On August 13, 2022, the EU parliament agreed to the proposal for a regulation on deforestation-free products. Passed with 453 votes against 57 (123 abstentions), the proposal would pave the way for EU lawmakers to negotiate with member states as to the form of the final legislation. “We are serious about fighting climate change and biodiversity loss. Acknowledging that the EU is responsible for around 10% of global deforestation, we have no choice but to ramp up our efforts to halt global deforestation. If we get the balance right between ambition, applicability and WTO compatibility, this new tool has the potential to pave the way to deforestation-free supply chains,” said rapporteur Christophe Hansen of Luxemburg from EPP, a center-right group in the EU Parliament, as quoted from European Parliament official website. Initially drafted as part of the European Green Deal in 2021, the proposal aims to make it mandatory for companies to exercise due diligence by verifying that their products are not sourced from deforested or degraded land. The proposal covers cattle, cocoa, coffee, palm oil and soybean, and includes any goods that contain or have been fed with or made using these products, such as chocolate or soap. Wood, leather, furniture items, as well as charcoal and printed paper products could also be affected in the final legislation. The proposal sets December 31, 2019, as the cut-off date for affected products. No country or commodity will be banned from selling products made after the aforementioned date. However, companies will have to conduct due diligence to manage risks in the supply chain. The commission will then be able to use the information to classify countries into low, standard or high-risk categories. How the proposal affects Indonesia-German trade The proposal could potentially add to the requirements already posed by the German Supply Chain Due Diligence Act. Slated to come into force in 2023, the German Federal Office for Economic Affairs and Export Control (BAFA) recently issued its first guidelines for in-scope companies that have been eagerly awaiting guidance from the relevant authority (available in German here). In Indonesia, the pulp and paper industry, furniture manufacturers, and the palm oil industry, are the sectors most likely to be affected by the proposal, though the country seems to have improved significantly in its enforcement of Law No. 32/2009 on Protection and Management of the Environment, as amended by Law No. 11/2020, as well as Law No. 41/1999 on Forestry, as amended by Law No. 2004 and Law No. 11/2020. The proposal must still go through an approval process from the Council of the European Union as well as the national parliaments of the 27 countries in the bloc. Member states must then transpose the agreed terms into national law by 2026. What form the final legislation will take remains to be seen. In this regard, European and Indonesian companies may look forward to the upcoming EU-ASEAN summit planned to be held this December in Brussels, where both blocs will discuss potential expansions in trade and infrastructure assistance and where supply chain management will be one of the key topics.
The textile industry is an important economic sector for Indonesia. According to data from the Ministry of Industry, textiles and textile products generated foreign exchange with an export value of US$13.02 billion and absorbed a workforce of 3.65 million people at the end of 2021. As of July 2022, the industry recorded an export value of $6.08 billion, or 5.51% of the country’s total exports. The ministry expects textile exports to reach $14 billion by the end of this year. These numbers place Indonesia one of the world’s top ten exporters of textile and textile products, alongside countries like China (the world’s top textile producer with around half of the global share of textile output), India, the United States, Brazil, and Thailand. Among Indonesia’s main appeals are the generally cost-effective labor that the country provides, as well as its large domestic market. However, Indonesia’s textile industry is also known to be lacking in terms of machinery. Around 70% of machines used in the industry are old and have a 50% less productivity rate, as stated by the Indonesian Textile Association (API) in 2019. Which is why the ratification of the Regional Comprehensive Economic Partnership (RCEP) is so important for the textile industry. Formalized just last month by the Indonesian Parliament, the trade pact would allow Indonesia to increase its exports to the 15 member nations of the deal, which include the 10-nation members of ASEAN, as well as to some of the world’s major economies such as Japan and South Korea. More importantly, the trade pact is a significant opportunity for Indonesia to improve its domestic textile industry by way of generating more trade and investment with non-members of the RCEP. According to Sheng Lu, Associate Professor of fashion and apparel studies at the University of Delaware, RCEP members together exported $374 billion worth of textiles and apparels in 2019 (50% of the world’s share) and imported $139 billion (20% of the world’s share). In terms of export destinations, the US imports nearly 60% of its apparel from RCEP members, while EU nations import 32% in that same year, or up 28.1% from 2005. In acknowledging the challenges and opportunities, the Indonesian government has taken efforts to ensure the competitiveness of its domestic textile players. For example, in September 2021, the Ministry of Industry allocated a total of Rp 3 billion for the revitalization of the fabric refinement and printing industry. Most recently, the government prepared another Rp 8.5 billion in financial assistance, out of which around 250 companies participated in the socialization of the assistance. The current landscape of the Indonesian textile industry could be highly lucrative for foreign investors, particularly among suppliers of sophisticated machinery and production equipment, as well as capacity builders. Other positive trends for investors are the country’s improving business climate following the issuance of the Omnibus Law on Job Creation, which introduces some significant reforms on investments and labor laws, as well as the rising purchasing power of the population and the proliferation of e-commerce platforms. To further discuss the matter, EKONID will host a German textile machinery manufacturers Symposium and Business Matchmaking event. To be held from October 10 to 14 October 2022 in Bandung and Solo, Indonesia, the German textile machinery Symposium and Business Matchmaking features a wide variety of textile machinery products, from spinning, knitting, weaving, dye-ing, finishing, and braiding. The leading German players in the textile machinery industry will be presenting their products and technologies in Indonesia. EKONID will also facilitate one-on-one B2B matchmaking and opportunities for networking. This event will provide Indonesian textile companies with the opportunity to source the latest innovative products from Germany.