Why the EU’s ‘Sustainability Criteria’ Will Likely Fail at the WTO

Recently, the European Council voted to postpone a decision on reducing tariffs on imported biofuels from Argentina after being ordered by the WTO to do so. The WTO declared the tariffs illegal after a three-year legal battle. A similar Indonesian suit may yield the same result.

The tariffs were put in place to support the EU’s ailing oilseed growers, who are struggling to compete against imported biofuels made from soybean and Palm Oil.

The delay by the Council indicates the political calculation Brussels is making when it comes to protecting its farmers against Palm Oil.

The EU could simply ignore the WTO ruling. Exporting countries would then have the right to introduce retaliatory punitive tariffs against European goods.

The EU has done this previously. It ignored a ruling by the WTO on US beef imports in 1999; consequently the US places legal punitive tariffs on European goods to the value of $100 million annually, costing the EU billions of dollars in lost export revenue.

The EU thinks this is a reasonable price to pay to keep its beef farmers happy.

So when it comes to vegetable oils, it’s likely that the EU will flaunt WTO rules in order to look after its farmers.

The EU Parliament has stated that it wants imports of Palm Oil to be ‘sustainable’ by 2020, defined by a set of ‘sustainability criteria’ that they define.

‘Sustainability criteria’ for imports of Palm Oil and related products have been floated for biofuels (under the Renewable Energy Directive), by the Dutch Government (for solid biomass), by the French Government (for all palm oil imports) and most recently by the European Parliament in a Resolution calling for the introduction of a single EU certification scheme for imports of Palm Oil.

It is highly likely that if the EU decides to unilaterally attempt to introduce these criteria it will find itself facing a WTO challenge. There are several reasons for this.

First, the EU criteria introduced for Palm Oil will likely be considered a technical regulation by the WTO. Technical regulations can’t be ‘more trade restrictive than necessary’ to fulfil their purpose.

In this case, the EU’s main purpose is reducing deforestation. But the problem isn’t oil palm cultivation; according to the EU, it’s the clearing of land. The introduction of sustainability criteria for Palm Oil won’t necessarily stop land clearing; it might stop people from planting oil palm on cleared land and instead plant rubber, cassava or other agricultural crops.

Under WTO rules, the EU would have to demonstrate that its measures reduced Palm Oil consumption in the EU (and/or increased ‘sustainable’ production), and would lead to lower ‘unsustainable’ production in producer countries – and consequently lower deforestation. This would be difficult.

Second, according to WTO rules the EU may have to treat ‘like products’ in a similar fashion. So, if the end use of Palm Oil is the same as sunflower oil and the two have a competitive relationship, the EU will need to treat the other vegetable oils in the same manner. Similarly, biodiesel made from Palm Oil will need to be considered in the same way as biodiesel made from other sources. One of the key tests is whether a ‘measure modifies the conditions of competition in the relevant market to the detriment of imported products’. This is more than likely given that Palm Oil products are solely imported.

Finally, WTO rules also allow exceptions. One is for situations where a rule is “necessary to protect human, animal or plant life or health”. Here, the definition of ‘necessary’ is quite narrow. Think of halting the import of toxic substances, endangered species or weapons. Sustainability criteria around deforestation and sustainability don’t fit in with this exception.

Another is for the conservation of ‘exhaustible natural resources’. For this exception to work, the EU would have to prove that the measures will actually prevent deforestation – as noted above, this would be difficult.

Third on the exceptions list is that the measure not be ‘arbitrary or unjustifiable’ when measured against its objective, i.e. deforestation. By this, the WTO rule is effectively stating that if Palm Oil is linked to a certain amount of deforestation, but other commodities cause more, sustainability criteria are ‘arbitrary or unjustifiable.’ Why? Because if beef causes ten times more deforestation, there needs to be sustainability criteria for beef.

The EU biofuel industry is lobbying hard both for the defensive measures (not reducing the anti-dumping duties) and the proactive measures (introducing new criteria into the RED Directive). There is no subtlety involved. The EU ethanol industry and the EU biodiesel trade association have both openly advocated banning Palm Oil.

The latest proposal from the Council puts forth a plan whereby Member State Governments would be able to implement their own rules for restricting or banning particular biofuel feedstocks – even if those rules are inconsistent with, or more restrictive than, the rules agreed at EU level under the RED. This would be the first time that such ‘flexibility’ allowed Member States to discriminate in such open terms within the RED. Prima facie this is a clear breach of the EU’s single market principles: namely that on being legally imported by one Member State (say, Palm Oil entering through the port of Rotterdam in the Netherlands), a product should have access on the same terms to the entire EU internal market. That will now, potentially, not be the case for imported Palm Oil biodiesel.

To be clear: the issue is not that Palm Oil must be used in all Member States, or that it must be used to the same level: multiple market variables determine these differences. The principle is that Government policy should not restrict or bar market access unfavourably for legally imported products, when compared with the same situation in other EU Member States.

Why is the EU considering such a breach of one of its fundamental freedoms? Simple. The lobbying power of its domestic oilseed industries. In the words of the European Biodiesel Board, opening the EU to more Palm Oil imports would “bring an end to any European biodiesel production. That statement alone illustrates the level of inefficiency and lack of price competitiveness that exists among European oilseeds, compared to imported Palm Oil.

Until the sustainability criteria and the implementing mechanism are made public, we will not actually know if they fall afoul of WTO rules; and until we see the final result of the Renewable Energy Directive, we will not know how far the EU is prepared to go, to protect its inefficient oilseed producers.

However, by the tone of the European Parliament’s recent report and efforts by Member States to discriminate against Palm Oil, it’s very likely that ‘sustainability criteria’ will be over-reaching and will find themselves at the losing end of a WTO challenge. However, in the meantime it is innocent Palm Oil small farmers that will lose out if the EU insists on introducing discriminatory measures that harm the export market to Europe. While producers may again resort to the WTO, there are other means of applying pressure that may pay more dividend in the short-term.

The EU is currently trying to engage with ASEAN countries to ink trade agreements, including Malaysia. The growing markets in South-East Asia are a major prize for EU manufacturers and service industries, looking to grow exports and increase shareholder value. Introducing restrictions on Palm Oil is not a good way for the EU to start negotiations to accomplish these goals.  Put another way in case that wasn’t clear: pressure from the vocal minority in Europe to force the Commission to adopt policies that are anti-Palm Oil that erode the shareholder value of Malaysia’s small farmers will lock out the silent majority of European businesses that want market access to the South-East Asia region.  The ball’s in Brussel’s court.

#Policy News