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Briefing

Timber trade flows and investments between China and six VPA countries

Key messages:

  • China is the most significant importer of roundwood and sawnwood from six countries that have signed a Forest Law Enforcement, Governance and Trade (FLEGT) Voluntary Partnership Agreement (VPA) with the EU. However, the total volume and value of trade between China and these countries represents only a fraction of China’s total roundwood and sawnwood imports.
  • Discrepancies exist between VPA exporters’ reports and China’s import records, indicating that there is undocumented and some potentially illegal trade. 
    VPA countries, except for the Central African Republic, are among China’s major overseas forestry investment destinations.
  • China is increasing its efforts to regulate business behaviour to improve the image of Chinese entrepreneurs and investors abroad.
  • A major goal of the EU FLEGT Action Plan is to provide VPA countries with the means to address legality and governance challenges. China is urged to provide technical assistance and resources to support the development of Timber Legality Assurance Systems in VPA countries.

Introduction

This briefing is based on a study of trade flows and investment between China and six countries that have signed Forest Law Enforcement, Governance and Trade (FLEGT) Voluntary Partnership Agreement (VPA) with the EU. These countries are:

  1. Cameroon
  2. Central African Republic 
  3. Ghana
  4. Liberia
  5. Republic of the Congo 
  6. Indonesia

The study is unique in that it combines two perspectives: one from China as an importer and investor, written by experts from Research Institute of Forestry Policy and Information, Chinese Academy of Forestry; and the second from the perspective of the six VPA countries, written by the European Forest Institute’s EU FLEGT Facility. The full report is a synthesis of both perspectives. 

 

 

Overview of the timber trade

China is one of the world’s largest traders and producers of forest products. In 2014, China’s forest products imports and exports amounted to USD 99.8 billion. The country is a net importer of roundwood and sawnwood products. Its foreign timber dependency is close to 50%. 

Between 2004 and 2014, its log imports almost doubled from 26.3 million m3 to 51.2 million m3. At the same time, China’s sawnwood imports increased more than fourfold, from 6.1 million m3 to 25.7 million m3.

China is the most significant roundwood and sawnwood importer for the six countries that have signed VPAs with the EU. The trade between China and these VPA countries, however, represents only a fraction of China’s total roundwood and sawnwood imports.

China’s log imports from Indonesia dropped dramatically between 2004 and 2014, declining from 100 000 m3 to 18 900 m3. In comparison, China’s log imports from African VPA countries increased by 38.7% from around 600 000 m3 to 1.5 million m3 over the same period. 

Of the six VPA countries, Indonesia is the largest sawnwood exporter to China, with trade valued at approximately USD 240 million in 2014. Cameroon is the second most important source of sawnwood for China, with a value of approximately USD 60 million in 2014 – a quarter of the value of Indonesia’s exports. China’s sawnwood imports from African VPA countries accounted for half of China’s total sawnwood imports from Africa between 2004 and 2014. 

Between 2007 and 2014, VPA countries reported roundwood exports to China that amounted to only 57% of the value that China reported as imports from these countries. During the same period, the sawnwood exports to China reported by VPA countries amounted to only 27% of the value of imports reported by China from these countries. 

There is clearly a discrepancy between VPA exporters’ reports and China’s import records.

Timber in transit in Cameroon

Timber in transit in Cameroon

Source: Source: Indra van Gisbergen, Fern

Timber in transit in Cameroon

Source: Source: Indra van Gisbergen, Fern

China’s overseas investments in VPA countries’ forest sectors

China’s overseas foreign direct investment in the forest sector is growing. China invested USD 7 billion in the forest sector in Asia, Europe, Africa, the Americas and Oceania in 2015. It had approximately 200 forestry investment and cooperation projects employing nearly 10 000 people in these regions.

VPA countries, except for the Central African Republic, are among China’s major overseas forestry investment destinations. Indonesia receives far more foreign direct investment from China than the other five VPA countries, presumably because of its rich forests and relatively stable political environment. 

China and the VPA countries share responsibility for ensuring that investments are mutually beneficial, responsible and sustainable.

China is increasing its efforts to regulate business behaviour to improve the image of Chinese entrepreneurs and investors abroad.

Over the past 10 years, several guidelines have been issued:

  • Guide on sustainable overseas silviculture by Chinese enterprises (2007), by the Ministry of Commerce (MofCom) and State Forestry Administration (SFA)
  • Guide on sustainable overseas forest management and utilisation by Chinese enterprises (2009), by MofCom and SFA
  • Guidelines for environmental protection in foreign investment and cooperation (2013), by MofCom and the Ministry of Environmental Protection
  • Green credit policy (2007), by the China Banking Regulatory Commission (CBRC), People’s Bank of China and State Environmental Protection Administration

 

 

Tracking system in Indonesia

Tracking system in Indonesia

Source: MFP3

Tracking system in Indonesia

Source: MFP3

In 2013, SFA and MofCom started to develop guidelines for sustainable, overseas trade and investment in forest products by Chinese enterprises. These have yet to be completed.

These guidelines urge operators and investors from China to respect local laws and regulations, to pursue and support sustainable forestry operations, and to follow ethical business practices in general. They are voluntary, however, effective control on the ground needs improvement. 

It is recommended that Chinese investors should consult and plan their investments together with VPA country stakeholders. Consultations with stakeholders before investment begins can help avoid labour disputes and adverse impacts on local communities and the environment. More attention also needs to be paid to labour protection and improved working conditions when implementing investments. 

Both China and the VPA countries could go further by providing open and transparent investment information, and increasing dialogue to promote mutual trust. To improve the quality of statistics collected, it is recommended that China’s MofCom should disaggregate forest sector investments from those in agriculture, animal husbandry and fisheries. VPA countries could also provide more statistical and supplementary information on publicly accessible websites about their forest sectors, including foreign investment received.

Timber for exporting in Ghana

Timber for exporting in Ghana

Source: EU FLEGT Facility

Challenges for legality in the forest products trade

Discrepancies exist between VPA exporters’ reports and China’s import records. This indicates that there is undocumented and some potentially illegal trade.

Ensuring legality in forest product trade is a shared responsibility between importers and exporters. It requires all points in the supply chain to comply with relevant laws and regulations. Traceability of timber to its origin is an important indicator of legality.
Chinese experts have identified five main challenges to legality in China. These are (not in order of priority):

  • Problems of tree species identification
  • Failure of the trading statistics system to meet legality requirements
  • Obscure information about place of origin
  • Lack of certification documents
  • Lack of a trade data exchange mechanism

From the VPA countries’ perspective, the top five challenges to legality in forest product trade are related to:

  • Political culture
  • Weak and inconsistent legal frameworks
  • Legitimacy factors (such as poor transparency and lack of accountability)
  • Non-compliance with the law and poor enforcement
  • Inadequate human and financial resources

These present considerable challenges for VPA countries. A major goal of the EU FLEGT Action Plan, however, is to provide the means to address these obstacles.

Progress has been made in VPA countries since the Agreements were signed, including necessary reforms and system development. When the Timber Legality Assurance Systems are established, especially in Indonesia and Ghana, the timber produced will be licensed as legal and will be recognised by the EU. 

VPA countries have a means of controlling legality at each point in the processing and transport chain, up to the point of export, through a Timber Legality Assurance System. Once VPA countries have functioning Timber Legality Assurance Systems and are exporting FLEGT-licensed timber, Importers are able to ensure legality.

Illegal logging still occurs in some VPA countries as a result of weak forest management capacity and law enforcement. China could provide technical assistance and related resources to support the development of Timber Legality Assurance Systems in VPA countries. In addition, China could help VPA countries to enhance their forest management and law enforcement by organising related meetings, workshops and events. 

Timber for exporting in Ghana

Source: EU FLEGT Facility

Timber industry in Indonesia

Timber industry in Indonesia

Source: MFP3

Recommendations

The EU Timber Regulation requires European operators to provide comprehensive information on the source of their timber products and evidence of their legality. It is recommended that Chinese exporters and their suppliers in the timber processing and supply chain develop equivalent due diligence systems to ensure that their imports are legal. 

The following recommendations are proposed to address some of the legality challenges in VPA countries.

  • Offer attractive remuneration packages and professional development opportunities for forestry and law enforcement officials. This will provide incentives to improve performance and deter corruption. The role of independent bodies and third-party monitoring should also be strengthened to combat corruption.
  • Conduct participatory reforms of regulatory frameworks to overcome problems in legislation. 
  • Change the behaviour of forest and law enforcement officials and the general public through improved transparency and accountability. This requires changes in forestry education to incorporate more interdisciplinary skills and attitudes.
  • Transform the current system of forest sector information dissemination in VPA countries to improve transparency and accountability. Authorities should improve the quality of statistics and develop appropriate channels for sharing information. This relies on in-country technical and human resource capacity. With the support of donors, NGOs could assist with the collection, interpretation and dissemination of complex information without replacing the role of the state. This would, however, require capacity building.
  • Address the challenges of limited resources. This is likely to have positive repercussions for a number of other challenges, such as improving legal compliance and enforcement, and changing political cultures and incentive structures.

Timber industry in Indonesia

Source: MFP3