FOREST INDUSTRIES INTELLIGENCE LIMITED Market impact of a FLEGT VPA between Malaysia and the EU A study for the Netherlands Ministry of Agriculture, Nature and Food Quality Rupert Oliver Forest Industries Intelligence Limited Final Version 24 June 2008 “INFORMING THE SUSTAINABLE WOOD INDUSTRY” VAT Registered No: 746311248 – Registrar of Companies for England and Wales Company No: 4689869 Head Office: 19 Raikeswood Drive ▪ Skipton ▪ North Yorkshire ▪ BD23 1NA ▪ United Kingdom Tel/Fax: +44 (0)1756 796992 / www.sustainablewood.com Market impact of a FLEGT VPA between Malaysia and the EC Forest Industries Intelligence Limited Contents Executive summary ......................................................................................................... 6 Aims and methodology ............................................................................................. 6 Malaysian wood products trade with the EU ............................................................. 7 EU Policy Instruments .............................................................................................. 9 Policy developments in other major consuming countries ...................................... 11 Malaysia’s competitors ........................................................................................... 14 Potential for circumvention and trade diversion ...................................................... 16 Banking sector ....................................................................................................... 17 Potential market related benefits of FLEGT VPA licensing ..................................... 18 The need for greater market incentives .................................................................. 19 Achieving a balance between costs and the need for regulatory reform ................. 20 Transaction costs at point of import into the EU ..................................................... 21 Handling timber imports ......................................................................................... 21 Recommendations: creating additional market incentives ...................................... 22 Recommendations: further research ...................................................................... 24 1 Introduction ................................................................................................................ 25 1.1 Scope of project ................................................................................................... 25 1.3 Methodology and data sources ............................................................................ 26 1.4 Project Team ....................................................................................................... 27 1.5 Structure of the report .......................................................................................... 27 2 Malaysia’s wood supply and industry.......................................................................... 29 2.1 Introduction .......................................................................................................... 29 2.2 Natural forest resource ........................................................................................ 29 2.3 Plantations ........................................................................................................... 30 2.4 Wood imports ....................................................................................................... 31 2.5 Illegal wood supply .............................................................................................. 32 2.6 Primary wood processing capacity ....................................................................... 37 2.7 Wood furniture industry ........................................................................................ 39 2.8 Wood products trade ............................................................................................ 41 2.8.1 Overall trade .................................................................................................. 41 2.8.2 Wood trade by Malaysian region ................................................................... 42 2.8.3 Wood exports by product and species ........................................................... 44 2.8.3.1 Logs ........................................................................................................ 44 2.8.3.2 Sawn lumber ........................................................................................... 45 2.8.3.3 Mouldings ............................................................................................... 46 2.8.3.4 Veneer .................................................................................................... 47 2.8.3.5 Plywood .................................................................................................. 47 2.8.3.6 Composite panel products ...................................................................... 48 2.8.3.7 BJC ......................................................................................................... 48 2.8.3.8 Wood furniture ........................................................................................ 49 2.9 Malaysia’s market position in the EU ................................................................... 50 3 EU Policy Developments ............................................................................................ 53 3.1 Overview .............................................................................................................. 53 3.2 Public sector initiatives ......................................................................................... 53 3.2.1 EU Communication on Green Public Procurement ........................................ 53 3.2.2 Overview of national level public sector procurement policies ....................... 54 3.2.3 Additional legislative options .......................................................................... 58 3.2.4 EU legislation requiring criminal sanctions for environmental damage ........... 61 Document: Final Report 2 Market impact of a FLEGT VPA between Malaysia and the EC Forest Industries Intelligence Limited 3.2.5 EU Ecolabel .................................................................................................. 61 3.2.6 Procura+ ....................................................................................................... 62 3.3 Private sector initiatives ....................................................................................... 63 3.3.1 European Timber Trade Action Plan .............................................................. 63 3.3.1.1 Background ............................................................................................. 63 3.3.1.2 Harmonisation of trade association procurement policy .......................... 64 3.3.1.3 Gap assessments and chain of custody .................................................. 67 3.3.2 WWF Global Forest and Trade Network ........................................................ 68 3.3.3 Chain of Custody certification ........................................................................ 71 3.4 Views on market acceptance of FLEGT VPA licenses ......................................... 74 3.4.1 Private sector ................................................................................................ 74 3.4.2 Environmental Non-Governmental Organisations .......................................... 76 4 Policy developments in other key markets .................................................................. 79 4.1 Introduction .......................................................................................................... 79 4.2 The United States ................................................................................................ 79 4.2.1 Recent Malaysian trade with the United States.............................................. 79 4.2.2 US trade potential .......................................................................................... 83 4.2.3 US government procurement policy ............................................................... 84 4.2.3.1 Overview ................................................................................................. 84 4.2.3.2 Federal government procurement policy ................................................. 85 4.2.3.3 State and municipality procurement policy .............................................. 85 4.2.3.4 Lacey Act Amendment ............................................................................ 85 4.2.4 US private sector initiatives ........................................................................... 87 4.2.4.1 IWPA Procurement Policy ....................................................................... 87 4.2.4.2 Green building initiatives ......................................................................... 88 4.3 China ................................................................................................................... 91 4.3.1 Recent Malaysian trade with China ............................................................... 91 4.3.2 China trade potential ..................................................................................... 92 4.3.3 Chinese government procurement policy ....................................................... 94 4.3.4 Chinese trade procurement policy ................................................................. 96 4.4 Japan 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