Indonesia and Malaysia: ‘Please use our Palm Oil’

19 July 2017 Jarryd de Haan, Research Analyst, Indian Ocean Research Programme

Background

The Indonesian and Malaysian trade ministers met in Kuching, capital of the Malaysian state of Sarawak, on 13 July. During the meeting, the issue of palm oil was discussed, as was the recent European Union (EU) resolution on palm oil and rainforest deforestation, which was adopted in April. According to the press release, both ministers ‘expressed deep disappointment on the unfair treatment by the EU on palm oil in favour of other vegetable oils and commodities which also contribute significantly to deforestation’, adding that the resolution ‘will adversely affect not only exports of palm oil from Malaysia and Indonesia to the EU market but also the livelihood of millions of small holders.’ The EU resolution, which was passed in April this year, calls for a single certification scheme for palm oil entering the European market as part of wider efforts to curb deforestation and illegal logging. Indonesia and Malaysia are expected to discuss the issue again later this month.

Comment

Palm oil exports to the EU make up a significant portion of total exports for Indonesia and Malaysia, with both countries having exported $46 billion worth of palm oil to the EU in the past ten years. Indonesia-Malaysia Palm Oil Exports to EUAs seen in Figure 1, however, palm oil exports to the EU have fallen dramatically since 2014. This trend is not unique to the EU. In terms of trade value, global imports of Indonesian-Malaysian palm oil fell by $14.5 billion from 2011-16, a reduction of 32 per cent. A major factor behind it is the commitment by the Netherlands, which accounted for sixty per cent of Indonesian and Malaysian palm oil imports in 2012, to only use certified sustainable palm oil, causing imports from the two countries to halve between 2012 and 2016. In the case of Indonesia, an additional factor contributing to that decline could be a moratorium on the granting of new permits to clear rainforests and peatlands. If enforced, the moratorium would constrain the expansion of palm oil plantations and, in combination with increased domestic demand, would result in declining exports.

Despite recent campaigning by Indonesian President Joko “Jokowi” Widodo with the Netherlands, Spain and Norway, it is unlikely that the EU will adopt a more lenient stance towards palm oil originating from South-East Asia. Both Indonesia and Malaysia have been aware of the negative perceptions surrounding palm oil for some time and have discussed efforts to counter it, efforts which so far have failed. Instead of activism, or simply claiming that the linkages between palm oil and deforestation are “baseless”, both leaders should look at making sure palm oil producers are compliant with EU standards.

That may be difficult, however, given that only a small number of palm oil plantations adhere to the national standards of sustainability that are defined by the Indonesian Sustainable Palm Oil Foundation (ISPO) and Malaysian Sustainable Palm Oil (MSPO). ISPO and MSPO are known to be less transparent, and have fewer criteria than the requirements of the Roundtable on Sustainable Palm Oil (RSPO), which is known as the main certification standard. Additionally, the EU Parliament openly criticised these three certification standards in its April resolution, meaning that the single certification scheme put forward by the EU will have even more stringent criteria than the abovementioned standards.

While it will be difficult for Indonesia and Malaysia to satisfy EU standards in the near future, it is not all bad news for their palm oil industries. India and China both continue to be the major destinations for palm oil exports from both countries, accounting for 32 per cent all exports, whereas the EU accounts for thirteen per cent. Exports to India and China are less likely to be held back by a lack of certification standards which is good news for the Indonesian-Malaysian palm oil industries, but less so for the environment. The future course of action for the Indonesian and Malaysian Governments will likely be continued protests against the EU while looking to expand into more receptive, less regulated markets. It seems unlikely that neither country will be able to (or even willing to) reform its entire palm oil industry for the sake of continued access to the EU market. That may not be the best course of action, however, as its conformance (or otherwise) with the EU standards could heavily influence perceptions of South-East Asian palm oil in the global market in the longer term future.

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