China, Russia Deal With MY on Palm
Malaysia and China are renegotiating an agreement on the country’s East Coast Rail Link (ECRL). The resumed negotiation process will be indirectly tied to an agreement by China to purchase more palm oil from Malaysia.
China is Malaysia’s third-largest market for palm oil after India and the European Union. China splits its imports between Malaysia and Indonesia, with around one-third coming from Malaysia.
Palm oil is China’s largest vegetable oil import, but not the most widely consumed oil. It represents around one-sixth of China’s vegetable oil consumption. This is because soybeans and other oilseeds are imported for both soybean meals and oil.
However, China’s soybean imports are at multi-year lows, due to a combination of tariffs on US soybeans and swine flu impacting China’s herd. This implies a shortfall in the vegetable oil supply. Chinese buyers have also switched away from canola supplies from Canada due to new tariffs. Palm oil can substitute for other vegetable oils for some industrial applications.
The rail link will link north-east cities such as Kota Bahru with the eastern port of Kelantan, and then to KL and the major port of Klang. It will effectively link both sides of the Malay Peninsula with China’s Yunnan Province. The ECRL will be further discussed at the Belt and Road Initiative (BRI) Summit on April 25 in Beijing.
It is being speculated that an agreement between China and Malaysia on greater palm purchases will be inked. Similarly, it is being reported that Malaysia and Russia are in talks to discuss a ‘palm for fighter jets’ swap, as Malaysia moves its military procurement away from the EU following the introduction of the Renewable Energy Directive.
Airplanes are France’s largest exports to Malaysia.
Is Europe Getting Further Sidelined?
EU policymakers should be demonstrating some level of concern that two of ASEAN’s largest economies are moving farther away from the EU’s orbit, and lobbying others to join with them. It’s worth noting that one week out from Indonesia’s election, the Jakarta Post ran an editorial that led with the following in relation to palm oil:
We call on ASEAN leaders to form a united front as a regional grouping to demonstrate full support to President Joko “Jokowi” Widodo and Malaysian Prime Minister Mahathir Mohamad … ASEAN should send a strong warning to their trading partners, especially in the Western bloc, to think twice before playing fire with Southeast Asia.
This is a strong message to both Europe and to other ASEAN leaders from a newspaper that is generally centrist, and is read by the diplomatic bubble in Jakarta. As much as European leaders might tell themselves that this is pre-election nationalism, it is not. Whether it’s Malaysian timber, Thai seafood, Indonesian paper or Cambodian garments, ASEAN economies are often in the firing line of EU double standards on protectionism.
The BRI Summit coincides with a meeting between ASEAN Senior Trade Officials and the EU’s Trade Commissioner on April 26.
It’s highly likely that EU Trade Commissioner Malmström will be seeking to placate the situation after last week’s bilateral meetings that saw the EU leave empty-handed.
But the question is whether she will be able to herd the cats in the European Parliament and Council of the EU.
Indonesia’s election, RED and the moratorium
Indonesia headed to the polls this past weekend. At time of writing, the incumbent President Jokowi appeared to be heading for a second term, although results will only be known in a few days.
Palm oil was not a central campaign issue, but both candidates were keen to showcase actions that would alleviate farmer and rural concerns around low prices.
This was particularly evident in areas such as South Sumatra and Riau, where polling indicated that Jokowi had suffered a backlash because of the three-year moratorium on land clearing.
This particular issue has been examined by Indonesian think tank Greenomics, which argues that the introduction of the RED ban on palm oil could result in increased deforestation.
The argument runs as follows.
The RED in its current form punishes Indonesia for deforestation that took place during the term of President Yudhoyono, which is the period covered by the RED’s deforestation data. It takes no account of reduced deforestation that has taken place in the Jokowi era.
Any drops in demand for palm oil as a result of the RED – and lower prices, household incomes and tax collections – may prompt President Jokowi to permit expansion of the sector.
Norway’s first payment to Indonesia this year as part of its ‘payments for deforestation’ agreement was worth around USD24 million for a 60 per cent reduction in deforestation in 2016-2017. By contrast, the government’s export tax on palm oil collected around USD900 million on palm exports for the same period. Although the export tax is triggered by prices, a reduction in exports – precipitated by European policies, e.g. the RED – will have an impact on government revenue.
The debate over RED and ILUC has had constant references to perverse outcomes. The dropping of the moratorium would fit this description.
EU talks suspended, MPOB advisor hoses down trade talk
Malaysia has reaffirmed that it has suspended talks with the European Union for a free trade agreement, and that it has the support of ASEAN nations in suspending EU-ASEAN talks.
Malaysia’s Deputy Trade Minister Dr Ong Kian Ming said last week that “ASEAN leaders have heard our views and agreed to suspend the elevation of that partnership. We hope the issue can be resolved.
“We do not refute the possibility of taking other measures that will have far reaching implications on the trade relations with some EU countries.”
Despite the clear tough line that Malaysia is taking with the EU and its member states, there appears to be a misunderstanding of the trade dispute’s politics.
Denis Murphy of the University of Cardiff and an advisor to the MPOB has argued that Malaysia is “not big enough to win” and that the country should “Focus on being smart.”
He said that Malaysia should focus on improving yields, partnering with NGOs, and that palm oil should re-brand: “It is premium coffee. There is also traceability of which farm it comes from.”
Although Professor Murphy is clearly an expert of biotechnology, it is vital that industry participants understand the politics of the RED and of the EU’s approach to palm oil.
At this stage, it doesn’t matter how much better yields are, how much NGO support there is, or if traceability is in place: palm oil has been subject to an intense politically motivated campaign that has nothing to do with facts or science. Indirect land-use change is the best example of this and a sign of more to come.
That Colombia’s palm oil – which has been cultivated on non-forested lands — can be treated in the same way as that coming from deforested lands in Indonesia – indicates precisely how politically oriented the policies are.
To draw a similar example, the EU attempted to ban beef products from the US on the basis that hormones used in animal feed posed a risk to health. This ban was slapped down by the WTO. Rather than let the exports in, the EU pays millions of dollars in penalties annually – all to keep the peace with the bloc’s farm sector.
Professor Murphy’s implication is that Malaysia should simply accept the ban and move on. European authorities have signalled they will take on palm oil with further regulation on deforestation and on health. What should Malaysia do then?