Palm oil sprouts a budding new trade spat

Indonesia and Malaysia plan to file a joint complaint against the European Union at the World Trade Organization over its decision to phase out palm oil use in biofuels by 2023, a ban that could cost the top two global producers tens of billions of dollars in lost sales.

While the EU and Southeast Asian nations have locked horns previously over the mooted ban, only to kick the can down the road, the latest threat comes as the EU looks increasingly unlikely to back down after Green parties secured major wins at European elections in May.

On that ballot, Greens took 63 out of 751 seats in the European Parliament, almost double the number they won at the previous election. Some 75 members of the European Parliament (MEPs) are now part of the Greens-European Free Alliance, a political grouping. But their influence is arguably much greater than their numbers indicate.

Ursula von der Leyen – who clinched the presidency of the European Commission, the bloc’s top job, by just nine votes on July 16 – had to pledge a “green deal for Europe” and higher targets on greenhouse gas emission reductions in order to win over the Green bloc. It had previously opposed her candidacy.

“With migration receding in the news, climate change has become a potent new front in the battle between green-minded liberals and populists,” the New York Times recently stated. Indeed, many analysts saw the Greens as the biggest winners of the European election.

All of this is unwelcome news for Malaysia and Indonesia. With a resurgent Green movement winning more power within the EU, the chances of overturning the pledged palm oil ban is even less likely now, analysts say.

Indonesia is the largest palm oil producer in the world, accounting for roughly half of global output. Malaysia, the second-largest producer, churns out about a third of the world’s output. The sector accounts for between 2-3% of Indonesia’s gross domestic product.

In 2017, the European Parliament agreed to phase out using biofuels made from palm oil for environmental reasons. While palm oil is used in everything from food to cosmetics, roughly 65% of all palm oil imports by European nations are used for biofuel.

The EU later ruled that its member states must by 2020 ensure that at least 10% of their transport fuel consumption comes from renewable fuels, including biodiesel. But the bloc also ruled that member states won’t be able to count palm oil-based biofuels to meet those renewable energy targets.

The EU Renewable Energy Directive (RED II), introduced in June 2018, ruled that crops used in biofuels must be sustainably produced and not cause deforestation.

This would surely bar palm oil after a European Commission report found that, between 2008 and 2015, palm oil cultivation caused the highest level of deforestation of any crop worldwide.

Palm oil was responsible for 70% of new acreage cleared to cultivate for crops, the report claims, compared to just 4% for corn and soybeans.

The International Union for Conservation of Nature, an environmental group, argues that about half of all deforestation in Malaysia between 1972 and 2015 was for palm oil cultivation.

The World Wide Fund for Nature (WWF) this month published an extensive report that found orangutan populations have fallen by as much as a third in areas near palm oil estates in the eastern Malaysian state of Sabah, which produces the most palm oil in the country.

“The monoculture nature of oil palm plantations means that they tend not to support species that are dependent on forest environment like the orangutan,” the WWF said in a statement.

If all goes to current plan, the EU will begin phasing out palm oil use in biofuels from 2023, with a complete ban taking hold in 2030.

Malaysian and Indonesian ministers say that European concerns are exaggerated, citing scientific research that disproves the theory that palm oil plantations are a greater cause of deforestation than other crops.

They also argue that the ban would hit hardest their poorest and most vulnerable populations.

Certain environmentalists who have critiqued the planned ban argue that it would be better to work with Malaysia and Indonesia to prevent problems associated with palm oil cultivation and achieve more sustainable cultivation.

Indeed, the EU started to work with Indonesia in 2003 to curb illegal logging and the unsustainable timber trade.

The 4,300-member Roundtable on Sustainable Palm Oil, an industry watchdog that includes producers, traders, buyers and environmentalist groups, agreed to new rules this month that, if followed, would see producing nations commit to allow protected forest areas to grow by up to 10%.

This would be achieved by banning the razing of certain forests and ending the practice of turning peatlands into palm oil plantations.

The Council of Palm Oil Producing Countries, which sent a lobbying mission to Europe earlier this year, has focused its campaign on two messages: 1.) Palm oil cultivation is a way for Southeast Asia’s poor to escape poverty, and 2.) that 40% of palm oil’s work output is done by smallholders, not big agribusinesses.

The lobbying group, as well as Malaysian and Indonesian ministers, are thus advancing a narrative that the EU’s anti-palm oil stance is disproportionately punishing the region’s poor, an effective message given that poverty relief is integral to European foreign policy.

A stronger, and potentially more dramatic, was recently made by Malaysian Prime Minister Mahathir Mohamad, who has called the EU’s decision “grossly unfair.”

His government has threatened that, as well as pursuing remedy through the WTO, his country would in retaliation also stop purchasing military equipment from European firms.

Kuala Lumpur is planning to spend as much as US$1 billion in the coming years on new military hardware, and has insinuated that it will take its business elsewhere, likely to Russia or China. Indonesia has also threatened to stop buying European military hardware over the palm oil dispute.

This is unlikely to stress European environmentalists, who tend not to be the most ardent defenders of their own nations’ arms exports. But it might dissuade the governments of member states, as well as the EU’s foreign policy apparatus, which wants to expand the bloc’s influence in global affairs.

Not only does the EU aim to pursue free trade deals with Indonesia and Malaysia, after signing similar agreements with Vietnam and Singapore earlier this year, Brussels might also miss the chance to secure closer relations with two of the few democracies in Southeast Asia.

Both are also geopolitically important if the EU intends to dip its toe more deeply in Asian affairs. This year and next, Indonesia will serve as a non-permanent member on the UN Security Council, a sign that the world’s seventh largest economy in terms of gross domestic product is a rising geopolitical player.