Re Opening MEUFTA

Malaysia and the EU recently signed the Partnership and Cooperation Agreement (PCA), concluding negotiations that have been ongoing since 2010. The EU and Malaysia also recently announced that they would re-start negotiations on a bilateral trade deal.

The announcement comes after a number of false starts. The talks originally commenced in 2010; they were called off in 2012, and then there was an announcement in 2014 that they would re-start.

The question might be: why now?

The EU has recently completed trade deals with Singapore and Vietnam. The Singapore agreement – given the nature of the Singaporean economy – revolves more around services and investment rather than goods. The Vietnam agreement is yet to be approved by the European Council or the European Parliament.

But the push into Asia comes on the back of a new trade strategy being pushed by the European Commission.

In its Trade For All policy released at the end of last year, the EU made it clear that it needs to push into the Asia-Pacific region. There was a general recognition that the Asia-Pacific region – and East Asia – was an opportunity that the EU had somewhat overlooked.

This recognition was better late than never; Pacific trade surpassed Atlantic trade for the first time in 1980. This was largely on the back of bilateral trade between Japan and the US, but it meant that Europe’s role as a driver of global trade was waning.

The important focus now for the EU is to support its export economy, namely Germany, at a time when the EU’s domestic consumption is flatlining.

So, the real question around the MEUFTA is who wants it more?

A notable feature of the recently signed Trans Pacific Partnership (TPP) Agreement negotiations was that all parties wanted to be there and for the deal to be completed; there was no sense of reluctance. If one party walked away, the deal – which included two of the world’s three largest economies – could still go ahead. This is not the case with a bilateral agreement.

The current EU-Malaysia situation

Malaysia’s biggest trading partners are China, Japan, the US, Singapore, Indonesia and Thailand. All of these trading partners are taken care of under either the TPP, the ASEAN Free Trade Agreement, or the China-ASEAN free trade agreement.

The trade balance between Malaysia and the EU is in Malaysia’s favour, not Europe’s, when it comes to goods. On services, it’s in the EU’s favour but the size of the trade is about one quarter of the goods trade.

When it comes to investment, both are significant investors in each other’s economies. Again, this weighs in the EU’s favour; outward stocks are bigger than inward stocks, but it’s not a massive imbalance.  Malaysia already has investment treaties with the EU’s major economies such as Germany, France, the UK and the Netherlands.  In addition to this, the Malaysian and EU Governments now plan to add the MEUFTA.

The primary issue for Malaysia’s trade negotiators is to ensure that Malaysia receives the best deal possible, within the trade negotiations with the EU. This is clearly the normal, fundamental position of any country entering a trade negotiation.

Key Issues for Malaysia

The EU has made a point of tabling a number of non-trade issues into its trade agreements – such as the environment and human rights. A number of sources have said that this is the reason that the trade negotiations between the EU and Thailand stalled completely.

In fact, there remains the outside possibility that the EU-Vietnam trade agreement will not go ahead; complaints have been made to the European Ombudsman regarding the lack of a ‘human rights assessment’.

Malaysia needs to consider how any agreement with the EU will affect the regulations and restrictions governing the exports of its critical agricultural exports – in particular palm oil.

The key issues for Malaysia are policy measures across Europe that block market access. They currently appear in four forms.

The first could be best described as ‘environmental’ barriers to trade.

The EU has already attempted to impose more onerous conditions on imports of timber from tropical countries via its ‘voluntary partnership agreements’ (VPAs) on timber under its Forest Law Enforcement, Governance and Trade (FLEGT) program. And the idea of a FLEGT-type arrangement for other commodities has already been floated.

Could a FLEGT-type arrangement for palm oil be pre-empted in MEUFTA? And could it give Malaysia something of an upper hand in Europe? Similarly, could an Indonesian arrangement give Indonesian palm oil producers an upper hand?

If anything, a government-to-government arrangement would necessarily make national certification systems – such as the Malaysian Sustainable Palm Oil (MSPO) – an absolute precondition of any arrangement. This would be the baseline for Malaysian negotiators.

However, there may be resistance to this from the European Parliament. The VPA arrangement between Indonesia and the EU – which is still not operational – has been lobbied against by a number of European Parliamentarians who think the standards are not ‘green’ enough. This should not deter Malaysia from pursuing its strategic interests: the internal politics in Brussels should be managed by the EU itself.

The second issue should be the ongoing tax discrimination against palm oil.

This has been the issue of the day in France, with the introduction of a tax on any product containing palm oil that isn’t considered ‘sustainable’ (how that will be defined is not clear). Similar proposals have been put forward previously in the Netherlands, Belgium and Italy. But the introduction of such a tax is a slippery slope, particularly when it is a measure that is clearly designed to offer local oilseed growers protection against imported palm oil, which is a superior and more competitive product.

It is highly likely that the French tax won’t withstand WTO scrutiny, but such a measure is a signal that European lawmakers are not negotiating in good faith. In short, it is clearly in Malaysia’s strategic interest that any Malaysia-EU trade agreement should prevent the imposition of any kind of tax measure against palm oil.

The third issue is the EU’s refusal to properly implement EU laws to protect Malaysian palm oil. Palm oil products across Europe are being attacked through the use of No Palm Oil labels. The labels, used by several companies primarily in France and Belgium – including major retailers such as Delhaize and Casino – are discriminatory and have been shown to be illegal under multiple existing EU laws on advertising and unfair trading. A court in France has already ruled that similar anti-palm oil campaigns breached existing advertising rules.

The EU is not enforcing the laws, currently, which is tantamount to supporting the anti-palm oil labelling efforts in Europe. The labels are a key barrier to fair trading for palm oil inside the EU single market. It is strongly in the interests of Malaysia’s palm oil industry that the Malaysia-EU free trade agreement stipulates that laws on labelling will be fully and effectively enforced.

Finally, on biofuels, and in particular the EU’s Renewable Energy Directive (RED).

The RED was established as a means to increase the uptake of renewable fuels in Europe by mandating that a percentage of renewable fuel be used in all sectors. For liquid fuels, this meant for the most part ethanol-blended fuels and biodiesel fuels.

Mandating the use of these fuels in effect provided subsidy for producers. In Europe, this includes rapeseed growers, which have been struggling against rising imports of better-value palm oil for use in food and other applications. However, the mandate also applies to imported feedstocks and fuels, which means that lower-cost imported biofuels (and their feedstocks) also have access to the subsidy. To get around this, the EU introduced a series of arbitrary technical measures that discriminate against palm oil under the RED. This measure is currently under challenge in the WTO.

As with the differential tax, this does not provide a signal of good faith to Malaysia.

The EU is often described as ‘Fortress Europe’ in terms of trade policy, an image the EU is trying to cast off. The EU’s Trade For All document begins by describing trade as a two-way street.

But Europe cannot continue to play a duplicitous game around trade. The EU must not continue to fund NGOs that argue for arbitrary barriers to trade for commodities they object to, and EU countries must cease introducing discriminatory tax measures and protectionist policies. This would be consistent with good faith trade negotiations. If the EU continues to support anti-palm oil efforts, it is clear that the trade negotiations are not based on good faith.

If Europe wants to gain a foothold in Asia, it needs to start walking down that ‘two way street’ – and Malaysia, must ensure that includes no more discrimination against palm oil imports.

#Policy News