26/09/2023 (DW) - The European Union (EU) intends to phase out imports of palm-oil-based biofuel by 2030 — while deforestation legislation adopted in Brussels earlier this year will impose considerable administrative burdens on palm oil exporters wanting to sell their goods in the bloc.

The new rules aim to remove deforestation from the supply chains of a range of everyday items sold in the EU, including palm oil.

Malaysia and neighboring Indonesia, the world's two largest palm oil producers, have reacted angrily to what they perceive as European protectionism.

There are concerns that intended environmental benefits of EU legislation could be nullified if the two palm oil producers come to depend on China for their exports.

Palm oil boost for China

Investment deals between Malaysia and China to the tune of €3.9 billion ($4.1 billion) were inked earlier this month at the China-ASEAN Expo.

Malaysia's state-owned Sime Darby Oils International and China's Guangxi Beibu Gulf International Port Group signed a memorandum of understanding for a €500 million trading and distribution center for refined palm oil in the Chinese city of Qinzhou, according to Japanese news outlet Nikkei Asia.

Malaysian Prime Minister Anwar Ibrahim said during the expo that his country will double its palm oil exports to China to 500,000 tons annually within a few years.

"This is the first time that China has asked for a big increase. Usually, it depends on price rates and considerations, but this time it's a fixed import agreement from China," Anwar said, according to local media.

It will, he added, "undoubtedly secure the interests of smallholders and small-scale palm oil producers" in Malaysia.

EU import cut just a way to protect Europe-produced biofuels?

Brussels' attempts to improve palm oil cultivation in countries like Malaysia could be "neutralized" if exporters turn to alternative markets, such as China, said Bridget Welsh, an honorary research associate of the University of Nottingham's Asia Research Institute Malyasia.

This not only makes Malaysia and Indonesia dependent on China — but it also closes out the EU from the marketplace in the future and creates more favorable conditions for China imports, she pointed out.

In addition, the EU's reputation remains damaged by a policy that is "driven by protecting its own vegetable oils at the expense of Southeast Asian producers," Welsh said, a reference to allegations that EU directives are merely intended to benefit Europe-produced biofuels such as rapeseed and sunflower oil.

Because much of Indonesia's palm oil sector is under Malaysian ownership, a shift by Malaysia towards Chinese markets would also likely affect palm oil producers in Indonesia, said Kevin O'Rourke, a Jakarta-based analyst and principal at consultancy Reformasi Information Services.

Palm oil production in Malaysia fell by 2.3% in the first half of this year, according to the Malaysian Palm Oil Board — while the state-owned FGV Holdings reportedly saw its revenue halve over the same period.

Frederick Kliem, a research fellow and lecturer at the S Rajaratnam School of International Studies in Singapore, said the inevitable risk of "leakage"— when exporters relocate to markets with fewer or no environmental restrictions — should not prevent the EU passing environmental legislation.

However, Malaysia's potential pivot towards China ought to be a reminder that "trade restrictions should be a last resort, applied very cautiously after all other avenues have been explored," Kliem added.

Shared vision

All sides to the spat have stepped up dialogue this year in an effort to resolve their differences.

The EU has sent numerous delegations to Malaysia and Indonesia to explain its initiatives which, it says, intend to improve environmental standards worldwide, an essential aspect of EU foreign policy.

EU officials stress that they haven't imposed a blanket ban on palm oil and note that EU markets imported almost 4 million tons of palm oil between July 2022 and June 2023 — albeit down almost a fifth from the previous year.

"The European Union remains a major consumer of palm oil globally," said Bernd Lange, chair of the European Parliament's International Trade Committee.

"Considering the EU's vast consumer base and its affluent middle class, it's anticipated that this market will remain attractive to exporters," Lange added.

"Both the EU and nations like Malaysia share this common vision. My dialogues with representatives from Malaysia and Indonesia have been extensive on this topic."

"Now, our task is to synergize our strategies and collectively address both challenges and potential avenues for collaboration. We need to approach this in unity with producing nations," said Lange.

Chris Humphrey, executive director of the EU-ASEAN Business Council, said that EU directives will add compliance burdens on exporters but if those sellers "are compliant that burden should not be too onerous and therefore the EU market will remain a viable one."

It is also possible that if Malaysia and Indonesia can improve palm oil sales to China, it will negate some of the ill will felt against the EU.

https://www.dw.com/en/malaysia-is-boosting-palm-oil-flow-to-china-defeat-for-eu/a-66927158