What are the EU’s options in the palm oil dispute with Malaysia and Indonesia?

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Brussels: The World Trade Organization (WTO) may soon rule on two cases brought against the European Union over its decision to phase out the import of unsustainable palm oil by 2030.

The complaints were filed by Indonesia and Malaysia, the world’s two largest palm oil producers, who called Brussels’ second renewable energy directive unfair and “discriminatory”.

The EU has sent mixed signals on the contentious issue.

On the one hand, its officials have made it clear that oil production is a leading cause of deforestation and therefore cannot meet renewable energy targets. There’s also a pollution problem – palm oil-based diesel emits up to three times more emissions than traditional petroleum-based fuel.

In early July, EU lawmakers passed draft rules for the ReFuelEU initiative, which would mean 85% of all aviation fuel would have to be ‘sustainable’ by 2050. palm would not be acceptable. And there is now talk in the European Parliament of bringing forward the final date for the elimination of palm oil imports, currently set at 2030.

At the same time, Brussels has tried to engage with palm oil exporters in recent months, including through the ASEAN-EU Joint Cooperation Committee meeting in Jakarta at the end of June.

And since the introduction of a renewable energy directive in 2018, EU palm oil imports have actually increased. In 2021, the EU imported €6.3 billion ($6.4 billion) worth of palm oil and palm oil products, mostly used for biofuels.

Indonesia and Malaysia accounted for 44.6% and 25.2% of these imports respectively. EU imports from Indonesia increased by 9% last year compared to 2020, according to Indonesian government data. Russia’s war in Ukraine, which began in late February, has put additional pressure on Brussels to secure its fuel supply.

The Malaysian and Indonesian governments have also tried to keep their options open in the EU row.

“Malaysia has often used both a cordial and confrontational approach on palm oil with the EU, not exclusively one or the other,” said Helena Varkkey, associate professor in the Department of International Studies and strategies of the University of Malaya.

Earlier this year, Malaysia’s Minister of Plantation and Commodity Industries, Zuraida Kamaruddin, denounced what she called “crop apartheid”.

“We will show them that Malaysia is not a nation to be mistaken with,” she said.

Last month, however, she said Kuala Lumpur wanted a cordial and “win-win” solution to the problem, referring to the World Trade Organization.

“WTO cases take a long time to resolve, so there would always be a need for countries to engage outside of the WTO during this process, and Malaysia probably sees the benefit of doing this amicably. “, said Varkkey.

And with the ongoing dispute, the Malaysian government is busy finding new markets. During his visit to Kuala Lumpur this month, Chinese Foreign Minister Wang Yi promised that Beijing would increase the country’s palm oil imports. China is currently the world’s second largest importer of the product, after India.
What if the WTO came out against the EU?

The WTO decision seems to be approaching. The panel to decide the case of Indonesia was formed in November 2020. A panel of the same members was formed for the case of Malaysia in July 2021. Both are chaired by Manzoor Ahmad, former permanent representative of Pakistan at the WTO. Members are Sarah Paterson from New Zealand and Arie Reich from Israel.

A senior EU official, who requested anonymity, said he expected a decision before the end of the year.

If the WTO panels were to rule in favor of Indonesia and Malaysia, Brussels has three options, explained Stefan Mayr, senior researcher at the Institute of Law and Governance at the University of Economics and Vienna trade.

First, the EU could appeal the panel report. But that could delay a final decision for years, as any decision would have to come after the appointment of new members to the WTO Appellate Body. The body is currently not functioning due to the blocking of new nominations by the United States.

The second option, Mayr noted, would be for the EU to comply with the WTO ruling and adapt the environmental policies established by the Renewable Energy Directive II. It’s unclear whether the EU could make cosmetic changes to its palm oil phase-out, while retaining the essence of the policy.

Finally, the EU could just go ahead regardless and accept all the retaliatory measures imposed by Indonesia and Malaysia.

This last option, however, does not seem too likely. A senior EU source with knowledge of the matter, who requested anonymity, said: “We will, of course, comply with whatever the WTO decides.”

Geopolitics and palm oil
If the EU were to ignore the decision, Indonesia and Malaysia would struggle to fight back economically, analysts say. According to data from the European Commission, Malaysia is only the EU’s 20th largest trading partner for goods; Indonesia is 31st.

But another EU official, also not authorized to speak publicly on the matter, speculated that Brussels would not want to unnecessarily frustrate two key players in Southeast Asia, where the EU is keen to strengthen its reputation and to sign new free trade agreements. Due to the energy crisis caused by the war in Ukraine, the official also expects EU palm oil imports to continue to grow in the coming years.

Moreover, Jakarta has one more card to play: it could limit the export of the raw materials necessary for the production of stainless steel. The EU filed a complaint against Indonesia at the WTO over this in November 2019.

“Which option the EU would choose is obviously not a purely legal question,” Mayr said.

“There are conflicting interests at stake and in light of the current geopolitical situation, it seems even more difficult to assess how the EU would react to an unfavorable outcome to WTO disputes.”

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