In the context of international trade, a trade dispute is defined as an economic conflict between countries resulting from extreme protectionism; It is usually characterized by an increase in or creation of tariffs, import limits or quotas, and other forms of trade barriers (Cambridge Business English Dictionary, 2021). Given the current state of globalization, the effects of such issues are never limited to just the conflicting countries; they inevitable affect many others. This is nowhere more evident than in the recent trade war between the United States and China, which has disrupted the global economy (Vilmi et al., 2019). Not all trade disputes are as high-stakes as this example, but that does not make them any less important to the countries involved. The following article will zoom in on the ongoing trade dispute between the European Union (EU) and Indonesia over European palm oil import restrictions.
A Quick History of EU – Indonesia Trade Relations
As the largest economy in Southeast Asia, Indonesia has been one of the EU’s most important strategic partners since the normalization of diplomatic relations between Indonesia and European member states in the 1940s (Indonesia Investments, n.d.). Yet, the trade relations between Europe and Indonesia can be traced back centuries, when Indonesian commodities were exported regularly to colonial powers such as the Netherlands, Portugal, and Great Britain (Nessel, 2017). It was not until 1980 however, that the two entered into a formal trade agreement under the EU-ASEAN Cooperation Arrangement (European Commission, 2000).
Nowadays, their trade relations are based on the 2014 Partnership and Cooperation Agreement (PCA) which was built as the initial framework for the upcoming Indonesia-EU Comprehensive Economic Partnership Agreement (IEU-CEPA). An exclusive agreement between Indonesia and European Free Trade Association (EFTA) countries – Switzerland, Liechtenstein, Iceland and Norway – called the Indonesia-EFTA CEPA (IE-CEPA) is also in the process of ratification (European Commission, 2021; European Free Trade Agreement, n.d.; Ministry of Foreign Affairs of the Republic of Indonesia, 2019). With the value of bilateral trade in goods amounting to €20.6 billion in 2020, the EU is currently Indonesia’s 5th largest trading partner in the world, while Indonesia is ranked as Europe’s 5th largest trading partner in ASEAN and 31st largest trading partner in the world (European Commission, 2021).
The European Union’s Indonesian Palm Oil Legislation: Debates and Implications
Despite their strong historic and contemporary relations, EU-Indonesia trade relations are currently being tested, following a disagreement over bilateral palm oil trade. The dispute emerged in 2017, when the EU, under the Renewable Energy Directive (RED) II, issued a Delegated Regulation categorizing palm oil as a high-risk commodity. This conclusion was allegedly adopted from various reports such as the UNDP’s Human Development Report of 2007/2008, a 2007 Greenpeace Report, and a World Resources Institute 2017 Report that highlighted the production of Crude Palm Oil (CPO) as the number one cause of deforestation and environmental degradation in Indonesia (Choiruzzad et al., 2021; European External Action Service, 2019; Indonesian Palm Oil Association, 2021; Mongabay News, 2007; Wicaksono, 2021).
After issuing RED I in 2007 and enforcing a palm oil sustainability certification system, the EU has recently reached several drastic new decisions regarding the future of palm oil in the European Union that gravely upset Indonesia. Chief among these is the decision to begin limiting the imports and use of CPO as a biofuels feedstock as of 2023, with the aim of eventually banning its use entirely by 2030 (Delegation of the European Union to Indonesia and Brunei Darussalam, 2019a, 2019b; European Commission, 2019; Parmar, 2020). As the biggest CPO producer in the world with 40 million tons per year, and with the livelihoods of 17 million Indonesian farmers in jeopardy, Indonesia refused to take the issue lightly. Viewing Europe’s decision as an affront to the UN SDGs as they relate to improving global standard of living, Indonesia has brought the case before the WTO, citing trade discrimination and violations of the fundamental principles of the WTO (Saptiko & Fauzi, 2019). Considering the EU is one of the top destinations for its CPO exports, Indonesia has further demanded fair treatment from the EU and has even threatened to take retaliatory action, such as pulling out of the Paris Agreement, stopping the import of Airbus aircrafts, and imposing high tariffs on EU dairy products (BBC News Indonesia, 2019; Jong, 2019; Pandey, 2019; Zaki & Syahputra, 2021).
The dispute has since become highly controversial due to its environmental and economic concerns (Adharsyah, 2019a). Indonesia defines the EU’s allegations of its palm oil industry’s extreme impacts as ‘pseudo-scientific,’ questioning the link between CPO production and deforestation. Its main argument here is the fact that Indonesia has significantly reduced its deforestation rate over the past four years, as part of its ‘Zero Deforestation’ commitment (Indonesian Forest Certification Cooperation, 2021; Pirard et al., 2015; Saptiko & Fauzi, 2019; Trase Insights, 2021; Wijaya et al., 2019). Furthermore, Indonesia argues that palm oil is not only 6 to 10 times more productive than other plant-based oils relative to land use, but also that Indonesian CPO has always been in compliance with Europe’s high standards and procedures for sustainable commodities (CNBC Indonesia, 2019; Murphy, 2015; Saptiko & Fauzi, 2019). This had created the perception that the EU is using environmental sustainability as an alibi for primarily economic intents.
Figure 1: The Palm Oil Story.
Source: (Meijaard et al., 2018).
Figure 2: Comparison of the world’s top plant oils by yield.
Source: (Nugraha, 2019).
Indonesia’s palm oil is the main competitor to other plant-based oils, such as Ukraine’s sunflower oil, China and U.S.’ soybean oil, and most importantly, the EU’s own rapeseed oil. As such, it seems that the EU’s decision to curb the imports of palm oil may simply be a double standard, employed to gain more control in the plant-based oil market (CNBC Indonesia, 2019; Embassy of the Republic of Indonesia In Brussels, 2019). This perception is compounded by the EU’s ‘Black Campaigns,’ which Indonesia believes are aimed at eliminating palm oil as a main competitor in the biofuels market by reshaping the public’s perception of palm oil (CNBC Indonesia, 2019; Embassy of the Republic of Indonesia In Brussels, 2019; Jong, 2021; Saptiko & Fauzi, 2019; Yoga, 2019).
Figure 3: Illustration of EU’s ‘Discriminatory’ Biofuel Policy.
Source: (Council of Palm Oil Producing Countries, 2021).
Meanwhile, the EU sticks to its arguments regarding the negative impacts of the palm-oil industry on the environment, citing it as a major cause of deforestation as well as of peatlands and wetlands damages. This is in line with the EU’s commitment to achieve a 45% reduction in CO2 emissions and a 32% share in renewable energy consumption by 2030, conform the UN SDGs for 2030 and the Paris Agreement (Delegation of the European Union to Indonesia and Brunei Darussalam, 2019a; Erbach, 2020; European Parliament, 2018; Russell, 2020). Furthermore, the EU argues, the palm oil industry contributes to various human rights issues in Indonesia, such as corruption and child labor. Good produced in this way do not belong in the EU (European Parliament, 2017; Russell, 2020).
The impacts of the dispute tend to stay on the economic sector. Following the issuance of the EU’s regulation, the CPO price immediately dropped 4.39% (Adharsyah, 2019b). With the EU no longer as a reliable market and as an attempt to curb its own oil imports, Indonesia hastened its mandate on B30 domestic consumption from January 2020 to late 2019 (Badan Pengelolaan Dana Perkebunan Kelapa Sawit, 2019; The Jakarta Post, 2019). Despite the EU’s regulation, the EFTA countries remain committed to welcoming Indonesian palm oil under the IE-CEPA, creating an internal political dilemma for the EU (Republika.co.id, 2021).
What to Expect?
The situation remains stagnant; as Indonesia is pursuing litigation, the EU is trying to address another issue regarding Indonesian nickel ore exports to the EU (Morse, 2019). Both parties are unlikely to deviate from the current path, and a settlement of the dispute seems far away. With the EU unlikely to budge, Indonesia is setting its sights on markets in China, India, and South Africa instead. Indonesian President Joko Widodo emphasized that the issue should not hinder the palm-oil industry’s development, stating that the government is currently focusing on developing the B20 and B30 biofuels to boost its domestic consumption (Kementerian Energi dan Sumber Daya Mineral, 2019). Though the dispute has impacted trade in other commodities between the EU and Indonesia, the dispute is unlikely to affect EU-Indonesia bilateral relations as a whole. The EU and Indonesia still rely on each other in other areas of international politics, not least in defense and security, education, and tourism (Liputan6, 2019).
EU’s noble intention to protect the environment and Indonesia’s tireless efforts to protect its economy that accounted for its people’s well-being are both understandable and highly appreciated. With the aim of resolving the dispute, Indonesia needs to show off its strong commitment toward sustainable environment, and needs to take practical and effective action to tackle the environmental challenges the palm oil industry has posed. This way, the image and trust in its palm oil industry could be restored. As for the EU, it is best to reassess its decision on limiting the imports of Indonesia’s palm oil, considering the economic impacts that the developing country might face. Furthermore, it should pursue more practical policies in reducing environmental degradation such as providing incentives for sustainable plantations and supporting “go-green” activities in environmentally degraded areas.
To avoid further damages and to maintain a good, comprehensive relationship between Indonesia and EU; it would be best for both to meet in the middle and generate a solution that would cover crucial elements of both the environmental and economic arguments presented.
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