- The IEUCEPA texts show clear positives for Indonesian palm going into the EU, with tariff-free entry for crude and refined palm;
- The Palm Oil Protocol in the agreement ‘recognises’ the importance of ISPO and its role in sustainable trade;
- A binding sustainability chapter is a novel inclusion, but is unlikely to be a dealbreaker
The signing of the Indonesia-EU free trade agreement brought a big round of optimism for EU-Southeast Asia relations, and particularly for trade in palm oil.
The publication of the substantially agreed draft texts gives a clear picture of the what the agreement will look like.
Key to that was the introduction of tariff-rate quotas for palm.
Starting from the agreement’s entry into force, Indonesia will gain preferential access through quotas covering both crude and refined palm oil products.
For crude and refined palm, the initial combined quota stands at 1.9 million tonnes, expanding to nearly 2.5 million tonnes by Year 9. Palm kernel oil products receive a separate quota of 140,000 tonnes, growing to 182,668 tonnes over the same period.
To put these figures in perspective, Indonesia’s 2023 exports to the EU totaled over 6.2 million tonnes for palm oil alone, while the country held approximately 37% of the EU’s crude palm oil market in 2024. Indonesia’s market share could therefore increase significantly as preferential tariff rates make Indonesian palm oil more competitive against other origins.
Out-of-quota tariff rates are likely to settle around 3%, though final tariff schedules await official release. Quota allocations will prioritize products currently facing higher tariff barriers, particularly those in specialized packaging or for industrial applications.
One of the agreement’s most consequential provisions concerns rules of origin. The IEU-CEPA rules prevent practice of importing non-Indonesian crude palm oil, refining it domestically, and then exporting it to the EU as an Indonesian product. This eliminates the blending of Malaysian and Indonesian palm oil for EU-bound refined products.
This does, however, created incentives for expanding Indonesia’s downstream palm oil industry. Companies producing value-added products such as technical-grade oils, industrial applications, and margarines will benefit from tariff reductions, making domestic refining and manufacturing more attractive for EU market supply.
This aligns with Indonesia’s policy objectives to move up the value chain and increase domestic processing capacity.
The agreement’s Trade and Sustainable Development (TSD) chapter establishes binding obligations — and this is unusual in trade agreements.
Most trade deals include TSD provisions without enforcement mechanisms, the IEU-CEPA allows disputes under this chapter to access the agreement’s general dispute settlement mechanism if the TSD Committee cannot resolve issues through consultation.
The TSD chapter does not explicitly mention palm oil, but it does establish obligations regarding deforestation, sustainable forest management, and climate change. Key provisions require both parties to adhere to International Labour Organization (ILO) commitments and maintain transparency by informing each other of relevant regulations.
This goes both ways. Although there will be scrutiny on Indonesian producers for labour practices, the EU won’t be able to introduce EUDR-like regulations without clear consultation.
The agreement includes a dedicated Palm Oil Annex that, while containing primarily soft commitments, establishes important cooperation. The Annex acknowledges palm oil’s role in Indonesia’s economic growth, and importantly “recognizes” the Indonesian Sustainable Palm Oil (ISPO) certification system as a tool for promoting sustainability, and encourages ongoing collaboration on palm oil sustainability issues.
More specifically relevant to the palm oil sector, the Trade and Sustainable Development Committee will have responsibility for both the TSD chapter and the Palm Oil Annex. This committee represents the primary forum for discussing sustainability issues, including those affecting palm oil trade.
The agreement’s entry into force will create immediate competitive advantages for Indonesian palm oil in European markets. While overall European palm oil demand may not increase dramatically, the preferential tariff treatment will shift demand toward Indonesian sources and away from competing origins, particularly Malaysia.
The rules of origin provisions will encourage greater processing and value addition within Indonesia, potentially accelerating investment in refining and manufacturing capacity oriented toward European markets. This could transform Indonesia’s export profile from predominantly crude palm oil toward a more diverse mix of refined and value-added products.
From an institutional perspective, the agreement formalizes and elevates cooperation mechanisms between Indonesia and the EU. Previous engagement through mechanisms such as joint council meetings will be supplemented — and potentially superseded — by the new committee structures established under the IEU-CEPA. This institutionalization of bilateral relations means that cooperation on environmental and sustainability issues now carries greater weight and political significance.
Will this impact trade itself? It always needs to be remembered that it’s businesses that trade, not governments. Governments can set conditions, but the price always needs to be right. A large fear among European businesses right now is not too much palm oil but too little. Indonesia’s domestic demand is ramping up, as is demand in China, India and Pakistan.
It’s also important to remember that both the EU and Indonesia are large economies and populations — but they have been outmuscled by China and the US. The stakes are high, and the incentives to have the agreement implemented even higher.