Malaysia – EU FTA – Why an annex on vegetable oils is important
On 10 September 2010, the Member States of the European Union (EU) agreed that the European Commission (EC) could start negotiations with Malaysia aimed at the conclusion of a free trade agreement (FTA) between the two trading partners. This decision was adopted in the aftermath of the suspension of FTA negotiations between the EU and the Association of Southeast Asian Nations (ASEAN).
In reality, in the context of the ASEAN meeting of Economic Ministers held in Cambodia in May 2009, the two regional blocs agreed to defer ongoing FTA negotiations, which had been officially launched in May 2007 with a view to fully implement a bilateral FTA by 2015. Following the suspension of bilateral ‘bloc to bloc’ discussions, the EU has pursued the strategy of seeking to conclude FTAs with individual ASEAN Member states, which would eventually serve as ‘stepping stones’ for a future EU-ASEAN FTA. Thus far, the EU has concluded a FTA with Singapore and is conducting negotiations with Malaysia, Thailand and Vietnam.
Two complementary trading partners
The EU and Malaysia are two very different economies that complement each other. Malaysia mainly exports electrical and electronic products, as well as palm oil, chemicals and chemical products, rubber products, optical and scientific equipment to the EU and imports electrical and electronic products, machinery, appliances and parts, chemicals and chemical products, transport equipment and iron and steel products. Therefore, together with industrial goods, commodities amount to an important part of bilateral trade between Malaysia and EU.
As demonstrated by its recent trade negotiating history, the EU is in general terms, a flexible negotiating counterpart. It is ready to conduct open and frank bilateral discussions with a view to adopt, in its FTAs, the approach that allows both trading partners to make the most of their agreement. Indeed, it is important that each FTA is tailored to the specific profile and needs of its parties. Malaysia must seize this opportunity and aim for the FTA with the EU that provides for the utmost possible benefits. Malaysia must make the most of the ongoing FTA talks.
First and foremost, the FTA between Malaysia and the EU needs to reflect the parties trade priorities, paying special attention to those products and sectors that deserve special care. Form Malaysia’s standpoint, palm oil is clearly one of those products.
The importance of palm oil
Data indicate that Malaysia exports a large percentage of its palm oil production to the EU. In recent years, the EU has imported around 2.4 MT/year of palm oil from Malaysia for a value of nearly EUR 1.5 billion.
Yet, palm oil (and its derived products, especially those related to its food and biofuel applications) is subject to a number of severely restrictive policies and schemes in the EU (as well as in many other export markets). By way of example, the EU has legislation in place (the so called Food Information Regulation) requiring that foodstuffs containing any vegetable oil carry a label clearly indicating the specific vegetable origin of such oil. Although this provision applies to all vegetable oils, and not to palm oil alone, it is clear that, in synchrony with other initiatives specifically targeted against palm oil, this requirement may have particularly negative effects on palm oil.
In addition, certain EU Member States (for example : Belgium) have recently seen legislative proposals tabled in their national parliaments that seek to lower palm oil consumption by limiting the amount of palm oil in food products. Moreover, a tax on palm oil consumption (popularly known as the ‘Nutella tax’) has been repeatedly discussed before France’s Parliament. Although none of these draft measures has been adopted, their mere existence testifies to the fact that (unsubstantiated) concerns related to palm oil’s nutritional properties or environmental foot print are shaping the debate among EU decision-makers despite the lack of credible scientific arguments justifying these concerns.
When it comes to its applications as a biofuel feedstock, palm oil stands to be seriously affected in the EU by the bloc’s legislative framework on biofuels (notably, the so-called Renewable Energy Directive and Fuel Quality Directive). This framework imposes a number of stringent ‘sustainability criteria’ for biofuels and foresees that only biofuels that satisfy certain requirements are eligible for, among other benefits and incentives, financial support. Needless to say, palm oil based biofuel is not among those that immediately meet the requirements at hand. Moreover, this framework stands to be further tightened by a draft directive currently undergoing the legislative procedure (for example: the so-called ILUC proposal), which sets the path to start the transition to non-food based biofuels. The draft EU directive envisages granting ILUC (for example: indirect land use change) emissions factors to biofuels on the basis of their feedstock, where palm oil based biofuel is accorded the highest ILUC emissions factor. Although it is not yet clear whether the attribution of such factors will be finally factored in the calculation of biofuels overall environmental impact, discussions entertained in relation to the draft directive reveal, once again, that unjustified concerns over palm oil may have dangerously influenced EU legislators and regulators.
These policies and schemes affecting the food and biofuel industrial applications of palm oil have been repeatedly challenged by different actors and within different fora. ,
The opportunities offered by a sectoral annex
In fact, this ensemble of anti-palm oil initiatives can be framed within the context of a wider campaign targeted against palm oil, largely orchestrated by the EU’s (competing) industry and waged in suspicious synchrony by both public instances and private operators. Against this background, Malaysia (as a Government and not as an industry or through its private business entities) has a number of instruments at its disposal, which it must wisely activate in order to challenge and address these damaging practices. In particular, the Malaysia- EU FTA provides for an excellent opportunity to stop and reverse this tendency. If wisely crafted, the inclusion of specific provisions addressing the relevant matters from an overarching inter-governmental perspective, would lay down a framework banning the damaging schemes that target palm oil in the EU and /or in certain jurisdictions thereof.
Ideally, such provisions should adopt the form of a sectoral annex attached to the EU-Malaysia FTA Agreement and covering vegetable oils. Its scope of application, to be agreed upon by Malaysia and the EU in the context of the on going negotiations, should be clearly laid down in an appendix, which would list the customs codes of the covered products in a clear, comprehensive and unequivocal manner. In addition, it is important that the annex incorporates language laying down a framework that permits to effectively address the trade obstacles and other problems hindering access of Malaysian vegetable oils (mostly, of course, palm oil) to the EU’s market.
The sectoral annex on vegetable oils should open with a provision stating the parties shared objectives with respect to vegetable oils, including the commitments to enhance trade in such products (by eliminating tariff and non-tariff trade barriers), to establish a market governed by competitive conditions (example: accordance with the principles of non-discrimination, openness, transparency, etc) and to address unfair commercial practices affecting trade in the concerned goods. In this sense, general and overarching principles like the prohibition of discrimination (vis –a – vis domestic products and products originating in third countries) should be expressly included.
Specific language should be included in order to address the current ‘no palm oil’ labelling campaigns in the EU. It is imperative that decisive concepts like those of ‘unfair commercial practices’ and the ‘appropriate measures’, which must be adopted to counter them, be defined. Indeed, a careful drafting of the annex will lay down the necessary framework to effectively outlaw advertising and marketing campaigns against palm oil, as well as to prevent that new and ‘creative’ schemes are put in place in the future.
In addition, a mechanism should be laid down in order to ensure that access of vegetable oils and biofuel derived there from (at least, where certified sustainable) to the EU not be hindered by ‘sustainability requirements’ or similar policies. The Malaysia-EU FTA should envisage, possibly on the basis of the Malaysian Sustainable Palm Oil (MSPO) certification scheme, a licensing scheme whereby vegetable oils (including palm oil and derived products) produced according to specific criteria, are to be considered ‘sustainable’ for purposes of the relevant EU legislative frameworks (in particular, of the EU’s framework on biofuels). The details of such scheme (the development of which should be naturally guided by Malaysia) should be clearly set forth in the annex, possibly in an appendix thereto.
The benefits of including such a mechanism under the FTA would go far beyond the immediate tax-free status granted to the covered goods. It would amount to governmental recognition that certain goods are ‘sustainable’ and, by the same token, it would ensure that no policies or practices adopted on sustainability related grounds be triggered to exclude Malaysian palm oil from the EU. In addition, the benefits of this approach would likely extend to other fora. Recognition by a WTO Member that (at least, some) palm oil produced in Malaysia is ‘sustainable’ would surely pave the way for (sustainable) palm oil to benefit from advantages accorded in the context of ongoing or future negotiations, such as the WTO negotiations for an Environmental Goods Agreement (for example: plurilateral trade agreement aimed at promoting green growth and sustainable development by liberalising trade in environmental goods).
Additionally, provisions in the sectoral annex require that any regulation enacted by Malaysia or the EU affecting vegetable oils be based (to the largest possible extent) on existing international standard and guidelines and be subject to enhanced transparency provisions. In this sense, the sectoral annex could accommodate any trade-facilitation mechanism that were to be deemed convenient and appropriate. Likewise, an institutional framework (including a dedicated working group to be set up) should be agreed for purposes of overseeing the proper implementation of the sectoral annex.
Clearly, both Malaysia and the EU have a lot to win from the ongoing bilateral FTA negotiations. Throughout this process, it is imperative that Malaysia remain aware of the full range of possibilities offered by the negotiations, so that the resulting bilateral agreement may allow both parties to boost trade in the key areas. In this sense, the negotiation and conclusion of a sectoral annex on vegetable oils stands to play a vital role to effectively address the market access hindrances that Malaysian palm oil is currently facing within the EU. To this end, business operators need to ensure that they maintain fluent and transparent communications with the relevant authorities, in order to secure that their legitimate commercial interests are duly considered at the relevant instances.
Paolo Vergano is a partner at Fratini Vergano European Lawyers, Brussels where he deals mainly with international trade. He holds a Master’s degree in International Business and Trade Law from the University of Fordham’s School of Law in New York, USA. He started his trade career in 1995 and has worked in Washington, DC and Brussels, Belgium. Paolo is currently pursuing a Ph.D. in international trade law at the University of Bern, Switzerland and is a regular speaker at conferences around the world on international trade issues .