Trade compliance has taken on a new dimension. No longer is the focus solely on the goods crossing borders – instead, regulations now emphasise how products are made, tracing the origins of their individual inputs deep into the supply chain.
This shift toward Environmental, Social, and Governance (ESG) requirements means that compliance demands go far beyond the final product, and companies are increasingly responsible for every facet of their supply chain – from raw materials to integrity of production. Importers, in particular, face unprecedented scrutiny as regulatory frameworks, such as the EU Deforestation Regulation (EUDR), Carbon Border Adjustment Mechanism (CBAM), and the U.S.’s Uyghur Forced Labor Prevention Act, introduce stringent demands for transparency.
Why businesses must adapt to the upcoming trade compliance changes
As the regulatory landscape tightens, businesses must adapt swiftly to avoid penalties, protect their reputation, and maintain seamless supply chain operations.
Take, for example, the palm oil trade. With imports into Europe valued at 7.5 billion USD in 2022, importers of palm oil will need to ensure that its production has not contributed to deforestation. Under the EUDR, companies failing to comply with these sourcing requirements could face penalties of up to 4% of their annual turnover, confiscation of goods, and exclusion from future procurement opportunities.
Likewise, businesses that delay action run the risk of significant financial and reputational damage. So far in 2024, U.S. Customs and Border Protection halted 4,245 shipments valued at 1.68 billion USD, ultimately denying 1,258 shipments after they were subjected to review under the Uyghur Forced Labor Prevention Act. In the EU, 20% of companies have so far submitted their CBAM reports, largely based on default values, meaning they could face challenges as Quarter 3 reports must contain actual emissions data.
“These numbers reflect the risks of non-compliance — from financial losses to the potential for long-term brand damage. And it’s not just about avoiding penalties – failure to comply can result in shipment detainment, missed sales opportunities, harm to a company’s reputation, and potentially loss of market access” says William Petty, Global Product Development Manager at Maersk Trade & Customs Consulting.
This elevated level of transparency pushes businesses into new territory, requiring them to track suppliers at multiple tiers and, in many cases, all the way to the raw material level. The burden is on importers to demonstrate that their supply chains are free from practices such as illegal deforestation, or risk severe consequences.
When nearly 24% of all company revenues in the EU depend on commodities linked to deforestation, the EUDR will mean increased regulatory oversight and urgent need for full transparency. And while the European Commission is proposing an extra 12 months of phase in time for EUDR implementation, this should not be seen as an opportunity for prolonged inaction, but as one to get ahead of the compliance.
One of the most significant challenges in adapting to this new regulatory environment is overcoming the perception of ESG compliance as a burden. “While implementing the necessary systems to meet these evolving regulations can be costly and time-consuming, businesses need to recognise that ESG is not a passing trend. As sustainability concerns continue to rise, and as consumers and governments demand greater accountability, the pressure to achieve full supply chain transparency will only increase,” continues Petty.
How to ensure your business is ready for new regulation
To meet the challenges posed by regulations such as the EUDR, CBAM, and Uyghur Forced Labor Prevention Act, businesses must implement a robust compliance strategy. This involves much more than understanding the rules on paper – it requires a deep dive into the supply chain, enhanced due diligence practices, and proactive risk management.
Here are the key steps businesses should take to ensure they are prepared:
- Gain awareness of the regulations – Understanding the scope and details of regulations like EUDR is the first step to staying compliant. These regulations are in their early days, and businesses must stay informed about new developments that could impact their trade flows.
- Assess the impact on trade flows – Determine how these regulations affect not just your core operations but also your entire supply chain. If your business involves components that fall under regulatory scrutiny, you need to be aware of how they are sourced and produced.
- Develop supply chain visibility – Achieving the required level of transparency means having complete visibility into your supply chain. This often requires collaboration with suppliers to gather data and assess risks at multiple tiers of production.
- Implement data-gathering mechanisms – To comply with these regulations, businesses need accurate, real-time data from their supply chain partners. Implementing robust mechanisms for gathering, analysing, and managing this data is critical to demonstrating compliance.
- Establish risk assessment processes – With greater visibility comes the need for strong risk assessment protocols. Businesses must evaluate where potential risks lie within their supply chain and take action to mitigate these vulnerabilities.
- Ensure documentation and proof of compliance – Even businesses that are fully compliant face risks if they cannot prove it. Companies must have processes in place to document and demonstrate their adherence to regulations, providing clear evidence in the event of an inspection or challenge.
The cost of non-compliance: More than just fines
“The financial penalties for non-compliance can be devastating, but the indirect costs — such as supply chain disruptions and reputational damage — can be even more harmful in the long run,” concludes Petty. Businesses must not only comply with regulations but also ensure that they can demonstrate this compliance effectively. In the case of EUDR, even companies whose primary business does not involve the direct import of raw materials must be vigilant, as non-compliant materials anywhere in the supply chain could trigger penalties.
For instance, an importer of consumer goods containing for example leather or chocolate, materials subject to the EUDR, could face consequences if their suppliers are non-compliant. This ripple effect through the supply chain underscores the urgency for businesses to conduct thorough due diligence and implement robust systems of transparency.
Lastly, ESG regulations, while challenging, offer a significant opportunity for businesses to drive positive change. For example, the most recent data suggests that the EU is responsible for at least 10% of forest destruction worldwide.
By complying with sustainability requirements, companies not only protect themselves from financial and reputational risks but also contribute to a more ethical and sustainable global trade environment.
The shift toward transparency in supply chains is not a temporary compliance challenge — it is a fundamental change in how business is conducted. Companies that take action now to implement the necessary systems, processes, and partnerships will be better positioned to thrive in this new era of trade.
