Month: September 2019

Trade War Update

The EU has hit back at Indonesia’s proposal to slap duties in European dairy products in response to the EU’s countervailing duties on biodiesel, with its most aggressive statement to date.

According to news reports, the EU’s Head of Trade and Economics for Indonesia, Raffaele Quarto said:

“What the WTO does not allow, absolutely forbidden by the WTO regulation, is retaliation, which is what’s suggested in this case of dairy products … In addition to that, if you see declaration of Indonesian importers that use dairy products from the EU, they pointed out it will damage the Indonesian economy to have this kind of measure”

This is correct to a point — if there’s a retaliatory motivation. However, there’s nothing to stop Indonesian authorities from commencing antidumping and countervailing duties investigations on European products.

In terms of following the WTO’s rules, the EU probably should have considered notifying Indonesia and Malaysia of the Renewable Energy Directive Delegated Act in the relevant WTO Committee.

A parallel battle is taking place on the ‘palm oil free’ labels front. As reported last week, the Indonesian Government has banned food labelled as being ‘palm oil-free’. This week, Malaysian supermarket chain Mydin removed products labelled ‘palm oil-free” from its stores. Malaysian Minister of Primary Industries Ms Teresa Kok welcomed the move, and confirmed the Malaysian Government would follow Indonesia with a proposal to ban products with anti-palm oil labels.

These actions led Charles Michel-Geurts, Chargé d’Affaires of the EU Delegation to Indonesia to organise a media briefing in Jakarta and declared that:

“There is no such thing as an EU ban on palm oil nor any trade war”

He also tweeted that “The EU, as a constitution, government, and the member states, has no relation to the ban on palm oil products.”

This is absurd to the extreme. The Commission’s original position on the RED and the Delegated Act was relatively sensible and had no ban on palm oil. The Council and the Parliament shouted the Commission down – and pushed the ban. But according to Michel-Geurts’ logic, the EU government had ‘no relation’ to this. Next, he’ll be suggesting that the EU’s new countervailing duties on biodiesel have nothing to do with the EU.

 

Palm bans could cost ASEAN USD4.3 billion, reduce smallholder wages by 4.5%

A new paper from Purdue University backs up many of the points the palm oil industry and deforestation experts have been making about using import restrictions against palm oil.

Although conservation advocates argue that halting palm consumption will halt deforestation, anyone close to the ground in a developing country knows how absurd this is. Actors – companies, governments, smallholders, individuals — deforest in order to generate revenue for their family, firm or state-owned enterprise.

The paper models that a trade restriction:

“does not halt deforestation in M&I, as oil palm is not the sole crop being produced. A restriction on the consumption of palm oil produced in M&I supported by an initiative that directly limits deforestation is needed to prevent additional deforestation, carbon emissions, and biodiversity loss. Targeting just a single driver of deforestation in M&I opens room for other drivers of deforestation to operate more actively in the absence of a forest protection plan.”

The paper goes through three scenarios over the medium term aimed at halting deforestation around palm oil. The first is a tax that aims to cap palm production in Malaysia and Indonesia at 2011 levels, incentivised by a tax over any limits. The second adds an incentive for reduced deforestation payments. The third is the introduction of an effective ban on palm oil use in the rest of the world.

The first scenario doesn’t stop deforestation, as actors switch to other crops. It does, however, push prices of palm oil up, and increases taxation revenue in Malaysia and Indonesia.

The second scenario does preserve forests, simply because it provides incentive payments to not deforest. Although overall welfare in Malaysia and Indonesia goes up, the wage rate in the agricultural sector decreases significantly. We’ve seen this before in payment systems for REDD (reduced emissions from deforestation and forest degradation), which effectively pay farmers in countries not to expand cropland.

Finally, the third scenario – which is closer to what the EU is aiming for with its approach on palm oil — doesn’t reduce deforestation, pushes the prices of all vegetable oils up and reduces global welfare significantly.

The authors also point out the following:

The 3 policy interventions reduce market-based global welfare by $4,300 million for [capping production], by $5,532 million for [capping production with REDD-type incentives], and by $7,398 million for the [tariff approach].

And just so we’re clear, the third scenario would cost Malaysia and Indonesia USD4.3 billion in welfare losses.  The other loser here is China, which suffers welfare losses in all three scenarios because of higher prices.

The modelling was put together using Purdue’s GTAP model, led by a Purdue Agricultural Economist. Policy wonks know that Purdue’s model is about as good as it gets, and faculty in the ag school there are nothing less than top shelf.

That said, the results are quite intuitive and can be summed up neatly:

• If you ban one crop for deforestation, farmers will simply grow something else;
• If you cap production, prices will go up;
• If you pay countries not to farm, the wages of unskilled farm labourers go down.

The paper has some major real world implications.

First, it supports the case that both Malaysia and Indonesia have been making about the economic damage of existing bans (for renewables) and broader measures against palm oil consumption, and that they will have no impact on deforestation.

Second, the fall in wages is estimated at 4.5% for unskilled agricultural labour. This is largely smallholders.

Third, in terms of legal action, the EU argued it didn’t need to consult with palm producing countries on the RED’s Delegated Act in the WTO because it is in their view WTO compliant. But the point of the Technical Barriers to Trade committee notification is that it’s for consulting with partners if measures are going to disrupt trade. If anyone needed an analysis of potential trade disruption, this is about as good as it gets.

 

Certified vs Non-Certified: GHG Impacts

RSPO has been – rightly – trumpeting a life-cycle analysis (LCA) of RSPO-certified versus non-certified palm oil.

The report is independent of RSPO itself, but sponsored by some of the organisation’s biggest members.

Obviously certified palm comes out on top. This is a relief for anyone involved in certification—if there’s no advantage in terms of greenhouse emissions, it would call the entire certification exercise into question.

Only the executive summary of the report is available, so it’s difficult to assess the data for RSPO against the counterfactual.

However, a more interesting way to look at this research is how it compares with earlier research by the same authors that undertook a comparative LCA of palm oil and rapeseed.

In that research, the global warming impact of rapeseed was significantly larger than for conventional palm oil. The swing factor – as always – is land use expansion.

After the decision by RSPO members to effectively prohibit any new planting in forested areas, RSPO is now on relatively safe ground when it comes to expansion.

This approach of demonstrating the lower impact of certified oil will be particularly useful for companies that are attempting to ensure a lower overall footprint for customers and stakeholders.

But when it comes to regulation, caution needs to be used. The greenhouse footprint of palm-based biodiesel with no expansion is lower than that of soybean. That hasn’t stopped the introduction of a hastily assembled ILUC methodology to keep palm out of the EU market.

In the EU, science is no match for politics.

 

IN BRIEF: EU’s own goal on rapeseed

With an impending ban on palm oil in the EU’s renewable energy scheme, the bloc’s rapeseed farrmers should be celebrating, right? Wrong.

According to various reports, larger numbers of farmers are walking away from rapeseed  and plantings are at a 14-year low in France. This because of two factors. First is an unusually dry summer. Second is the EU’s recent ban on neonicotinoids, a type of pesticide that has been attributed by different groups to bee colony collapses.

So, despite higher prices, it’s becoming more difficult for EU farmers to get sufficient yield.

The big winner in this scenario may end up being soy-based biodiesel, with soybean prices still hitting multi-year lows.

Trade War Update

As stated last week, a number of commentators are now referring to the palm oil spat between the EU and ASEAN countries as a ‘trade war’. POM will be happy to use that term for the time being – and until told otherwise. Here’s a roundup of the latest developments.

Malaysia

Malaysia’s Prime Minister Mahathir Mohamad has taken the EU to task directly on the Renewable Energy Directive’s Delegated Act, stating in a speech that:

We have been accused of putting the need for development before the needs of our forests. The issue of deforestation for oil palm plantations has always been championed by our detractors.

The claims linking palm oil to deforestation is baseless, unfair and unjustified. These claims bring negative impact to Malaysia which depends highly on the palm oil industry to raise the socio-economic well-being of our people, in order to help us achieve the Sustainable Development Goals (SDGs).

It has also significant detrimental effects on oil palm growers which include 650,000 smallholders as well as another 1.5 million people employed throughout the palm oil supply chain.

Indonesia

Indonesian Trade Minister Enggartiasto Lukita has publicly stated that he has spoken with Lion Air – Indonesia’s largest private airline – about dropping purchases of Airbus planes in favour of Boeing.  According to a number of news sources, Lukita said that:

We will order from Boeing instead of Airbus. I have told [Lion CEO] Rusdi Kirana about it, and he agrees. As a nation, we must not let ourselves be treated like this … We must give a strong signal that Indonesia can also enact import barriers against EU products. They started this protectionism step first.

Lukita also signalled that the Trade Ministry has already been in consultation with local food and manufacturing industries about sourcing products from countries other than the EU.

We have already talked to food and beverage entrepreneurs to switch their imports from the EU. We are concerned about unnecessary matters from the EU, we only ask to divert its imports from the region. Businessmen agree.

Most of the rhetoric has been around blocking the import of European dairy products in favour of other sources.

Oceania to the rescue?

Dairy exporters from other regions think this is possible.  We spoke with a representative of a major dairy exporters in the Southen Hemisphere, who said that any switch away from the EU would be “absolutely a potential opportunity.”

It’s worth remembering that Indonesia and Malaysia already have trade agreements in place with Australia and New Zealand, and are towards the end of negotiating an additional regional agreement in the form of RCEP.

Labels under scrutiny

Other arms of Indonesia’s government are also mobilising, with the country’s Drug and Food Control Agency (BPOM) asking retailers to remove goods carrying “palm oil-free” labels from sale. BPOM has advised that the labels do not meet regulatory requirements, issuing a statement saying it will not approve for distribution products with “palm oil-free” labels, that palm oil is “safe”.

BPOM officials have clarified that this is a health issue, stating: “These products are sold at higher-end retailers so maybe there’s [the implication that it’s] healthy food,” she said. “So we need to fight that and educate the public that just because [a product contains] palm oil, it doesn’t mean it’s an unhealthy food. That product might contain trans fats from other vegetable oils. So we have to tell the public not to link palm oil with [adverse] health aspect.”

The Mercosur Question

Meanwhile, the EU has published much of the text of its agreement with Mercosur.  The Trade and Sustainable Development chapter is standard Brussels, and very similar to the equivalent chapters in the EU-Vietnam and EU-Japan agreements. There’s a lot of talk of cooperation, respecting multilateral environmental agreements, and keeping the chapter’s dispute resolution mechanisms non-binding. This has made us wonder what the EU has put on the table in the EU-Indonesia agreement to get Indonesia so riled up. If the EU is calling on Indonesia for stronger sustainability measures on palm, but not asking Brazil for the same on beef and soy, that could be read as a big insult – particularly with the fire situation in the Amazon (see below).

 

RSPO taking hits in Africa … Already?

NGOs hit out at RSPO at the organisation’s third Africa Sustainable Palm Oil Conference in Ghana last week.

Friends of the Earth in particular led in criticism of RSPO on the continent, stating that cases of environmental degradation and human rights abuses are still present among RSPO member companies – despite new NDPE (no deforestation, peat and exploitation) commitments.

Friends of the Earth Africa stated:

We stand with communities in these countries and beyond that resist the expansion of industrial plantations on their lands, and demand sincerity from RSPO in their bid and claim to halt the deforestation footprint of certified oil palm plantation companies.

At the same time, FOEA has also criticised funders of oil palm developments across Africa, including the World Bank.

We’re not entirely sure what FOEA is criticising given the new and higher levels of certification that have come into being since RT16 on zero deforestation. Given the extra requirements for RSPO certification that go beyond standard operating practices in Africa – e.g. the use of paraquat – if anything, we’d argue for a loosening of national interpretations in some circumstances.

The Accra action by Friends of the Earth does, however, prompt some questions around the next RSPO RT in Bangkok in October.

The tougher position on zero deforestation has effectively ‘won’ in RSPO – what will NGO members have to protest?

 

FIRE MONITOR: Why is Bolsanaro so angry?

Fire and haze were in the headlines across the world this week, and for the first time in recent memory they haven’t been associated with oil palm or Indonesia – it has all been about Brazil.

Brazil’s President  Jair Bolsanaro has been under pressure from Western nations to tackle the country’s current fire problem, which has been amplified by celebrities such as Leonardo DiCaprio.

Bolsanaro was offered EUR20 million in aid to battle the fires from France, which the President promptly rejected, calling the action ‘colonialist’.

But as always, it’s important to get a handle on the magnitude of the problem.

Official INPE data from Brazil estimates the peak number of fires this year at around 82,000, covering a total area of around 1.62 million ha.  It has also been reported that Bolivia has a fire area of around 730,000ha.

Just a reminder, this area is roughly on par with the area estimated to be affected by wildfires in Russia, which were at 2.3 million ha last time we checked, with total fire numbers in excess of 90,000.

But it is the European response that has caused offence to Bolsanaro, who has already mobilised more than 40,000 troops to assist in dealing with the problem.

The offending remark appeared to be Macron’s statement: “The Amazon forest is a subject for the whole planet … We can help you reforest, but we cannot allow you to destroy everything.”

This appeared to impinge upon Brazil’s sovereignty, along with threats to cancel the EU-Mercosur trade agreement.

It contrasts heavily with the offers of aid that were offered to Indonesia in the 2015 haze crisis. At that time, Australia, Russia, China, Malaysia and Singapore all offered support in the form of firefighters, equipment and firefighting aircraft. In other words, they offered an immediate action plan to put out the fires, rather than a future management plan that would tell Brazil how to manage the environment.

Moreover, the EU threats to cancel the Mercosur trade agreement were particularly odd. As ASEAN has learned, protecting the environment costs money. Wealth is generated through trade. The EU slipped back into its default mode on aid and the environment: don’t send us your exports and grow your wealth – we’ll send you an aid cheque instead.

The current Amazon fires – like those in Russia – are an absolute tragedy. President Bolsanaro may bristle at his opponents, but his words have probably struck a chord in Malaysia and Indonesia. EU promises to ride in as an environmental saviour may be well intentioned, but they often come with strings attached. The palm oil sector knows this better than just about anyone.

That said, the Bolsanaro-Macron exchange will potentially prompt an even bigger cry of ‘double standards’ from Indonesia. Much of the pressure on palm oil was built around the haze event of 2015, which inevitably added to harsher trade restrictions on palm oil in the EU. In this instance, Bolsanaro has openly pushed back on France, yet soybean crops – and their associated fire emissions – from Brazil and elsewhere are getting a free pass.

A question to EU NGOs and politicians: Why are you looking at the cameras, but looking the other way when it comes to renewables policy?