Malaysia and EU inch closer to full-blown trade war

The EU’s delegated act against the use of palm oil in biofuels is riddled with politics of protectionism and discrimination


Malaysia should slap additional tariffs on the European Union’s (EU) products as a retaliatory action against the latter’s plan to ban palm oil in biofuels as the two trading partners inch closer to a full-blown trade war.

The EU’s decision to classify palm oil as “high risk” and ratify the delegated act will see Malaysia losing billions in revenues from the second-largest buyer of the country’s key agriculture commodity.

Tensions between the EU and palm oil-producing countries like Malaysia and Indonesia — which both account for 85% of the world’s production — flared last week after the European Commission (EC) decided that the edible vegetable oil is not a “green” fuel and should not be promoted.

The EC justified the move, claiming that palm oil is not “green” road fuel as it causes major deforestation, a claim which Malaysia and Indonesia said to be full of twisted agenda and protectionism.

The world second-largest importer of palm oil, with imports about 6.5 million metric tonnes last year, uses about half the vegetable oil for biofuels.

Malaysia last Friday issued a statement threatening retaliatory actions against European exports if the delegated act is accepted.

Primary Industries Minister Teresa Kok said the EU’s delegated act against the use of palm oil in biofuels is riddled with “politics of protectionism” and discrimination.

“Malaysia’s prime minister (PM) has made it clear that if the delegated act is finally adopted, Malaysia will investigate retaliatory actions against European exports, to combat this aggressive protectionist measure,” she said in a statement.

The EU has been Malaysia’s second-largest buyer of palm oil as it imported 1.91 million tonnes last year, representing 11.6% of total exports.

Kok also alleged that the EC failed to apply the same standard to soybean oil which is a bigger contributor to deforestation.

She also hit out at the EC’s decision to lower the definition of smallholders to two hectares, compared to the previously proposed 2ha-5ha in the draft delegated act.

“This is totally unacceptable, and it is discriminatory and insulting to smallholders in the palm oil producing countries,” she said.

PM Tun Dr Mahathir Mohamad in a letter to French President Emmanuel Macron called upon Europe’s economy to reject any move to ban palm oil in biofuels.

“Failing in that mutual respect will force Malaysia to look at actions, including, but not limited to, suspension of EU-Malaysia free-trade talks and the imposition of like-minded legislation against French exports,” Dr Mahathir said as reported by Reuters.

Sunway University Business School economics Professor Dr Yeah Kim Leng said the tariff could be seen as the “tit-for-tat response” to the EU’s stand on palm oil within the EU’s revamped Renewable Energy Directive or RED II, that would be tabled at the EU parliamentary sessions soon.

“Nobody wants another trade war, but I think if and when (the EU) had put up the law, we can retaliate as an option, and it will be the tit-for-tat to send the right message.

“I think if we were to impose tariffs, it should only happen when the EU has decided to go on with the law. We should not initiate it now because it will just escalate the tension,” he told The Malaysian Reserve.

Yeah added that while imposing tariffs remains as an option, it should be limited to the agriculture sector with an equivalent amount of trading value.

“It is always best if we can avoid that. But, if they implement the law, whatever our retaliation is, it should be limited to the agricultural side, if possible.

“The action also should be proportionate to the law, while the value that the EU will cost our industry should be the guiding principle to the tariffs. It should not be beyond the consequences,” he said.

The bloc will cease the use of palm oil-based biodiesel to meet the EU’s green fuel target. The draft proposal, which was allowed to be reviewed and commented by the public, is currently under the EC’s deliberation before it will be tabled at the bloc’s next parliamentary sessions.

However, Yeah said any unilateral retaliation will be counter-productive.

“But as for now, we should pursue further negotiations, particularly in seeking a win-win solution, given that the anti-palm oil initiative is seen as a measure to curb deforestation.

“Compromising is a win-win scenario for Malaysia. While we have done our part, the EU cannot be labelling palm oil as an unhealthy product and exclude it from the vegetable oil trade as it is unfair.

“Banning the palm oil does not serve as the main goal in protecting the environment, particularly in terms of curbing deforestation because palm oil is a well-established commodity crop,” he said.

Some quarters claimed besides deforestation, the move was to protect European farmers, especially soybean, which see palm oil as a threat.

“Palm oil produces eight times more oil than the US soybean oil per ha but, the EC classifies soybean as “low risk” for political reasons,” said Kok.

The free-trade agreement (FTA) between the EU and Asean is also expected to be derailed permanently if the former continues its objection against palm oil.