Are EU regulations suffocating Estonian retail?

LEGISLATION

2023-10-03

Nele Peil, managing director of the Estonian Merchants' Association

Europe has, for some time now, been growing relatively poorer compared to growth in the US and China. One of the underlying causes of this relative impoverishment is excessive administrative burden, which wastes companies' resources. The European Commission and the Estonian Government have promised to reduce companies' administrative burden by 25% in the coming years. While the time and hourly rate of a data-entry clerk can be calculated, the cost of increasing process complexity is harder to assess — let alone the opportunity cost, that is, the money that could have been earned by investing company resources in productive work rather than bureaucracy.

Below are a few examples of new EU requirements that will bring increased costs and administrative burden to retailers in the years ahead.

The Deforestation Regulation has already entered into force, with the broader aim of reducing the risk of protected forests being cut down around the world for the purpose of producing palm oil, timber or meat. To protect forests, companies importing into the EU products containing coffee, cocoa, rubber, soy, palm oil, beef or wood must now mark on a world map the forests from which the raw material in each batch originates. An average building supplies retailer would have to mark roughly 40,000 locations on the map every week. A store has tens of thousands of products in its assortment, and a batch typically contains raw material sourced from several or even a dozen different forests around the world. The European Commission is currently developing a mapping application for transmitting the data, in which, reportedly, locations have to be marked one by one by clicking on a world map. How much will it cost retailers to make 40,000 clicks a week and verify batch information? In addition, retailers must send their own "inspector" out to the forests in question to verify that their supplier has not been engaged in prohibited deforestation.

The European Commission is currently working on a directive called the Right to Repair. The aim of this directive is to promote the sale of more sustainable products and to create an environment for consumers in which repairing the old is always possible and generally cheaper than buying new. Consumers will gain the right to demand repair from the producer when this is technically possible — for instance, with washing machines or televisions. Among other things, the consumer must be issued an information sheet listing the maximum repair price for the product and the various service providers in their area who offer the repair service. If the producer has gone out of business in the meantime, the obligation and the cost of repair fall on the retailer, who generally has neither the necessary skills nor the spare parts. One example of a practical challenge is the requirement to provide a maximum repair price at the time of purchase. Normally, even a repairer offers different alternatives at different prices depending on what has broken. Sometimes repair may be unreasonably complex or expensive, and from both an economic and an environmental perspective it would be more efficient to send the product to recycling and buy a new one. Sometimes a new product is safer or more environmentally friendly than the old one. The availability of spare parts is also questionable. The European Commission's proposal currently lacks any timeframe specifying how many (or how many dozen?) years a producer and retailer will be obliged to repair various products.

The regulation on packaging and packaging waste is expected to be signed in the European Parliament as early as November this year. The aim of this initiative is to accelerate the reduction of packaging placed on the market — covering sales packaging, grouped packaging and transport packaging alike. A certain share of products will have to be sold in returnable, washable packaging. A ban on packaging fruit and vegetables is also under discussion. The proposal that worries retailers most is the idea to require stores to dedicate part of their sales floor to selling unpackaged products — whether via dispensers, in bulk, or deli-counter style with the customer's own container. There is currently consideration of requiring stores with a sales area of more than 400 m² to dedicate 20% of the sales area to unpackaged products. The European Commission would issue a list of products recommended for unpackaged sale. Retailers see many risks here, ranging from a lack of consumer interest and the difficulty of keeping the area around dispensers clean, to an impact on assortment narrowing and falling sales.

Major changes lie ahead for retailers selling textiles and footwear. Extended producer responsibility is being introduced for textiles, meaning that whoever places clothing or other textiles, leather goods or footwear on the market must in future cover the cost of collecting and recycling those products. Recycled material must be used to produce new textiles. An export ban on textile waste from the EU market will be put in place, along with eco-design requirements for producers. Stores will have to start accepting textile waste on their premises, much as they accept used batteries today. If the producer is in another country, the cost must be covered by the importer. The question mark in this equation is the fact that most textiles are woven from blended fibres of different materials (the average jumper has cotton fibre interwoven with polymers), and the technology to unravel these fibres and recycle the materials separately does not exist. Recycled fibre mass can always be used to make lower-value textile products such as filling material or floor mops, but Europe's recycling targets cannot be met that way.

In addition to major sectoral regulations, the European Commission also occasionally deals with minor matters. One example from 2023 is the obligation imposed on online stores to create a product return button, so that the consumer can return products by clicking that button in the online store. It does not matter how many (more convenient) return options the online store already offers its customers, or whether its customers actually need that button.

Trade associations are constantly drawing attention to the growing administrative burden and overregulation.

Officials do not seem to weigh these comments as heavily as observations about technical problems. The growth in administrative burden seems to be a stock phrase carrying little weight. In this context, it is bizarre that places are being sought to cut administrative burden by 25%. A good place to start would be to review the obligations currently being drafted. They require collecting and submitting large volumes of data gathered just in case, and creating solutions that turn out to be more expensive than would be reasonable to spend.