What does the EU’s new deforestation regulation mean for Indonesia?

The European Union (EU) is a formidable economic force, wielding influence far beyond its borders. With a population of approximately 448 million, the EU is seen as a highly attractive market because of its high incomes and the advanced integration of legal and bureaucratic processes among member states. The European Commission’s establishment of a stable and integrated EU market has helped foster a business and investment-friendly climate.

But the EU’s recent deforestation initiative, as the European Union Deforestation Regulation (EUDR), poses a significant challenge to countries with a comparative advantage in commodity-based sectors, like Indonesia. The EUDR, ratified by the European Council on 16 May 2023 and enacted in June of the same year, imposes stringent regulations on commodity businesses and traders serving the European market.

These rules necessitate thorough verification processes and adherence to standards to ensure that exported products originate from sustainable and non-deforested areas. The policy introduces new complexities, such as the country benchmarking system, geolocation requirements, data accessibility and due diligence obligations. These measures will affect a wide range of commodities, including agricultural products like beef, palm oil, cocoa, coffee and rubber.

Although well intended, EUDR will have major implications for commodity exporters, particularly low and middle-income countries like Indonesia, which currently lack the technical capabilities and governance structures required to achieve a high level of regulatory compliance.

Europe is doubling down on sustainability

The introduction of  EUDR comes as no surprise – sustainability has long been a focus of EU economic policy. For instance, in 2019 the European Commission launched a blueprint called the European Green Deal (EGD), aimed at decoupling economic growth from resource use and ensuring no net emissions of greenhouse gases by 2050.

The EGD encompasses a broad range of long-term goals – including achieving climate neutrality by 2050 and developing a more circular economy – which it will pursue through the mobilisation of over EUR 1 trillion in new sustainable investments. This includes a EUR 100 billion Just Transition Mechanism to assist European regions, like Germany and Poland, that will be hardest hit by the transition.

While the EGD largely aligns with the climate policy framework, the EUDR is more closely aligns with the EU’s environmental policy framework. The EUDR addresses tangible and visible environmental challenges with immediate consequences for biodiversity, climate change and local communities. The EUDR aims to directly mitigate these impacts by regulating commodity trade – the root cause of deforestation.

How should Indonesia respond?

The EUDR has big implications for Indonesia, a country blessed with abundant natural resources and an economy increasingly reliant on commodity exports. Indonesian exports to Europe totalled EUR 21.5 billion in 2022, with a strong emphasis on commodities.

The EUDR will impact many Indonesian industries and stakeholders, from large government agencies and corporations down to small-scale farmers.  EUDR therefore presents Indonesia with some complex challenges that will require a strategic response at multiple levels of society.

First, negotiations will be critical. Indonesia needs to collaborate with likeminded partners, like Malaysia, to engage the EU. The Joint Task Force (JTF) between Indonesia, Malaysia and the EU will be crucial for shaping EUDR’s practical implementation. Advocacy within that forum must emphasise the importance of balancing trade and environmental policy with the capacity of local communities, particularly small-scale farmers. It will be crucial to inject social concerns into these discussions. The EU’s Just Transition Mechanism recognises that environmental reforms will have social consequences for many Europeans – the EU should not turn a blind eye to the impact of its reforms on vulnerable populations in developing countries.

On the regulatory front, Indonesia must prioritise the development of digital infrastructure to align with the EU’s deforestation mitigation goals. Rather than viewing digitisation solely as a means to comply with EU regulations, it should leverage new tools and technologies to also enhance the general efficiency and resilience of agricultural processes.

The requirements of EUDR could also be seen as a chance to evaluate the length of Indonesia’s commodity supply chain and implement Good Agricultural Practices (GAP), a global certification program to ensure agricultural commodities comply with food safety standards.

From a business standpoint, compliance with EU standards is urgent. If Indonesia fails to act promptly, it risks losing access to lucrative EU markets and will quickly be displaced by competitors from around the world. For each commodity, Indonesia will need to quickly decide whether to fulfill the EUDR’s requirements or look for new potential trading partners – both options will take time. Market intelligence will play a role in identifying and navigating other opportunities beyond the EU.

Making EUDR into an opportunity

The EU’s position as the world’s largest single market underscores the gravity of the EUDR. The EU’s economic model is now heavily guided by environmental sustainability and the EGD and EUDR demonstrate how environment and climate perspectives are becoming increasingly embedded in trade policy. Integrating these new perspectives will cause some headaches initially – but in time they can become mutually reinforcing and a source of competitive advantage.

While the regulations may seem daunting, they reflect the EU’s unwavering commitment to sustainable practices. Indonesia’s response must be strategic and leverage a suite of tools – especially negotiation, digital compliance and business innovation – to navigate the evolving global trade landscape. If Indonesia can get these things right, it will go a long way towards strengthening its own competitiveness.

But it must also be quick. The market waits for no one – adaptation will be key for Indonesia to defend, or even strengthen, its position in the global economy.