KUALA LUMPUR, March 11 – Malaysia’s recent win against the European Union (EU) over the Renewable Energy Directive (RED II) and the related Delegated Act, which has been ruled to discriminate against oil palm crop-based biofuels, is a fine example of a well-coordinated action plan among Malaysian ministries, organisations, and agencies.
In the case before the World Trade Organisation (WTO), the country was represented by Malaysia’s Attorney General Chamber (AGC) and assisted by FratiniVergano – European Lawyers, a law firm specialising in international trade, dispute settlement and trade negotiations.
While we celebrate this important legal victory, which vindicates Malaysia’s long struggle to defend the good name of its sustainable palm oil production, Putrajaya now needs to keep the momentum going by defining an action plan with a pragmatic and effective negotiating strategy to protect its interests in a wider spectrum.
To recap, the WTO Panel Report last week found fault with the EU’s use of the indirect land use change (ILUC) mechanism to cap and progressively phase out palm oil-based biofuels from the EU market and its approach to notifying and consulting with other WTO Members when introducing new measures that stand to have significant trade restrictive effects.
However, while the EU would need to make adjustments based on the final Panel Report unless appealed, it need not withdraw the measure of phasing out palm oil-based fuels by 2030, as the trade bloc no longer considers them as renewable transport fuel.
“The changes that the EU will have to bring to the RED may provide some continued access to Malaysian palm oil as a feedstock for the production of biofuel to the European market,” said an expert on the subject matter.
Unfortunately, two of the three WTO panellists who decided the trade dispute did not consider the RED II and its ILUC mechanism illegal, despite their trade restrictive and discriminatory effects, as they were deemed justified by the EU’s objective of protecting the environment by preserving exhaustible natural resources and safeguarding animal and plant life and health, which are available justifications under the WTO system.
Malaysia is in a good position to engage with the EU, given the dispute’s compliance stage.
Virtually all of its production is sustainable, deforestation-free, and not in violation of international agreements, as it is fully compliant with the Malaysian Sustainable Palm Oil (MSPO) standard and related compliance frameworks.
“I think that Malaysia should be vigilant of the EU’s revision of the RED to comply with the WTO ruling, but it should also reach out to the EU to negotiate a broader and more structural solution,” said another expert.
As for the timeframe for the EU to comply with the WTO ruling, it is understood that the reasonable period of time may be up to 15 months from when the Panel report is adopted.
“The RED needs to be amended, and this entails a legislative process that may take months,” said the expert.
In fact, it is unlikely that either the EU or Malaysia will appeal against the Panel Report, especially in view of the current situation with the WTO Appellate Body, which has not been operational for years.
This dispute was about the trade of palm oil as a biofuel feedstock with the EU, which is vital for Malaysia.
The best option for Malaysia is to negotiate a lasting and fair solution with the EU within the framework of a Free Trade Agreement (FTA), the expert suggested.
In December 2023, Investment, Trade and Industry Minister Tengku Datuk Seri Zafrul Aziz said that a recent workshop between Malaysian and EU representatives had marked the commencement of discussions on the scoping process for the Malaysia-EU FTA.
Malaysia-EU FTA negotiations stalled in 2012.
Putrajaya has thus far agreed to 16 FTAs.
It is to be noted that Indonesia is currently negotiating a preferential trade agreement with the EU called the Comprehensive Economic Partnership Agreement (CEPA), which may also be the forum within which the two parties may try to reach a solution to several of their trade disputes, including under the RED for Indonesia’s palm oil and considering Indonesia’s nickel ore export ban, which was declared illegal by the WTO.
Indonesia suspended its own parallel WTO proceeding against the EU on the RED hours before it was scheduled to be circulated, and observers believed that this may have been because of negotiations between the two parties.
Whether or not that is the case, Malaysia should finally consider restarting its FTA negotiations with the EU and finding preferential outcomes and solutions within that framework to access the EU market.
The EU now needs to comply with the WTO ruling, and it should do so while engaging with Malaysia and taking into account Malaysia’s trade, financial and development needs.
