The EU approved a draft to ban palm oil importation for use in biofuel. This will have damaging effects on Indonesian and Malaysian exports.
There is a trade war shaping up between ASEAN’s palm oil producing nations and the EU. The Malaysian Palm Oil Association (MPOA) is lobbying the government to halt trade deal negotiations with the bloc. The move is in response to the EU’s proposed 2021 ban on palm oil imports for use in biofuels.
The EU approved draft measures of the ban in January
The EU is the second-largest palm oil importer on earth. It bought 6.7 million tonnes in the 2016/2017 financial year. Only India imported more. In 2009, it implemented a renewable energy directive. The directive set the target that 20% of its energy should come from renewables. 10% of its transportation should also run on renewables.
This was welcome news to Indonesia and Malaysia. The pair account for 90% of the global palm oil output. The EU is also a key trading partner for the two nations.
However, the EU has misgivings about the sustainability of the palm oil industry. The World Wildlife Fund (WWF) estimates that every hour an area of rainforest the size of 300 football fields is destroyed to make way for palm oil crops. A third of native Indonesian mammals are endangered because of this deforestation.
These concerns prompted the EU to draft another directive. The new directive bans the import of biofuel from crops on land converted from forest or food crops. The EU Parliament approved the ban in January. It will come into effect in 2021.
The Malay and Indonesian economies depend on palm oil exportation. In Indonesia, palm oil accounts for 10% of its total exports. A ban on imported palm oil for use in biofuel from the largest global importer of palm oil will damage the economy.
Palm oil is not as big a culprit of deforestation as other energy crops
In 2012, the European Commission completed a comprehensive study on the drivers of deforestation.
Source: European Commission
It found that other industries contribute far more to deforestation. However, the EU ban does not affect those industries in the same way.
The ban is as much a move to preserve EU business interests as to promote sustainability
The palm oil industry has been under attack from the powerful soybean lobby for decades. In the 1980s, the American Soybean Association spread a false narrative that palm oil is bad for human health. The lobby group has power in the US government. It lobbied the Obama administration to exclude palm oil as a biofuel source. Obama eventually caved and banned its use in biofuel during his time in office.
In this context, the EU’s ban appears to be another move from the soy lobby to attack the palm oil industry. The EU controls 80% of the global rapeseed, soybean and sunflower seed business. It, therefore, has a vested interest in promoting these commodities at the expense of palm oil.
What can Malaysia, Indonesia and Thailand do?
The MPOA wants the government to halt trade deal negotiations with the EU if the ban goes ahead. The Malaysian government has hinted that it will consider doing so. Malaysia’s Minister for Plantation Industries and Commodities Mah Siew Keong promised Malaysia would respond with “might and tact”.
However, Malaysia, Indonesia and Thailand are limited in their options. Talks for the EU-Malaysia free trade agreement resumed last year. But Malaysia makes up just 1.1% of the EU’s total trade. On the other hand, the EU represents 10% of Malaysia’s trade in goods. A delay to negotiations to a free trade agreement will impact Malaysia more than it does the EU. Similarly, Indonesia represents just 0.7% of total EU trade and Thailand 1%. Any trade war would be futile.
Another option is to court individual member states to speak out against the ban. Before it can come into effect, the ban requires ratification by the 27 member-states. But no palm oil producing nation has the missions and relations to court enough states to stop the ban.
Transitioning to sustainable development is the only solution
To circumnavigate the ban, Malaysia, Indonesia and Thailand must prioritise sustainability. There has been some progress in this area in Indonesia. The Indonesian Sustainable Palm Oil (ISPO) program has introduced tougher rules within the palm oil industry. However, they still do not meet the United Nations Development Program’s sustainability standards.
The Malaysian and Indonesian governments must increase collaboration with plantation owners. In Malaysia, this will be easier than in Indonesia. There are large industry players like Genting Group and Sime Darby. They can work with the government to improve working conditions and sustainability practices.
The Indonesian industry will require more effort
For Indonesia, this will be much more difficult. Small local businesses own 50% of Indonesian palm oil plantations. Helping these small players meet required sustainability standards will take a more organised effort. Smaller players cannot afford to overhaul their working practices and focus on sustainability.
There could be several positives to come from the ban. It could put ASEAN nations on the path towards a more sustainable palm oil industry. It could bring deforestation to manageable levels. It may also improve the conservation of native animal species.
Putting sustainability at the forefront of the palm oil industry would be no bad thing. But the travesty for palm oil producing nations is that it will come at the expense of the export economy.