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Malaysia palm oil WTO panel divided over EU protectionist intent

The World Trade Organization released the panel report in one of the two cases brought by two world leading producers of palm oil against a European Union directive that excludes the oil produced in their countries from its future biofuels mix.

The lengthy 348-page report does not settle for good the core question of whether the EU acted in a protectionist and discriminatory manner against Malaysia: one panelist – out of a mere three – dissented from the main conclusions of the report on this specific fundamental question.

Indonesia, which has filed a similar case, asked on Monday (4 March), one day before today’s release, for the proceedings to be suspended for two months.

RED II measures acceptable as environmental in intent

Under the EU’s 2018 second edition of its renewal energy directive, biofuels are set to play a key role in decarbonising road transport.

But Brussels has capped the use of fuels classed as involving a high risk of fostering ‘indirect land usage change’, and hence climate damage, to 7% of the fuel mix. More importantly it is gradually phasing them out by 2030.

The report rejects the claim made by Kuala Lumpur that the way the measure is designed has a protectionist and discriminatory intent targeting Malaysian exports.

It accepts the EU’s arguments that the measure has mainly an environmental objective.

The panel says that the measure, although regulating the way palm oil is produced in far-away countries is legal under WTO and international law due to the global nature of the problem it tries to address: the climate crisis.

The panelists also ruled that in any case the measure is acceptable under the GATT’s ‘general exception’s under article XX which provide room for countries to violate WTO norms if the aim is to protect the environment.

Discriminatory administration of low-risk product certification

Although in principle ‘low risk’ palm oil is allowed on the EU’s biofuels market, the report shows that producers from Malaysia have not had a chance to obtain the required certifications.

Also, soybean-based fuels, which largely hail from competitive countries South or North America, are not subject to the same requirements as palm oil.

This is where the panel does not simply give the EU a clean slate.

The text says that Brussels has acted inconsistently with the WTO’s most-favoured nation principle by giving what it considers ‘like products’ – such as precisely soy-oil based fuels – from other countries better treatment.

It also chides the EU for violating a range of requirements enshrined in the agreement on technical barriers to trade – mainly article 2 of the TBT agreement on central government obligations in administering technical regulations.

The EU “has applied the high ILUC-risk cap and phase-out inconsistently with Article 2.1 of the TBT Agreement by failing to conduct a timely review of the data used to determine which biofuels are high ILUC risk, as this results in arbitrary or unjustifiable discrimination between countries where the same conditions prevail”, the panel report says.

A “10-year limit on the eligibility for low ILUC-risk certification disadvantages perennial crops in a manner that constitutes arbitrary and unjustifiable discrimination”, the report continues.

Brussels “acted inconsistently with Article 2.9.2 by failing to notify the proposed 7% maximum share and the proposed high ILUC-risk cap and phase-out measures,” the panellists write.

The EU violated TBT agreement article 2.9.4 “by having failed to organize a commenting process in respect of the proposed 7% maximum share and the proposed high ILUC-risk cap and phase-out measures in accordance with the requirements of that provision”, the text continues.

The panel also partly rules a French biofuels tax as explicitly discriminatory against Malaysian palm oil – although it refused to take Malaysia’s argument that the taxation system designed by Paris was in fact a disguised subsidy for national competitors of palm oil such as rapeseed-based biofuels.

While some criticisms of the EU measures and administrative procedures are severe, Brussels overall gets a fairly clean slate from the panelists.

Dissenter: “Sufficient evidence” of protectionism

This has triggered a rare dissenting opinion by one of the panellists.

“I do not consider the inconsistencies with the TBT Agreement and the GATT 1994” found in the report “to be limited to these issues, which relate exclusively to certain deficiencies in the manner in which it has been administered”, the dissenter writes.

“Malaysia has provided sufficient evidence to meet its burden of demonstrating that the objective of the measure includes an element of protectionism,” the dissenting panelist adds.

“This conclusion is reinforced by the evidence showing there is an element of arbitrariness in singling out palm oil-based biofuel for the high ILUC-risk cap and phase-out when other types of oils, notably soybean, appear to pose the same alleged risk,” the dissenting opinion says.

Malaysia filed the WTO complaint in Geneva in early 2021. The Covid-19 pandemic, and the fact that fellow palm oil powerhouse Indonesia had filed a case on the same issue one year earlier, have contributed to lengthening the procedures.

The panellists treated the two cases in an almost similar manner.

Indonesia is negotiating a free trade agreement with the EU. Malaysia has withheld negotiations with the European bloc in part because of its approach to importing palm oil and to regulating deforestation.

The WTO case is politically highly sensitive but also technically challenging, not least due to its grappling with abstract scientific concepts such as ILUC.

To appeal or not

Now the question is whether Kuala Lumpur will be content with the result. If Malaysia were to appeal, the EU could be tempted to appeal the case ‘into the void’, given the absence of an appellate body in the WTO. Brussels has already appealed at least one case into the void.

Malaysia is not a signatory to the alternative appeals mechanism known as the MPIA established as a fall-back option in the absence of the appellate body.

There are no indications that Brussels and Kuala Lumpur have considered establishing an ad hoc appeals panel, which is a possibility set out in the WTO rule-book.

“The matters identified by the panel are, to a very large extent, required anyway to be adjusted under EU law”, said the commission in a press statement today.

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