September 25, 2014

　　Nanning City, Guangxi Autonomous Region, China

　　1. Introduction

　　Conference hall of the 4th International Forest Products Trade Forum

　　The 4th international Forest Products Trade Forum was held in conjunction with the 11th 2014 China-ASEAN Forest Wood Products Expo in Nanning City, Guangxin Autonomous Region of China on September 25, 2014. The participants included industry association leaders, government officials, representatives from NGOs, enterprises and universities from China, USA, EU, Australia, Myanmar, Indonesia, Thailand, Malaysia and Philippines. This forum was co-organized by the China National Forest Product Industry Association (CNFPIA), the Center for International Forest Products Trade (CINFT) of State Forestry Administration (SFA), International Wood Culture Society (IWCS), China Society of Forestry Economics, The Nature Conservancy (TNC) – Responsible Asia Forestry and Trade (RAFT) Program, European Forest Institute (EFI) EU FLEGT Facility, and World Wide Fund for Nature (WWF) China.

　　Compared to the previous three forums, the uniqueness of the 4th forum was that it focused on the role of industry associations in China and other timber producing and consuming countries in helping companies comply with laws and respond to international timber legality requirements, as well as seeking the cooperation opportunities among associations to foster responsible timber trade.

　　2. Main contents

　　The forum consisted of five sessions. The first session was opening remarks and keynote speeches. Madame Dai Guangcui, the Deputy Director General of the Forestry Economics and Development Research Center of SFA launched the forum. She said that China’s forestry sector has developed very fast in the past decade, even though China’s forest resource base has been scarce and international forest products trade is getting tougher. Legality is the basic requirement in the timber products trade. Legality assurance is also an important step to promote sustainable forest management. The Chinese government is speeding up the forest governance system development and building law enforcement capacity. In the meantime, China will also allow the market to take the leading role in allocating forest resources.

　　The second speaker was Mr. Fu Jianquan, the Division Director of the Department of Development Planning and Assets Management, SFA, who gave a keynote speech titled “China’s Foreign Capital ﹠ Overseas Investment and International Forest Products Trade.” Mr. Fu emphasized the following points which needed further attention: 1) government regulation on timber legality and related association’s services are still vacant in China; 2) enterprises lack capability to cope with international market changes and risks; 3) enterprises’ self- disciplinary awareness needs to be improved; and 4) systematic publicity needs to be enhanced. Along with the acceleration and deepening of forestry globalization, enterprises and industry associations should actively take part in the intentional rules and standards development process. This will be critical as a way to influence policies and capture markets. During the international forest products trade process, industry associations should also help enterprise members to effectively protect their legal rights and interests and actively find solutions in coping with trade friction.

　　During the second session, recent international timber trade dynamics, government policies and plans on combating illegal logging were discussed.

　　Chen Shaozhi，Director General, Research Institute of Forestry Policy and Information, CAF

　　Prof. Chen Shaozhi, the Director General, Research Institute of Forestry Policy and Information, Chinese Academy of Forestry (CAF), systematically reviewed global and China’s forest products trade. Since 2013, China has been the largest forest products exporter country in the world. The shortage of domestic forest raw material supply has been getting worse, especially since China launched a ban on commercial logging in state-owned forests in the vast Northeast China last year. At the same time, there are more and more timber supplier countries that have banned round-wood exportation which has widened the gap of timber supply and demand for China. China is the largest wood-based panel producer in the world which concentrated in several provinces, accounting for a quarter of the total wood-based panel production in the world. Most of the wood-based paneling is produced in the family-owned small business enterprises. Their equipment and technique are very simple and outmoded. The higher international standards for the quality of the wood-based panel and the formaldehyde content of adhesive are gradually limiting exports. All in all, it’s time for us to re-consider the strategies on how to deal with the market mode of “both ends are overseas”, which means both importing and exporting large amounts of volume of forest products. Forest production in China in the future should unite with science and technology, thus better quality and more added-value products can be manufactured.

　　Jirawat Tangkijngamwong, the president of the Thailand Timber Trade Association, emphasized in his comments that although there are more and more country governments who have introduced legislation to prohibit illegal timber trade, there are also more big corporations and NGOs promoting legal timber trade in recent years. Companies and suppliers are dealing with these new initiatives and bearing the emerging pressure. In front of the dynamics, the smartest enterprises will adapt to this situation quickly, and then will gain benefits for the long run. In addition, the topic of “timber legality” connects multi-stakeholders, including governments, NGOs, companies, research and financial institutions. We are seeing these groups unprecedentedly come together to seek solutions.

　　Alexandra Banks, the Legality Specialist from NEPCon, gave an overview of new regulations in place in the international markets. She said, even though the regulations on prohibiting illegal timber trade in context and provisions are different in the US, EU and Australia, the objective of the three regulations are basically the same. More specifically, they all require their importers and operators to exercise due diligence, risk assessment, and take risk mitigation measures to reduce the risks of importing illegal timber products. Usually importers and operators can’t collect sufficient information by themselves. They typically work with suppliers and their clients on the supply chain to do risk assessments. The government documents as standalone proofs of legality are not enough.

　　During the third session, the industry association leaders from consumer markets including China, EU, the US and Australia, shared their experiences and challenges as they relate to helping their members handle legality requirements.

　　Industry association leaders from China, Australia, EU and the US

　　Mrs. Zhang Liyan, Director of International Cooperation Department, China National Forest Product Industry Association (CNFPIA), briefly introduced the timber legality verification (TLV) system pilot work implemented by CNFPIA. So far, there have been 10 pilot companies awarded TLV certificates. One of the most distinguishing features of its TLV system is the close integration of the Chinese laws and policies, so the cost for the legality verification is relatively low. Because the system is still in the testing stage, the CNFPIA is in the process of seeking mechanisms to improve system management and minoring. Moreover, in order to reorganize the system so it is better tailored to the international markets, more communication and cooperation with the companies and industry associations in the targeted markets are needed.

　　Rachel Butler, a consultant with the European Timber Trade Federation (ETTF) and manager of Global Timber Forum (GTF), summarized how the European enterprises’ are responding to the EUTR. She said enterprises need clear guidance to help them clarify the confusions. The similarity among the regulations of the US, EU and Australia was to allow enterprises take more effort to know their supply chain and take illegality risk mitigation actions. Risk assessment was subjective. It was unrealistic to use a unified source of information. Certification and legality verification were not automatically compliant for EU & US (only FLEGT license exempt in EU), but this could be one of the tools used for risk mitigation. Implementing due diligence was an effective way to help companies to access the EU markets. She also mentioned that the Global Timber Forum (GTF), which is a forum to share expertise and collaborate in the international trade arena, will be organized the second time in Shanghai in June 2015.

　　John Halkett, the General Manager of Australian Timber Importers Federation Inc., shared the background and outlines of the Australian Illegal Logging Prohibition Act. He reinforced that the industry associations should cooperate with government and government also needed to provide support to industry in order to set up a level playing field for companies who trade legal timber products. Because of timber legality verification, the cost to Australian importers, as a percentage of the imported wholesale value of timber products, has likely increased 2.5-4.0%. Therefore, legislation is needed to support rather than diminish the development of an effective timber importing sector. Industry associations certainly should provide assistance to their member companies for better operation, as well as work hard and constructively to collaborate and influence government policies and decisions.

　　Cindy Squires, the Executive Director of International Wood Products Association (IWPA) from the US pointed out firmly that the core requirement of the U.S. Lacey Act for the American companies is to implement “due diligence” or “due care.” Legal compliance in the US includes all rules not just legal harvest. CARB and EPA Formaldehyde Emission Rules are also part of the legality rules in the U.S. Promotion of legal timber trade has provided a turning point for more and more companies in the US industry to look for brand partners and credible partners rather than the commodity salesmen.

　　The fourth session focused on perspectives from industry associations from timber producing and processing countries regarding their experiences, challenges and needs when they are dealing with the timber legality requirement.

　　To begin, Jirawat Tangkijngamwong, the president of the Thailand Timber Trade Association, introduced the progress of timber legality verification work in Thailand. Their timber legality verification system is license-based in all processes. The license can be traced and ensures the legality of the supply chain. In the near future, the system will be upgraded, in which the paper-based documents will be digitalized and uploaded on websites, to respond to the due diligence requirements by different international markets.

　　Next, Barber Cho, the Joint Secretary General of Myanmar Timber Merchants Association, provided insights regarding the challenges and suggestions for coping with timber legality in Myanmar. He said all the forest in Myanmar is state-owned and only Myanmar Timber Enterprise (MTE) had rights to extract logs. The annual allowable cuts (AAC) which are under Myanmar Selection System (MSS) have for a long time been exceeded and illegal harvesting has been widespread, particularly in the disputed areas (e.g. conflict boarder area and ceasefire-established area) and even in forest controlled by the Forest Department. Currently, both the government and business enterprises don’t have enough awareness and haven’t taken sufficient actions to meet the international market requirement for legality and sustainability. He suggested that 1) the government must enhance their political commitment, and ensure a level playing field; 2) industry associations alone cannot handle the matter of legality, but can provide trainings and technical support to enterprises to help them implement due diligence; and 3) the international community should provide assistance to Myanmar manufacturers and the government, but not just criticize it, because blaming will not solve the issue.

　　Thirdly, Bhakti Sadeli from Indonesia Sawmill and Woodworking Association shared successes and challenges on combatting illegal logging in Indonesia during recent years. In 2012, a FLEGT VPA was officially signed between Indonesia and EU, and in January 2013, the Timber Legality Assurance System (TLAS) was implemented. As it was in the transition period when the FLEGT license came into force, the application of the SVLK certificate was mandatory for all forest management units and industries and for all export destinations. Although it was an exciting step, there have been many challenges including: 1) high cost to set up for the internal system; 2) exposure of some business sensitive information when providing legality related documents to buyers, which threaten manufactures’ long-term stable supply chain; 3) constant changes of timber legality requirements by different countries which had to be adopted by the companies; and 4) unaffordable timber legality verification costs, especially for small scale home industries. In order to help address these challenges, industry associations should help enterprises enhance the awareness of sourcing legal materials and provide practical guidance. They also should take the responsibility to communicate with buyers to compensate some of the additional costs.

　　The final speaker was Madame Myrna Castro- Bituin, the President of Philippines JB Woodcrafts Inc. who briefly introduced the timber legality situation in the Philippines. She said, in order to promote legal timber trade effectively, industry associations must closely cooperate with government and enterprises. Most countries have sophisticated and reasonable legal systems. Philippines started this kind of work 20 years ago. What they urgently need is a better forest law enforcement and monitoring system, and a good legality verification system.

　　The last session was a chaired discussion focusing on two topics, which were: 1) what can industry associations do to help reduce their members’ risk of importing illegal timber and improve their competitiveness in the global market? and 2) how can industry associations at different points on the supply chain work together to support each other in these actions? Some key talking points are summarized below:

　　Guangdong Timber Trade Association: China as a world timber products manufacturer, has had to import large volumes of raw materials from overseas. However, recently more and more logs and sawn wood have come from low-risk countries including New Zealand, the US and Canada, even the rubber sawn wood from Thailand. To enhance international legal timber trade effectively, the key is that each timber producing country should govern its own forest legally. Industry associations should provide advice and suggestions to the government constructively. Customs, which is the last checkpoint for exported timber products, should take more responsibility in timber legality verification. It is very important for government agencies and industry associations to join efforts to monitor the legal timber trade globally.

　　Shanghai Timber Trade Association: Even though forest certification is not exempt for timber legality assurance, we still should encourage enterprises to apply for certification because it is an active response for companies to self-regulate and self-discipline their performance. In order to mitigate illegal wood sources, it is recommended that Chinese enterprises purchase raw materials from low risk countries, which means good forest governance countries. Industry associations at both the local and national level also need to join efforts to assist enterprises to improve timber legality. One suggestion for international organizations is that they consider concentrating their attention and efforts to the rainforest with its rich biodiversity, as well as the high risk regions and species, thus improving the efficiency and effectiveness of combating illegal logging.

　　China Timber and Wood Products Distribution Association (CTWPDA): Illegal logging is a complicated issue because it is not just an environmental and technical issue, but also includes economic and political matters. CTWPDA, as a national level industry association, usually develops its work plan based on the urgency and frequency of problems that enterprise members and local level associations submitted or need assistance. In terms of addressing timber legality requirements, CTWPDA hasn’t received many requests during the past several years. Of course, the association should reach out and proactively collect and understand the enterprises demand, but not passively wait for enterprises to come to us. It will be useful to provide guidance to the Chinese enterprises on how to implement due diligence based on China’s unique circumstance. Another thing that industry associations can do is to provide timely legality market demand and supply information, which would help Chinese enterprises address the challenge of information asymmetry.

　　International Wood Products Association (IWPA): From the American importers perspective, they usually try to cooperate with the low risk suppliers. The challenge has been the process of collecting large amounts of information to evaluate the supplier. IWPA is advocating responsible wood products by the WTO’s ‘green goods’ agreement, which aims to pursue global tariff-free trade in responsible wood products. Besides “sticks,” companies needed “carrots” (incentives) to take action for legal timber trade.

　　European Timber Trade Federation: One of the roles of industry associations should take is leadership. Associations should not just deliver timely information to the members, but provide guidance to them on how to implement. This will be a key service that members want to get and they are paying for.

　　Myanmar Timber Merchants Association: Many timber processing and producing countries complain when consuming countries impose timber legality requirements. In fact, it practices two-way choices approach. If a company would like to keep the competitiveness and continue exporting products to those countries, they must comply with those legality requirements.

　　3. Outputs and recommendations

　　(1) Challenges business enterprises face when dealing with timber legality requirements

　　· Information asymmetry, enterprises need to get the timber legality requirements information more timely;

　　· Very minimal value if any added to the final product vs costs for forest certification and timber legality verification that enterprises have difficulty bearing. In addition, it is frustrating for enterprises that forest certification, which is a practical approach, can’t prove timber legality;

　　· The constantly emerging legality requirements in different markets have resulted in enterprises having to adjust their strategies frequently to meet different target market needs;

　　· Implementation of due diligence somehow has forced enterprises to make their supply chain information more transparent, which makes them face the risk of business confidential information exposure;

　　· Legal compliance including all rules not just legal harvest has it made tougher for enterprises to follow, e.g. the CARB and EPA Formaldehyde Emission Rules which are part of legality rules in the U.S.

　　(2) How industry associations can effectively help enterprises to meet timber legality requirements?

　　· Provide timely market requirement information, join efforts with enterprises to seek solutions, provide technical support, and encourage enterprises to actively cope with the new requirements;

　　· Industry associations need to reach out and collect enterprises’ needs, rather than passively wait for enterprises to knock on their doors for help. Industry associations at the national and local level need to work together to help members address their challenges effectively and take the leadership;

　　· Industry associations should act as a bridge connecting the government and enterprises and need to cooperate with the government, because the governmental polices safeguard the level of playing field;

　　· Conduct cost-benefit analysis for a better understanding of the impacts on forest certification or legality verification for enterprises;

　　· Strengthen cooperation and communication between industry associations in China and peers internationally; join efforts to seek answers to meet the requirements through a practical, effective and low-cost way;

　　· Incentive mechanisms are needed to encourage responsible timber trade, e.g. IWPA advocated responsible wood products by the WTO’s ‘green goods’ agreement;

　　· Participate in dialogues and forums of timber industry sector globally and regionally, e.g. Global Timber Forum, and use such platforms to collect the most updated information, improve industry associations’ capacity and awareness, and promote industry associations’ cooperation and communication on the different nodes on the timber products supply chain.