Decoding Indonesia’s Palm Export Ban

The most significant story that has emerged from Indonesia this month is the possible export ban on palm oil.

The announcement resulted in an additional price spike across global oil vegetable markets on the weekend before prices dropped below last month’s peak as new details emerged. 

News outlets are reporting that the ban will apply to cooking oil including RBD (refined, bleached and deodorised) palm oil. The measure is aimed at maintaining supplies of vegetable oil – for household use – across Indonesia and is likely to be temporary.

Context is important. Global price spikes were created by the Ukraine-Russia conflict, prompting companies such as Iceland and others to walk back ‘no palm oil’ commitments. Other, less publicised, global factors are also at play, including drought in Latin America affecting soybean crops.

Indonesia’s move highlights differences between rich countries and poor countries on palm oil. Restrictions come in very different forms (Indonesia’s export restrictions, or the EU’s anti-palm oil regulations) but both can have a price impact. The difference is really in intention: the Indonesian measure looks to assist poor households in Indonesia through the global crisis and can be considered temporary and unavoidable. The EU’s measures on palm oil are something else. The EU is seeking permanent trade barriers through regulation – harming poorer countries’ agricultural exports in order to coddle their own wealthy landowners and farmers. This is wholly avoidable. As the Indonesian government has shown, there are other successful ways to prevent deforestation so the idea of a ‘green’ justification for these barriers was debunked long ago.

Does Brussels Want to Push Food Prices Up Further?

The disruptions prompt a big question for Brussels as it continues to embark on its Deforestation Regulation that explicitly targets palm, soya and other staples: in a time of spiralling prices and worrying shortages, why is the EU looking to impose additional trade barriers on food?

The acute nature of the situation has prompted multilateral organisations such as the IMF and the World Bank to call for reduced trade restrictions on goods, particularly when they impact developing countries.

Trade measures at their top level fall into two categories: tariff and non-tariff. Both make imported goods more expensive. Tariffs are used to raise revenue and protect local industries. Non-tariff measures – when they are legitimate – can ensure product safety and quarantine. But when they’re illegitimate, they’re nothing more than a protectionist measure.  

As we’ve seen in the case of biofuels, the EU’s non-tariff measures (NTMs) – principally in the form of the Renewable Energy Directive (RED) — have given vegetable oil feedstocks from the EU and other wealthy countries (e.g. US soybean, Australian canola) an advantage over those from developing countries. The principal subject of protection is EU rapeseed growers. The RED is literally designed to lock out the poor and give the spoils to the rich.

However, there are bigger impacts when it comes to NTMs and food. Such trade barriers do three things: increase consumer prices, harm exporting countries (particularly developing countries) and they also have the effect of raising global prices, even though the measures are directed at a single market.

The EU’s proposed rules on deforestation and commodities will significantly impact exports to the EU, principally vegetable oil, beef, soybean (including animal feed), cocoa and coffee. The CBAM (Carbon Border Adjustment Mechanism) will also impact fertiliser, which will obviously affect food production.

According to one estimate existing NTMs in the EU are equivalent to a 8 per cent tariff on prices; for vegetable oil, they are equivalent to around 5 per cent.

And there’s already been additional work done on the impact of effective bans on palm oil in EU markets. One study – from Purdue – indicates that prices for palm oil would increase by around 2 to 7 per cent globally with the imposition of EU policies, with more acute impacts in lower income countries. Another study places the estimate at around 9 per cent in the EU.

But the significance for developing countries hits at the household level. The proportion of household income spent on cooking oil in developing countries is much higher than it is in rich countries. It is a significant household staple. In rich countries, much cooking oil is in processed food – for example pre-packaged biscuits. The difference is important; a small rise in biscuit prices can be absorbed by a household in France; price rises for bulk cooking oil will more difficult to manage for a family in India or Indonesia.

This leads to another, broader, point. Wealthy countries will pay more for cooking oil in times of short supply simply because they can afford it. It’s precisely for this reason that countries such as Indonesia have required firms to fulfill a domestic market obligation before export.

To be sure, the global spike in prices should be temporary. But it will not ease off quickly. When food prices started to spike in 2007, it took a full five years for prices to stabilise and nearly nine years to return to pre-crisis levels in 2016.

With this backdrop, the EU needs to take its obligations to the world – and its own people – a bit more seriously. Sure, the EU may argue that its people do not want food that has contributed to deforestation. There are already ways and means to achieve that via pre-existing certification systems. Nearly all of the palm oil going to the EU hasn’t contributed to deforestation at all simply due to certification, and supplier and purchaser commitments.

Policymakers in Brussels might consider higher food prices to be tolerable.  EU citizens may also – although only to a point. But those in the developing world cannot.  There is already political unrest associated with price spikes. This is not the EU’s fault at the genesis, but it should not be adding fuel to the fire.

CBP and Forced Labor: “An Unfair System”

In the past month the EU and the US have put down new markers with regards to their labour and human rights requirements in supply chains. The EU has issued its proposed due diligence on human rights, and announced a forthcoming forced labour regulation; the White House has indicated that labour rights are a key plank of trade policy going forward.

But the backdrop of this – particularly in the US – is much more complicated. Observers will be well aware that Malaysia’s exporters have been under consistent pressure from US authorities on forced labour risks in supply chains for several years. This has culminated in several high-profile cases against Malaysia’s largest companies.  

However, one US importer, Virtus Nutrition, is challenging US Customs and Border Protection’s approach, which has been described at various points as opaque and arbitrary.

The American Apparel and Footwear Association submitted an amicus brief to the case, which takes CBP to task. AAFA represents some of the world’s largest apparel manufacturers and deals with incredibly complex supply chains for raw materials and manufacturing. Their submission states:

“CBP’s enforcement of the U.S. forced labor statute has instead been marked by lack of due process, an unreasonable standard of evidence, lack of transparency, and arbitrary and capricious decisions. This significantly reduces the effectiveness of CBP’s enforcement by creating huge inefficiencies and propagating an unfair system that unreasonably detains and excludes licit goods. Besides being unfair, this chaotic process appears to be an abdication of CBP’s mandate to facilitate legitimate trade.”

“CBP’s regulations  … impermissibly introduce uncertainty, specifically the concept of detaining cargo based on inconclusive evidence rather than certainty. Further, no evidence is provided by CBP to support the exclusion and the importer is afforded no opportunity to rebut such evidence, if indeed any such evidence even exists.”

“CBP can exclude the importer’s property from importation without providing the importer any actual evidence of its illegitimate source. The importer’s only recourse is to provide evidence that somehow satisfies a standard of proof that seems to rise to the level of absolute certainty, a standard that CBP will not even explain.”

Let’s see what happens.