EU's anti-deforestation bill and Brazil's exports
This week's feature: ?? EU’s tough anti-deforestation rules could have major impact on Brazil’s key goods exports
Predictions
Developments
Insights
The European Parliament bill will require approval by the EU Council and ratification by 27 national parliaments, but if it meets those tests it could have a devastating impact on Brazilian exports.?Brazil is one of the world's top food exporters - in 2020 soya exports alone were worth USD 28.6 billion - but much of it is grown on land linked to deforestation or whose supply chains are opaque. Brazil’s foreign ministry responded saying that the EU was using deforestation as a "pretext" for a protectionist stance designed to restrict imports. The dispute comes as Brazil holds presidential elections in October, and will be high on the agenda of the next government, which takes office in January 2023.
Incumbent right-wing President Jair Bolsonaro, who is seeking re-election, has?actively downplayed deforestation and environmental issues?and championed unrestricted economic development of the Amazon including mining, logging, agriculture and livestock development. One explanation of the latest surge in Amazon fires is that farmers and loggers, who fear Bolsonaro might lose the elections (opinion polls put him in second place) are stepping up illicit forest “slash and burn” clearance ahead of an expected tightening of environmental controls under a new government after January.?
The left-wing frontrunner, Luiz Inácio Lula da Silva (president 2003-2011) has promised to strengthen environmental regulation, stop land invasions of protected areas, rebuild key protection agencies (Funai and Ibama) and seek international aid to finance alternative development. However, conservative farming lobbies will remain powerful, even under Lula. Environmental lobby groups also criticise Lula's past support for the Belo Monte hydroelectric project, and more recently his backing for the controversial BR-319 highway linking Manaus and Porto Velho. Therefore, a?Lula presidency would take a stronger stance than Bolsonaro on environmental protections but would remain mindful of strong local business lobbies.??
Implications for business
Regulatory:?Regardless of who wins Brazil’s October elections, companies operating in Brazil - or sourcing from the country - will face increased environmental scrutiny from European trade partners during 2023. While this is an increased risk, on the upside, resulting EU-Brazil negotiations might help lift a proposed free trade agreement between the EU and Mercosur (the four-country South American trade bloc dominated by Brazil), which has been blocked partly by European environmental concerns. This could therefore lead to broader economic opportunities for companies in Brazil.
Supply chain:?If the EU bill becomes law, companies will be required to supply details of their supply chains to show they are not linked to deforestation. Methods are likely to include satellite monitoring, isotope testing and production site visits, all of which are expected to involve additional costs for companies. In response, some European companies are likely to look to other countries to source goods, while in turn Brazilian exporters are likely to look to other countries with weaker environmental controls and standards, principally China.
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