least in the short term, but on the other hand, more disciplined public spending has reduced subsidies and financing of transmigration schemes. (Kaimowitz & Angelsen 1998, Kaimowitz et al. 1998, Barr 2001, Wunder & Verbist 2003).

The development of estate crops, smallholder agriculture and forest industry has contributed positively to the economic development of the country but at a great cost to the environment and long-term

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sustainability. Many social issues are also linked to forest sector development and forest product trade. Benefits from logging and other forest industries have flowed largely to an already privileged group of businessmen and politicians., Employment has been created but it is mainly in low-wage jobs. Labour laws are not respected in illegal operations. Local and indigenous communities have not benefited much. On the contrary, customary rights and indigenous forest management systems have been often ignored even though there are also positive cases (Simula et al. 2004). Logging concessions, forest plantation development and transmigration programmes have resulted in social conflicts between forest-dependent communities on one hand and government and private sector forestry and land development projects on the other hand. Tree crop plantations have even displaced smallholders from their own land in some cases, but also community forestry programmes are emerging. Most of the forest production is for the domestic market, but it appears that increased trade has provided additional rewards to industrial stakeholders to override indigenous stakeholders with weak or unprotected property rights (FWI/GFW 2002, FAO 2004). 2.5 Impact on Economic Incentives , Production System and Trade There is no specific study available that would look at the impacts of a full trade liberalisation in the Indonesian forest sector. The earlier mentioned global studies (USTR 1999, Brooks et al. 2001) have projected that full trade liberalisation would increase wood production in Indonesia to meet increased production and export of processed products. Feridhanusetyawan & Damuri (2002) applied a computable general equilibrium model to assess the economic impacts of trade liberalisation in Indonesia’s forest sector under different scenarios. The scenario closest to this study’s full liberalisation scenario assumed zero import tariffs for all ASEAN countries and developed countries and 5% for the developing countries. According to the model simulations, further trade liberalisation would increase forest product prices, production and exports in Indonesia. Increased wood product exports would in turn increase the domestic log prices, which eventually would stimulate domestic log production. The production of wood products (sawnwood and plywood) and pulp and paper products would increase significantly. Export composition would shift mote towards further processed products such as furniture, joinery, plywood and paper products but also market pulp and sawnwood (cf. Feridhanusetyawan & and Damuri 2001). 2.6 Impacts on Sustainability Aspects Indonesia’s forest sector suffers from serious sustainability problems. Trade liberalisation, or almost any measure, that would increase forest products production from the current levels, would likely have primarily negative sustainability impacts amplifying the current negative trends. In a situation, where the existing industrial capacity exceeds the sustainable supply of wood manifold, incremental wood production due to trade liberalisation cannot be sustainable. 2.6.1 Economic Effects • Domestic log prices would increase creating an incentive to improve efficiency in harvesting and

processing. • According to Brooks et al. (2001) industrial wood round production would increase by 4.5% in 2010

compared to the baseline. • Supply of raw material would increasingly have to come from plantations reflecting in the need for

restructuring of the wood industry.

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• Most of output expansion in forestry would be based on domestic demand, which would be driven by the domestic consumption and using wood as intermediate input for of value-added products aimed at export markets (Feridhanusetyawan & Damuri 2000).

• Increased exports and imports, with exports focusing on value-added products such as furniture, joinery, plywood, sawnwood and pulp and paper products (especially pulp).

• Overall trade liberalisation would allow cheaper imports of modern forestry equipment and machinery that can improve the efficiency of forest resource use.

• Increased economic welfare and foreign exchange earnings relation to the baseline as a result of improved market access and reduced distortions in the economy (Feridhanusetyawan & Damuri 2000, consultations).

• The trade between southern partners would increase more than the trade with Northern developed countries.

2.6.2 Environmental Effects • Lost of forests due to land conversion for oil palm and other crops. • Risk of further conversion of natural forests into forest plantations by the pulp industry would be

increased in the absence of effective enforcement due to supply problems. • Increased harvesting due to trade liberalisation would accelerate somewhat logging in natural forests

(Feridhanusetyawan & Damuri 2000, Brooks et al. 2001). • Negative impacts on biodiversity, soil protection and watershed management services. • Possibly increased logging in national parks, including harvesting of high-value conservation forests. • Illegal international trade in rattan could be reduced if there were no export tax. • Industry restructuring could reduce the role of environmentally dangerous illegal small scale operations

which are hard to control. 2.6.3 Social effects • Increased employment and wage income especially in export-oriented industries and forestry

operations in the plantation sector (Feridhanusetyawan & Damuri 2000). • Employment conditions appear to be on average better in the export-oriented companies than in

companies targeting local markets. Export-oriented international companies try to comply with international agreements (ILO, WHO, etc) and consequently trade liberalisation can have positive impacts on labour standards.

• Trade liberalisation would likely benefit more large-scale export-oriented industries than small and medium scale producers.

• Inefficient producers will suffer from increasing competition (e.g. better quality and cheaper imports), which may result in mill closures and unemployment while the overall economic structure of the sector would be improved.

• Risk of increased social conflicts and infringement of indigenous people’s rights (disputes over land, displaced people).

The positive economic and employment impacts would largely be short-term, because they are based unsustainable utilisation of forest resources. This means that there would be trade-offs between economic gains and environmental losses. In the long-term, without expansion of the forest plantation sector, it will no longer be possible to maintain the higher production levels because of scarcity of wood, and the overall impacts would be largely negative. The negative sustainability impacts could be reduced, if the increased trade volumes were met through wood supplied from sustainably managed fast-growing plantations. This could be possible in Indonesia, because the country has excellent growing conditions and expertise and knowledge in plantation forestry. However, the present plantation resources are grossly inadequate in

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relation to the existing industrial capacity. Further, many plantations have been established on lands converted from natural forest with loss of many environmental and social values. 2.7 Cross-cutting Impacts Sustainability trends in the forest sector are greatly affected by cross-sectoral factors, both trade-related and others, the latter being related to national economic and forest policies. Export-oriented agriculture of estate crops, especially oil palm, has contributed to deforestation and forest degradation. For example, in the 1990s frequent devaluations increased producer prices for agricultural export commodities, which increased pressure for clearing forest (e.g. Kaimowitz et al. 1998, Wunder & Verbist 2003). Further agricultural trade liberalisation under DDA is likely to aggravate these negative cross-cutting impacts on sustainability in the forest sector. Especially measures that would make agricultural cash crops financially a more viable land use than forestry are likely to have negative impacts on environmental sustainability. This concerns especially oil palm, rubber, and cocoa all cultivated in monoculture plantations. Oil palm has been identified as one of the priority sectors that can be affected by trade liberalisation under the DDA negotiations on agriculture (Maltais et al. 2002). The main environmental and social impacts would be on forestry through increased conversion of natural forest into oil palm plantations and associated conflicts over land rights. In the liberalisation scenario Indonesia would improve economic incentives for expanding oil palm production due to predicted 11% increase in global prices for edible oil crops (Maltais et al. 2002). Combination of higher prices and reduced subsidies in developed countries would increase production especially in low-cost developing countries such as Indonesia. Oktaviani & Dryna (2000), using a computable general equilibrium model, have predicted that oil palm, rubber, coffee and tea production and exports would increase under the APEC trade liberalisation. Especially oil palm and rubber estate expansion has contributed to deforestation in Indonesia. Production increase can be obtained through converting natural forest into oil palm plantations or intensifying production on existing areas. In the past, the emphasis has been on extensive land use, leading to deforestation. Based on the information received through SIA consultations, 90% of the increase in estate crops production has been met through extensification (e.g. clearing forest). In many cases impacts on biodiversity would be negative although sometimes also abandoned (idle) forest land would be put into more efficient use. Large-scale plantations tend to reduce the connectivity of the remaining natural forests, which can seriously reduce their biodiversity value as habitats. Impacts on carbon release or soil protection may be relatively neutral (Casson 2000, Kartodihardjo & Supriono 2000, Maltais et al. 2002). Additional oil palm plantation development also causes social conflicts over land. The impacts may be serious, especially on forest dwellers whose traditional forest use rights may be ignored (based on past experience). 2.8 Mitigation and Enhancement Measures Indonesia has used both log export bans and export taxes combined with import tariffs to reduce export of unprocessed wood and protect its own industry:

• Log export bans. In 2001 log export ban was re-introduced mainly to curb deforestation and forest degradation but also to ensure adequate supply of logs to the domestic processing industry.

• Export taxes. Indonesia still has export taxes for selected forest products although they have been considerably reduced compared to rates in the 1980s and early 1990s.

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Prohibitive export taxes on logs and sawnwood and outright log export bans allowed Indonesia to become the world’s leading exporter of tropical plywood. At the same time, Indonesian wood processors were provided with an undue competitive advantage, which resulted in industrial excess-capacity leading to significantly increased forest exploitation. It has been estimated that the log export ban in the early 1980s and the consequent prohibitive export taxes, lowered domestic log prices by some 40-50% below international levels. In addition, quasi-cartels and collusive behaviour further reduced the value of logs. The depression of log prices created artificial demand for logs and promoted wasteful practices. The plywood industry’s productivity has been clearly below an international level and possibly 15% below the neighbouring countries (Barbier 1994, Barbier et al. 1995, GATT 1995). Barbier (1994) estimated that log export restrictions caused over USD 545 million loss to the national economy in 1979-1982, and USD 725-850 million in 1981-84. Export restrictions reduced the domestic wood prices, increased demand for wood, and helped indirectly the development and maintenance of an inefficient processing sector, all of which have had had a negative impact on the Indonesian forest environment. Low wood prices made forestry a less attractive land use and also eliminated the possibility of addressing externalities in the wood price. The current log export ban is likely to have similar impacts, i.e. economic loss to the economy and possibly negative impacts on the environment in spite of being driven by environmental conservation. The size of the domestic market, extra-sectoral causes for deforestation and weak existing governance capacity are likely to have limited the effectiveness of the log export ban. In addition, the ban may have increased both public and private sector corruption (FAO 2004). Shimamoto et al. (2004) argue for a log export ban, on the grounds of repressing timber production in Indonesia, but in reality the impact appears to have been the opposite. On the other hand, the possible abrupt elimination of the log export ban as part of trade liberalisation poses also environmental risks as illegal logging is likely to continue because of the weak governance system. When roundwood export volumes increase, it will also be easier for illegal loggers to export wood without detection. When the log export taxes were drastically reduced in 1998, both legal and illegal log exports grew rapidly with adverse impacts on the environment (Brann 2002). The elimination of the log export ban would likely have a similar impact although there would be economic gains through improved production efficiency. Clearly, there are trade-offs between economic and environmental objectives in adopting trade-related measures to mitigate environmental impacts of trade liberalisation. Because Indonesia is a major exporter of forest products, control of illegal trade can be used as a mitigation measure. The EU FLEGT Action Plan can result in a voluntary partnership with Indonesia to ensure that only legal timber enters the EU by using a licensing scheme. Recent environmental impact assessment of this proposal concluded that in the case of Indonesia FLEGT may not, however, have the desired impact, because the volume traded with EU is so small that Indonesia can meet the legality requirement without significant improvements in control. Further, there is a possibility of Indonesia redirecting its forest product supply to major less discriminating markets nearby (including China). Certification and eco-labelling requirements in developed countries could have a similar effect if these requirements are not effectively applied to re-exports from third countries. Other bilateral agreements to control illegal trade, combined with FLEGT, can increase the size of the market requiring legal forest products. Bilateral agreements exist already between Indonesia and China, Japan, Malaysia, and Norway, and there is a Memorandum of Understanding between the Governments of Indonesia and the United Kingdom. It is too early to say if these initiatives will make any impact. Malaysia has already taken measures to improve control of their import (ITTO 2004).

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3 TANZANIA 3.1 Background Tanzania is a LDC with an estimated average income per capita of USD 282. However, during the recent years GDP has grown faster than population. GDP growth has ranged between by 3.6% in 1995 and 5.1% in 2000. The economy largely depends on agriculture. The population in 2002 was about 32 million, with an estimated annual growth rate of 2.8%. About 75% of the population live in rural areas. Some 50% of the population is living in poverty and dependent on various forest resources in rural areas. About 337 000 km2 or 38% of Tanzania’s total land area (886 000 km2) is covered by forests and woodlands that provide for wildlife habitat, unique natural ecosystems, biological diversity and water catchments. The total area of forest plantations is estimated to be 160 000–200 000 ha. Tanzania is one of the richest countries in terms of biodiversity and has been classified as a “megadiversity” nation along with the Democratic Republic of Congo, Brazil and Indonesia. Forests provide biofuels and support agricultural sector through provision of water resources and maintenance of hydrological balance and soil protection services. The contribution of forest sector to the national economy has remained relatively constant: in 1990 the forest sector’s recorded share was 3.1%, 3.5% in 1996 and 2.8% in 1999 (the actual contribution to the GDP is higher if the informal sector is accounted for). The sector employs about 3% of country’s paid labour and even a bigger proportion of people in the informal forestry related activities. 3.2 Production and Trade Trends Fuelwood dominates forestry production, consuming more than 60% of the roundwood. In both rural and urban areas wood-based energy consumption is estimated to account for about 92% of total energy consumed in the country. Forest industry in Tanzania is dominated by mechanical wood processing represented by sawmilling, furniture and joinery. The other forest-based industries encompass small-scale paper and board production, match manufacturing, pole production, chipboard, fibreboard and blockboard manufacturing and tannin extraction. The majority of forest industry plants currently operating in Tanzania depend on their raw material supply from industrial plantations. Construction activities in Tanzania are dependent upon significant amounts of forest products as materials. In recent years, these activities have increased, hence triggering further production and exerting pressure on forests. There is also a large variety of NWFPs in Tanzania: food, fruit, honey, nuts, medicinal plants, gums, resins, barks, natural dyes, aromatics, fibres, etc. Some of these products have a significant positive impact on rural households in terms of generating cash income and supplementing diet. The overall value of both imports and exports is small. Tanzania produces most of the products it consumes and imports are mainly paper and paperboard products as well as wood-based panels (plywood). The main export products are logs (especially plantation teak) and sawnwood, bee products, and wood carvings (30%). The total export value of in 1999-2000 was USD 3.6 million compared to USD 5.8 million in 1995-1996 and USD 14.1 million in 1997-1998, showing thus considerable annual variation (MNRT 2001). The volumes exported are usually below 10 000 m³ and only few hundred cubic meters or tons depending on the product. Recently there has been incidence of illegal exports of wood products, but there is no overall evidence on the extent of the problem in terms of total volumes involved.

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3.3 Trade Conditions Like all economic sectors of Tanzania, the forest sector has been influenced by economic reform and trade liberalisation policies, which were initiated in 1987, and fully implemented in the 1990s. The reforms include Macro-Economic Policy Framework, Civil Service Reform Programme, Financial Sector Reform and Monetary Policy, Parastatal Sector Reform (including all the state-owned forest industries), and Local Government Reform Programme. (MNRT 2001, UNEP 2002) Main measures affecting the forest sector include: removal of trade distortions in the production and marketing of forest products to ensure effective market-determined prices, elimination of the licensing system, removal of fiscal and non-fiscal barriers in forest products trade, and introduction of economic incentives to promote investment. Most of the import tariffs (usually below 60% but reaching up to 300%) were reduced considerably. At the same time import tariffs on machinery, including machinery and equipment needed in forestry and forest industry, were reduced drastically. These measures facilitated the import of more efficient machinery improving efficiency in wood utilisation with less waste. 3.4 Overview of Sustainability Conditions Deforestation and forest degradation are a serious problem in Tanzania, reducing biodiversity, destroying and fragmenting habitats, and threatening soil conservation and catchment management services. Annual deforestation is estimated at about 500,000 ha per year (MNRT 2001). Deforestation is caused by • heavy pressure from agricultural expansion mainly for subsistence use and local markets; • livestock grazing; • wild fires; and • over-exploitation and unsustainable utilisation of wood resources mainly for subsistence use and domestic

market (fuelwood).

Social issues related to forestry are mainly associated with deforestation and forest degradation that affect negatively the livelihoods of local people. Forests are increasingly becoming important in terms of rural and urban livelihoods, as there is an established cause-and-effect relationship between poverty and forest degradation due to subsistence household needs. The role of forests and trees in food security, contributing to water supply, providing economic alternatives and supporting other sectors such as agriculture and nature-based tourism are being threatened by loss of forest resources (MNRT 2001). The importance of fuelwood and charcoal for household energy supply is a key social issue. 3.5 Impact on Economic Incentives, Production System and Trade UNEP (2002) has carried out a comprehensive integrated assessment of the impacts of trade liberalisation and trade-related policies in the Tanzanian forest sector. As trade liberalisation has been only one element of the overall economic reform package, which makes it difficult to separate its impacts. According to the UNEP study, trade and economic reforms increased market prices of forest products and improved market access. Reduced tariffs on imported machinery stimulated investment into more productive technologies. As a result, production and export of forest products increased although most of the new investments (especially mobile sawmills) targeted the domestic market (Katila et al. 2003). There are no economic studies available predicting what would happen to the wood and forest product prices were trade further liberalised under WTO DDA. Also, no modelling efforts have been carried out to study the impact of the Uruguay Round in the Tanzanian forest sector. USTR (1999) and Zhu et al. (2002) project the following trends in Africa based on a full liberalisation scenario baseline:

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• A 0.9% reduction in the production of industrial roundwood compared to the baseline. • Export of industrial roundwood would increase. • Africa would become increasingly a net importer of pulp and paper and paperboard; import of

woodpulp and paper and paperboard would increase 8.1% and 1.1%, respectively. • Despite an increase in the export of wood-based panels, Africa would remain a net importer. There is huge variation in forestry and economic conditions in Africa. Compared to the North African countries Tanzania has considerable forest resources, but compared to the countries in the Congo Basin, Tanzania’s forest resources are limited. However, it is likely that in principle (category and direction of effect), the impacts in Tanzania will be similar to many other African countries. In summary, further trade liberalisation in the forest sector would likely increase both imports and exports. Tanzania would increasingly import pulp and quality paper and paperboard products. Exports would be dominated by the same products as in the past (logs, sawnwood, handicrafts and other wood products). The increase in the export volume would mean increased production but the overall impact on wood production would likely remain small because of the small trade volumes involved. This is consistent with the findings of UNEP (2002). According to UNCTAD (2000), Tanzania had no or little beneficial impacts from the Uruguay Round in terms of market access, largely because the country is an insignificant producer. There were a number of constraints, including low investment, limited access to capital, weak legal framework including land tenure, and poor infrastructure. These same factors will also apply to the Tanzanian forest sector, with expected further liberalisation of trade in forest products under WTO DDA. 3.6 Impacts on Sustainability 3.6.1 Economic Effects Further trade liberalisation is likely to continue providing the same economic effects as in the past as identified by UNEP (2002). • small increases in export and income; • limited increases in employment in export-oriented industry; • reduction in production in industries, which face increased competition from high quality exports9; • consumers will gain through lower prices and better quality for imported products; and • producers using imported raw materials (e.g. paper converters) will gain, but producers using domestic

wood may face higher prices. In summary, there will be both positive and negative economic impacts. Most of the economic effects are limited but the balance is probably positive. 3.6.2 Environmental Effects The impact of further trade liberalisation on wood use is likely to be quite small, because the increase in export volume will likely be relatively small in absolute terms. Consequently, the environmental impacts will remain small compared to the baseline trends influenced mainly by domestic factors. This conclusion

9 The UNEP study failed to mention that because of drastic reduction of imports tariffs, one of the major industrial

operations in Tanzania, the Southern Pulp and Paper Mill had to close down, and is still closed. It could not survive when the protective tariffs were removed and paper converters and importers/consumers could access better quality products at a lower price.

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is contrary to the UNEP (2002) study that stated that trade liberalisation has considerably contributed to deforestation and forest degradation and associated deterioration in the supply of environmental services. Demand for fuelwood will continue to dominate wood use. Population growth and economic growth (reflected e.g. in increased household wood use and construction) will drive demand for industrial wood. The volumes exported (in rwe) are very small compared to total production in Tanzania and limited increases in export volumes will not cause major (absolute) incremental impacts. Because also agricultural and livestock expansion are domestically driven, the link between international trade and sustainability conditions in Tanzania is quite weak. However, export of roundwood and processed products such as sawnwood and handicrafts have contributed to overexploitation of e.g. teak plantations and selected valuable species (such as African Blackwood) in natural forests (UNEP 2002). Further trade liberalisation would possibly add to these impacts and contribute especially to forest degradation. The most valuable species are likely to be harvested and exported to lucrative export markets. 3.6.3 Social Effects Trade liberalisation will likely have the following effects: • increased employment in export-oriented industry (UNEP 2002); • reduction in employment in industries, which face increased competition from high quality exports; • risk of encroachment of local people’s rights if private industry exploits natural forest for export

without due consideration of these rights; and • improved environment for private sector involvement in the forest sector (UNEP 2002). 3.7 Cross-cutting Impacts Domestic demand and other domestic factors mainly affect sustainability conditions in the Tanzanian forest sector. Forest management is impacted by a number of functions and services in other related sectors such as agricultural production, livestock development, wildlife management, mining, energy and the overall land development. However, no cross-cutting issues related to trade, and especially to the WTO DDA were identified, which would have recognisable impacts on the Tanzanian forest sector. 4 MEXICO 4.1 Background The following presentation makes use of two recent case studies looking at the historical impacts of trade liberalisation in Mexico (Guerrero et al. 2001, FAO 2004)10. The case study can also demonstrate what may happen in other similar Central American countries. Mexico has a land cover of 19 million km2 (FAO 2001). It has a population of 97.4 million with an estimated annual growth of 1.6 percent (FAO 2001). The total forest area is estimated at 5.5 million km2 equalling 28.9 percent of the total land area (FAO 2001). The economic importance of the forest sector is small, contributing only 1.1 percent to the national economy in 2000 compared to 1.4 percent in 1990.

10 The Forestry Industry in the State of Chihuahua: Economic, Ecological and Social Impacts Post NAFTA by

Guerrero et al. 2001. The second study is a case study prepared by IIED for FAO on impacts of trade liberalisation in Mexico at national level with special focus on forest governance issues (FAO 2004).

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Annual deforestation in the 1990s was 1.1 percent. Mexico contains areas, which have been classified by IUCN as mega-diversity areas. Mexico is also a home for a large number of indigenous people. According to the official statistics, Mexico produces annually about 7.4 million m3 of industrial roundwood, most of it softwood. Wood is mainly produced for the domestic markets; in 2002 only 0.1% was exported. The main export products are paper and paperboard, sawnwood and SPWPs (mouldings, wooden frames, furniture, etc.). The United States accounts for more than 90% of the export volume. Paper and paperboard products account for about two thirds of imports followed by wood products (especially sawnwood) and pulp. In the 1990s import of wood products and pulp has remained relatively stable but that of paper and paperboard has grown rapidly. Already before the North American Free Trade Agreement (NAFTA) in 1994, Mexico had reduced import tariffs (exceeding commonly 50%) to 15-20% for most forest products and removed the system of export quotas in preparation for entry into GATT and as part of the structural adjustment programme (SAP). Table 5/6 shows the tariff reductions based on NAFTA. Table 5/6 NAFTA Import Tariff Reduction Schedule for Main Forest Products

Import item Pre- NAFTA tariff %

Mexico tariff reduction schedule: years to zero tariff

US tariff reduction schedule

Canadian tariff reduction schedule

Pulp and paper 0-5 Mechanical wood pulp: 10 Other pulp: immediate

Already 0% Already 0%

Newsprint 15 5-6 years Already 0% Already 0% Logs 10 10 with tariff quota Already 0% Already 0% Sawnwood, pine beams/rafters

15 10 with tariff quota; immediate: construction spp.

Already 0% Already 0%

Veneers 15 Immediate Already 0% Already 0% Wood panels, particle board

20 10 Immediate 10 years

Cardboard sheets 15 10 Already 0% 10 years Furniture 20 10 ? ? Chipboard 15 5 Immediate 5 years Softwood plywood 15 10 ? ? Hardwood plywood 20 10 Immediate 10 years Sources: IMEXFOR (2002), Guerrero et al. (2001) Mexico has also a number of other free trade agreements involving low or zero tariffs with important forest trade partners including Chile and the EU. The latter allows for a four to eight-year period for phasing out tariffs depending on the product. 4.2 Impacts on Economic Incentives, Production System and Trade On the basis of economic theory and empirical models, Prestemon & Buongiorno (1996) predicted that especially imports of paper (e.g. newsprint) and sawnwood to Mexico from the Unites States would increase as a result of tariff reductions under NAFTA. The impact on pulp exports would be limited. The analysis of post-NAFTA import and export trends confirms these predictions. Further trade liberalisation under WTO DDA can be anticipated to strengthen the trends described below, but in a much smaller scale, because tariffs are already close to zero for all the main trading partners and products. Consumers have gained through trade liberalisation due to tariff reductions and resulting lower product prices. Producers of selected forest products have also gained through increased trade. The value of wood product exports rose by almost 40% and of paper and paperboard by almost 100%, most of the exports going to the United States.

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However, trade liberalisation combined with the overall liberalisation of the economy has exposed the Mexican forest industry to increased competition. Lower import prices due to tariff reductions and high competitiveness of the US forest industry have resulted in an increasing trade deficit because of the influx of imports. In 1990, the sector’s trade deficit was about USD 1 billion while in 2000 it had reached almost USD 4 billion. NAFTA has enforced this trend that started already before 1994. During NAFTA implementation the import of processed forest products especially from the United States has increased rapidly. Imports of forest products have also increased from Chile, Brazil and Asia (especially plywood from Indonesia) partly fuelled by the pre-NAFTA tariff reductions. The increased competition has reduced the share of especially wood panels, furniture, and plywood of domestic production. The wood industry has been calling for establishment of higher import duties as the companies are not compatible with US, Chilean and Asian suppliers. Tariff liberalisation has provided considerable economic benefits to consumers. It has also contributed to restructuring of a sector that has suffered from the prevalence of obsolete and inefficient technology and uneconomic mill sizes inherited from the protectionist era. Mexico’s existing pulp capacity is no more competitive , and neither in coniferous sawnwood or plywood production, which explains why increased domestic consumption has been met through imports. Lifting protection and reducing subsidies forced the industry to modernise and increase productivity (World Bank 1995, IMEXFOR 2002). Both the positive and negative developments in the forest industry can be assumed to be more influenced more by the domestic market growth, domestic economic conditions (including the value of the peso), changes in domestic forestry law and industry consolidation than by tariff reductions (Guerrero et al. 2001, FAO 2004). In summary, further trade liberalisation under DDA is unlikely to have significant incremental impacts in the Mexican forest sector, because Mexico has already zero tariff rates with the world’s leading economic blocs (the Unites States, Canada, EU, and many Central American and South American) countries. Imports from countries such as Indonesia, Malaysia and Brazil may increase magnifying thus the existing trade trends. 4.3 Environmental Impacts • There is speculation that increased competition from imports is putting pressure on domestic forest

industry enterprises, which may avoid improving environmental standards to maintain their competitiveness, but no data is available to confirm the existence of this trend (Guerrero et al. 2001).

• The evidence on impacts on wood production and the size of the forest area are mixed. Trade liberalisation has increased wood production in some areas (especially softwoods) and may have thus contributed to deforestation and forest degradation but such impacts are probably very limited. Prestemon (2000) used a simulation model to predict that increased prices of forest products would increase the area of private forest land and decrease the area of public forest land as a result of the acceleration of natural forest degradation. However, Brooks et al. (1999) predict that full trade liberalisation would reduce the overall harvest level in Mexico in relation to the base scenario.

• The contribution of trade liberalisation in forest products has had a limited impact on the overall deforestation in Mexico. Most of the deforestation and forest degradation is taking place in the tropical forest areas, where agricultural and livestock expansion put pressure on the remaining forests. However, these incremental pressures are partly linked to trade liberalisation under NAFTA, and consequently can be regarded at least partially as cross-sectoral impacts.

• In the northern and central parts of Mexico unsustainable logging is clearly an issue and, to some extent, the problem may have been aggravated by trade liberalisation. However, illegal logging and poor forest management were serious problems already before trade liberalisation. Trade liberalisation has certainly not improved the situation but the domestic market demand is a much more important underlying cause behind negative sustainability trends.

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• There is no information available for making conclusions on possible incremental pollution effect caused by increased production of pulp and paper aimed at export markets. Some mills have been rehabilitated which usually also leads to better pollution control.

• Uncontrolled (both sanctioned and illegal) logging is resulting in soil erosion and sedimentation e.g. in Chihuahua and Guerrero, but it is practically impossible to “allocate” these negative environmental trends by source of demand (e.g. domestic consumption vs. increased exports).

As Guerrero et al. (2001) stated: it is exceedingly difficult to quantify the degree to which NAFTA has influenced the forest sector and how changes in harvesting and production patterns have affected the forest and other natural resources. 4.4 Social and Governance Impacts • Trade liberalisation has affected social conditions and forest governance, but the overall evidence is

mixed. There are both negative and positive impacts, but quite often it is difficult to attribute a change specifically to trade liberalisation. In some industries employment has increased because of improved international market access but some plants have also been closed because of influx of cheap imports especially from the United States.

• Trade liberalisation appears to have weakened local institutional controls, especially related to community forestry, where natural and social capital levels were already low, whereas it has stimulated improved governance in better-resourced community forest enterprises.

• Trade liberalisation appears to have magnified social conflict and governance problems created by inappropriate sectoral policies and the SAP, especially in the community forestry sector. However, forest governance problems appear to be more common and acute for lower-value domestic market production than for export-oriented industries.

• There is evidence of corruption in the forest sector and increased trade may have in some cases created new opportunities for illegal activities. In many areas, forest and environmental laws are not enforced efficiently. However, high level corruption was higher in Mexico before trade liberalisation due to complex import and export procedures involving a high level of discretionary powers (FAO 2004).

• Trade liberalisation has made minor contributions to a number of positive institutional developments, including civil society participation, certification, and the location of more law-abiding foreign companies in Mexico. However, other factors have affected these developments more than trade liberalisation (FAO 2004).

4.5 Conclusions and Implications for Mitigation and Enhancement Measures • In trade conditions like in Mexico, where the domestic market development and domestic forest and

economic policies are the driving forces, trade is a magnifier rather than a prime cause of economic, social, environmental and forest governance impacts. Further trade liberalisation can mitigate or exacerbate the social, governance and environmental consequences depending on the context.

• It is difficult to separate impacts of trade liberalisation from other reforms such as structural adjustment programmes, deregulating the economy, and devaluation of the currency. Many impacts of NAFTA were indirect, complex and inter-related with other causative factors. Trade liberalisation impacts were found to be particularly dependent on the accompanying policies and the existing quality of governance.

• It is important to carefully phase the efforts to improve forest governance and trade liberalisation measures, if one is to avoid exacerbating problems created by weak regulatory capacity.

• Support must be provided to vulnerable groups so that they are better equipped to manage forests sustainably, complemented by institutional changes that would allow weaker segments of the society to capture a fair share of improved market opportunities and wood prices.

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It is important to monitor sustainability impacts of trade liberalisation in all sectors, including forestry. NAFTA has established Commission for Environmental Cooperation (CEC) that promotes enforcement of environmental laws, helps monitor NAFTA’s environmental impacts and fosters environmental co-operation among NAFTA parties. 5 ECUADOR 5.1 Background Ecuador’s land area is 2.8 million km2 (FAO 2001). It has a population of 12.4 million with an estimated annual growth of 2.0 percent (FAO 2001). Ecuador has a forest cover of 1.1 million km2 or 38.1% of the total. Annual deforestation in the 1990s was about 1.2 percent (FAO 2001), posing a threat to Ecuador’s globally important biodiversity resources. Commercial logging has been an important source of deforestation and forest degradation especially in Northwest Ecuador (Sierra 2001). The forest sector’s share of the total GDP is limited. The main export products are sawnwood, particleboard and plywood. The self-sufficiency varies by main products: industrial roundwood 96.3%, sawnwood 96.0%, wood-based panels 74.3%, and paper and paperboard 213.0% (FAO 2002). Ecuador has made much progress in recent years toward removing or reducing trade constraints. Tariffs have been cut, restrictions on log exports have been eased, and an attempt has been made to reduce non-tariff trade impediments such as licensing requirements and quotas (Southgate et al. 2000). The following presentation builds on two separate studies: one at a national level and the second at a local, sub-national level.11 5.2 Impacts of Trade Liberalisation Tariffs have been reduced on average below 10% but because of tariff escalation, plywood and some other products still have rates higher than 15%. These rates are, however, far below tariffs that prevailed in the 1980s. Past protective policies were found to be ineffective, which also justified the policy shift reflected e.g. in the national forest policy. Trade liberalisation in Ecuador has been pursued with an expectation that increased competition will improve the efficiency of local processing industries, enhance exports of competitive products, and provide incentives for adopting good forest management practices through higher stumpage prices. The empirical results do not support these expectations. There appear to be no major negative impacts but neither have the expected benefits from trade liberalisation been realised (Southgate et al. 2000, Sierra 2001). Before trade liberalisation and overall liberalisation of the Ecuadorian economy, tariff and non-tariff measures impeded competition in the forest sector. The sector was dominated by a relatively small number of companies, which operated in oligopolistic or monopolised markets. Log prices were below international levels, and consumers paid more for products such as plywood than would have been the case had imports not been restricted.

11 “Markets, Institutions, and Forestry: The Consequences of Timber Trade Liberalization in Ecuador” by Southgate

et al. (2000) and “The Role of Domestic Timber Markets in Tropical Deforestation and Forest Degradation in Ecuador: Implications for Conservation Policy and Planning” by Sierra (2001).

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The impacts of trade liberalisation have been modest, consumer and producer gains have been limited: • The differences in domestic prices and efficient (competitive market) prices have diminished only a

little; • Log prices have not increased and consequently no price incentives for improving forest management

practices have been created; on the contrary prices have stayed so low that high-grading remains the most economical option;

• Low wood prices have meant that the opportunity cost of land in best alternative use has remained very high, making forestry an unattractive land-use;

• No major movement towards greater competition and improved production efficiency; • Deforestation and forest degradation have continued like before trade liberalisation. 5.3 Conclusions and Implications for Mitigation and Enhancement Measures The main conclusions based on this case study are: • One should not expect too much from trade liberalisation or trade restrictions in a context, where

domestic demand and domestic economic, policy and institutional conditions are the main drivers of forest development.

• It is essential to (i) develop a regulatory system that safeguards environmental and social interests rather than aggravates corruption; (ii) improve property rights of forest dwellers and small-scale producers and strengthen especially the position of forest communities; and (iii) eliminate distortions in the domestic market structure and improve investment climate, if one is to obtain benefits from trade liberalisation and create an enabling environment for SFM, including wood prices reflecting the true value of the resource.

• The benefits from trade liberalisation will be realised and distributed more equally by improving direct access of local wood producers to export markets and niche markets for certified wood, as well as to capital markets.

• Equity can also be enhanced by (i) strengthening institutional services needed to develop forest management capacity, (ii) promoting co-operation among small producers to facilitate marketing, and (iii) strengthening the position of small producers to make them more attractive business partners.

• Promotion of forest certification will provide benefits mainly to export-oriented producers and enterprises, which means that most of the wood production would not be impacted in countries where the majority of wood production is for domestic consumption. Because wood prices are often distorted and low, the additional costs created by certification may make forestry financially even less viable financially unless considerable price premiums are obtained and these benefits accrue also to primary producers. These conditions can rarely be met.

• Trade restrictions aimed at promoting conservation and sustainable forestry are likely of limited use in dealing with the structural (underlying) causes that give rise to unsustainable logging. Deforestation and forest degradation were shown to be linked largely to domestic consumption, suggesting that trade liberalisation or trade restrictions may not have much impact on sustainability.

• Excessive domestic controls and regulations are to be avoided, because they enhance corruptive practices in the sector.