What Now for EU Trade Policy and Palm Oil?

At the core of the palm oil debate is the issue of trade: palm oil is known as the “world’s most traded edible oil”. The reason for this is simple: it is cost-effective, super-productive, and has many applications in energy, industrial uses and food.

But as we are well aware, its impact on global edible oil markets has been nothing short of disruptive.  Palm oil’s market share has more than doubled since the 1980s to become the world’s most consumed vegetable oil. The share of other oils – soy, rapeseed and sunflower – has remained flat or declined.

Growers of those crops have lost market share at home (particularly in Europe), and domestic mechanisms to prop up those farmers, such as biofuels subsidies, have not been effective, because of the superior nature of palm oil as a product.

It is no surprise, then, that EU trade policy is the instrument of choice when it comes to European efforts to use government power to restrict palm oil’s success.

If the conditions are too strict, partner countries will simply not sign up or agree to the terms – because it would mean massive cost or administrative burdens on their businesses and traders, not to mention sub-contracting regulation and enforcement effectively to the EU.

There are three clear arenas that are currently in play.

First are environmental measures, such as the Renewable Energy Directive. The RED (and its revision) are a form of subsidy for vegetable oil producers. Depriving this subsidy to palm oil growers locks palm oil out of the EU biofuels market and is a de facto ban on palm oil. European growers continue to receive the RED benefits, as well as the myriad other subsidy and government support schemes put in place by the EU and Member State Governments.

Second are blunt tariff instruments, such as antidumping actions and countervailing duties. These place a tariff on imports of palm oil to a particular country. They have been levelled primarily at Indonesian palm-based biodiesel thus far – but they have also been applied to soy biodiesel from Argentina.Third are bilateral trade negotiations such as the Malaysia – EU Free Trade Agreement (MEUFTA), and the Indonesia EU Cooperative Economic Partnership Agreement (IEU-CEPA). Bilateral agreements can be used to place certain conditions on goods, such as certification requirements. Both agreements have been under negotiation with EU but the MEUFTA has put on hold for sometime. Negotiations on IEU-CEPA are still ongoing with the expectation to be concluded in 2020 despite the palm oil issues. Bilateral trade agreements should be alternate policy way-out in the midst of growing impasse between EU, and palm oil producing countries especially Indonesia and Malaysia.

The RED is being challenged at the WTO, because of its clearly protectionist nature. The EU’s antidumping tariffs on Indonesian biodiesel were ruled illegal by the WTO, because they were clearly unjustified. Bilateral agreements can take years to negotiate, but there are models that are used when it comes to dealing with the environment (it is worth noting that EU trade aggression against palm oil producing countries could make the bilateral agreements harder to conclude).

But there are some changes on the horizon that make peaceful resolution seem out of reach. The new European Parliament has increased Green MEP representation. This has, in turn, prompted a heavily Green and protectionist outlook from the new European Commission.

The Commission has declared the EU will be ‘climate neutral’ by 2050. But to achieve this, it will need to introduce cleaner methods of production for many industrial products, which has prompted calls for a ‘border tax’ on carbon emissions. Under this regime, products with high emissions will be penalised upon entering Europe. And this would also likely apply to agricultural commodities such as palm oil. 

What the new Parliament and new Commission have done is normalise the idea of using protectionist measures, dressed up as environmentalism, to protect domestic industry. The REDII is in many ways a forerunner of this new world in Brussels – where environmentalist campaigning and trade protectionism align into new EU policy.

This approach is already being proposed in new EU plans for 2020. In July the Commission published the ‘Communication (2019) on stepping up EU action to protect and restore the world’s forests’. The Communication is the culmination of a multi-year process based on the idea that the EU should exercise power over how commodities are produced in forested developing countries, by using EU regulation and market access as tools to impose the EU’s worldview.

At the heart of the document – and the subsequent endorsement by the Council of the EU – is the idea that EU consumption of certain products such as beef, soy and palm oil can make a big difference to the world’s forests. These are referred to as ‘demand side measures’, but can equally be referred to as trade measures. The EU has gone down this path before, introducing regulatory measures that make it more difficult to import timber and paper products from developing countries based on the idea of legality. This approach also being considered in bilateral agreements.

The EU has in the past had a model for dealing with its ‘Trade and Sustainable Development’ (TSD) chapters in its trade agreements. They are generally non-binding. If there is a dispute between the countries on ‘real’ trade issues (e.g. tariffs or technical standards), the decisions following are binding and require action. In TSD chapters, a non-binding consultation generally occurs. This is the case in the EU-Vietnam agreement, for example.

But the new Parliament and new Commission are now calling for stronger TSD chapters with stronger monitoring and enforcement mechanisms. This presents a bind for the EU and for partner countries. If the conditions are too strict, partner countries will simply not sign up or agree to the terms – because it would mean massive cost or administrative burdens on their businesses and traders, not to mention sub-contracting regulation and enforcement effectively to the EU. The EU’s trade leaders know this, and are likely not to want to push partner countries too far. Unfortunately, ideological Greens and the EU farming lobby is pushing for conditions that would hamstring developing economies, and make bilateral trade agreements very difficult to sign.

However, from the Brussels side, the EU needs trade agreements with growing economies – more so than those economies need the EU. Export dependent countries such as Germany are finding themselves under siege from falling demand within the eurozone and former growth markets such as China increasing their own production capacity. So, the question for the EU is whether they want to work more readily with countries like Malaysia and Indonesia when it comes to palm oil, taking the broader view of trade and geopolitics.

Although the EU seems to think that keeping FTA negotiations separate from other trade disputes is tolerable, not everyone thinks that way. The EU is happily banning palm oil from the RED II, and slapping tariffs on biodiesel, but still thinking the IEU-CEPA negotiations will go smoothly. On the side of producing countries, the negotiators will prioritize to integrate palm oil to the international trade agreements, especially with EU. Satisfactory solution to the palm oil issue will be a determining factor for the conclusion of IEU-CEPA. For every push from the new Green lobby in Brussels, there will push back from the palm oil producing countries.  

The solution should not be that difficult. It simply requires taking a grown-up approach and negotiating an outcome as simple as loosening the strict rules in the RED II for smallholders, for example.