Forget US-China, the Malaysia-Indonesia-EU trade war may be upon us

Forget US-China, the Malaysia-Indonesia-EU trade war may be upon us

27 May 2018

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EU/SE ASIA – A trade war is looming between the European Union and the world’s biggest producers of palm oil, Indonesia and Malaysia, over proposals to strip biofuel off the menu of renewable energy sources member states may use to reduce their greenhouse gas emissions.

At issue is the US$39 billion palm oil industry. Indonesia and Malaysia are the world’s two biggest producers of the crop, used in everything from fuel to cosmetics to cookies.

Last month Luhut Pandjaitan, coordinating minister for maritime affairs and a close lieutenant of President Joko Widodo, warned of retaliation if the government sensed the EU, the second-largest importer of palm oil, was cracking down on the commodity in favour of its own crops.

The stand-off pits environmentalists against big emerging economies who argue worries over deforestation and carbon emissions are exaggerated and are a fig leaf for protectionism that deny small scale farmers reliable income. Environmentalists say cultivating palm oil contributes to deforestation and carbon emissions.

“Palm oil is still a leading cause of deforestation,” said Kiki Taufik, global head of Greenpeace’s Indonesia forest campaign. “This is a direct response to the industry’s failure to address the problem.”

Palm oil has long been a bête noir for activists, prompting a consumer backlash against the product in Europe. In April, the British grocery chain Iceland pledged to remove palm oil from its own brand of foods.

Bringing matters to a head is a vote in January at the European Parliament, which if adopted by all member states and the European Commission, would stop biofuels from being considered renewable energy.

That’s a massive blow to palm oil producers. Less than half of the palm oil the EU imports is used in fuel.

There’s more bad news for palm oil producers. While there was already an effort underway to scale back biofuel use to roughly half its current level by 2030, the parliament wants the biofuel portion of renewables to be cut to zero within three years.

EU Ambassador to Indonesia, Vincent Guerend, says the vote did not amount to a ban – as has been widely reported in Indonesian media. While parliament voted by a four-fifths margin to remove biofuels from the list of renewables like solar and wind, they will still be available. Additionally, the vote is only the first step in a lengthy process. Tripartite talks between parliament, the European Commission and the member states will begin next week, he told This Week in Asia. The result, expected by September, is likely to reflect give and take from all three sides.

“There is a high probability that the text of the proposed amendment will not end up as it is now,” Guerend said. “Palm oil won’t disappear from fuel but it won’t grow either. It will plateau.”

Even so, Pandjaitan has warned the government may swear off Airbus aircraft for its military and for the state-controlled carrier, Garuda, if they think palm oil has been given a raw deal.

Pandjaitan’s colleague, Trade Minister Enggartiasto Lukita, has already put Norway on notice by threatening to ban fish imports after its parliament voted to exclude biofuels from government procurements.

Guerend said the Widodo administration had given assurances there would be no trade reprisals unless there was evidence the EU was discriminating against palm oil. When it comes to biofuel in the EU, rapeseed is king of a shrinking market. While it comprises 60 per cent of all biofuel now, demand for the energy source will shrink by a tenth by the end of the next decade, the European Commission has said. EU farmers, the world’s biggest producers of rapeseed, earn roughly US$3.2 billion from the crop each year. Even so, Guerend vows a final deal will treat all biofuel sources equally.

“We take threats of retaliation seriously,” Guerend said. “The final text will be WTO compliant.”

Energy rich and easy to grow in tropical climates, palm oil was promoted as an easy fix to the world’s addiction to fossil fuels.

Indonesia and Malaysia account for 90 per cent of global production of palm oil, which is expected to clock in at about 65 million tons. In Indonesia, production has ballooned fivefold since 2000.

In Indonesia, the industry directly employs almost 6 million workers and annually generates US$20 billion in export earnings. Half a million Malaysians earn a living from planting oil palm.

The trouble is that making more palm oil means clearing more land. In Indonesia, palm plantations cover an area of 12 million hectares, triple the area in 2000. In Malaysia, oil palm plantations cover 4.5 million tons.

Over the same period forest cover shrunk by almost 15 per cent, according to Global Forest Watch.

But massive fires in Indonesia in 2015 put a question mark over its sustainability.

Unusually dry conditions combined with slash- and- burn practices, often by small-scale farmers, in Sumatra and Kalimantan and on Sulawesi scorched 2.6 million hectares of forest and peat land.

Haze choked villages, closed schools and grounded planes. The World Bank estimated the fires, which burned for months, cost the Indonesian economy US$16 billion – double what the 2004 tsunami cost.

“The fires of 2015 were a giant wake up call,” said Fitrian Andriansyah, who heads the non-profit Sustainable Trade Initiative.

Up until then villagers would clear a small piece of protected forest or low lying peat land to plant oil palm. Mature oil palm fruit can earn US$1,200 a year per hectare. The Widodo administration banned clear cutting for new plantations and threatened local police chiefs with demotion if fires broke out on their turf.

It’s too soon to say whether a repeat of the 2015 fires will be avoided. Fires last year covered a tiny fraction of the area three years ago, though conditions were not as dry as they were in 2015. Still, the industry shows signs of mending its ways, said Adriansyah.

“The EU needs to acknowledge that progress has been made, but Indonesia needs to acknowledge there are still big gaps in the industry that need to be addressed quickly.

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