Food Navigator Asia | 10 January 2022
Palm oil attacks? Why EU’s latest sustainability plans risk alienating Indonesia amid free trade talks
By Pearly Neo
Palm oil industry experts have warned that the European Union’s (EU) latest proposed regulations on deforestation carry major risk of upsetting Indonesia amidst ongoing free-trade negotiations.
The EU recently published anti-deforestation regulations in the name of sustainability, basically calling for the ban of all commodities produced from deforested land, whether this deforestation was legal, controlled, strategically planned or not.
“Deforestation and forest degradation are occurring at an alarming rate, aggravating climate change and the loss of biodiversity,” said the EU via the draft regulations.
“The main driver of deforestation and forest degradation is the expansion of agricultural land to produce commodities such as cattle, wood, palm oil, soy, cocoa or coffee.”
According to the draft, imports from different countries will be classified as ‘high’, ‘standard’ or ‘low’ risk based on deforestation rates and other ‘risk factors’.
“Based on this risk factor idea, we can already see it is obvious which countries are going to be classified as high-risk or low-risk – and safe to say, major palm oil exporting countries that are also emerging economies such as Indonesia and Brazil are definitely going to be high-risk,” trade consultancy Article Three Director and palm oil industry expert Khalil Hegarty told FoodNavigator-Asia.
“Even for relatively more developed economies like Malaysia, which is of course also a major palm oil producer, it is really hard to say as there are other risk factors the EU could say they are considering.”
Although multiple commodities such as cattle, wood, soy, cocoa and coffee are mentioned in addition to palm oil, industry experts such as Hegarty maintain that the regulations are clearly targeting palm oil exporting countries due to the way it is set up. For Indonesia in particular, palm oil and related product exports to the EU come up to US$2bn, and would be a heavy hit for the country.
“The main issue here is also that this regulation would definitely drive palm oil costs up, and it is understandable that pal oil producing countries like Indonesia and Malaysia are getting annoyed about this as so much more has been done for palm oil sustainability certification over the past 10 years as compared to any other commodity around,” he said.
“The EU has not included established voluntary certification schemes such as the Roundtable on Sustainable Palm Oil (RSPO) as part of the risk assessment for this, and there is going to be additional burden of cost that is going to be passed to the producers and not the EU companies using the palm oil nor local consumers – this means that the costs will have to be borne the producing countries, the ones suffering the most economically here.”
Legality vs sustainability
Comparisons were drawn between the EU’s proposal and the UK’s recently-announced Due Diligence scheme, which takes a ‘legality over sustainability’ approach to the palm oil situation and is viewed much more favourably by the palm oil sector in general.
“The fact is that sustainability is far more subjective than legality – Indonesia would see what constitutes sustainability differently from the EU does, perhaps they would support a small amount of deforestation whereas the EU would say 0% is allowed,” he said.
“Defining this ‘sustainability’ is what has caused many problems as it’s different for different countries, and there are global trade law implications so no one country should go ahead and apply their own definitions without international agreement.
“So legality, which is the route the UK has taken, would be a much better route where the importing country just calls on the exporting country to ensure that its laws are enforced and the goods it is exporting are not produced without illegal activity – for instance, that the exported palm oil has been certified as sustainable by parties such as RSPO.
“We are also seeing hope that UK authorities might be accepting of national sustainability standards such as the Malaysian Sustainable Palm Oil (MSPO) or Indonesian Sustainable Palm Oil (ISPO) certifications as evidence of compliance, which would be the best for the industry.”
High risk to trade relations
The UK has been actively seeking out new major economic partnerships to diversify exports away from the EU ever since the Brexit split, and one of its major targets is ASEAN which could explain its new amicability.
“The way to forge good trade relations is to make trade between ASEAN countries and the UK less difficult – trade is a two-way street, and it would make a lot more sense to lower trade barriers where possible instead of enacting new ones if healthy trade relations are to be maintained,” said Hegarty.
“The new EU regulation would impose a non-tariff barrier that would disrupt trade and create uncertainty for exporters to European markets.
“The EU is currently in the midst of negotiations with Indonesia over a potential free trade agreement. [This situation] simply adds to the complications of completing a deal that is being held hostage by EU domestic politics, rather than genuine concerns about deforestation - Indonesia’s deforestation rates are at historic lows.
“It is also worth noting that Indonesian President Joko Widodo (Jokowi) has recently emphasised that the country will not accept regulations undermining Indonesia’s development or sovereignty.”
During the recent 2021 United Nations Climate Change Conference, President Jokowi had highlighted Indonesia’s successes in reducing deforestation and emphasised that the country has banned new permits for forest clearance for palm oil plantations, whilst calling out Indonesia’s accusers for attempting to violate its sovereign rights.
“Providing aid does not mean to dictate, let alone violate the sovereign rights of a country over its territory,” said the President.
“Indonesia’s concrete achievements on forestry sector is beyond doubt. In 2020, forest fires were minimized by 82%; In 2019, emissions from forests and land use were reduced by 40.9% compared to 2015; Deforestation has also fallen to its lowest level in the last 20 years.
“All of this was accomplished when the world lost its primary forests by more than 12% last year [and] when many developed countries experienced the largest forest and land fires in history.”
Indonesia’s achievements were acknowledged and lauded by US Special Envoy for Climate John Kerry.
“[Given this proclamation], if the EU proceeds with this measure, it might need to be careful about what it wishes for,” said Hegarty.
“And it also needs to be prepared for some raised ire; not just from Indonesia, but also from other ASEAN members – maybe even a trade war.”