Beware unexpected effects of palm oil export ban, say experts
15/01/2023 (Free Malaysia Today), Petaling Jaya - A veiled threat of a ban on palm oil exports to the European Union may well backfire, bringing with it unintended consequences, say economists.
The threat was made by Deputy Prime Minister Fadillah Yusof on Friday. Fadillah, who is also plantation industries and commodities minister, said the government is considering an export ban because of new deforestation regulations in the EU.
The new regulations are regarded as a trade barrier, Fadillah said.
Singapore-based Segi Enam Advisors senior economist Khor Yu Leng said while key politicians have been taking a more combative stance on rising compliance regulations from the EU, Malaysia’s palm oil suppliers are still keen to supply to the EU as it is a premium market.
She said bans can have “unexpected effects”, especially in a competitive landscape where Indonesia has been gaining market share in the EU and with big buyers.
Malaysia and Indonesia account for more than 80% of world palm oil supply. The EU accounted for 9.4% of Malaysia’s export volume in 2022 but exports have been declining since 2015.
Last year, Malaysia’s exports to the EU fell 10% from the previous year to 1.47 million tonnes. That represents a 40% plunge from 2.43 million tonnes in 2015.
Countries within the EU passed a historic law last December that will stop products causing forest destruction from being sold in European shops and supermarkets.
Products like wood, rubber, beef, leather, cocoa, coffee, palm oil and soy won’t make it past EU’s ports unless proven to be “deforestation-free”.
Fadillah said he will have discussions in Indonesia in February about a ban on exports to the EU. “We would have one stronger voice if we join hands with Indonesia,” he added.
While Fadillah thinks he can rope in Indonesia to take on the EU and US anti-palm oil lobby, the Indonesians may not necessarily be keen to go down this route.
Khor said Indonesia’s policy updates have been a key focal point for its government-to-government engagements with EU and others.
“Indonesia’s multi-pronged approach shows that it also takes pro-buyer and pro-climate action while voicing concerns from government to government,” Khor told FMT Business.
EU may take retaliatory measures
Sunway University economics professor Yeah Kim Leng thinks it is always better to use a “non-confrontational approach” to solving trade disputes as any ban will invite retaliatory actions that will be damaging to both palm oil consumers and producers.
“Fadillah’s response could be a negotiation tactic, but this could result in an adverse response that leads to a hardening in the bargaining positions of both the EU and Malaysia,” he told FMT Business.
University of Tasmania political analyst James Chin said this has been a long-standing issue since the 1990s. “The West is going towards sustainable forestry, and they do not appreciate (oil palm) plantations destroying virgin forests.”
However, he said the reality is that Malaysia cannot stop exporting to Europe as they are one of its biggest buyers.
“If this ban happens, we will need to find alternative markets. At the present moment, which country in the world can absorb what Malaysia is exporting to Europe?” said Chin.
In recent years, Malaysia has actively explored new markets to offset losses from Europe, including food-importing countries in the Middle East, Central Asia and North Africa.
‘EU hypocrisy’
However, Center for Market Education CEO Carmelo Ferlito accused the EU of actively being on a crusade against palm oil. “The EU cannot talk about pushing for free trade in this region and then ideologically ban one of its most important commodities.
“Free trade agreement negotiations and procedures should be based on agreed standards, not by imposing ideological standards, and without being open to negotiation. This smells like neo-colonialism,” Ferlito said.