Another EU Hurdle for Palm Oil Imports?
The European Commission (EC) is to determine new methodology to identify which biofuels, biomass and bio-liquids pose the greatest climate risks based on High Carbon Stock (HCS) and Indirect Land-use Change (ILUC). This stems from concerns that biofuels production may lead to deforestation as a result of conversion of carbon-rich land to crop-land. Deforestation would lead to an increase in greenhouse gas (GHG) emissions.
The methodology will be prepared in 2019 to recommend whether and how biofuels that are defined as ‘high risk’ are to be phased out. It is expected that the phase-out will take place in 2030. However, ‘high-risk’ biofuels are likely to be frozen at their import levels in 2019.
This was confirmed by the French Ambassador to Malaysia, the Hon. Frédéric Laplanche, in comments to The Edge Financial Daily in July: “Firstly, there is to be no discrimination. But there will be criteria defined in the coming years to differentiate the biodiesel that has a positive impact on climate change as compared to the traditional fuels and the ones that have a negative impact. We have to tackle this problem together. What we want to do now in order to face this transition period is to work with the producers in the respective countries to see what we can do.”
Transport & Environment, a Brussels-based NGO, has already begun lobbying to have ILUC/HCS applied to palm oil. Biofuels Officer Cristina Mestre, said: “The law plainly states that the EC needs to come up with a robust methodology to phase out biofuels with high ILUC risk and which are grown on HCS land: “That’s palm oil and soybean in all but name. It’s crucial for the [EC] to honour its promise by the deadline of February next year, which is two months before the EU elections.”
Both these comments indicate the uphill task that palm oil-producing countries will face. Early preparation is necessary to ensure that palm is not placed in the ‘high-risk’ category. Apart from providing food security to the world, the versatile palm oil is extensively used in the non-food sector and is popular as a renewable energy feedstock.
Excluding Malaysian palm oil based on claims of low or negative GHG savings would have to be highlighted as an unconvincing argument. World Resource Institute estimates reveal negative GHG emissions for Land-use Change and Forestry (LUCF), by 129 MtCO2 for 2014 alone. Malaysia’s LUCF policy functions as a CO2 sink. Furthermore, according to the World Bank’s World Development Indicators, Malaysia’s land area attributed to forests had increased from 65.7% in 2000 to 67.6% in 2015.
Economist and newspaper columnist Martin Khor, in an article headlined ‘Good and bad in trade war’s twist’, in the STAR in July, notes that many developed countries spend hundreds of billions of dollars in subsidies and maintain high tariffs to keep their farms in business.
“The US and EU also flood the world market with their artificially cheapened farm goods, while insisting that developing and poor countries open their markets through lower tariffs for both agricultural and industrial products. This hypocritical practice is at the heart of the imbalances and inequities of the world trading system,” he writes.
In addition, the prospect of trade wars has emerged in recent months, with some countries resorting to tariffs to protect their economy. The most common reason is increased competition from imported products, often produced at lower prices and therefore affecting the profitability of domestic products.
For instance, palm oil has attracted protectionist measures because it can be produced at a more competitive cost than the rival oils and fats available globally. In the past, countries such as France, Belgium, Switzerland, Norway and Italy have tried to impose restrictions on palm oil imports. Such attempts are expected to continue.
Sometimes, bans or trade barriers are imposed as a retaliation strategy when rules are not observed by a trading partner, or when a government feels it needs to protect its population from products that may affect human health.
Whatever the reason, there are no winners in a trade war. Ultimately, the consumer is denied the benefits of free trade, which enable a wider choice of products at a lower price.
Palm oil and bilateral trade
The palm oil industry is a pillar of socio-economic development in producer countries like Indonesia, Malaysia and Thailand. It provides job opportunities, creates spin-off economic activities and generates a significant amount of foreign exchange for these developing countries.
In Malaysia, 650,000 small farmers manage 40% of the oil palm crop. Indonesia’s smallholders are responsible for 60% of the oil palm planted, while Thai agriculture supports a significant farming community. Small farmers would be most vulnerable to any ban, tax or other non-tariff barrier imposed on palm oil. Therefore, producer countries would act from any position of strength to fend off threats.
Discriminatory measures imposed by the EU, for example, could significantly affect bilateral trade and create difficulties for its member-states. A report by Copenhagen Economics states that EU goods exports to Indonesia, Malaysia and Thailand amounted to EUR 39.5 billion in 2017 and supported at least 354,000 jobs in the EU.
The products are concentrated within five sectors, which contribute 76% of the EU exports to Indonesia, Malaysia and Thailand. The largest sectors are machinery and electrical equipment (EUR 14.1 billion); transportation equipment (EUR 6.7 billion); and chemicals including pharmaceuticals (EUR 5 billion). The others are measuring instruments (EUR 2.6 billion) and metals (EUR 1.8 billion).
The EU member-states with the largest value of goods exports to Indonesia, Malaysia and Thailand are Germany, France and the UK. Germany alone exported goods worth EUR 12.4 billion, or about 30% of the EU total to the three countries in 2017. France and the UK had the second- and third-largest exports, while Italy and the Netherlands come in fourth and fifth respectively.
Coping with trade barriers is only one part of the equation for palm oil-producing countries. Government agencies and the private sector need to work together to find new ways to tackle multiple challenges. For a start, raising the value of palm oil would benefit small famers and the overall industry. Consumers in both mature markets and developing countries are much more sophisticated today, and demand quality products.
While the non-food sector is important, the food sector should remain the focus. This supports comments by Thomas Mielke Oil World Executive Director, who noted that the food industry should be the primary focus of industry players as it used 70 per cent or 45.5 million tonnes of palm oil, whereas the use of the commodity in biofuel accounted for only 17.8 per cent or 11.6 million tonnes.
Branding plays a large role in this. Some may argue that commodities that are similar and which can be substituted have little opportunity for value addition through branding. However, the market for bottled water proves otherwise.
Over the past two decades, bottled water has become the fastest-growing beverage in the world. It was worth US$157 billion in 2013, with potential to reach US$280 billion by 2020. The key is innovation, with the introduction of new products claiming to impart health benefits and different flavours.
Malaysian palm oil can similarly be branded successfully. We need to find the sweet spot that will help unlock its true value and make it desirable to the consumer. With a 100-year history behind the industry, there must be a Unique Selling Point (USDP) that can be marketed globally. Branding efforts should start now, if Malaysia is not to miss the opportunity to elevate its palm oil as the preferred product.
Deputy CEO, MPOC