Explainer: Why Malaysia is considering a ban on palm oil exports to EU

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Malaysia, the world’s second-largest palm oil producer, on Thursday said it might stop palm exports to the European Union after the bloc imposed additional import restrictions on the edible oil due to concerns over deforestation.

What is the disagreement about?

Malaysia and Indonesia have for years been at loggerheads with the European Union over curbs on imports of palm oil, which the two countries say are trade barriers and protectionist measures for the bloc’s domestic oilseed industries.

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The EU deforestation regulation is in addition to an EU renewable-energy directive, announced in 2018, that requires the phasing out of palm-based transportation fuels by 2030.

The bloc has also set a separate safety limit on food contaminant 3-MCPD esters for palm oil compared to soft oils derived from crops such as soybean, canola and sunflower.

What has Malaysia done about EU restrictions?

Indonesia and Malaysia, which account for 85 percent of the world’s palm oil exports, have filed separate World Trade Organization suits against the EU over the renewable-energy directive.

The palm oil producers say they have taken steps to meet EU requirements, including stepping up their national sustainable palm oil certification standards and improving environmental protection and food safety standards, but that the bloc keeps imposing new restrictions.

EU officials say their regulations do not target any one country and are aimed at ensuring that commodity production does not further drive deforestation and forest degradation.

Trucks with palm oil fresh fruit bunches are parked in a queue at a palm oil factory in Siak regency, Riau province, Indonesia, April 26, 2022. (Reuters)
Trucks with palm oil fresh fruit bunches are parked in a queue at a palm oil factory in Siak regency, Riau province, Indonesia, April 26, 2022. (Reuters)

How is the market reacting?

Bursa Malaysia’s benchmark crude palm oil futures have yet to react to Malaysia’s proposal, although some traders said they see it as a bearish signal.

Some in the palm industry view the proposed ban as a knee-jerk reaction that will hurt the sector, and others laud Malaysia for putting its foot down.

Malaysia said it will discuss with Indonesia the possible ban and other strategies to tackle the EU measures, as both have agreed to increase cooperation to fight “discrimination” against the commodity.

How will Malaysia halt exports to EU?

It is not clear whether Malaysia is considering a direct ban on exports to the European Union or enacting tariffs.

What about Malaysian palm oil exports to Europe?

The EU accounts for 9.4 percent of Malaysia’s export volume in 2022. Malaysian Palm Oil Board data indicates that exports to the 27-member bloc have been declining since 2015.

In 2022, Malaysia’s exports to the EU fell 10 percent from the previous year to 1.47 million tonnes. That is a 40 percent plunge from 2.43 million tonnes in 2015.

The Malaysian Biodiesel Association last year urged industry officials to come to terms with a steady decline in shipments of palm-based biofuels to the EU.

Where else can Malaysia palm oil exports go?

The palm oil industry makes up about 5 percent of Malaysia’s economy. Malaysia has in recent years actively explored new markets to offset losses from Europe, including food-importing countries in the Middle East, Central Asia and North Africa.

Several publicly-listed Malaysian palm oil companies, however, have established refineries in Europe and an export ban would disrupt their operations.

Read more:

Malaysia aims to regain palm oil market share in EU amid global shortage

WTO sets up expert panel to resolve Malaysia-EU palm oil row

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