French Palm Oil Tax Falls Foul of WTO

France recently introduced a tax specifically directed at palm oil. The new law proposes a tax that will hit palm oil that doesn’t meet ‘sustainability criteria’. There would be an initial tax of EUR90 per tonne on ‘unsustainable’ palm oil. ‘Sustainable’ palm oil would be exempt.

Palm oil producers have for the most part expressed opposition to the tax. Governments – particularly Indonesia’s – have been vocal, pointing out that the law breaks both WTO and EU rules.

So what do the WTO’s rules actually say, and what happens next?

The tax could fall foul of at least two parts of the WTO Agreements.

The first is the Technical Barriers to Trade (TBT) Agreement. To fall foul of the TBT Agreement, the new law must be aimed at an identifiable product (palm oil), lay down a specific characteristic for conformity (sustainability criteria), and be mandatory (a tax applying to all products containing palm oil).

The test is whether the law isn’t more trade restrictive than necessary, and contributes to its purpose – reducing deforestation and preventing biodiversity loss.

But as has been pointed out, it is not the production of palm oil that causes deforestation. It’s the other way round; deforestation occurs that enables palm oil production among other things, including other commodity production and urbanisation. This is a significant distinction.

Similarly, because the law distinguishes between ‘sustainable’ and ‘unsustainable’ palm oil, it would have to be shown that the law reduces the amount of palm oil that isn’t produced sustainably, and then that reduction in unsustainable production contributes to reducing deforestation overall.

Is it possible to demonstrate this? Consider whether the introduction of mandatory sustainability certification in Europe tomorrow would actually mean that deforestation levels in Indonesia fall as a result. Rather, deforestation would continue, and farmers would either send palm oil to different markets, or grow a different crop.  Or better yet, maybe they’ll build housing for the 250 million plus people that live in the country, similar to what Europeans so aptly enjoy.

The next part of the TBT that comes into play is national treatment and ‘like products’. The crux of this is whether the product in question can be substituted for other products. In this case, as a vegetable oil, palm oil can be substituted for other products such as rapeseed and sunflower.  This has proven to be the case absolutely in the case of products such as Nutella and competing chocolate spreads. The new law treats palm oil less favourably than other products imported from other countries – and therefore falls foul of this agreement.

The second WTO area is the General Agreement on Tariffs and Trade (GATT). It is likely that the proposed law will fail the ‘national treatment’ requirement under the GATT. The crux of this is that an imported product must be given the same treatment as a domestically produced like product – in this case it would be rapeseed or sunflower oil.

It is highly likely that the French government will consider that the law can be saved by ‘general exceptions’ under the GATT relating to human, animal and plant health and the conservation of natural exhaustible resources. But for this to be the case, they must be considered as necessary to do so and the interpretation is quite narrow. Banning the sale of animal parts to save a particular endangered species is an example of a necessary action. As stated above, given that the measures do not contribute directly to the solving problems – deforestation and biodiversity loss – this is unlikely to give France the green light. Similarly, GATT rules states that such measures cannot be used as a disguised restriction on international trade. And given the comments made when the Bill was being debated in French parliament, this is clearly the case.

This is yet another case of Europe finding a way to keep out a product that is a threat to domestic industries under the guise of the environment – and causing economic damage, particularly to small farmers, while it’s at it.

So what happens next?

Any country that produces palm oil can take this to the WTO. In the case of the TBT, it can be raised at a TBT Committee meeting. In the case of the GATT, countries need to open a consultation with France; if a resolution can’t be reached, it will then need to go to the appellate body. But realistically this can’t happen until the Bill becomes a law.

The TBT Committee is a forum where countries issue notifications for laws and rules that may have an impact on other WTO members – even if they’re just in the pipeline.

That France hasn’t done this indicates a clear disregard for the global trading system. Barbara Pompili, Deputy Minister for Biodiversity and Climate, indicated during the French National Assembly vote that this added provision ‘fully respects the WTO treaties’. Nevertheless, it’s reasonably clear that France is fully aware that it takes a while for these cases to be resolved.

In which case, a country like Malaysia or Indonesia could easily dangle the threat of looking at non-French suppliers for defence contracts, or locking French suppliers out of bids on infrastructure projects.  Or the next time a European Commissioner travels to Malaysia or Indonesia, let them know that there is no longer interest in an FTA, for as long as France is applying discriminatory taxes on strategic exports.

#Policy News