Malaysia, Indonesia respond to the palm oil ban
Both Malaysia and Indonesia have responded aggressively to the final version of the RED Delegated Act. This response isn’t surprising given that palm oil is ASEAN’s largest agricultural export, and Indonesia’s largest export across the board.
The latest intel circulating in KL and Jakarta is that:
- PM Mahathir Mohamad and President Jokowi will write a joint letter to the heads of the European Commission and Parliament;
- Both are likely to collaborate on a WTO action;
- Both will engage in diplomatic missions to Europe;
- Trade retaliation against European exports to the region remains on the table.
Here’s a rundown of the actions that have taken place so far.
Indonesia has said it is reviewing its trade agreement with the EU. Indonesia’s Director General of Trade, Iman Pambagyo, has said that Indonesia will undertake a thorough review of the Indonesia-EU Agreement, which has been triggered by the Delegated Act. Pak Iman made the comments following the most recent round of negotiations between the two countries, which ran from March 13 to 16 in Brussels. Pak Iman stated that “There is one amazingly difficult chapter, namely trade and sustainable development in which there is an issue of vegetable oil,” noting that the EU does not accept Indonesia’s conceptual approach to sustainability.
Malaysia has publicly stated that Malaysia-EU trade talks will remain on hold. Deputy Trade Minister Ong stated that “We have not decided whether to continue with the discussion or not … But this is a very important platform for Malaysia, which provides an opportunity for us to show our stand in the ongoing issue with palm oil [in the EU] … Malaysia has submitted a proposal to the EU to introduce a new appendix on vegetable oils and fat in the Malaysia-EU FTA. This is to ensure Malaysia’s right is protected especially on oil palm-related issues that are actively highlighted in Europe presently.”
Prime Minister Mahathir has written to all EU heads of state directly. He told reporters that “We have pointed out to them that we will need to retaliate if they continue with this unfair discrimination against palm oil.” He is also reported as saying that Malaysia “should be more aggressive” in its response to the European Union’s effective ban on palm oil-based biofuels.
Indonesia has declared that it will commence a case at the World Trade Organization if the Act is adopted. Indonesian Coordinating Minister Darmin Nasution, Trade Minister Lukita Enggartiasto and Director General of Trade Iman Pambagyo convened a special meeting with the country’s key palm oil stakeholders to plot a path forward on WTO action, telling reporters that legal representatives “have been appointed”.
PM Mahathir has stated Malaysia will consider boycotting EU-built fighter jets. Malaysia is currently considering upgrading its fighter jet squadron with two EU-built models. However, Mahathir stated that “If they keep on taking action against us, we will think of buying airplanes from China or any other country …If we have to buy fighter jets, we will consider these China-made jets.” Shortly thereafter, a senior Russian official made a not-very-transparent statement that Russia is ready support the purchase of additional palm oil, as part of a wider trade package that could include defence procurement (Malaysia already uses MiG and Sukhoi aircraft). There is a growing sense that the EU’s approach to palm oil has created an opportunity for others.
Broader trade retaliation
There has been talk of trade retaliation from Malaysia and Indonesia. But what could it look like?
Among the biggest exports from the European Union to Malaysia and Indonesia are aircraft. Both countries have leveraged this before. Two years ago, when the European Parliament tabled a motion calling for a general phase-out of palm oil, both countries made clear that future military procurement deals could be affected, particularly the purchase of Airbus aircraft and Thales electrical systems.
But this only works when procurement is in the pipeline – as is potentially the case for Malaysia.
But it is also possible for countries to isolate and target particular products that are coming from a particular trade partner without falling afoul of WTO rules.
Germany, for example, exports large numbers of cars to Malaysia. These cars have a relatively high price point that could be targeted with a ‘luxury car tax’.
It may be possible to apply such a tax that will not irritate other trade partners by identifying a higher taxation threshold. The tax could also support revenue collection, as well as the local car industry, which has long been a personal favourite of Malaysia’s Prime Minister.
Another possibility is isolating European products that are applied at lower than agreed WTO tariff rates (known as ‘applied rates’) and raising them where possible to ‘bound rates’. This is a perfectly legal action and used by countries such as India quite often.
The products chosen would either have to come almost exclusively from Europe, and there would have to be a country from which an alternative supply is available that has a preferential trade agreement with Indonesia or Malaysia. In the case of Malaysia, most of its whey powder comes from Europe. Malaysia could consider sourcing from Australia or New Zealand – both have additional bilateral or multilateral arrangements with Malaysia.
Other products, such as whiskies and brandies from the United Kingdom and France are an obvious target for either changes in tariffs or limiting of quotas.
In both cases, consultation with local industry would be required.
WTO action will not take place straight away. The law has to be adopted in its final form before in can be objected to in the multilateral forum.
However, it is not surprising that Indonesia is taking the lead. Indonesia recently emerged victorious from a protracted antidumping battle with the European Union.
The EU was applying illegal antidumping tariffs on Indonesian (and Argentinean) biodiesel exports.
The exporters carried the day, but the mechanics of the case are instructive.
The case commenced in 2013, but took almost five years to resolve. Once it was completed, the EU launched a countervailing duties investigation against Indonesian palm oil.
At roughly the same time, Argentina lodged a complaint against the first version of RED in 2013, which resulted in Argentinean soy-based biodiesel being excluded from the RED. At that time, the issue was the ‘default values’ ascribed to different biodiesel feedstocks.
The complaint gives an indication of the complexity of the case; it’s not just a matter of the Directive or the Act, but also any implementing regulation.
As with the dumping action – or any other WTO settlement – the process could take years to resolve.
It’s worth noting that when it comes to blocking palm oil, the EU never gives up. Although it’s the revised RED now, in a few years it will be another measure. WTO action is just another bout.
A longer view: ASEAN realignment
Could the procurement of military hardware from Russia signal a pivot away from Europe by ASEAN, particularly Malaysia and Indonesia? This is entirely plausible.
EU officials are acutely aware that they were caught off guard by China’s rise. This has had considerable economic and security impacts; China now outweighs the EU’s economic and military influence globally.
EU officials should not make same mistake in ASEAN – but this appears to be happening.
The EU’s population is flat at just over 500 million people. ASEAN’s is already in excess of 600 million and will hit 700 million in around five years. Indonesia’s GDP already matches that of Germany by one measure.
The EU needs to wake up to this significant demographic and economic change if it is to participate in the region’s growth and avoid repeating its China mistake. And that participation should be of mutual benefit.
Indonesia is open to China’s One Belt infrastructure projects. Japanese development loans funded Jakarta’s new MRT system. EU aid contributes to education and health programs, but the EU’s highest-profile aid contributions have been for stopping deforestation – which are read by many as a way of curbing palm exports.
On palm oil, last month, China agreed it would increase its palm oil purchases from Malaysia by 50 per cent. Russia is now also signalling that it will increase purchases of palm oil. This was at almost exactly the same time that the EU singled out and banned palm oil — ASEAN’s largest agricultural export — under the RED. Indonesian palm biofuel exports have been hit by wave after wave of EU measures.
It is perfectly reasonable for Malaysia and Indonesia to ask why they should display any ‘loyalty’ to Brussels at all when it comes to military hardware — or anything else. The region’s trade agreements — RCEP and CPTPP — are progressing or completed. At this point in history, Tokyo, Beijing and perhaps even Moscow seem like more reliable trade partners. This should induce significant reflection in Brussels – because a core element to this is European leaders not understanding what is actually important to their ASEAN partners, both economically and politically. It appears that both Russia and China have figured out what the EU could not: that palm exports are fundamental. They are now looking to press home their advantage, and encourage a wider re-alignment in southeast Asia, away from the historic ties with Europe.
Iceland tries to ‘dig upwards’ on sustainability
Iceland CEO Richard Walker has made the news again for his statements on sustainability and palm oil.
Walker came under fire for instituting a boycott of palm oil in his company’s supply chain, and launching a widely viewed joint PR campaign with Greenpeace.
Walker stated that the move “did nothing for sales”, and that “If I were the boss of Tesco, I’d be sacked because I’m loading up millions of pounds of cost into our business.”
It’s well understood by more qualified sustainability experts that boycotting palm oil will do nothing to stop deforestation – and arguably it will make it worse. It’s also understood that around 35 per cent of palm oil is produced by smallholders around the globe.
Despite the fact that this move has done nothing for sales, nothing for the environment and nothing for people in developing countries, Walker states that “we genuinely feel it’s the right thing do, and we have quite a long history of being a corporate activist.”
Which is odd; we “genuinely felt” Iceland was a business, rather than an activist group.