The Oil Palm

Malaysia’s Trade Position and Palm Oil

Trade is critical to Malaysian Palm Oil.

This means that Malaysia’s trade agreements – and proposed trade agreements – are of substantial importance to the industry.

There are two that are currently on the table, one with EFTA (European Free Trade Association – comprising Switzerland, Norway, Liechtenstein and Iceland) and the re-energised agreement with the EU.

So what’s at stake?

The Malaysia-EFTA agreement generally doesn’t get a lot of attention; the size of the market of the four countries isn’t as large as, say, the EU. However, there are significant levels of trade in components for machinery and electronic products.

Just as important will be the investment framework – banking and telecommunications are important, the former being particularly crucial to, say, Switzerland.

Negotiations commenced in 2010; the most recent round of negotiations was completed in March. However, local lawmakers in Switzerland are currently lobbying federal officials to have Palm Oil removed from the trade negotiations completely.

Palm Oil and PKO exports to Switzerland are currently exempt from import duties. This is because Malaysia maintains developing country status with Switzerland and is granted preferential duties under Switzerland’s generalised system of preferences (GSP) scheme.

A free trade agreement with EFTA will likely result in the removal of GSP status for Malaysia; this status has already been removed for Malaysia’s trade with the EU.

A duty rate for Malaysia would therefore have to be negotiated under a new trade agreement.

Local lawmakers are essentially requesting that Malaysia’s tariff on Palm Oil and related products revert back to the default value of around CHF1280/tonne (around USD1300).

Those calling for the removal have stated clearly that they are requesting this in order to protect local rapeseed growers. This is a rare example of protectionism, and discrimination, being openly admitted by the protagonists.

The MEUFTA – the Malaysia EU Free Trade Agreement – is clearly the bigger prize for Malaysia, provided it gets it right.

Two-way trade between Malaysia and the EU isn’t enormous. Malaysia’s biggest trading partners are China, Japan, the US, Singapore, Indonesia and Thailand. Malaysia has a good and not insignificant trade relationship with the EU; if anyone needs to gain the upper hand in the current global environment, it’s probably the EU itself.

The EU needs to gain a stronger foothold in the Asia-Pacific region. The advent of the Trans-Pacific Partnership (TPP) Agreement means there is a new trade bloc opening that the EU has no place in. It’s no coincidence that it has inked trade deals with Singapore and Vietnam (both of them TPP countries) and is now going after other TPP members Malaysia and Japan.

And why is this critical? Because demand growth in the EU is flat and it needs to find export markets beyond its own borders. Think of it this way: Germany needs to find new markets for BMWs, because Greece is no longer interested in buying them.

But when it comes to agriculture, the EU tends to play a very defensive game. As an agricultural producer it is inefficient; its high costs mean that as an exporter it cannot compete with producers such as the US, Brazil and Australia. This includes Malaysia, hence the bloc’s extraordinarily defensive plays against Palm Oil. There are of course exceptions, such as French wheat, finished food products and wine.

This means that the EU is only going to give ground on tariffs on Palm Oil reluctantly, if at all. There are two factors to consider in its decision making. The first is that EU trade agreements are strategic more than economic. European importers might make a clear case for greater economic benefits for the EU if Palm Oil comes in cheaper, but strategic concerns will be more important. The second is that of domestic politics; if the domestic political appetite for trade agreements wanes – as it is doing so currently – there is little upside for unpopular politicians to support lower tariffs on imports.

At the same time the EU is negotiating with Malaysia, it has signalled its intention to negotiate an agreement with Indonesia the IEU CEPA, (Indonesia-EU Comprehensive Economic Partnership Agreement). The EU will consider Indonesia the bigger ‘prize’ because of the size of the market and because Indonesia is not part of the TPP. The EU’s agricultural sector will aim for market access similar to that negotiated by Australia and New Zealand under AANZFTA. However, negotiations with Indonesia are likely to take significantly longer. There is a diminished appetite for more open trade in Indonesia because of slowing economic conditions; similar sentiment arose following the negotiation of the ASEAN-China FTA.

The EU’s primary aim will be to protect its farmers. A better deal for importers of Palm Oil won’t be of paramount importance.

So what can Malaysia do?

It can shoot for a duty rate for Palm Oil (and related products) that maintains its competitive position over competing imported oils (e.g. soybean) and EU-produced oils (rapeseed).

But this will be met with resistance; in order to achieve this, it will have to give EU producers something they’re interested in, such as access on dairy products that’s equal to that enjoyed by TPP countries such as Australia, the US and Canada.

It should also assert a strong position on non-tariff barriers. This was exemplified by the proposed massive tax raise in France against Palm Oil – a tax rasise that was dramatically withdrawn in June by the French Government, following pressure from producing countries. However, it must be expected that further such attempts to raise barriers against Palm Oil will be made. A strong Malaysian position against non-tariff barriers on Palm Oil must be a condition of the negotiation and part of the outcome. There will need to be an adequate dispute resolution process that allows for Malaysia to pursue any grievances.

There’s no doubt that a FTA with Europe could be beneficial for both Malaysia and the EU. However, it needs to be remembered what the differences in objectives actually are. The EU’s motivations are arguably more political than economic; and it will play defensively on agriculture. Malaysia is looking to increase its role in global trade in order to benefit its citizens economically; this is evidenced by its participation in the TPP, RCEP and earlier trade agreements with countries such as Chile, Japan and Australia. One thing that observers of the negotiations should keep in mind is that the EU has not signed a FTA with any major agricultural commodity exporters. In other words, observers need to temper their expectations on the agreement.

The Swiss domestic oilseed lobby has been open and transparent about their collaboration with protectionist politicians, to block Palm Oil imports. It seems that for now the Swiss Government, and EFTA more widely, understands that such protectionism cannot be reconciled with a proper trade agreement: so Palm Oil will likely not be blocked in Switzerland. The EU’s trade negotiators are unlikely to be as forthright about their intentions: nonetheless, producing countries must enter trade discussions with their eyes fully open. EU countries are currently at the forefront of taxing, regulating, and restricting Palm Oil. The EU may not admit its protectionist goals publicly, like Switzerland has done – but actions speak much louder than words.