Storm Clouds Grow for Asia’s Palm Oil Behemoths

Hard-hitting Associated Press report triggers US action

Palm oil producers in Malaysia and Indonesia, which together produce as much as 85 percent of the world’s palm oil – the most ubiquitous vegetable oil – are growing increasingly concerned about possible damage to the countries’ economies from rising antipathy in the United States and the European Union over environmental degredation and human rights.

Concerns have deepened enough that Malaysian Prime Minister Muhyiddin Yassin flew to Jakarta last week to meet with Indonesian President Joko Widodo to discuss the issue, in addition to crafting an ASEAN response to the coup in Myanmar, which got far more attention. Both countries are complaining that US and EU vegetable oil companies are running lobbying campaigns against them. 

It is a worrisome economic issue for the two countries, especially if, as expected, the incoming Biden administration takes a tougher line on environmental, labor, and human rights issues, a reasonable expectation given the relative lack of attention paid to those issues by the outgoing Trump administration. Biden has picked Boston, Massachusetts Mayor Marty Walsh, an ally with deep ties to unions, as his labor secretary. Malaysia is especially vulnerable to labor issues because of the tens of thousands of immigrant laborers who people the plantations and barracks across the country. Most of the workers in Indonesia are indigenous.

Questions over a partial or outright ban in the west assume additional international importance with the United States and the European Union seeking Southeast Asian allies in their effort to contain China’s rise. Banning the two countries’ most important agricultural export is hardly the way to make friends. While the share of agriculture in Malaysia’s GDP has fallen to 8.8 percent as the country has industrialized, the palm oil industry nonetheless employs 600,000 people. In Indonesia, while it makes up 13.7 percent of GDP, it employs 8.4 million workers in a multilayered industry from forest to marketing to research. A serious downturn for the industry in either country is a blow to the economy.

Widodo said later that he opposes what he called the EU’s “negative campaign against palm oil” and said EU policy would complicate the distribution of Indonesian palm products. Banning palm oil, he said, “is not a solution. If then palm oil must be taken out, then how to replace it? So we have to show the world that replacing palm oil is not a sustainable solution."

Palm oil is ubiquitous, comprising 38 percent of the world’s vegetable supply. According to the Associated Press, it can be found in roughly half the products on supermarket shelves. It is used for everything from simple cooking oil – having survived a public relations campaign in the west accusing it of causing heart problems – to personal care and cosmetics, biofuels – competing against US and EU corn and other products – as well as pharmaceuticals, animal feed, snacks and a cornucopia of other products. Palm plantations are said to be 10 times more productive than soybean, sunflower, or rapeseed cultivation.

But it has become the world’s bugaboo because of deforestation, particularly in peat forests, allegedly driving up greenhouse gas emissions and threatening endangered species including the orangutan, one of the world’s most photogenic primates. In past years, as many as a million hectares of forestland have gone up in flames annually to clear land for new plantations in Sumatra and Kalimantan, blanketing huge areas of Southeast Asia with smoke. The Formula 1 grand prix in Singapore was regularly threatened with cancellation because of diminished visibility although strengthened enforcement has cut the fires markedly.

Some of the antipathy to palm oil was created by a prize-winning investigation that ran last November by the Associated Press into widespread abuse of imported labor in which women, in many cases South Asians such as the Rohingya, are allegedly routinely raped and abused and forced to work in horrendous condition amid the threat of being thrown out if they complain. That spurred 25 members of the US House Ways and Means Committee to call for the government, now controlled by the Democrats, to ask the customs and border protection department if it had considered a blanket ban on imports.

Matters came to a head in mid-December when customs issued an order to detain shipments of seafood and cotton, among other imports, as well as palm oil from Sime Darby, one of Malaysia’s biggest conglomerates with interests stretching from motorcar sales to healthcare, insurance, and logistics and which has more than 600,000 hectares of oil palm under cultivation. While Sime officials told local media the US action would have little effect on the bottom line, that is a statement that seems ingenuous at best. Officials with Sinar Mas, the major Indonesian oil palm plantation interest, are also said to be deeply concerned over rising western antagonism to palm oil. Meetings have been taking place among industry officials in both countries.

Liberty Shared, an anti-trafficking group that has targeted the palm oil industry, submitted a petition that pushed the US Customs and Border Protection agency to issue a Without Release Order against Sime in December. Liberty Shared later filed additional complaints in London questioning the company’s disclosure about its protection of human rights under the country’s Modern Slavery Act, and a second to the Malaysian stock exchange, questioning the accuracy of Sime’s required disclosures on its labor practices.

“We believe there should be urgent improvements to corporate governance and internal controls around management and supervision of plantations and treatment of workers,” Liberty Shared said in a prepared release.

The policy warning issued by the European Union is “no surprise,” said Yu Leng Khor, the lead economist with Segi Enam, a Singapore-based research firm. Broadly speaking, she said, the challenges are on two fronts. US customs officials—pushed by the labor unions—for several years have enforced labor rules, with palm oil and rubber gloves (of which Malaysia is the world leader) coming under the spotlight. The other front is from the EU, which has long displayed anti-deforestation concerns with Indonesia as a target.

The palm oil-producing countries have formally set up a Council in Jakarta seeking to provide a countervailing message, Khor said, but it has yet to show any muscle. There is an ASEAN-EU ministerial-level Joint Working Group on Palm Oil, whose first meeting was attended by Indonesia, Malaysia, Cambodia, Thailand, Laos, Vietnam -- the Philippines and Myanmar are also rising producers of palm oil. Indonesia’s big palm oil production has shifted policy leadership to Jakarta, which influences the market with its biodiesel mandate.

Earlier this month, 25 Democratic lawmakers from the U.S. House Ways and Means Committee cited AP’s investigation in a letter calling for the government to come down harder on the palm oil industry in Malaysia and Indonesia, asking Customs and Border Protection if it had considered a blanket ban on imports from those countries.

“In our view, these odious labor practices and their pervasive impact across supply chains highlight the need for an aggressive and effective enforcement strategy,” the letter said.

Ana Hinojosa, one of the executive directors of the U.S. Customs and Border Protection’s Office of Trade, told the Associated Press the decision to issue the ban should send an “unambiguous” message to the trade community. “Consumers have a right to know where the palm oil is coming from and the conditions under which that palm oil is produced and what products that particular palm oil is going into,” she said.

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