Trade wars usually end badly

The US decision to slap tariffs on European aircraft and agricultural products after getting the go-ahead by the World Trade Organisation (WTO) is set to spin into a trade war, close on the heels of an ongoing trade war between the US and China.

Global growth outlook is now forecast to be at a slower pace with a weaker global trade scenario as tensions continue to escalate among the top economies of the world.

Outgoing European Commission president Jean-Claude Juncker touched a sensitive nerve with his remarks on the transatlantic relationship which has now been threatened by the latest WTO ruling.

“Trade wars are easy to start, but escalate quickly and end badly. Whoever starts a trade war will end badly in his own camp.”

WTO ruled that the US can impose tariffs on US$7.5 billion of EU products.

The US is expected to impose a 10% tariff on airbus aircraft and 25% duty on agricultural and industrial goods effective October 18.

When the EU reminded US that trade wars start easy but end badly, it should have been reminded on how its trading partners in Asia felt when the EU Delegated Act banned the use of palm oil biofuels.

Juncker also highlighted that trade was more than numbers as it involved livelihoods and jobs.

The EU Delegated Act bans palm oil biofuels from Europe as of 2030 while the phase out of palm oil biofuels will commence in 2024.   Malaysia and Indonesia have planned to take the issue to the world trade body.

Europe’s decision to ban palm oil has put a dent to the efforts put in by producers to meet the demand for certified sustainable palm oil (CSPO).

Companies have embraced the RSPO, MSPO, ISPO and ISCC certification schemes to ensure they fulfil the demand from European buyers for certified sustainable palm oil.

The high yield and relatively low price of palm oil has attracted its use in the biodiesel sector and its demand in Europe.  Only palm oil biofuel has been singled out as ‘high risk’ under the Delegated Act based on claims of deforestation.

Prime Minister Tun Dr Mahathir Mohamad, in an opinion column, referred to the Delegated Act as a misguided policy designed to protect the agricultural industries of a few member states.

Although the French Ambassador to Malaysia was quoted as saying in the NST that the European market will remain open for palm oil, the competitiveness of palm oil biofuels will be eroded with the withdrawal of subsidies.   This was meant to protect the local oilseed sector.

Tun Dr Mahathir also pointed out during the recent UN General Assembly that due to inability to sustain the competitiveness of their own edible oils, a campaign was mounted to ban palm oil, with claims that palm oil is poisonous to health, destroy the habitat of long-nosed monkeys, reduce carbon dioxide absorption and so on.

Dr Mahathir defended palm oil at the recent UN General Assembly in New York, saying that “it is a classic case of the denial of free trade’.

He pointed out that Malaysia’s forest cover currently stood at 55.3 percent, exceeding the pledge made at the Rio Earth Summit in 1992 to maintain at least 50 per cent of the country’s landmass under forest cover.

That pledge was made three decades ago when as Malaysia’s Prime Minister he committed that Malaysia will maintain at least 50 percent of our land mass under forest cover.

This is far greater than that of most European countries.  According to Eurostat, forest cover within the EU-28 in 2015 was at around 38.0 % of its total land area. Although above the world average of 30.7 %, it’s far less than Malaysia.

The Prime Minister added that the Malaysian government has set the maximum arable land for oil palm cultivation at 6.55 million hectares by 2023

Despite much talk about free trade, the Prime Minister said that new regulations were being introduced all the time which were detrimental to the development of poor countries and this was evident in the Trans Pacific Partnership agreement.

Trade wars were also wasteful and would stultify the potential for everyone to become rich.

Indeed, regulations like the Delegated Act are detrimental to the development of poor farmers who depend on oil palm as a source of income. It puts a dent to their standard of living.

“We appeal to the good sense of the rich not to impoverish us, not to deprive hundreds of thousands of our workers from earning a living. You will be doing a good deed by consuming palm oil,” the Prime Minister said on the ban on the import of palm oil proposed by the European countries.

A new line-up in the European Parliament, Commission and Council means new policies and new demands on the food and agriculture sector. New policies may not mean better outcomes if these hinder free and fair trade.

According to Ag Perspective, Health Commissioner-designate Stella Kyriakides was asked by MEP’s to reduce use of pesticides, get rid of endocrine disruptors and glyphosate, say no to GMOs and ensure food imported into the EU complies with the same standards as Europe’s.

This means further compliance to EU standards are expected.

For the palm oil sector, new policies 7 standards, environment compliance demand and health related concerns mean we must be better prepared for a more long term strategic plan that addresses and meets the new global requirements.

The EU passed a Delegated Act on June 10 to restrict and ban palm oil biofuels by 2030. If it’s not a ban, then what exactly is it?

Inward looking regulations like the Delegated Act will only have limited outcomes and, referring to Juncker’s caution, “whoever starts a trade war, will end badly in his own camp”.

Belvinder Sron is the Deputy CEO of MPOC