Kalla takes on Europe

Indonesian Vice-President has used the Belt and Road Forum (BRF) in Beijing to launch a broadside at the European Union – specifically over palm oil.

In a leaders’ forum hosted by Chinese President Xi Jinping, Kalla stated that the EU’s policies are hampering Indonesia’s ability to achieve the UN Sustainable Development Goals, and that the EU had ‘ignored’ Indonesia’s position.

“Regrettably, the EU ignored the data and continues its discriminatory campaign which has been hampering Indonesia’s effort to achieve the SDGs. For that reason, we have to fight against the discrimination,” Kalla said.

He also said that “This discriminatory measure is conducted under the pretext of sustainability … At the same time, these sustainability issues have been taken seriously by [palm oil] producing countries with data.”

Kalla also called on leaders present at the meeting to fight trade discrimination, particularly against palm and other traded commodities.

The Vice President’s choice of forum to launch such a broadside is significant. The BRF is a high-profile forum featuring 40 world leaders and all ASEAN economies.  It was also attended by European Commission Vice President Maros Sefcovic.

China has stumped up nearly $5 billion for a high-speed rail link between Jakarta and Bandung; construction commenced recently. Malaysia has renegotiated its East Coast Rail Link deal with Beijing, and both have signed an MoU on palm purchases.

The EU, for its part, issued a statement by Sefcovic that the EU’s infrastructure plan would be “more sustainable” than China’s, and concentrate on “‘sustainable financing, avoiding debt traps, environmental impact”.  And it is still looking to maintain a palm ban via the recently-released RED Delegated Act.

It is no wonder ASEAN has changed its outlook to ‘look east’ –as Malaysian Prime Minister Mahathir first said back in the 1990s.

Norway’s new contradictions at WTO

Norway has defended ‘special and differentiated’ treatment for developing countries at the World Trade Organization and stated that development is ‘at the heart’ of the WTO system.

The Norwegian statements come at a time when it is pursuing the exact opposite.

The Norwegian Parliament recently voted in favour of a ban of palm oil in biofuels. The country’s sovereign wealth fund has also divested from a large number of plantation firms.

The contradiction is curious. Norway has relied, and continues to rely, heavily upon oil revenue, but seeks to limit agricultural commodity expansion because of climate emissions.

It calls upon for ‘special treatment’ for developing countries within the multilateral trading system, but doesn’t think that any special treatment should be given to on-the-ground agricultural development in poor countries. Its solution in the case of Indonesia is to pay the country not to expand its cropland – a kind of green welfare.

Nestle’s Deforestation Free Supply Chain

Nestle announced this week that it has confirmed that 77 per cent of its palm supply chain is ‘deforestation free’. Nestle has confirmed the figure using Starling, an imaging system developed with Airbus satellite technology.

The system works by analysing images throughout Nestle’s supply chain; algorithms are used to detect when forest loss occurs. Nestle then contacts suppliers to determine the nature of the forest cover loss.

Arguably the most interesting consideration here is the resources required to implement a deforestation free supply chain – that is only three-quarters complete.

When the ‘zero deforestation’ idea was sold to followers of NGOs, there was a clear sales pitch: zero deforestation is easy. This is simply not the case. Greenpeace’s first attacks on Nestle occurred more than a decade ago. Nestle is a particularly risk averse company when it comes to reputation; the company suffered during its baby formula scandal in the 1970s and 1980s, and this has shaped its approach to reputation management.

Costing information on Starling is not publicly available; Airbus states that quotes are available on a per hectare basis. It may be a cost-effective solution for larger operations. But this solution may also make broader voluntary certification commitments redundant, particularly if all the public is interested in is ‘deforestation free’.

ANALYSIS: Is California the next front in the Palm Oil Battle?

The United States has generally not been a big part of palm oil’s trade battles. There are, of course, some exceptions to this – the ‘tropical oils’ health scare that was spread by the US soybean industry in the 1990s is probably the leading example.

There are several reasons.

First, the US imports a relatively small amount of palm oil – around 3 per cent of the global export market. Palm oil makes up around 7 per cent of consumption in the US vegetable oil market.  US farmers are also particularly efficient and competitive.

Second, the policy battleground in the US has been health, rather than environment. The biggest battle has been around trans fats, mainly impacting soybean oil. The absence of trans fats in palm oil has made palm the clear replacement for soybean oil.

The US Food and Drug Administration (FDA) introduced a full trans fats ban last year, after a lengthy phase-in period.  But the phase-in period gave US processors time to develop low-trans-fat oils and products from soy, canola and corn oils.

Third, the US renewable fuel standard has penalised palm oil, but the impact has been smaller because the market for biodiesel in the US is significantly smaller than the EU, and the major renewable fuels used in the US are for gasoline-powered vehicles, which provide a subsidy for corn ethanol producers.

One of the other exceptions in the US has been an anti-palm oil campaign on labour. The motivations here were twofold. There was a push in the US to stop or limit participation in the Trans-Pacific Partnership Agreement; the campaign sought to exaggerate poor labour practices in partner countries. At the same time, new regulation in California on human rights and labour in supply chains required companies to disclose supply chain information and risks.

California is at it again.

Legislators are pushing two pieces of legislation. The first is the California Deforestation Free Procurement Act, which we’ll analyse this week. We’ll look at the second bill, the Child Nutrition: School, Childcare, And Preschool Meals (AB 842), next week. The Deforestation Free Procurement Act (AB 572) will require government contractors and subcontractors to ensure that if they are providing products that might contain a ‘forest risk commodity’ that they must undertake certain actions. They will need to:

• Certify that the products sourced did not come from areas that were deforested from 2019 or later;
• Have a no deforestation, no peat and no exploitation policy in place;
• Make any certification and policy data publicly available.

At first glance, this might seem benign. There are two things to consider.

First is the size of the US procurement market. The US government procurement is around 9 per cent of GDP, i.e. around $1.6 trillion. In terms of magnitude, this is around the size of economies such as South Korea and Russia.

California’s state government spending was around USD225 billion in 2017. This is similar to the GDP of countries like Portugal, Greece or Vietnam.

The sheer size of California should make anyone who thinks Europe is a big market think twice.

Second is that California tends to lead the way in terms of regulation in the United States, especially on the environment. Regulation in California tends to be adopted elsewhere in the US, simply because California is such a large market.

The adoption of a new procurement rule in California could therefore have implications across the US in the longer term.

So, consider the response of producers of palm oil, other commodities and the industry more broadly if a country like Portugal, Vietnam, Korea or Russia decided to unilaterally impose similar reporting requirements.

Just as important is that this is a model that many NGOs will seek to pressure other governments to introduce for their procurement processes or as a legal and regulatory requirement.

This is precisely what the EU’s Deforestation Action Plan was originally aimed at doing: preventing ‘imported deforestation’.

There are other dimensions to this legislation, particularly on school food – and we’ll take a look at those next week.