Recently, Indonesia was faced with a problematic issue relating to the crude-palm-oil (CPO) industry as the European Union announced plans to ban the importation of the commodity. The EU claimed that environmental concerns were a strong reason for the ban, but a closer look suggests that European domestic interests were also a major incentive.
According to the Indonesian Palm Oil Association (GAPKI), CPO provides a very high contribution to EU vegetable-oil consumption, accounting for 80% of total imports of such products. Furthermore, in the period 2011-2016, Indonesia’s average CPO export to the EU was around 60% per year, with Malaysia accounting for the rest. However, the EU wants to increase the growth of domestic vegetable-oil production, specifically rapeseed, sunflower oil and soybean oil.
Indonesian President Joko Widodo and Malaysian Prime Minister Mahathir Mohamad met on August 9 in Kuala Lumpur to discuss several issues, including the discriminatory policy on CPO implemented by the EU. The result of the meeting was that Indonesia and Malaysia agreed to protest the EU’s ban on imports of CPO-based biofuel to the World Trade Organization (WTO).
The European Commission issued the Delegated Regulation Supplementing Directive 2018/2001 on March 13 as regards the issue of indirect land use change (ILUC). This regulation is a derivative of the EU’s Renewable Energy Directive II (RED II) regarding biofuels, including CPO.
As formally stated in a press release from the EU delegation to Indonesia on March 21, the Delegated Act is a legal framework to ensure the sustainability of bio-energy and ensure that the production of feedstock for biofuels is sustainable and does not cause deforestation through ILUC. The EU claimed that CPO is a commodity with a high risk of causing deforestation. Consequently, once implemented, the Delegated Act will gradually reduce the use of CPO-based biofuels throughout the EU to zero by 2030. That would be a nightmare for Indonesia’s palm-oil industry.
Most of Indonesia’a palm oil enters the EU with zero or very low tariffs (22% at zero duty and 55% below 5.1%), and thus the EU is the second-largest market for Indonesian palm oil (after India and ahead of China).
Political interests of palm oil ban
In principle, the Delegated Act aims to isolate and exclude palm oil from the renewable-energy sector for the benefit of rapeseed oil and other less competitive vegetable oils produced in EU member countries. Further, it is widely believed within the palm-oil industry that this Delegated Act constitutes political and economic protectionism, with the EU using environmental issues for its own interests rather than making science-based decisions.
Considering that the EU is a major producer of rapeseed oil and sunflower oil, it could be seen that the Delegated Act is an effort to encourage the growth of domestic vegetable oils, particularly those two.
Violation of WTO principles
The Delegated Act is not the first policy aimed at slowing the rate of CPO imports to EU member countries; in 2015, there was a policy to label products “palm oil free” as part of a campaign to save the environment and protect endangered animals. However, the Delegated Act may be in violation of principles of the WTO, particularly the principle of national treatment.
Article III of the General Agreement on Tariff and Trade (GATT) in essence stated that once imports have passed a national frontier, they must be treated no worse than domestic products. The laws, regulations and requirements affecting internal sales, which the WTO inherited from GATT, should not be applied to imported or domestic products so as to afford protection to domestic production.
It is evident that this principle puts the products of all of a country’s trading partners on equal terms with the products of the importing country itself. Therefore, as the import of palm oil will be reduced gradually and benefit rapeseed and other vegetable oils produced in EU member countries, the Delegated Act clearly neglects the spirit of this national-treatment principle.
Furthermore, as many have been aware, the Delegated Act was justified in terms of protection of the environment and rare animals. In that respect, the EU may also be in violation of the Technical Barriers to Trade Agreement, as it did not provide scientific information stating that palm oil is more dangerous to the environment than vegetable oils produced in EU member countries. The Technical Barriers to Trade Agreement is actually a fundamental regulation to ensure that technical regulations, standards, and conformity assessment procedures are non-discriminatory and do not create unnecessary obstacles to trade.
Article 2.2 of the Technical Barriers to Trade Agreement states that the regulation in connection with the protection of animal or plant life or health shall be accompanied by available scientific and technical information/scientific evidence. However, the fact is that the EU is not able to provide such relevant scientific evidence that clearly shows that biofuel produced from palm oil would do more harm or damage than biofuel produced from other vegetable oils.
The aforementioned provisions are the most clear and relevant evidence that by implementing the Delegate Act, the EU is neglecting the rules of the WTO.
Impact on Sustainable Development Goals
Another problem is the negative impacts the EU ban would have on oil-palm producers, particularly farmers. Enactment of the Delegated Act would negatively impact the agenda of the United Nations regarding its Sustainable Development Goals (SDGs), especially in connection with poverty eradication, which is expected to be accomplished by 2030.
Indonesia is one of the countries that consistently support the ideals of the SDGs, especially on the poverty issue, as Indonesia is a developing country. In Indonesia, the palm-oil industry is one of the biggest sectors helping the government eradicate poverty. According to GAPKI, during 2018, palm-oil production in Indonesia reached 47.44 million metric tons and involved more than 15 million oil-palm farmers. Increased palm-oil production has significantly reduced poverty in rural or remote areas, given that the industry is active in 25 of the 34 provinces of Indonesia.
In the current circumstances, the implementation of the Delegated Act would markedly decrease the productivity of palm-oil farmers as demand would drop significantly, which could lead to the failure of the government’s poverty-eradication campaign. Thus the EU should accept moral responsibility for the livelihoods of millions of people affected by its policies and should uphold its commitment to the SDGs agenda.
Even though the issuance of the Delegated Act was triggered by the issue of environmental protection, reducing or banning the import of palm oil is not a wise policy given that the EU has a favorable relationship with and palm-oil producers such as Indonesia. Therefore what is needed is an intensive dialogue on how to cooperate on finding ways to save our planet such as through a green palm-oil industry without ruining the international relationships.