Legality requirements for wood import in the EU: Who wins, who loses?

Abstract

This paper presents a spatial equilibrium model to analyses the leverage impact of the legality requirements in the EU Timber Regulation (EUTR). The EUTR is part of the EU's Forest Law Enforcement, Governance and Trade (FLEGT) program, which aims to stimulate legal wood production and sustainable forest management at global level. This leverage effect is an argument in favor of FLEGT but it has never been investigated thoroughly, nor simultaneously for demand and supply. The leverage effect is measured in terms of the market share of legal wood (i.e. accompanied by a license which approves its legality) in total wood production. Our research finds that FLEGT does not increase legal wood production and consumption. FLEGT creates a non-tariff trade barrier at the non-tropical regions' conventional wood markets. This situation allows conventional wood producers to benefit from monopoly rents. The presence of transport costs prevents consumers to switch to foreign producers. In addition, producers in tropical regions cannot compete with the more efficient producers in the non-tropical regions on the certified market. As such, FLEGT curtails part of the international trade flows which decrease the global quasi-welfare, with especially consumers being hit. To tackle those issues, non-compliant producer should be assisted in reaching the legality requirements to turn FLEGT into a fully inclusive policy. In addition, consumers should be engaged to pay a price premium to compensate the additional costs related to legal wood production.