The pitfalls of Malaysia’s palm oil defence

As palm oil trade tensions drag on, Malaysia has slated another round of EU lobbying and a joint World Trade Organization (WTO) dispute filing with Indonesia for November 2019.

These are two of many strategies that are being deployed by Putrajaya to halt the European Commission’s Delegated Act. The Act aims to restrict and eventually phase out high indirect land-use change (ILUC) biofuels (biofuels whose production involves deforestation and high carbon emissions) from being counted in contributions towards renewable energy targets. Considering that palm oil has been identified as a prime cause of deforestation, Malaysia’s EU-bound exports that go towards fuel production are directly in the line of fire.

Malaysia has launched a 2019 ‘Love MY Palm Oil’ campaign to limit palm oil’s bad press and to establish a counter-narrative on its benefits. Meanwhile, the industry is shoring up exports to alternative markets, such as India and China. Putrajaya is also gunning for Malaysian Sustainable Palm Oil (MSPO) certification, while halting plantation expansions and focusing instead on improving palm oil yields to prove that the commodity can and does dovetail with environment-conscious frameworks.

While these strategies could bring about a resolution in Malaysia’s favour in the near-to-medium term, they may not address the sustainability issues bedevilling the palm oil debate, leaving it vulnerable to attacks in the long run.

That Putrajaya is looking for a quick fix is understandable. The industry contributed 3.8 per cent to GDP in 2017 and supports the livelihoods of around 4 million people. At 12 per cent, Europe is the second-largest importer of Malaysian palm oil. In a global economy rife with headwinds and debt issues — and the ever present need for politicians to secure the palm oil smallholder vote — the Mahathir administration’s multipronged strategy is unsurprising.

To resolve the dispute, negotiations and the building of a solid case in the WTO are of prime importance.

It is unclear whether the EU will budge on the Delegated Act barring WTO intervention. But judging by the environmental strikes mushrooming across the European continent and gains by the European Greens in the last European Parliament vote, sentiment is not leaning towards an embrace of the commodity.

Much depends on how the Act is implemented. Malaysia may well have a case when it comes to negotiations in the dispute settlement process should the consultation phase prove fruitless.

The Act could contravene the EU’s General Agreement on Trade and Tariffs (GATT) obligations. Countries must avoid discrimination against like products. Generally, like products have been determined by whether or not the end products, not the production processes, have similar characteristics. Biofuels that emit high emissions when used, for instance, are different from biofuels that do not. But biofuels produced from sustainable processes, such as those produced on non-ILUC land, are not different as a final product from biofuels produced on deforested land.

Under the Delegated Act, biofuels such as soybean oil are considered acceptable despite yielding less oil per hectare planted compared to palm and despite being identified as a major driver of deforestation. Given this, ILUC-based sustainability rules may be considered a non-trade barrier rather than a justified non-trade measure.

While discrimination against palm oil is mainly unwarranted, none of the above strategies — save for MSPO certification and plantation caps — address valid concerns about the commodity’s sustainability. Even then, compared to the Roundtable on Sustainable Palm Oil (RSPO) certification, the MSPO has generally been viewed as less stringent in its sustainability standards, making Putrajaya’s attempts appear insubstantial.

Pitted against more sustainability-minded governments, MSPO certification is unlikely to turn the tides in favour of Malaysian palm oil. But it may raise the commodity’s credibility in alternative export destinations, as emerging markets could legitimise greener reputations under divergent sustainability-governance frameworks.

As of August 2019, Putrajaya has been largely silent on future plans to upgrade MSPO requirements. This has elicited opposition among some environmental organisations, with calls to use RSPO-plus standards devised by the Palm Oil Innovation Group, a broad coalition of international civil society groups.

Likewise, little talk has emerged on strengthening palm oil supply chain visibility so sustainable palm oil sources can be better distinguished and more effective policies can ensue.

At the multilateral level, both Malaysia and Indonesia have reached out to ASEAN to halt the EU’s strategic partnership upgrade. But neither have tapped into regional governance mechanisms to tackle how the financial sector — mainly ASEAN banks from Singapore, Indonesia and Malaysia — fund the palm oil industry’s less-than-green growth in the region.

Not all banks are holding clients to high environmental, social and governance standards, though winds of change have accelerated since the launch of the Sustainable Development Goals and the 2018 EU Action Plan on Sustainable Finance. Improving sustainable banking in ASEAN could help lay the foundations for long-term growth in palm oil exports, insulating it from further criticisms on the green front.

The march towards sustainability is gaining momentum, despite the uneven attention it receives globally. Setting the bar higher for palm oil sustainability merits much greater consideration when it comes to assessing Malaysia’s palm oil defences.

Amalina Anuar is a Research Analyst with the Centre for Multilateralism Studies at the S Rajaratnam School of International Studies (RSIS), Nanyang Technological University (NTU), Singapore.

This article is republished from East Asia Forum under a Creative Commons licence. 

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