Impact of the EU Deforestation Regulation on the Textiles Sector

This blog was originally posted on 9th June, 2024. Further regulatory developments may have occurred after publication. To keep up-to-date with the latest compliance news, sign up to our newsletter.

AUTHORED BY HANNAH JANKNECHT, REGULATORY COMPLIANCE SPECIALIST, COMPLIANCE & RISKS

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What are the Requirements Under the EU Deforestation Regulation?

The EU Deforestation Regulation (EUDR) came into force in June 2023 and is set to significantly expand the obligations that have already been in place under the European Timber Regulation since 2010. 

Under the EUDR, operators and traders of products made with commodities that have a high deforestation risk – namely cattle, cocoa, coffee, oil palm, rubber, soya and wood – must ensure that their products are deforestation free. To this end, operators and traders will have to set up a tight due diligence and traceability system, providing evidence that their products: 

• Have been produced in accordance with the legislation of the country of origin; and 
• Have not been produced on a plot of land that has been subject to deforestation after 31 December 2020. 

The majority of the due diligence requirements apply from 30 December 2024, which means that operators and traders must establish a suitable due diligence and traceability system as soon as possible. Micro and small undertakings have a little more time, since they will be in scope of the obligations from 30 June 2025. As part of the due diligence procedure, operators must collect detailed information on the origin of their products, conduct a risk assessment and implement measures such as audits and training that mitigate the risk. 

Impact of the EUDR for the Textiles Sector

Products placed on the market or made available in the EU are only in scope of the EUDR if they are listed in Annex I to the regulation. Products that do not fall under one of the HS codes listed in the Annex are not in scope of the regulation, even if they contain any of the high-risk commodities. In terms of finished apparel products, the only product on the list is ‘ex 4015 Articles of apparel and clothing accessories (including gloves, mittens and mitts), for all purposes, of vulcanized rubber other than hard rubber’. This means that finished textile products are by and large not affected by the EUDR. 

This should however not lead to the misconception that the EUDR has no significant impact on the textiles industry. A number of raw materials that are important for the sector are on the list of products in scope of the EUDR. And while the finished product may not be impacted directly, there is a high potential for supply chain disruption and increased costs for those products and materials. Amongst the listed products that are relevant for the textiles industry are:

• ex 4107 Leather of cattle, further prepared after tanning or crusting, including parchment- dressed leather, without hair on, whether or not split, other than leather of heading 4114;
• 4001 Natural rubber, balata, gutta-percha, guayule, chicle and similar natural gums, in primary forms or in plates, sheets or strip;
• Pulp, paper and printed products (the packaging of a product is not in scope if it is used exclusively as packing material to support, protect or carry another product placed on the market; the purchase of packaging material might however be affected by supply chain disruptions and increased costs). 

Since the EUDR sets requirements for the entire value chain of the product, companies outside the EU will also be asked to supply additional and more detailed data. The detailed traceability requirements furthermore present companies with the challenge of introducing traceability systems in areas where traceability is not a common practice yet, such as the leather industry. 

Who is Responsible for Ensuring Compliance?

Both the operator, who places the product on the EU market for the first time and the trader, who makes the product available or distributes it, are responsible for ensuring that the product is deforestation-free and covered by a due diligence statement. 

To make things easier, operators who have carried out due diligence and uploaded the due diligence statement in the information system of the competent national authority are obliged to pass on the reference number for the due diligence statement to other operators and traders in their supply chain. These are then able to refer to the existing due diligence statement. Non-SME operators and traders must however ascertain that the due diligence has indeed been carried out in accordance with the legislation before referring to the existing statement.

Enforcement and Penalties

Penalties for non-compliance will be established under national law. Based on the frame set by the EUDR, these shall include:

• Fines up to 4 percent of the operator’s or trader’s total annual Union-wide turnover;
• Confiscation of products;
• Confiscation of revenues gained by the operator and/or trader from a transaction with the concerned products;
• Temporary exclusion from public procurement;
• Temporary prohibition from placing or making available products on the market;
• Prohibition from exercising the simplified due diligence process for countries with a low risk of deforestation. 

What Happens Next?

The majority of due diligence requirements will be applicable from 30 December 2024 (30 June 2025 for small and micro undertakings). 

As the deadlines are looming, there is much debate within and outside the EU as to whether or not the application of the EUDR should be postponed. Amongst the voices asking to postpone are the Austrian Ministry of Agriculture, the European People’s Party (EPP) and the US government. 

According to the Financial Times, the Biden Administration sent a letter to the EU Commission on 30 May, stating the enormous impact of the new requirements on US producers of timber, paper and other commodities and products. Based on the letter, the application of the regulation should be delayed until the outstanding economic and technical questions are solved, giving producers more time to implement the necessary systems. 

In a letter sent to the EU Commission on 27 April, the Austrian Ministry furthermore highlighted the administrative challenges that companies will face if the EUDR will be enforced without the necessary country benchmarking system in place. The country benchmarking system aims to classify areas with high and low deforestation risk, and imports from countries with a low risk of deforestation would be subject to simplified rules. The benchmarking system was supposed to be adopted in 2024, but as of today, no draft has been published yet, and the initial classification might be pushed out to 2025. If this happens, all importers will have to comply with the stricter rules in 2025. There is however no confirmation of a potential delay as of yet, with many deeming it unlikely due to the approval that would be needed from the European Parliament.

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