Indonesia prepares for battle in Switzerland
This week Indonesia and the EU are meeting in Geneva for a WTO consultation over the revised Renewable Energy Directive (RED). The meeting is the culmination of a months-long public battle of words over the introduction of the measure.
Over the past few months Indonesian lawmakers and policymakers have ramped up the public pressure on European goods, threatening to suspend purchases of aircraft and switching to different sources of dairy goods. The political message very much seems to be that if the EU adopts aggressive trade restricting measures, then Indonesia is willing to do so as well.
The WTO consultations, though, are where the action will take a more substantive form. If the consultations don’t produce a result within 60 days, the Dispute Settlement Body will form a panel – and this is where things will start moving.
Resolving the next steps in the case may take up to two years. If it requires going to the Appellate Body it could take even longer.
But Indonesia is taking this action very seriously. As much as European policymakers might see this as a technical issue or a genuine environmental standard, Indonesia understands that the EU actions against palm oil are ultimately political and are designed to achieve a protectionist goal, not an environmental one.
Indonesia has watched these trade actions – from the first iteration of RED, to biodiesel antidumping action and now countervailing duties and RED II – pile up over the course of a decade. They are well aware that RED was originally conceived as a support mechanism for EU oilseed producers, and that it’s politics – not science – that wants palm oil out of the EU market.
As far as we can tell, Indonesia is sending at least three ministers and a raft of other experts to participate in the consultation.
These participants are also becoming increasingly aware that the EU needs other export markets, particularly as the US looks increasingly hostile, and China can no longer be counted on as a source of demand.
Malaysia lobbies in the UK
Malaysia’s Minister of Primary Industries Ms. Teresa Kok did the rounds in London last week. Unlike Indonesia, however, Malaysia appears to be taking a softer approach with the EU and is less willing to openly criticise the EU’s approach on palm oil.
This is evidenced in one of Kok’s recent opinion pieces, where she stated that the EU’s ‘Green New Deal’ could herald the basis of a broader EU-ASEAN trade agreement, and should include sustainable palm oil.
The rationale would be that the economic heft of ASEAN could prompt the EU to relax its strict approach on trade and sustainable development in such a large trade agreement.
Although we’d like to be equally optimistic about a trade agreement between the world’s two largest trading blocs, we’re not convinced that the EU will agree to loosen any conditions: and that if producing countries give ground on defining ‘sustainable palm oil’ it effectively hands control of certification and standards partially, or fully, to Brussels.
Probably the best example in this case is what has happened with the EU-Mercosur agreement. The negotiations were completed – with a very old negotiating mandate – under the previous parliament. Opposition has already come from Ireland and Belgium, citing environmental and farming concerns. Environmental lobbies have also been mobilised.
Sure, Mercosur’s economic size is around half that of ASEAN, but the cultural ties between the EU and Mercosur are arguably much deeper than those with ASEAN.
Somewhat surprising was Minister Kok’s swerve away from a Malaysia-EU agreement. We’re aware that Malaysia has little appetite for trade liberalization and new FTAs right now. But this indicates that in Putrajaya’s view, the EU-ASEAN agreement is a better prospect.
There is some logic to this; the EU ratified its agreement with Vietnam last week, much to the chagrin of the European human rights lobby. Vietnam – as ASEAN chair – may be able to push a wider ASEAN agreement up the agenda.
Reuters reported that Minister Kok also stated that Malaysia would not be taking action in the WTO against the EU over REDII — which the Minister denied in a later statement.
This isn’t entirely surprising. As we’ve pointed out many times before, Malaysia has used the WTO Dispute Settlement system only once in its history. But it also reflects the skew of Malaysia’s industry, which is less oriented towards renewable fuels than Indonesia. That said, Malaysia is a party to the dispute, and no doubt taking Indonesia’s side. But ‘big brother’ is doing the heavy lifting while KL sits somewhat in the proverbial neutral.
Yet another skirmish …
Malaysia shouldn’t, however, simply assume that having a non-fuel supply chain is going to win the day in the European Union. Food uses of palm oil are also under threat.
The 3-monochloropropane diol (3-MCPD) debate has again reared its head in Europe. The problem has emerged because the EU has set new limits for the presence of 3-MCPD in foodstuffs, including more onerous levels for palm oil, with a likely implementation in January 2021
The 3-MCPD limit rationale is based on a perceived risk from resulting from a study of rats, rather than a proven link between the substance and health problems in humans.
At a CPOPC event in Jakarta two weeks ago, representatives from both Malaysia and Indonesia heavily criticized the measure.
“They put two levels, one for their oils, one for our oils. In other words, discriminatory,” said Yusof Basiron, an executive director of CPOPC.
“The EU is raising a trade barrier by trying to formulate an even higher standard. We cannot let this happen,” said Indonesia’s coordinating economy minister, Airlangga Hartarto.
In many ways, this is the oldest trick in the European playbook: divide, and then conquer. The split levels is an attempt to divide palm producers, by enticing some to favour their short-term self-interest (if they feel they can meet the more onerous levels) rather than their long-term strategic interest, which should be focused on preventing the expansion of EU non-tariff barriers against palm oil.
Unfortunately, some quasi-governmental officials in KL appear to have fallen for the trap, and have bought the EU line that ‘if a few of us can meet the EU standards, then all is ok’. This is a false success. If you accept EU restrictions it means only one thing in reality: harsher EU restrictions are coming in future. Moreover, you have accepted their scientific position without challenging it. Industries all over the world have learned that lesson the hard way. It appears not everyone in the palm oil sector understands the strategic big-picture.
While the standards themselves are technical, the EU is clearly playing politics. Focusing only on accepting short-term technical impositions (that you can meet) is a long-term strategic howler.
Thailand looks at CPO market reform
The positive story for the week, however, is that Thailand has indicated it wants to take a lead on liberalizing the market for palm oil both within ASEAN and with ASEAN’s agreement partners.
This is along with other goods that are listed as ‘sensitive’.
Thailand’s palm oil sector is hamstrung by an inefficient set of pricing policies. The government sets a floor price for FFBs, but also sets a ceiling price for the sale of refined vegetable oil that comes from palm oil. This is to limit the price paid by manufacturers consumers.
This means that producers don’t have an incentive to be more efficient, and processors are limited to the profit they can make on processed goods. Further, because palm oil is considered a ‘sensitive’ good within ASEAN, it means that Thailand can impose extremely high tariffs on imported palm oil. But it also leads to the situation where smuggling cheaper CPO from over the border in Malaysia is relatively lucrative.
If Thailand can prompt some change in the domestic market, it will be well overdue.