Europe-Asia trade war looms over palm oil

Mah Siew Keong, Malaysia’s minister for plantation industries and commodities, is on the front line of a looming trade war against what he sees as unfair European Union (EU) trade practices.

Last April, the European Parliament voted in favor of a draft law that aims to ban on palm oil biofuel imports to the EU beginning in 2021 due to environmental concerns the crop is contributing to deforestation.

The European Commission, the EU’s principal executive body, has yet to formulate a final draft law. Each of the EU’s 27 national governments will have to ratify the ban before it is uniformly enforced.

Still, the proposed move has spurred a diplomatic row with Malaysia and Indonesia, the world’s top palm oil exporters, and now threatens to spiral into tit-for-tat punitive trade measures.

Mah, known as Malaysia’s global palm oil ambassador, has likened the EU proposal to “crop apartheid.” The draft law, he notes, does not prohibit other similar oils such as rapeseed, olive and soybean that are mostly grown in EU member states.

Indonesia and Malaysia employ around 3.5 million people in the palm oil industry, generating a combined export value of over US$40 billion annually.

Malaysia’s Federal Land Development Authority (Felda), a state body founded to organize smallholder cash crop plantations, is presently the world’s largest crude palm oil producer.

Felda settlements in Malaysia are synonymous with rural aid programs and regional poverty reduction efforts. Nearly 640,000 smallholders in the country account for some 40% of global palm oil production.

Given the EU’s clout as the world’s second-largest palm oil importer, trailing only India, Malaysian producers fear a precipitous drop in future demand and potential European divestment in the industry. Malaysia stands to lose about US$500 million in annual revenue if the EU goes ahead with palm oil curbs, analysts cited by Reuters estimate.

Combined palm oil output between Indonesia and Malaysia is forecast to hit to record highs in 2018, putting further downward supply-side pressure on prices.

The edible vegetable oil is a lucrative commodity with diverse applications ranging from use as a cooking oil to an ingredient in processed foods, pharmaceuticals, soaps, detergents and cosmetics.

Global per capita consumption of palm oil has doubled since 2000, reaching 17 pounds (7.7 kilograms) in 2015, reported Bloomberg.

Palm oil is also blended with fossil fuels such as diesel to create renewable fuel sources for motor engines that have better fuel economy and emit fewer greenhouse gases like carbon dioxide.

Some conservation groups, however, believe biofuels contribute to biodiversity losses, higher food prices and an increased reliance on fertilizers. But the bigger criticism is environmental, with widespread charges the industry has contributed to massive deforestation.

Businesses and smallholders have been accused of setting forests and carbon-dense peat lands aflame to clear land for plantations. Illegal slash-and-burn methods have given rise to annual bouts of transnational air pollution, blanketing Malaysia, Indonesia and Singapore with severe haze.

Agriculture fires in Indonesia, where forest cover has dropped by almost a quarter since 1990 according to United Nations and World Bank data, have been linked to a deterioration in air quality that is blamed for respiratory illnesses, deaths and economic losses.

Environmental groups advocate for restrictive criteria for palm oil imports to offset the crop’s deleterious effects, putting pressure on Malaysian and Indonesian producers, who together account for more than 85% of global supply, to conform.

Indonesian authorities have already vowed to limit European imports as a retaliatory trade measure, though details are scarce on what products they may aim to target. Malaysian minister Mah has gone further, threatening to respond with “might and tact” by pulling back from pending free trade talks with the EU.

Analysts estimate that Malaysia could lose US$500 million in annual revenue should the EU ban come into full effect, blighting the fortunes of smallholder settlements that have long been a loyal vote bank for the United Malays National Organization (UMNO)-led government.

The minister has also threatened to steer lucrative defense industry deals away from EU suppliers and move towards closer ties with post-Brexit United Kingdom (UK) to pressure European governments not to support the palm oil ban.

The UK government, which is reportedly split on the palm oil issue, has not confirmed its support of the proposed EU ban, though its High Commissioner in Malaysia reportedly described the measure as “unfair” and contrary to international trade practices in a meeting with Mah, according to media reports.

France, meanwhile, has promised to oppose the EU ban and has vowed cooperation with Malaysia. France and the UK are notably both bidding to sell fighter jets to Malaysia, a defense contract valued at more than US$2 billion.

Though the prospect of lucrative contracts and strategic market access have compelled some European countries to oppose the palm oil ban, rising pressure on palm oil-producing nations is prompting wider adoption of sustainable procurement policies as national certification schemes are introduced more broadly.

In February, Malaysia’s government announced that the Malaysian Sustainable Palm Oil (MSPO) certification scheme, a bid to introduce sustainable agricultural practices across all palm oil plantations, would be made mandatory. Some, however, say the measures fall short of European sustainability schemes.

Demand for sustainably produced products gave rise to the multi-stakeholder Roundtable on Sustainable Palm Oil (RSOP), a voluntary governance scheme initiated by transnational nongovernmental organizations and corporations, in 2004.

It introduced a comprehensive certification scheme in 2007, though experts and environmentalists now regard the scheme’s effectiveness as limited.

RSOP critics helped to propel the “No Deforestation” movement in 2013 that prompted Asian agribusiness giant Wilmar International to adopt a new “No Deforestation, Peat, Exploitation” (NDPE) standard that introduced supply chain traceability and banned suppliers from destroying forests and peatlands.

Around 60% of global palm oil trade is now believed to meet the NDPE norm. With that progress and threats of retaliatory trade measures, some doubt the EU will actually implement the palm oil ban, which may anyway also run afoul of World Trade Organization (WTO) rules.

“It seems rather unlikely that legislation will be passed given the wider economic interests of a number of EU members in maintaining trade, investment and defense links with Malaysia,” says Helen E S Nesadurai, a professor of international political economy at Monash University Malaysia.