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3.5 Background Material

Key Issues and Draft Executive Summaries of Background Papers
for Discussion

in preparation of the

Expert Consultation
Trade and Sustainable Forest Management -Impacts and Interactions
3 - 5 February 2003
Food and Agriculture Organization (FAO)
Green Room in Building A
Viale delle Terme di Caracalla
0100 Rome, Italy

Table of Contents:
1. Brief Description and Background of the Expert Consultation

2. Key Issues and Questions on Trade and Sustainable Forest Management
3. Tentative Outline of the main study for the Project GCP/INT/775/JPN
4. Summaries of Background Papers

How can trade promote sustainable forest management?
(Draft Executive Summary of first 4 chapters)
By Duncan MacQueen, Maryanne Grieg-Gran,. James Mayers and James MacGregor

1. Brief Description and Background

Expert Consultation

Trade and Sustainable Forest Management -Impacts and Interactions
3 - 5 February 2003
FAO Rome
Viale delle Terme di Caracalla
00100 Rome, Italy

Introduction

Background

Objective

Process of Project Implementation

Organization of the Expert Consultation in February

2. Key Issues and Questions on Trade and Sustainable Forest Management
Current Debate on Trade and Forest Management
1. How can the current differences in perspectives regarding the impact of forest trade on sustainable forest management and their dynamics be developed into better common understanding and basic consensus for appropriate policies at different levels?
2. What is the nature of the inequities of developing countries in trade negotiations caused by capacity deficits and what are the unfavourable trade conditions deriving thereof?
3. Do environmental concerns limit trade in forest products and therefore further erode opportunities to manage forests in an economically viable way - particularly in developing countries where the capacity to add value to primary forest products is rather limited?

4. Must the multiple functions of forests (products and services) be maintained in every forest area, or might sustainable land use mosaics in a given country involve some legitimate unsustainable forest use or even deforestation in some parts? What role could trade play in such a scenario to maintain an effective balance of production and non-production forests?
Global Trends in Trade of Forest Products and Services
1. Given that only a small proportion of tropical timber felled enters international trade, and that in aggregate tropical countries are becoming net importers of wood, how relevant is trade to the improvement of natural forest management in the tropics?
2. Is the interest in SFM on the part of consumers and end users of wood likely to divert trade away from tropical countries and from natural forest operations and boost exports from temperate countries?
3. What are the implications of the shift towards plantations for trade patterns and for natural forest management?
Public Policies and Private Sector/NGO Engagement
1. Which public policy instruments, in which contexts, have most effect on trade in forest products and services?
2. What key opportunities/points of leverage in public policy are there for improving trade in forest products and services?
3. How can concerns about forest management be given more explicit consideration in extra-sectoral policy processes relating to trade and macroeconomic development?
4. How might one increase the weight of international processes on social and environmental issues and their impact on forest management and trade in forest products and services?
Trade Agreements and Trade Restrictions
1. Do current tariffs on forest products create significant problems for exporters and what are those problems (reducing possibilities for added value and investment in SFM)?
2. Should trade restrictions (tariffs, standards, government interventions, customs/administrative entry procedures etc.) be used for addressing social and environmental problems even if these problems are not being caused by trade?
3. What potentials do regional and international trade agreements carry for a positive impact of trade in forest products and services on sustainable forest management? What specific role could the Doha Declaration and its implementation process play in terms of policy development and operations?
Links between Trade, Finance and Industrial Structure
1. Will consolidation in the forest products sector lead to greater efficiency in the use of forest resources and more responsible practices? Or will such development towards a more compact industrial structure increase the market power of relatively few companies in the sector and enable them to exploit weak forest governance and undermine systems of environmental control?
2. Does the level of foreign ownership in a country's forest products sector matter in relation to forest management?
3. Can financial institutions play a role in promoting sustainable forest management (for example by making provision of capital conditional)? Or else, are questions of financial return, political risk and macroeconomic climate likely to limit the interest of those institutions to planted forests/ plantations in high and middle income countries?
Links between Governance and Trade in Forest Products and Services
1. Does international trade in forest products and services without appropriate consideration of social and environmental concerns act as a magnifier of existing forest governance problems or virtues? Or could liberalized trade lead more directly to the development of good forest governance systems?
2. How will forest governance in tropical producer countries be affected by
consumer country measures or consumer behaviour to restrict imports of forest products from illegally harvested (tropical) timber and/or to avoid procurement of such products?
3. In the long-term certification may be the best market-based and trade-linked instrument for
positive governance impacts. But how can certification be complemented to
prevent or minimise more negative short-term consequences? How can it
become a tool to help domestic trade governance?
4. What are the key complementary institutional and environmental policies which should accompany trade liberalisation in weak forest governance situations?
Interactions between Extra-Sectoral Influences on Forest Products Trade and Land Use
1. Is the imposition of social and environmental standards in developed country forest sectors justified and appropriate or does it merely shift undesirable forest activities to developing countries?
2. To what extent does agricultural policy in the North America and Western Europe dominate forest and agricultural policy in the South and determine forest product trade patterns and forest management?
3. Are policies at the macro-level which favour capital over labour likely to lead to increased forest cover through agricultural intensification, or to increased pressure on forests from subsistence agriculturalists or other developments impacting on forests?
Impact of New Markets for Environmental Services on Trade in Forest Products and Services
1. Which forest environmental services can have potential for international trade?

2. Which services lend themselves for trade and which are better handled through other instruments (e.g. user fees, taxation)?
3. What kind of market development strategies can be considered for each type of service with trade potential?
4. How to address timber benefits, particularly in carbon sequestration (incl. intensively managed reforested/planted areas), in connection with trading of environmental services and what implications can be expected for the promotion of sustainable forest management?
3. Tentative Outline of the Main Study for the Project GCP/INT/775/JPN

EXECUTIVE SUMMARY
GLOSSARY

1. INTRODUCTION
1.1 Background
1.2 Aims of the study
1.3 Approach and Conceptual Framework
1.4 Structure of the report
2. THE CONTEXT
2.1 Global economic trends, development strategies and patterns of investment, and their relation to the forest sector

2.2 The Forest Resource Base
2.3 Long-term trends in demand, supply and trade in forest goods and services
2.4 Key findings and implications
3. THE DEBATE ON TRADE AND FOREST PRODUCTS AND SERVICES
3.1 The Trade Environment Development debate
3.2 Competing views on forests and trade
3.3 Key areas of conflict and convergence
4. POLICIES INSTRUMENTS AND PROCESSES
4.1 Types of policy instruments that impact on trade in forest products
4.2 Public policy - National and Sub-National Level

4.3 Public Policy - Regional and International Level

4.4 Market-based Initiatives

4. 5. Key Issues and Priority Policy Areas
5. TRADE RESTRICTIONS AND TRADE AGREEMENTS AFFECTING TRADE IN FOREST SECTOR PRODUCTS
6. INTERACTIONS BETWEEN EXTRA-SECTORAL INFLUENCES AND THE FOREST TRADE
7. THE LINKS BETWEEN FOREST TRADE AND GOVERNANCE
8. THE LINKS BETWEEN TRADE, FINANCING AND THE STRUCTURE
OF THE FOREST PRODUCTS INDUSTRY AND THEIR IMPLICATIONS

9. THE IMPACT OF NEW MARKETS FOR ENVIRONMENTAL SERVICES

10. IMPLICATIONS AND OPTIONS
10.1 Summary of key linkages between trade policy and SFM
10.2 Policy/investment opportunities and priorities
10.3 Challenges for governments, industry, consumers, investors
10.4 Research and development needs

REFERENCES
4. Summaries of Background Papers

How Can Trade Promote Sustainable Forest Management?

By

Maryanne Grieg-Gran, Duncan MacQueen, James Mayers and James MacGregor

DRAFT EXECUTIVE SUMMARY OF IIED CONTRIBUTION

TO MAIN STUDY OF FAO PROJECT GCP/INT/775/JPN

Why trade-forest links are so important today
As the increasing momentum behind globalisation and the various movements opposed to it demonstrate, the question of how trade influences the balance between the rich, the poor and the environment becomes more important by the day. Previous analyses have covered vital ground in tracing the links between policies changing freedom of trade (primarily in forest products) and environmental impacts (on the forest itself).
This study broadens the analysis to consider what it might take to ensure that forests meet the diverse needs of multiple interest groups at local national and international levels in a sustainable manner. It seeks to assess the impacts of the forest trade on the provision of these forest-related products and services and, therefore, how trade might promote 'sustainable forest management' (SFM). The study is necessarily broad because it is increasingly recognised that many different policies (within and outside the sector) affect the comparative costs of forest products and services which are themselves diverse.
The shape and trends of forest trade
The study begins with an assessment of the main trends affecting forests and trade in forest products (and also to a lesser extent, forest services). A spotlight is directed at areas which have particular relevance for the impact of trade on SFM:
• The marked differences between geographical regions in terms of remaining natural forest areas (led by South and East Asia, former USSR and South America) and economically accessible forests (of which South America still has comparatively little) will have implications for future trade.
• The expansion of plantations (led by Asia) will divert supply away from less competitive natural forests to their benefit or detriment depending on contextual factors.
• The complexity of patterns of deforestation and lack of simple correlations between forest cover and deforestation rate, indicating that there are likely to be complex contextual drivers of deforestation and potential trade-forest impacts in different regions.
• The tiny proportion of certifiable SFM despite numerous international targets to the contrary, which is indicative of the low governance priority which SFM has.
• The trends towards increasing consumption, production and increasing trade as a percentage of production which is particularly true in developed countries for highly processed products
• The continuing importance of intra-regional trade flows and the gradual fall in concentration in global trade
• The transition of tropical countries from net exporters to net importers of wood due to growth in domestic consumption outstripping sluggish export expansion despite significant productivity advantages.
• The development of markets for environmental services which will change the incentives for the production of timber from particular forest types or in particular locations although as yet not to any significant extent.
The importance of an ample notion of sustainable forest management
Amongst the defining characteristics of forests, three are particularly notable for the prospects and impacts of forest trade:
• Forests take a long time to grow (which increases risk and requires high returns or incentives to stimulate investment)
• Forests occupy large areas of land (which increases interactions with multiple stakeholders)
• Forests supply important present environmental services and subsistence options (which makes their use for longer term commercial production contentious)
Any vision of SFM must therefore accommodate long time frames and balance the different needs and perspectives of multiple actors at local national and international levels. The study develops a framework of SFM which balances needs at all of these three levels: sustainable management at the stand level, sustainable forest land use mosaics at the national level, and sustainable levels of global forest cover to maintain the climate and global biodiversity. Sustainability at one level does not necessarily translate into sustainability at other levels.
Since the concerns of people to whom forest are important encompass financial, social and environmental issues, the notion of SFM within which trade impacts are assessed also has to incorporate these three dimensions.
The study argues that this it is only when the multiple perspectives and values which people hold are addressed within forest-trade analyses that the entrenched positions of particular interest groups can be broken down. The lens or framework of SFM through which the study views trade impacts is therefore a matrix with at least nine elements as depicted below. It is not necessarily possible to achieve all nine types of benefit simultaneously and tradeoffs are likely to be involved. But it is important to broaden the assessment of trade impacts beyond financial benefits aggregated at the national or regional level.

A framework with which to evaluate the impacts of trade on SFM

Framework for assessing impacts on sustainability

Financial benefits

Social benefits

Environmental benefits

Local benefits adjacent to forest stands

Access and conditions for local enterprise and employment options ensured

Local institutions to negotiate forest activities developed

Local needs from forest environmental met

National benefits through mosiac of forest land use

National welfare from forest land use optimised

Transparent national institutional partnerships for forestry strengthened

National conservation and environment targets attained

International benefits at global level

The efficiency of international economic activity enhanced

Worldwide cooperation for good forestry fostered

Global climate and biodiversity

Because assessment of trade impacts on SFM goes well beyond management considerations at the stand-level, the study argues that it is important to pay particular attention to interactions between trade and forest governance - enabling policy, legal and institutional conditions - which must be developed if forest trade is to contribute to SFM.
The cast of characters and debates
Since, in order to make progress, we must engage with different stakeholder perspectives, we consider it vital to adopt a pluralist perspective - one that recognises multiple and potentially irreconcilable interests associated with forest trade. In so doing we acknowledge the validity of different value systems working to achieve outcomes at different levels (as indicated in the framework above).
The study characterises these positions (in the table beneath) - in an undoubtedly simplistic manner - the idea being to keep debate provoked and so to work towards solutions or promising initiatives that result from areas of convergence within these conflicts.
The cast of characters and what they [might] say about forestry and trade

Character

....on forestry

....on trade

    Increasing influence on forest trade

· WTO trade negotiators

No comment

Free it!

· Multilateral finance agencies

Manage and conserve!

Liberalise it!

· National governments

Mix sustainable use and conservation (vaguely)

Protect national producers and consumers

· Forest authorities

Manage and conserve sustainably

Protect export duties or import tariffs that pay for management

· Transnational companies

Give us control of healthy forest supplies!

Liberalise it harder - cut the red tape!

· National companies

Make supplies and production systems economically viable

Liberalise it - unless we can be protected by import tariffs and export subsidies

· Private investors in forest industries

(Some)Manage ethically!
(Others)Make us rich quick!

(Some)No barriers to certification and fair trade
(Others)No controls

· Consumers of forest products

(Some)Manage sustainably
(Others)Cheap wood - now!

(Both)Liberalise it!

· Consumers of forest services

Here's the cash for storing carbon or saving biodiversity, but rarely both

Yes, liberalise it!

· Environmental donors and NGOs

Environmental sustainability - now!

Control it!

· Social development donors and NGOs

Social sustainability - now!

(Some)Liberalise it(Others)No - control it!

· Researchers and consultants

(Foresters)Good forestry - soon!
(Economists)Maximise human welfare - sometime!

(Foresters)Protect good forestry
(Economists)No - you can't!

· Farmers at the forest-agriculture interface

Secure our neighbourhood forests and enable tree farming

Protect our agricultural products we'll worry about forest trade later!

· Artisans and small-scale entrepreneurs

Sustainable supplies of timber and ntfps

Protect our businesses!

· Forest dwellers

Self-determination!

We reject export-led development

Drawing on these differences in perspective the study then explores the substance of some of the more substantial of trade debates. The debates are typically triggered both by disputes over values (whether a particular affect of trade is 'good' or 'bad') and in many cases disputes over facts (whether the stated impact of trade is hypothetical or actual). Some of the more common trade disputes which spill into the forest sector include the following:
1.Invisible hand or Achilles heel?Is there evidence that the predominance of trade through transnationals in the forest sector is precluding the capture of the national and local benefits predicted by standard economic trade theory?
2.Rising returns or deteriorating terms?Is there evidence that the historic differences between developing and developed countries in the forest sector leads to institutional inequality in the negotiation of trade policy, worsening balance of trade and an increasing skills deficit between the 'haves' and the 'have-nots'?
3.The `golden straight-jacket'?Is there evidence that forest trade liberalisation is adopted voluntarily, or is it forced on national and local governance structures in defiance of what they perceive to be in the own interest?
4.Rise to integrity or slide to corruption?Is there evidence that trade liberalisation has led to improved governance, or is it usually implemented in parallel with governance cuts leading to an increase in corruption and illegality in the forest sector?
5.Wealth first or environment first?Is there evidence that, in meeting international demand through liberalised forest trade, social and environmental externalities are addressed, or is the reverse the case?
6.`Steadying hand' or growing instability?Is there evidence that increasing consolidation of trade in forest products and services leads to instability for developing countries with negative impacts on the environmental sustainability, economic viability and social acceptability of the forest sector?
For some of the debates currently raging in the forest sector there is substantial evidence, and the arguments are well rehearsed. But in several key areas evidence is sparse, and it is to these areas that the study turns:
• legitimacy of tariff and non-tariff barriers and other trade measures - current trade restrictions in the forest sector are few, and the debate is shifting towards an examination of the extent to which trade restriction is legitimate in order to protect social and environmental ends.
• inter-sectoral land use competition - international forest trade policies are not the main drivers of deforestation, but they may contribute to the level of competitiveness of forest land use in comparison with alternatives, which is a much more important driver of forest conversion.
• corruption and illegality - the extent of illegal international forest trade is enormous and whether trade has a causal link to illegality is an important issue.
• forest financing and industrial structure - the patterns of ownership and market power, particularly where transnational companies are involved, have generated concern over the distribution of benefits from forests.
• the development of markets for forest environmental services (MES) - potentially offering a market mechanism to address social and environmental concerns, MES are receiving increasing attention even if their impacts to date have been minimal.
• Rather than being restricted to issues of management, most of these issues fall within the broad remit of forest governance, thus endorsing the suggested governance approach.
The main policy instruments and processes
The arsenal of policy instruments and processes are available for the governance of forests and forest trade extends to all measures which affect the cost structure of the forest products sector relative to other sectors and relative to competitors in other countries.
Yet it is not just the measures themselves that are of interest. The study contends that forest trade also affects and is affected by the processes by which those measures are developed and implemented. This requires an examination of way some people are involved while others are not; the way institutional frameworks succeed or fail to integrate different objectives; the capacity people have to make changes; and the difference between what people say they will do and what people actually do. The attention to both policy and process is required in relation to:
• National policies - These include both forest related policies such as (National Forest Programmes (nfps) or forest trade policies and equally influential policies in other sectors with forest trade effects. Some of the policies which affect the competitive nature of sectors which vie with forestry for land and other inputs can have much more significant impacts than forest sector policies themselves. Pro-agricultural policies which support large-scale agriculture have had particularly significant effects on forestry. Policy support for sectors which use forest products, or which develop infrastructure, supply energy, promote security etc. will also have knock on impacts for forest trade. In addition to sectoral policies there are important macroeconomic policies which affect interest rates, stability and risk, investment, procurement and employment.
• Regional processes - There are more than 100 regional agreements which affect a range of processes from political and economic issues, to security and of course trade. Regional trade agreements are the most prominent of these. But regional mechanisms to control illegality in forest trade have also begun to receive support and provide more workable platforms upon which to develop new ideas.
• International processes - Although dominated by the legal strength of the World Trade Organisation (WTO) negotiations, there are host of other international agreements relating to environmental issues (climate change, trade in endangered species, biodiversity conservation etc.) and to social issues (core labour standards, guidelines for multinational enterprises, conventions on combating bribery etc.). The implementation of many of these social and environmental agreements is at the heart of many of the proposals of the United Nations Forum on Forests (UNFF). The challenge is to give these social and environmental agreements teeth in assessments of trade policy.
• Voluntary initiatives - Significant headway has been made with both demand side processes (e.g. certification and labelling, supply chain management, boycotts etc) and supply side initiatives (e.g. investment guidelines, corporate citizenship, partnerships, criteria and indicators etc). The scale of influence of these initiatives is currently still small and it is not expected that the scale of desired change will be achieved through voluntary mechanisms alone given the extant competitive paradigm.

Trade Restrictions and Trade Agreements Affecting

International Trade in Forest Products

By James Bourke

Draft EXECUTIVE SUMMARY

Introduction
Trade restrictions have important impacts. The difficulties they impose apply to exporters in both developed countries and developing countries. They also apply to those seeking to export to both developed and developing countries. The type and effect of different restrictions vary considerably, and are very product and country specific. This report is an input into the study `Impact Assessment of Forest Products Trade in the Promotion of Sustainable Forest Management'being prepared by IIED as part of the FAO/Government of Japan project of the same name. The IIED study is addressing the relationship between trade and sustainable forest management. In the context of the overall study, this present report focuses on the specific issue of trade restrictions. By considering what restrictions exist, to what level, and what the trend in them is, it is possible to consider the extent to which trade is being hampered. The overall thesis is that trade restriction limit trade, and hence liberalisation will expand trade. The difficult issue to consider is, if this is the case, is this increased trade supportive or not of sound forest management i.e. does increased trade assist or conflict with sustainable forest management. This latter question is much more complicated and difficult to answer with any certainty.
The report does not address the broader question of the impact of the trade on the sustainable management of the forests to any extent, but largely limits itself to the identifiable effects of trade restrictions on the sustainable management. Its main attention is on trade restrictions. It examines whether, and in what way, trade restrictions of various types impact on forest products trade. A related but separate issue that is addressed is that of regional trade and economic agreements, with a focus on the aspects that are aimed at encouraging trade liberalization. There are a number of these agreements which have forestry trade elements in them, and in particular which aim to reduce trade barriers.
Current Situation
a) Tariffs:Although generalized statements are difficult to make, it is clear that indeveloped countriesmost tariffson forest products are currently generally quite low (less than 5 percent for most products) and only have a relatively limited impact on imports. There are, however, some significant exceptions to this statement, both in terms of countries and products. Wood-based panels (especially plywood), some value-added products, and various types of paper products have rates between 10-15 percent in several countries. Fordeveloping countriesrates are much higher in many countries - typically 10-20 percent, but in some cases considerably higher. They are therefore more restrictive than those in most developed countries. As with developed countries rates tend to be highest on wood-based panels, some value-added products, and some paper products.
Many exporting countries are able to avoid full tariff rates by benefiting from special preferences which apply in specified countries. Members of regional groupings get benefits from others in the group, e.g. NAFTA (North American Free Trade Agreement), ASEAN (Association of Southeast-Asian Nations), New Zealand-Australia, and some countries give special rates to countries that they have close trade or political ties with e.g. European Union-ACP (African, Caribbean and Pacific Group of States), Commonwealth countries - while most (but not all) developing countries get the benefits of the Generalized System of Preferences (GSP).
Tariffs are both country and product specific, and whether they create problems depends very much on who the exporter is and who the importer is. It is difficult to state that any particular country is good or poor in this respect. Most countries are a mixture, with some products having low rates and others higher rates.
b) Non-tariff barriers (NTBs):These are much more difficult to evaluate, but as tariffs fall they become of more significance than tariffs. The main difficulty is in determining whether the non-tariff measures (NTMs) that exist are primarily being used as non-tariff barriers (NTBs) to restrict trade, or for other legitimate reasons.
Individual NTMs do not appear to be of major significance, but there are much greater difficulties when a number of measures exist together, and where tariffs are also present. Some NTBs have also been declining. Others, however, have been increasing. The main problem areas for forest products continue to be health and phytosanitary, and technical regulations and standards. These often create major difficulties.
c) Export restrictions:Although import restrictions are the most obvious barriers in forest product trade, export restrictions currently have a greater impact. They are common in most developing countries and in some developed countries, and have had a major impact on world trade patterns for some forest products - notably logs, sawnwood and plywood. Log export controls have increased markedly in recent years, especially as many tropical countries have attempted to retain logs for domestic processing, or as is the case more recently, to reduce harvesting levels in order to protect forests from overuse.
Export restrictions are likely to continue, since developing countries find them the most direct way of controlling some of the undesirable practices that exist in their forestry sectors, such as illegal harvesting and trade. The forms of controls are continually being changed or re-assessed.
In addition to this upsurge in export restrictions there is increasing use of controls on harvest levels. These are in place or scheduled in many countries. Although not trade restrictions these clearly have trade impacts which are similar to export restrictions.
As an overall assessment,in general import tariffs are not a major problem in most developed countries, but for specific products they can be significant. They are of more significance in many developing countries however. NTBs are more difficult to assess, but some appear to create considerable difficulties.
Liberalisation efforts are resulting in declining tariffs, and in many cases NTBs are either declining or the rules concerning their use and interpretation are being improved, resulting in less abuse. Their use is also becoming more consistent between countries. In reverse, there are some individual restrictions (in particular trade impediments such as certification and labelling) that are increasing. Declining trade restrictions have largely given a more level playing field in international trade to all producers, rather than impacted environmental aspects; increasing restrictions are occurring in some cases and having an impact on sustainability issues.
While in general tropical countries are not singled out for more difficult treatment than non-tropical countries, there are certain exceptions to this. Typically the same rules and regulations apply to each. There are, however, situations in which it is more difficult for them to meet the specified requirements, some where they face higher tariffs or requirements, and some where they are specifically targeted. The latter is particularly true of those that fall under the category of trade impediments, such as in the regulations being developed for imports by local governments and municipalities. In this, tropical countries appear to be facing much greater difficulties than non-tropical countries.
Future trends in restrictions
Moves are underway on a new Round of WTO multilateral trade negotiations (the Doha Development Agenda). The new negotiations are `comprehensive' and negotiations will cover a number of trade sectors. As a result countries will be able to make cross-sectoral trade-offs. In this process forest products often receive little focus when compared with some other sectors. Issues of significance to forestry are being addressed in many different fora and negotiating groups.
Few trade negotiations, including those concerning RTAs, place much direct emphasis on forestry issues, but most address development and environmental issues, both of which have an important forestry element. There are still many details to be resolved in the Doha negotiations, but tariff and non-tariff issues will be addressed together with a range of other issues, some of which have significance for forestry. There are many issues which will be addressed that may result in benefits to forestry trade but, as in previous rounds of negotiations, the benefits are unlikely to be substantial, although it must be borne in mind that many impacts could be significant for selected products and countries.
When the Uruguay Round commitments are fully implemented, tariffs in developed countries on many products will have been reduced to very low levels, or completely eliminated. Even before this occurs, further reductions may have been agreed to through the Doha negotiations. In addition, regional trade agreements (RTAs) are likely to continue to exert further downward pressure on tariff rates. In developing countries reductions will also result, and since their tariffs are considerably higher, their reductions will, in absolute terms, be greater - but the final level of their tariffs will still, in most cases, be higher than in the developed countries.
Overall it does not seem likely that the Doha negotiations will have major implications for forest products trade, though the effects will nevertheless be valuable to some individual countries. The impact for forestry should be for continued progress in the directions set in the Uruguay Round negotiations. Further tariff reductions will occur, with the reductions phased in over a period of years, but because tariff rates on forest products are already generally quite low, they will not be great. As a result of this, efforts will probably be directed to extending reductions to a wider range of countries than previously, speeding up reductions already underway, and increasing the reductions on products that still remain a problem, such as panels and secondary processed wood products.
In most countries tariffs will become less significant. They will, however, remain high in some developing countries. The gains will be country-specific, being limited to certain products in particular markets, with some countries continuing to maintain high tariffs on some, but not all, of their products. Wood-based panels (especially plywood) and some value-added products will continue to face greater tariffs than most other products.
As far as NTBs are concerned, the outcome is more difficult to predict. Nevertheless it has been clearly indicated that the negotiations should aim to reduce or eliminate non-tariff barriers. There will be further progress on strengthening the rules surrounding them in order to limit or remove their ability to be used as trade barriers. Benefits to forestry will also come from the continuing scrutiny and the fine-tuning of existing Agreements, particularly to theAgreement on the Application of Sanitary and Phytosanitary Measures(SPS Agreement); and theAgreement on Technical Barriers to Trade(TBT). Considerable attention will be directed to environmental issues. For forestry this may result in clarification of some relevant issues, such as how and where ecolabelling may be used without being considered a trade barrier. This would remove some of the ambiguity that exists at present and give clearer guidelines to work from.
The exact effect and direction in which the trade impediments will move continues to be difficult to predict with any real certainty. It will be heavily dependent on which markets institute them, the degree of support that is given by consumers, legislators and traders, and the extent to which harmonization or at least mutual recognition of different practices is achieved. While many have valuable objectives, they can also have undesirable effects and act in the same way as more formal trade barriers. A factor which makes them especially troublesome to exporters is that they are currently outside formal international trade rules. The attention they will receive in the Doha round may result in an increased focus on aspects that are of interest and concern to forestry.
RTAs will continue to expand, and efforts will be made to encourage greater integration between them. While their central focus is usually not on trade restrictions, most have an interest in at least harmonising restrictions within their RTA. Thus in the broader scheme RTAs will continue to encourage trade, and also to encourage improved efforts to achieve sustainability. On the narrower issue of trade restrictions, most encourage reductions between members of a particular RTA, and indirectly support and encourage greater global efforts to reduce trade restrictions. RTAs are also being both affected by the proliferation of bilateral trade agreements that have been or are being signed at present.
RTAs are likely to continue to contribute to further trade liberalization, either directly or indirectly. They now have a greater interest in sustainability aspects than previously, but not directly linked to liberalisation efforts. There is still, however, some variation of opinion on whether they are supportive or contrary to the global liberalisation efforts.

Impact of trade restrictions on sustainable forest management
It is difficult if not impossible to determine whether current efforts concerning trade restrictions are having any significant effect on sustainable forest management. Global trade in forest products has continued to expand, but much of this has little to do with changes in trade restrictions. Most of the changes in trade restrictions show little clear evidence of having a substantial effect on sustainable forest management - either positively or negatively. All it seems possible to conclude is:

Perhaps the clearest message is that trade restrictions have only indirect effects on SFM, and where they appear to be able to make their greatest contribution to SFM they require careful development in order to ensure the effects are as expected. They must be associated with other related, and often more direct, measures and policies; be developed specifically for individual countries; and associated with bilateral and multilateral agreements between affected parties.
Because of this, major efforts should be put on other more direct policy and assistance mechanisms, but, where appropriate, coordinated with policies on trade restrictions. The aim should be to ensure that trade restriction policies are not against environmental policies. But equally environmental benefits should not be used as an excuse to move back to restrictive actions which are against free-trade principles.
The main drive on restrictions has been on their reduction, and to make their use and application more consistent and equitable. However, recent heightened interest in reducing deforestation and forest degradation, improving the management of forests, and/or reducing environmental impacts, has directed attention towards using restrictions as a means of encouraging/forcing improved management. This has resulted in actions and proposals which increase the level of restrictions, rather than reduce them.
On the surface it is easy to conclude that increasing restrictions might increasesustainable forest management. There are, however, many qualifications to this conclusion, and any use of trade restrictions should be carefully evaluated before being used. Whether the apparent positive benefits would in fact occur is very speculative. The most likely result is that overall, further liberalisation is unlikely to have much impact on SFM. Different restrictions affect different countries differently, thus the impacts are often country and even regional specific.
In developing countries the effects are more likely to be negative unless accompanied by sound country-level forest policies which place clear limits and controls on exploitation, and are able to be effectively enforced. This increases the importance of paying close attention to any moves to increase restrictions, in order to ensure that trade is not disrupted and that environmental problems are addressed. One thing is clear: trade restrictions are a poor mechanism for addressing deforestation and degradation problems. They may, however, if soundly developed, assist more direct policies.
Overall, continued reductions in tariffs are unlikely to have any substantial effect on sustainable forest management since tariffs have in most cases reached low enough levels for them not to have a major impact on trade and/or consumption. There are nevertheless situations where they may have an effect on some countries or on particular products.
Increased emphasis on NTBs which focus exclusively on environmental issues, may have environmental benefits, but again there is considerable uncertainty on a) what these benefits might be b) what other negative effects might exist c) whether the environmental benefits more than counteract the loss in economic benefits and thus d) what the net situation might be. For NTBs, apart from health regulations, improvements in SPS and TBT rules may not be directly impacting environmental issues. Trade impediments on the other hand may be having some direct effect where imports are limited to certified or similar products, but the exact effects appear to be ambiguous.

Linkages between Industrial Structure,

Trade and Forest Management

By Maryanne Grieg-Gran

DRAFT Summary Discussion Paper

January 2003
Aims of the Sub-Study
This sub-study examines how the structure of the forest products industry affects the expansion of trade and the impacts of trade on forest management. The term industrial structure is used here to refer to some key characteristics of the forest products sector which are thought to influence the conduct and performance of companies within it. These include characteristics related to:

Background
Forest product companies, like those in other sectors, have been both consolidating through mergers and acquisition and investing in other countries. Some estimates put the percentage of world forest product trade controlled by trans-nationals at 80-90% but these date from a study carried out in the 1980s. Nevertheless, foreign investment has been on the increase since the 1980s. Many of the leading pulp and paper companies, which in the 1960s and 70s typically operated solely in their home country, now have a global reach with forest operations, manufacturing facilities and distribution activities in a range of countries. In Cameroon, only 25 out of 300 forestry companies are purely national. In Indonesia, the top ten timber companies recently held 47% of the total forest concession allocation, amounting to 24 million hectares - more than one fifth of the total Indonesian forest area.
There are potential advantages to such changes in the structure of the forest products sector. Larger companies can exploit economies of scale and so increase efficiency, foreign-owned companies can bring new technology and skills and the injection of additional capital can enable a more long-term perspective, crucial for sustainable forest management.
Yet there is concern that the growing power of these trans-national companies as they increase their size and market share will fuel the race to the bottom and contribute to forest destruction. It is also believed that the presence and interest of large companies will undermine forest governance and existing rules on land use.
Implicit in this concern is the fear that any economic gains from trade liberalisation will be captured by large powerful companies rather than bringing increased benefits to local communities, landholders or governments. Thus, the World Rainforest Movement points to the huge profits of trans-national companies and banks and the cheap prices paid by consumers at the expense of loss of natural capital to local peoples such as the Baka pygmies in Cameroon, the Nahua people in Peru and the Saramaka people of Suriname.
It is therefore important to study the changes in industrial structure which have taken place in the forest products sector at an international level and more specifically in different countries, to examine what has driven these changes, in particular the link with trade and trade liberalization efforts, and to assess implications for the extent of sustainable forest management and the benefits and costs which accrue to different groups from forestry.
A general analysis of trends in the structure of the forest products sector and their likely implications will be supplemented by detailed examination of the situation in three case studies in Ghana, Philippines and Brazil. These case studies are ongoing and results are not yet available. The discussion that follows is intended to provide an overview of the issues and stimulate debate.
Changes in the Structure of the Forest Products Sector
The forest products sector is heterogeneous but in terms of industrial structure a broad distinction can be made between companies engaged in pulp and paper production and those primarily concerned with solid wood products.
Pulp and paper production tends to be more capital intensive than most types of solid wood production, which implies greater barriers to entry by new producers. In the pulp and paper sector, there has been a noticeable trend towards consolidation both within and across national boundaries, with for example, outward FDI from Finnish forestry firms increasing tenfold over the period 1988 to 1998. The sector however, is considered fragmented in comparison with other manufacturing sectors.
The biggest deals in the pulp and paper sector are typically between companies in developed countries. North-South foreign investment, although on the increase, is relatively minor compared with trends in the solid wood sector. International Paper, the world's leading company in terms of paper and board output, has the majority of its overseas operations in New Zealand and Europe and the only developing country where it has investments is Brazil.
Much of the merger and acquisition activity has been of the horizontal integration type that is between companies at the same stage in the production chain. Trends in vertical integration and diversification are less easy to discern and the picture is rather mixed. Over the long term the trend has been towards both of these. For example, the Canadian company, Kruger, which started off as a fine paper wholesaler integrated backwards into paper production in 1950 and since then has expanded its range of products and countries of operation. A more recent trend though, is for companies to divest non-core assets and to concentrate on core businesses. Stora Enso, for example, has moved out of energy generation and specialty paper for this reason, but with its significant capacity in both paper products and timber products is still relatively diversified. Georgia Pacific has recently announced plans to sell a majority stake in its global paper distribution subsidiary and to split into two companies, one concentrating on consumer products and packaging and the other on building products and distribution.
Companies in the solid wood sector are typically smaller than the companies in the pulp and paper sector. The Danzer Group, which is considered the market leader in hardwood veneers, had 5000 employees worldwide and sales of €540 million in 2001 and Louisiana Pacific, a leading manufacturer of wood-based building materials had about 8,000 employees and net sales of US$1.9 billion. By way of comparison, Stora Enso, ranked number 3 in the world terms of output volume, had 43,000 employees and sales of €13.5 billion in 2001. There has perhaps been less of a marked recent trend to consolidation at the international level than in the pulp and paper sector. This reflects the fact that foreign investment generally started earlier than in the paper sector. European companies have been investing in forest operations in Africa for decades while Asian companies have had significant foreign investments in the forestry sector since the 1960s but primarily within Asia. They have however, intensified their foreign investments since the 1990s and moved into other regions, notably South America and Africa. More recent moves by European companies are into Eastern Europe, for example Danzer Group is closing veneer production in Germany and Belgium and building a new veneer mill in Prague.
Specialised sub-contracting is more common in the solid wood sectors than in the pulp and paper sector and is particularly important for furniture. 75% of Malaysia's furniture exports are produced under sub-contracting arrangements.
It is also more common for solid wood companies to be family-owned, private companies or at least family-controlled in the case of listed companies In contrast most of the large pulp and paper companies are listed companies, with shares increasingly held by financial institutions. There are some important exceptions though, for example the Canadian company, Kruger, is privately owned.
Companies in both pulp and paper sectors and the solid wood sectors in spite of consolidation trends are still small in relation to those in the sectors they sell to. More important though is the level of concentration in the buying sectors. This varies but is thought to be growing in some sectors.
The Relation between Industrial Structure and Trade
To what extent have these changes in the structure of the forest products sector impacted upon trade patterns and to what extent are they are a result of trade expansion and changes in trade policy? In practice it is difficult to separate the two.
The expansion of trade and the opening up of markets through trade liberalization has been an important driver of the process of consolidation and of mergers and acquisitions across national boundaries. This is because in order to compete on the global market, companies have to search for ways to maintain competitiveness. They can lower costs of production through exploiting economies of scale and scope, implying consolidation, or by shifting certain stages of the production process to low-cost locations, implying foreign direct investment. But trade restrictions, in particular the log export bans in South East Asia, have also played a role prompting wood processing companies in search of raw materials to invest in logging operations in other regions.
Foreign direct investment can sometimes have a trade-reducing or trade-diverting effect by giving companies direct access to the market in the host country. Norske Skog's investments in South America, for example, are motivated by the growing market for newsprint there. The company is now the largest supplier of newsprint in the region. But these types of market-seeking investments appear to be less common in the forest products sector, than resource or labour-seeking investments. Thus foreign direct investment appears to have been primarily a driver of trade, facilitating access to forest resources in host countries, to supply home country markets as well as other markets and supplying the capital and technology to enable an export industry to develop. This applies to both the solid wood sector and the pulp and paper sector.
Exports of logs from West and Central Africa have been driven by the investment of European companies there and latterly Asian companies, while export-oriented plantation developments in South America have involved significant amounts of foreign investment.
Links between Industrial Structure and Forest Management
The implications of different types of industrial structure for forest management are complex and no firm predictions can be made without reference to the governance and policy context.
As companies increase their market share through expansion and horizontal integration and wield greater amounts of market power, they increase their buying power in dealing with suppliers, particularly of wood raw materials and their selling power in relation to consumers and end-users. This means that they may be able to exert pressure on their suppliers for improvements in forest management. At the same time they may be able to ensure that it is their suppliers that incur the additional costs. But greater selling power may mean that they can resist calls from their buyers for improvements in forest management.
Increases in the size of companies can affect their bargaining power with governments as they become more crucial for employment and government revenue. This may influence the terms on which they access forest concessions and increase the scope for discretion in the enforcement of forest policy. Cameroon, where just ten parent groups (including five wholly or partially French-owned) hold half of the country's logging concessions, is widely cited as an example. According to Global Forest Watch, despite a theoretical maximum holding of 200,000 hectares per parent company, three of the parent groups operate in direct violation of this law or through their subsidiaries.
Alternatively, the unit costs for government agencies of monitoring larger companies are generally lower making them the most likely target of government inspection activity. Moreover, large companies are generally more visible to the general public, facilitating NGO campaigns.

Trends to vertical integration, particularly to downstream activities, may have the effect of simplifying the production chain and making the company at the forest operation level more visible to consumers. In environmentally sensitive markets this may intensify pressures for improvement in forest management and give a stimulus to forest and chain of custody certification. However, there are few examples of this happening, and in some cases companies have been able to keep a low profile even where they produce items sold at retail level.
Stationery products originating from Asia Pulp and Paper, allegedly from unauthorized natural forest clearance in Indonesia, were sold through British retail outlets under other brand names and were not easily associated with the company.
Rather the pressure from end-users and consumers for SFM has led some wood product manufacturing companies to integrate backwards and increase their control over their sources of wood raw materials. An example is given by Tramontina a producer of wooden kitchen utensils and garden furniture in Brazil which having had little success in persuading its suppliers to change their practices, has bought forest land in order to apply for forest certification. Similarly, Castle Doors, a US company with a manufacturing subsidiary in Bolivia, and a supplier of Home Depot, has stated plans to move into lumber production by acquiring forest concessions from the Government of Bolivia in order to achieve 100% certification of its products. Other advantages for the company of such backwards vertical integration would also be price and availability control.
Increasing foreign involvement can have both positive and negative impacts and the outcome can vary depending on the business strategy of the investing company, its sources of finance, the markets it is targeting and the policy context in which it operates.
Foreign direct investment may bring improvements if the investing company has a global set of environmental and social standards and a declared policy on sustainable forest management and is concerned about maintaining its reputation. Most of the leading pulp and paper companies have policies or declarations on their commitment to sustainable forestry available on their websites and some solid wood companies also, for example Danzer Group. Shell had a policy of sustainable forest management for its plantations divisions and obtained FSC certification in 2001 for all its forest operations in South America.
But it can be equally argued that the prime interest of some investing companies is to secure raw materials and labour at low cost, making forest mining without any consideration to long-term management the most financially rational strategy for them. One implication though is that the companies that are concerned about their reputation will shift their investments away from natural forests in the tropics to plantations where requirements for certification can be more easily met without compromising commercial viability and competitiveness.
Transfer of technology and skills may improve harvesting techniques and increase processing efficiency and so increase the viability of SFM. Moreover, there may be spill-over effects on the forest management of small and medium companies that are linked with foreign-owned companies as suppliers. Gethal, a plywood producer in Brazil with majority US capital, is actively encouraging its suppliers to improve their forest management practices and to seek certification.
Foreign investors may facilitate access to markets in their home countries or regions and so may bring contact with environmentally sensitive consumers. The implications of this depend on the size of these markets.
As foreign investment decisions are often heavily dependent on the availability of finance, the interest in sustainable forest management of the financial institutions can be important. The involvement of official finance institutions, multilateral and bilateral development finance institutions such as IFC and FMO of the Netherlands and export credit agencies should in theory provide scope for looking beyond financial returns to questions such as social and environmental and overall development impact. In practice export credit agencies and to a lesser extent DFIs have been heavily criticized for their involvement in some controversial forest investments, notably Asia Pulp and Paper in Indonesia.
Both types of agency have been taking steps to adopt more comprehensive ways of assessing their investments in order to address environmental and social issues. But CDC, which was one of the first bilaterals DFIs to develop and monitor ethical principles for investment and which in the past had an extensive forestry portfolio, has decided to move out of forestry because of its low returns in relation to other sectors.
IFC has taken environmental issues more seriously than other agencies with safeguard policies on forestry and a range of other issues. Its involvement in the forestry sector aims to reduce deforestation, enhance the environmental contribution of forested areas, promote afforestation, reduce poverty, and encourage economic development. The effect of its policy though has been to limit its investments in natural forest management. Between 1992 and 1998, 64% of its total forest-related investment involved plantations and 36% boreal/temperate forest. There were no investments in tropical forests as IFC's safeguard policy in operation since 1991, states that it does not finance commercial logging operations or the purchase of logging equipment for use in primary tropical moist forest.
The involvement of private financial institutions that specialize in socially responsible investment or that have a particular interest in forest management also provides scope for influencing the performance and attitudes of the company. In the case of the Brazilian plywood manufacturer, Gethal, forest certification was one of the conditions required by the U.S. investment fund manager GMO which acquired a majority holding in the company in early 2000. Other timberland investors in the US, such as Hancocks are also investing outside of the US, but a prime consideration in choosing and assessing an investment location is political risk. Their preferred investment locations have been developed countries or middle income developing countries in Latin America. Africa, apart from South Africa has received little attention from them.

Higher International Standards or Rent-Seeking Race to the Bottom?

The Impacts of Forest Product Trade Liberalisation on Forest Governance

By Michael Richards

DRAFT EXECUTIVE SUMMARY
The objective of this study is to assess the impacts of forest trade policies, especially trade liberalisation, on forest governance. This was based on a literature review and three country case studies - Brazil, Indonesia and Mexico. The emphasis is put on national (public, private and community sector) forest governance in developing and transition economy countries, since this is where governance problems like illegal logging and corruption are most problematic.
A brief review of trade policies found that it is difficult to establish an overall trend towards trade liberalisation. Reductions in tariffs have been counteracted by a range of non-trade measures - mainly trade restrictions by poorer countries, and subsidies by wealthier nations - to protect domestic forest industry.
An analysis was carried out of the various pro and anti-trade liberalisation positions over forest governance impacts. Evidence surrounding the following overlapping issues was collated and assessed:

• Impacts of trade policies on rent seeking and corruption
• The effect of increased external demand pressures on forest level governance
• The role of green international market pressures, especially certification
• The role of transnational companies and the `race to the bottom'
• The effect of trade policies on the temptation to cut compliance costs
• The capacity of governments to limit or internalise externalities
• The links between trade liberalisation, wealth creation and improved governance
It was found that the empirical basis for both (pro and anti-liberalisation) sets of arguments was weak, fundamentally because trade policies and pressures are weaker drivers of forest governance than non-trade factors. The impacts of trade policies on forest governance are weak, indirect and sometimes perverse. They are also difficult to identify due to the complexity of trade and governance interactions.
Much of the evidence is therefore conflicting. For example, while political corruption tends to fall following removal of trade restriction (since discretionary powers are reduced and transparency increases), there is likely to be an increase in rent-seeking opportunities to other actors. There is also evidence from Southeast Asia that export booms can lead to forest sector institutional breakdowns due to political interference with the concession allocation system. Increased external demand pressures can have positive or negative governance and environmental effects depending on regulatory capacity and other policies. Even neo-classical economic theory is ambivalent about the effect of higher rents on corruption.
The evidence does however suggest that trade policies and pressures can be a stimulus to either a virtuous governance cycle (providing regulatory weaknesses and externalities are tackled) or a downward spiral. The impact of trade policies depends on the presence or absence of underlying market, policy and institutional failures, External trade is thus a magnifier of these failures or of successful efforts to rectify them, for example through internalising the externalities. Accompanying non-trade policies, both sectoral (regulatory, competitive concession bidding, forest taxation, etc.) and extra-sectoral (decentralisation, state downsizing, devaluation, etc.), can therefore either ameliorate or exacerbate the potential adverse impacts of trade policies.
The three case studies confirmed these literature-based findings. They showed that both freer trade (tariff reductions in Mexico) and increased protection (Indonesia's log export ban, and Brazil's ban on mahogany exports) could exacerbate underlying problems and result in incentives for non-compliance. They confirm the concern that trade policies are unreliable for pursuing environmental objectives, and can cause perverse incentives. For example, Brazil's attempts to control the mahogany trade have increased corruption, especially species mis-specifciation, and diversion of mahogany to less discriminating markets, including the domestic market.
The Brazil case study found that in general external trade pressures are encouraging better governance; certification is exerting an important market access incentive for, in particular, foreign companies operating in Amazonas State, and is having a knock-on effect on the domestic market with the establishment of a buyer's group. But the superior governance record of the export-oriented Amazonas companies, in comparison with the largely nationally-owned and domestic market oriented operations in Parα State, is due to a range of more powerful determinants of forest governance like road access, tenure security and the scale of frontier clearance timber. The increased media and regulatory attention to the mahogany and export sector issues has however been at the cost of reduced vigilance of the domestic trade in which forest governance problems are worse. The Mexico case study also found the governance problems are more acute for lower value domestic production.
In Indonesia, external trade policies and pressures are reported to be less important drivers of corruption and illegal logging than political and financial instability, and the lack of law and order. At the same time the demand for logs from Sabah, China and other countries was found to be fuelling the illegal export trade. An important aspect of this is that China's logging ban and marginally better control in Malaysia have increased the governance pressures on Indonesia forests. Another observation from Indonesia is the way decentralisation has caused a shift in rent-seeking opportunities and corruption away from central government and large companies to local government and small operators.
In Mexico it was felt that trade liberalisation has probably had an overall net positive governance impact, but that other inappropriate policies and the structural adjustment programme (SAP) have been more important drivers of negative governance impacts on the community forestry sector. The timing of the SAP before the first wave of tariff reductions in 1986, and the deregulatory forest law before the implementation of NAFTA in 1994, were both very poor preparations for trade liberalisation, and resulted in large increases in unregulated logging. This brings out the vital issue of sequencing.
As argued by Stiglitz and others, regulatory and institutional strengthening must precede trade liberalisation, not follow it. Another clear consequence of trade liberalisation in Mexico has been to widen the governance gap between the higher value, formal, regulated and more export-oriented community forestry sector, and the lower value, informal, unregulated and more domestic-oriented community forestry sector.
In all three case study countries, the domestic trade was much bigger than the export trade, and the forest governance problems considerably more acute and less well regulated. Therefore much greater efforts are needed to tackle domestic market governance issues. Again, building institutional capacity for greater regulatory control, combined with efforts to increase civil society participation in policy and monitoring processes, and to increase the incentives for sustainable forestry, like environmental service payments, are critical. This is an essential complement to the multilateral trade-based approaches espoused in the EU Forest Law Enforcement and Governance process.
The Indonesia case study and wider literature confirm the concern that an improvement in forest control in a wealthier country, which can afford to substitute imported for domestic production to meet a domestic market shortfall, will increase the environmental and governance pressures in poorer neighbouring countries. An FAO report also reports that countries which have imposed logging bans have greatly increased their log imports. As Sedjo (1996) comments, in the context of stricter controls in the US and Canada, "logging restrictions in some places will simply be offset by logging increases elsewhere. In short, the issue is not whether to log but where to log."
The implication of this is that unilateral approaches to improving forest governance are unlikely to result in a net overall improvement in forest governance, and that regional and multilateral approaches are essential. While this confirms the importance of the regional Forest Law Enforcement and Governance initiatives, there is a concern over the EU-led consumer country measure to legislate against illegal timber imports. As with certification, there could be perverse governance impacts in poorer producing countries, at least in the short term. The verification costs required for importing are likely to further reduce the competitivity of natural tropical forest products compared to temperate and plantation products, resulting in their diversion towards less discriminating domestic and external markets. A recent ITTO study reports a consensus view among tropical timber producers that consumer country measures to prevent illegal timber will be another major obstacle for them. The higher costs of legal production will also be a further incentive to illegality.
The most important accompanying `stick' for the `carrot' of trade liberalisation is a strengthening of forest sector institutions or regulatory capacity in poorer producer countries - although great care is needed to ensure that increased effective, as opposed to paper, regulation does not increases the transaction costs of `good forestry'. When regulatory capacity is weak, either higher stumpage values (higher returns from illegal logging) or lower prices (increased pressure to reduce compliance costs) can increase the incentives for illegality.
It is clear that considerable financial support, as well as domestic political will, is needed to make this transition. The strengthening of producer country regulation and institutions should be regarded as the other side of the coin of consumer country moves to ban illegal imports. This includes adequate resources, training and incentives to implement stricter control, as well as a greatly enhanced role for civil society, as shown in thevigilancia verdeprogramme in Ecuador. The bilateral partnership approach, as in the UK-Indonesia Memorandum of Understanding, is therefore a critical model.
Finally there is an important political economy aspect to forest governance. The transition towards more effective forest governance usually only happens in more economically developed countries with mature democracies, although the recent progress in Bolivia and Ecuador does not make this an iron law. There is a strong correlation between the quality of governance and income per capita. Poorer producer countries like Indonesia are still heavily dependent on natural resource exports, and thus often suffer from `resource curse' governance problems. Democratic progress and political stability are also essential. For these reasons, Brazil and Mexico are making some progress in improving forest governance, while Indonesia is caught in a downward spiral. Improving forest governance is therefore integral to the wider processes of economic and democratic political development.

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