RED gets even hotter
Just when we thought it wasn’t possible for the RED issue to gain more traction, it has done precisely that.
The Indonesian actions against imports of alcohol have caused major ructions in Brussels (more details on the measures themselves below). But, sources are telling us the following.
First, President Juncker is personally concerned by the prospects of a trade battle with ASEAN being one of the last things his Presidency is remembered for.
This is understandable. Under Juncker’s watch, trade agreements with Singapore and Vietnam have both been (more-or-less) completed, as was the agreement with Japan.
A trade war with Indonesia – the world’s fourth-most populous country – as well as general disagreements with the US on trade, plus an increasingly distant Turkey, are not the things he would like to be remembered for.
Second, and similarly, Cecilia Malmström, who has managed to distance herself from the EU’s worst protectionist impulses, will not want this to get any worse. Our understanding is that from now, DG Trade and her Cabinet will be leading the discussions on this issue.
This also stands to reason. We had persistently heard that DG Trade was unhappy with the way RED II had evolved under DG Energy. Observers of trade policy (and we include DG Trade in this) would have been aware that this would end in a hot mess – which is precisely what has happened.
Third, although Europe will frame Indonesia as the aggressor, the EU is acutely aware that it is the aggressor, and if or when Malaysia piles on to any action, it will be particularly problematic for the Commission. Indonesia is a frequent user of the WTO system and of non-tariff measures more broadly. Malaysia, on the other hand, is shy. This is most likely because Malaysia has a much greater dependence on exports.
What are the Indonesian actions?
One of the problems with the Indonesian actions at this point is that they haven’t appeared as a regulation or decree from any agencies – they haven’t even been confirmed to the media by Indonesian officials.
So what’s actually happening?
First, there are definitely disruptions. SpiritsEUROPE, which is the EU’s leading body for alcohol exporters, is apparently already encouraging some form of action against Indonesia, potentially via the WTO.
Second, any changes to Indonesian regulations may not necessarily be published on a website or gazetted immediately.
The Indonesian Government directly controls – and has absolute discretion over – which beverages might come into the country and who can sell them via a 2006 regulation. There are quotas for different types of alcoholic beverages that are set every year. These quotas are determined every year on April 1.
So, the problem for the Europeans is that alcohol is regional. Scotch whisky comes from the EU. But rye whiskey comes from Canada or the US. They are not the same product, and they have different codes under the world’s customs system to reflect this.
Third, proving that this flouts WTO rules may be difficult.
Indonesia is a Muslim country. Let’s say Indonesia decided to flatten alcohol quotas, i.e. allow the same amount of different hard liquors from different countries, rather than allowing more Scotch than Rye whiskey.
It could permit the equal amounts of Scotch, brandy, rye whiskey and rum, but overall have a lower amount of liquor going into the country, even though these quotas don’t necessarily reflect the market demand for liquor going into the country.
This isn’t exactly discriminatory. And could easily fall within the WTO’s moral exceptions.
It is very different to an early WTO case that covered Japanese taxation on imported whiskey and brandy. The Japanese levied a lower tax on ‘shochu’ whiskey and a higher tax in brandies, cognacs and Scotch. Japan lost the case, because the WTO determined that these are like products and that they do actually compete.
But that might not be the point.
One thing many countries do – and something that Indonesia is very good at – is disrupt each other’s trade to get leverage, or just get listened to.
Realistically, if the EU was to raise this at the WTO, they’d have to see what the published measure is, request consultations, then call for a dispute panel to be convened, then wait for the panel report, and then that might go to the WTO Appellate Body, which is currently not functioning.
But the fact that European industry lobby groups are calling on the Commission to take action already indicates that this strategy has been successful on the part of the Indonesians.
What are the options?
As we noted last week, the EU is likely to offer Indonesia and Malaysia a review of the Delegated Act within the next six months (well in advance of the 2021 deadline currently foreseen), in exchange for some form of de-escalation.
Both countries should be wary.
In six months’ time, all three EU institutions could look very different. The Council of the EU, the Commission, and the Parliament could all be led by entirely different political leaders.
It is possible that the incoming Commissioners and Member State governments will be even less sympathetic to palm oil. A review of the Delegated Act guarantees nothing other than a review of the Delegated Act – unless it comes with guarantees.
Japanese renewable energy policy allows National Schemes, RSPO
Japan has delayed introduction of a mandate that requires the use of certified palm oil for its biomass power plants.
Japan’s trade ministry (MITI) originally issued a requirement that all biomass power plants must use RSPO-certified biomass beginning March 31 this year.
The requirement was introduced last year, but Japan has agreed to delay the requirement for a further two years as Indonesia and Japan review their economic relationship.
MITI also stated that it will allow the use of biomass from other certification schemes, including national schemes such as ISPO and MSPO.
The move by Japan’s authorities should be watched closely by European regulators. They might learn a thing or two.