In May, the World Trade Organization (WTO) agreed to review a trade dispute between Malaysia and the European Union. The case, which was initially filed in January, is based on an EU directive that biofuel produced from palm oil will not count as a green fuel, and therefore will be phased out under new EU renewable energy targets. Indonesia filed a similar protest in 2020 which is also currently under review.
Palm oil, which is used in a wide variety of products, is complicated. According to the World Wildlife Fund, its production “contributes to rural poverty alleviation and rural development” while also causing “widespread rainforest destruction and wildlife loss.” Indonesia and Malaysia are the number one and two producers of palm oil, respectively. Together they account for around 84 percent of global palm oil production.
So it should surprise no one that they are presenting a united front in their efforts to ensure these products are not denied access to big markets. It also shouldn’t surprise anyone that the EU, in line with changing public opinion and consumer preferences mainly in higher income countries, is looking to green its supply chains and taking harder stances against environmentally unfriendly practices.
This is part of a broader EU effort to leverage its market power to ensure that products entering the trading bloc are more environmentally sustainable. Later this year the EU plans to release mandatory due diligence rules intended to reduce deforestation in its supply chains, a sharp step-up from what were previously mainly voluntary rules. As reported by Euractiv the new rules will “tackle a wide array of topics across global supply chains, from European businesses to smallholdings in developing countries. It will need to address human rights violations, trade and security issues, and combat the root causes of poverty which often drives deforestation.”
It’s basically a way of using market access as an incentive to force more sustainable business practices lower down on the supply chain. It’s not the first time the EU has used its giant market as a carrot to induce Southeast Asian trading partners to improve regulatory environments. In 2007, the EU banned all Indonesian airlines from entering its airspace due to what it considered poor safety standards. Gradually, the Indonesian authorities worked to improve their safety record and regulatory oversight and the ban was fully lifted in 2018.
Clearly, Indonesia and Malaysia see the EU’s moves on palm oil and biofuels as the first steps toward a much tougher stance on environmental standards that could kneecap some of their biggest exports. It will be really interesting to see how the WTO rules on this matter. The days when a country could defend environmentally unfriendly exports behind the veil of free trade seem like they might be behind us. And these kinds of political conflicts are likely to become more common, as countries are asked (or forced) to act against their own economic self-interest in order to mitigate climate change. As I’ve written before, countries that depend heavily on exports of fossil fuels such as Malaysia and Indonesia are not likely to give them up simply because it is good for the environment.
But in the case of palm oil there is a potentially more optimistic resolution. The production of palm oil is not, in and of itself, an environmental disaster. It’s not like coal, where the only real solution is to leave it in the ground. Palm oil can be produced sustainably – if it is carefully regulated. Indeed, waste from palm oil plantations can actually be gasified to create a source of renewable energy. It is the illegal concessions, over-permitting, and failure to enforce regulations against slash and burn practices that are among the causes of palm oil’s bad reputation. And these are things that can actually be ameliorated, as long as the political will is there to do so.
Much like the EU’s decision to deny Indonesian airlines entry to the market in 2007, this could be an opportunity for Indonesia and Malaysia to get serious about creating and enforcing a regulatory structure for the industry that can meet global best practices standards. Verifying that producers are complying with stricter labor, environmental and land use rules is not going to be easy but if that’s what it takes to get access to European consumers it might just be the incentive the industry needs.