How the French Palm Oil Tax Could Hurt French Trade

The French palm oil tax, as passed by the National Assembly in March, is a discriminatory proposal, that would harm the relations between France, and Malaysia.

Palm oil is a major commodity export for Malaysia, and for Indonesia, whether in the form of crude palm oil itself (CPO), oleochemicals or other products. The tax proposed by France is a serious and unfriendly act that could have negative consequences for jobs and rural development in Indonesia and Malaysia, and possibly other palm oil producing countries around the world.

In which case, the question needs to be asked: if Malaysia were to respond to the tax, through trade policy instruments, what would be the options at their disposal?

There are a number of options that would be available, if palm oil producing countries chose to respond.

Suspend the Malaysia-EU free trade negotiations. Negotiations for the Malaysia EU Free Trade Agreement (MEUFTA) have been on and off since around 2006. They were suspended in 2012 in the lead-up to the Malaysian elections of that year, but we re-started just a few weeks ago.

Two-way trade between Malaysia and the EU isn’t enormous. However, the EU is acutely aware that it is missing out on trade in the Asia-Pacific region, particularly with the advent of the TPPA agreement between the Pacific countries, led by the USA. Agreements with countries such as Malaysia are of great political significance for the EU. If the EU is rebuffed by Malaysia, it would be a considerable setback for its broader trade policy.

Like-for-like targeting of French products. Malaysia imports significant quantities of bulk dairy commodities in the form of skim milk powder and whey milk powder; significant quantities come from France and are subject to import tariffs. Imports from New Zealand and Australia are tariff-free because of the ASEAN-Australia-NZ Free Trade Agreement. The forthcoming Trans Pacific Partnership Agreement will reduce tariffs on those products to zero when coming from the US and Canada. In other words, Malaysia would be able to switch away from importing these French products – and can switch to other geographic suppliers with no problems.

Reconsider government procurement. Government procurement procedures are not subject to WTO rules, with the exception of the small number of countries that have signed up to the Agreement on Government Procurement. It’s no secret that government tenders often set local content rules in tenders that will favour domestic firms or preferred supplier countries.

France’s major exports include transport services and engineering services. Malaysia – like other countries in the region – has a number of infrastructure developments underway. Among these is the Klang Valley Mass Transit Project. One of the major successful tenderers in the first phase of the project was the German transport company Siemens.

Later stages of the project are now coming up for tender evaluation. France’s export promotion authority has been pushing French firms to participate in the tender process. It would be relatively simple for the tender process to be moved away from French firms, making it very difficult for them to participate or succeed.

Aviation exports. Similarly, defence spending is an area that is not governed by WTO rules and, again, military and aviation exports are significant exports for France. Like government procurement, defence spending is often politicised. A move to reconsider defence contracts in, say, aviation or naval vessels – as a response to the French palm oil tax – would be a considerable setback for France’s exporters. Both have been under considerable scrutiny in the French media, with accusations of the Hollande government bungling export deals.

Conclusion

This is a thought experiment, for now, as the palm oil tax still has not become law in France: the Senate must still consider the proposal. If the tax does become law, and impacts producing countries such as Indonesia and Malaysia, there are clearly several options for a trade-based response.

The central question now is: Will France’s lawmakers continue to move ahead with a tax that could harm the economies of France, Malaysia and Indonesia? French Minister Matthias Fekl is in South-East Asia – specifically Indonesia and Singapore – this week, promoting good relations between France and the region. If the French Government is serious about good relations, the first step is to drop the discriminatory and damaging palm oil tax.

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