Southeast Asia’s Trade War over Palm Oil

With the world preoccupied by the threat of a major trade war initiated by US President Donald Trump against much of the globe, the threat of a smaller one is emerging in Southeast Asia, where Indonesia, Malaysia and Thailand are scrambling to deal with the effects of a Jan. 17 decision by the European Parliament to reduce renewable energy fuels and liquids produced from palm oil to zero by 2021 and threatening retaliatory trade measures.

Indonesia and Malaysia are the world’s biggest producers of palm oil, accounting for 90 percent of global production. The oil comprises 10 percent of Indonesia’s exports, accounting for US$14.4 billion annually as well as 7.8 percent of Malaysia’s, meaning the ban could have serious economic impact as well if it sticks.

However, the commodity has come under fire from environmentalists across the world because plantations to produce the oil – the world’s cheapest edible oil– have wiped out vast amounts of primary forest and peat bog, which act as sinks to contain carbon dioxide, the biggest source of greenhouse gases. They also allege that palm oil used in biofuels emits three times as much carbon dioxide as traditional gasoline.

Almost every year, Southeast Asia is bathed in choking smoke as Indonesia’s so-called burning season begins as villagers and plantation owners, many from Malaysia, slash and burn land to make way for crops. The haze is so bad in Singapore that it threatens the running of the annual Formula 1 race, during which car speeds often top 300 km per hour. Schools close, tourism drops. As much as 2 million hectares of land, much of it irreplaceable peat bog, which sequesters carbon, have gone up in smoke.

With millions of potential voters involved in palm oil production, the decision to ban palm oil on the part of the EU could create thorny political problems for both countries.

“What have Malaysia and Indonesia been doing to fight this ban?” asked an editorial in the trade publication International Palm Oil Monitor. “Why haven’t these countries fought harder to ensure that the ban never takes place? If the Renewable Energy Directive comes into play and is enforced, close to 650,000 palm oil smallholders in Malaysia and 3,000,000 palm oil smallholders in Indonesia will lose their livelihood. Shouldn’t the governments work together to ensure the its citizens have sustainable incomes in the foreseeable future?”

Indonesia alone is believed to have something like 10 million hectares dedicated to oil palm biofuel production. Malaysia has dedicated another 5.77 million hectares to production of the oil, whose uses are almost unlimited, from cooking oil to margarine, non-dairy creamers, ice cream, soaps, detergents, lubricants, candles, grease, bactericides, cosmetics, pharmaceuticals and many others.

Although the ban has ostensibly been laid to a desire on the part of the 28 EU member countries to protect rainforests in tropical countries, Malaysia, Indonesia and Thailand claim the decision was taken to protect the flagging oil industries in Italy, Spain and Greece. Malaysia has threatened a similar preferential ban on EU imports and both countries have held numerous meetings with EU representatives, both in Europe and Asia.

There is also potential economic damage to the European transport industry, 70 percent of which uses biofuels in transport. It is estimated that more than 3 million tonnes of imported palm oil is used for transport biofuels. According to the Malaysian business publication Malaysian Reserve, biodiesel use has increased by 35 percent since the EU started mandating its use.

The palm oil monitor editorial urges Malaysia, Thailand and Indonesia to use their economic power to threaten the European Union “due to the many bilateral trades that are currently in place between these South East Asian countries and the European Union” – in effect starting a trade war.

Germany, it said, “stands to lose most of all its neighbors from a trade war with bilateral trade with the three Southeast Asian countries totaling over £27 billion, its biggest airline Lufthansa operates extensively in the region and carmaker Mercedes Benz has found a lucrative market in Thailand. France meanwhile is at risk of big losses to its aeronautics industry with its trade to Malaysia alone worth £3.5 billion.”

Malaysia for one, has focused on Europe’s six biggest countries –Germany, France, the UK, Italy, Spain and Poland. Officials have visited all six in the attempt to reverse the ban. Mah Siew Keong, the Malaysian Minister of Plantation Industries and Commodities, told the Palm Oil Monitor that “Malaysia has visited these six countries and it looks very promising right now because five out of the majority European countries have stated that they will not support the discrimination against palm oil.”