Palm Oil Monitor Alert: Indonesia-EU Trade Deal at Risk over Biofuels; A400M Deal Under Review

This is an exclusive to Palm Oil Monitor.

According to our sources in Jakarta, the Indonesian government has issued an internal directive that effectively suspends the Indonesia-EU negotiations on a trade deal until the matter of the EU’s effort to ban palm oil under the EU’s Renewable Energy Directive is resolved.

This was communicated last week to a UK delegation visiting Jakarta to discuss “trade relations” by Indonesian Minister for State-Owned Enterprises, Rini Mariani Soemarno. Present from the British Government was the UK Ambassador to Indonesia, H.E. Moazzam Malik and Richard Graham MP.

It gets more interesting: according to our UK sources, the Ambassador was also told that a military procurement deal between the Indonesian government and Airbus for A400M cargo planes worth around USD2 billion is effectively off until the RED problem is dealt with. That contract could stave off proposed job losses across multiple EU sites, including a potential 450 jobs in the U.K. Without the Indonesian contract, are those jobs once again at risk?

The issue of Iceland supermarket’s planned removal of palm oil was also raised at the meeting with Ambassador Malik – although, as we had reported at the time, Iceland’s share of the global palm oil market is miniscule.

What is the wider context to the Indonesian stance? Indonesia has very few bilateral FTAs. Most of its agreements are between the ASEAN bloc and third countries (e.g. China, Korea).

There has been a political and popular backlash against previous FTAs. A holdup in the EU-Indonesia negotiations would not be considered a major failure by many Indonesian businesses and politicians — or the public.

But the palm oil dispute has added dimensions. The Indonesian government earns significant revenue from its palm oil taxes – approaching USD1 billion at times. A dip in palm oil exports is a dip in revenue. In addition, there are more than 2 million farmers in Indonesia that rely on palm oil. A drop in demand equals a loss of income for these farmers.

This has further political ramifications. There is a general election next year. President Widodo will be seeking a second term. The EU’s stance on palm oil will not help him move closer to victory.  The Indonesian government will find leverage with the EU where it can.  The same can be said for Malaysia.

At the last round of Indonesia-EU negotiations there was a special meeting between the countries’ two chief negotiators that covered only palm oil. Clearly nothing was resolved at this meeting, and it seems that Indonesia has now decided to flex its muscles.

Is the UK ready to risk all of this over palm oil?