Palm Oil Monitor Weekly Update – 4th February 2019

What is Happening to the EU-ASEAN Relationship? 

The discontent between palm oil producers and the EU – which has been bubbling now for several years – has now broken into the open, with ASEAN allies lining up alongside Malaysia and Indonesia. Several events and news reports from recent days support the theory that recent EU moves against palm oil are being seen in Jakarta and Kuala Lumpur as a bridge too far.

Sources in Brussels confirm that some within the EU hierarchy now recognise the scale of the problem – and that significant action will be needed to prevent a major breach in the trading and political relationship. It is now suffering an internal deadlock.

Is the EU prepared to back down on its Deforestation Criteria, for example? Will Malaysia and Indonesia demand the same deal for palm oil as Trump secured for U.S. soya under RED? All of this remains unknown, but must surely be considered as an option if Brussels is looking to de-escalate the situation.

How has the EU found itself here? After failing for a long period of time to recognise the seriousness of ASEAN concerns around palm oil regulation, the EU will be in no doubt after the events of recent days. Here are the events that have led us to where we are now:

 

EU-ASEAN Ministerial Ends in Acrimony

The international impact of the RED became apparent last week when the EU suffered a rebuff on palm oil this week at the EU-ASEAN Ministerial. As late as December last year it was being reported that Malaysia and the EU would sign a Partnership and Cooperation Agreement (PCA) in January. The EU-ASEAN Ministerial was also supposed to be the occasion for the signing of a EU-ASEAN Strategic Partnership Agreement.

But this didn’t happen. And it was because of palm oil, at the behest of Malaysia and Indonesia.

Instead, what came out of the meeting was a joint working group on palm oil.

The EU got rolled.

According to EU High Representative Federica Mogherini,

“our [ASEAN] partners today have heard a very firm and strong commitment from the European Union side to work with them on the sensitive issue of palm oil. We will establish an European Union-ASEAN Working Group to look at all the related issues in depth. We all have a common interest in addressing the possible negative environmental and social impacts of the production of palm oil, by ensuring that it takes place in a sustainable manner.”

Compare this to the statement from Indonesia’s deputy Foreign Minister Fachir:

“Palm oil is a strategic commodity for Indonesia, especially for small farmers. About 20 million people in Southeast Asia depend on their lives for palm oil industry and more than 5 million small farmers in Indonesia, Thailand, as well as the Philippines rely on oil palm … Refusing palm oil is the same as rejecting the SDGs, which is a global agreement.”

Further, last week Indonesia’s Foreign Ministry released details of a letter it had sent to ASEAN nations asking them to reject the EU-ASEAN Strategic Partnership. Mahendra Siregar – head of CPOPC (the Council of Palm Oil Producing Countries) – noted to the press that Indonesia would challenge any EU action at the WTO; although Indonesia’s own trade officials have been foreshadowing this for months.

The response from the EU Ambassador in Jakarta was simple: “The EU considers the RED II to be in line with the EU’s international commitments, including its WTO obligations.”

False; the EU is struggling internally with the measure (see below).

How is it that the EU could misread the ASEAN position so badly?

The EU has been working completely unilaterally on palm oil with no regard for the concerns of exporting nations, and ASEAN countries have had enough – to the point where they’ll put other concerns on hold.

Does the EU get it? Note that Mogherini doesn’t say the EU will address the trade barriers it is erecting; she is simply saying that they will continue to address supply-side issues, i.e. whether products are ‘sustainable’ or not.

It seems that the EU’s best response is more talk-fests.

 

Internal EU Deadlock Over Palm Oil Delegated Act

The most recent rumours coming from Brussels on the revised Renewable Energy Directive (RED II) are that the Directorate-General for Energy (DG ENER) and the Commission’s political leaders (the Commissioners) are at odds over how the RED should be handled.

DG ENER believes it should follow the desire of the European Parliament – expressed clumsily in the three-way compromise in the RED last year – and insert an effective ban on palm oil imports for biodiesel – via the RED Delegated Act’s ‘deforestation criteria’. The Commissioners, however, are particularly worried about the international trade implications, particularly action in the WTO – which any number of palm oil exporting nations, including Indonesia, Malaysia and Colombia have been foreshadowing.

The Commission has also been talking of ‘phasing out’ biofuels such as palm and soy, rather than a ‘no ban’ situation. Yet a phase out is unlikely to satisfy palm exporters: unequal treatment is unequal treatment, particularly under international trade rules. It’s therefore unlikely to allay any concerns from Commissioners.

Last week this came to a head. The Commission had to postpone its meeting with the European Parliament until it could sort out the differences between DG ENER and the Commissioners themselves. The Commissioners know they must somehow appease the Parliament, but also avert significant trade problems.

The EU also has bigger trade worries. The Delegated Act could put the EU’s entire trade agenda at risk. The EU has been attempting to complete a trade agreement with Indonesia and also get a cooperation agreement signed with Malaysia. In addition, the EU is also seeking an agreement with Mercosur, the trade bloc comprising Brazil, Argentina, Paraguay and Uruguay. Brazil is one of the world’s largest soybean exporters, and Argentina’s biodiesel has been a consistent target of trade actions by the EU.

 

Malaysia Escalates France Case

The EU-ASEAN difficulties are not related only to the EU institutions in Brussels – and EU leaders will now be aware that actions in their own capitals do not take place in a vacuum.

Malaysian Prime Minister Dr. Mahathir Mohamad has taken the step of writing to his French counterpart, President Emmanuel Macron, to protest the country’s recent move to ‘declassify’ palm oil in its renewable energy scheme, as noted in a Palm Oil Monitor exclusive last week.

It is worth noting that the French approach to banning palm oil biofuels is not hugely dissimilar to the approach taken by the EU Delegated Act – which was probably a factor in stirring the ire of Mahathir.

The Ministry of Foreign Affairs released a statement saying that the letter had been handed directly to France’s Ambassador to Malaysia.

The statement also said:

“Malaysia calls on our European Union partner countries to treat us and our people as it would want themselves to be treated. Our nations and people have been close friends and partners in diplomacy, trade and security for many decades. Our strong ties are underpinned by our common values of justice, fairness and trust. In this context, such a discriminatory measure would undermine these values and only by working together will make fair solutions for all stakeholders involved, including the earth’s ecosystem.”

The letter and statement follow an aggressive letter earlier in the year from Minister of Primary Industries Teresa Kok.  But the letter from the PM is a big deal; world leaders don’t write to each other unless it’s serious, and they certainly don’t publicise it unless they want to make a strong point.  Moreover, the PM taking this step means all other ministries – Foreign Ministry, Primary Industries, Trade, Land and Climate Change – will now follow suit and take on board the new robust approach towards Europe’s palm oil stance.

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