Is Europe’s Trade Agenda Tanking in ASEAN?

Did Trevelyan succeed in Jakarta?

UK Trade Secretary Anne-Marie Trevelyan visited Jakarta last month with one primary purpose: salvage the Indonesia-UK roadmap.

Sources had indicated that the roadmap had hit some bumps; Indonesia was seeking full recognition for its sustainability standard under any new regulations – specifically the UK’s Environment Act. But the UK wasn’t prepared to give a forward commitment of that nature.

The upshot of the talks was that Indonesia and the UK are prepared to talk some more. The key result of the meeting is that there will be ongoing bilateral discussions now between the Indonesian agriculture ministry and its UK counterpart, the Department of Environment, Farming and Rural Affairs (DEFRA). 

Why is this significant?

In Jakarta, the ministry has oversight over Indonesia’s sustainable palm oil standard (ISPO), and in the UK, DEFRA has responsibility for implementing what will be acceptable under the UK’s new law on illegal deforestation in supply chains.

It looks as though both are keen on a solution; the UK’s exports to Indonesia are recovering after a predictable decline in 2020 and 2021.

Importantly, both sides have discussed the potential of a future bilateral – which may put the UK on a stronger footing than the EU when it comes to trade agreements. The UK has managed to successfully complete a trade agreement with Australia, which the EU has not due to sustainable development being a stumbling block for Brussels – the same issue that bedevils EU-Indonesia discussions.  The UK has another opportunity in Jakarta to jump ahead, if agreement can be found.

Brussels takes a dive across ASEAN.

On the topic of perceptions of the EU, ISEAS annual ASEAN Outlook should be sobering reading for those in Brussels hoping to have greater sway in Jakarta and other ASEAN capitals.

The EU’s free trade bona fides have taken a serious dive. In 2021, a full 22% of ASEAN survey subjects thought the EU could provide the greatest leadership on global trade; this has fallen to 14%. Falls in Indonesia were more acute, going from 30% to 12%. Even Singapore and Vietnam – both of whom have FTAs with the EU – saw slight falls.

The percentage of Indonesians that think the EU is the leading economic influence in ASEAN has fallen from 2.3% to zero, lower than China (68%) and the US (8%), as well as Japan (5%), Korea(1.5%), the UK (1.5%) and even Australia (1.5%). Similarly, in terms of political and strategic influence, the EU fell behind China, the US and Australia, sitting at 2.3%.

What explains the change?

There are some clear policy differences that have been expressed in the survey. The share of respondents that thought climate change is an immediate threat fell across ASEAN and was more noticeable in larger economies – Indonesia, Malaysia, Philippines, Singapore and Thailand.

There is, however, general confidence among respondents that the EU will ‘do the right thing’ when it comes to international affairs, but there’s a wrinkle. The number of people that think “the EU’s stance on environment, human rights, and climate change is an asset for global peace and security” has fallen in Indonesia from 53% to 42%, in Malaysia from 46% to 29%, and across ASEAN from 44% to 38%. There was also an increase in respondents who agreed that “the EU’s stance on environment, human rights, and climate change could be used to threaten my country’s interests and sovereignty.”

Similarly, there’s another point to consider. COVID remains a primary concern of most ASEAN countries, with around 75% of all respondents listing it as a top concern (the survey was conducted before the recent hostilities in Ukraine). But in terms of who has provided the most assistance, the EU is behind China, the US, India, Japan and Australia.

Overall, the picture is quite clear. The EU is well trusted, but it is becoming increasingly misaligned with those in ASEAN.

This isn’t surprising. Nor is the general view that the EU is no longer providing leadership on global trade; a combination of the ‘Green Deal’ and export restrictions on pandemic supplies have dented the perceptions of Brussels in the region.

Will this trajectory continue? As we’ve pointed out many times before, the EU continues to put up greater restrictions on ASEAN’s largest agricultural export – palm oil – despite trying to argue that it is aiming for sustainable development.

If there’s one thing people in ASEAN – and anywhere in the world – dislike, it’s a hypocrite. And they’ve come to be very suspicious of any EU or UK mention of the word ‘sustainable’: generally, it means that protectionist trade barriers are on the way.

Russia, Ukraine and palm oil

The world has been intently focused on the Russia-Ukraine conflict. There have been multiple questions about the impact on vegetable oil markets. Noting that we are not geopolitical experts and won’t wade into the tragic situation in the region, here’s an overview:

  • All sunflower oil exports from Russia and Ukraine appear to have been disrupted, representing around 70 per cent of global supply;
  • It’s a similar situation for disruptions to rapeseed exports, although the situation is not as acute;
  • Vegetable oil prices were already above 7-year norms from about mid-2020 and have increased again since the conflict began;
  • Those price rises prompted export controls in Indonesia;
  • Soybean oil is now under increasing pressure from drought in South America;
  • The price of crude oil — obviously — is adding to the situation.

For import markets:

  • In China and India, there will probably be greater policy intervention to dampen prices locally;
  • How the EU manages skyrocketing prices is anyone’s guess, but the slew of non-tariff measures on palm oil will not be helping;

For Malaysia and Indonesia:

  • Downstream industries will feel the pinch;
  • Plantation owners should continue a profitable streak
  • There may be renewed pressure on Indonesia’s domestic allocation;
  • Pressure to reduce plantation expansion of palm — and other crops — in Indonesia will be dampened.

But overall, the implications for global agriculture are so much bigger. Depending on how long this runs, the flow-on effects here are going to be extraordinary, with (for example) increases in the price of animal feed going into China/EU from South America, eroding profitability for farmers and putting upward pressure on food prices.

The short answer: a tight market is about to get tighter.