Palm Oil Powerhouses: Why the EU’s Deforestation-Free Regulation Does Not Work in Southeast Asia

The European Union (EU)’s palm oil ban is well underway, and Indonesia and Malaysia are taking action to protect their global palm oil exports, filing complaints to the World Trade Organization (WTO). Though pivoting toward a sustainable future, Indonesia and Malaysia cannot phase out palm oil production until they further develop their economic advancement and climate plans. As Malaysia and Indonesia consider alternative trade options to protect their palm oil exports, the EU should restructure dialogues with both nations to generate solutions that encourage sustainable palm oil production, mitigating future tensions with the region while maintaining its strength as a global climate leader.

In June 2023, the EU enforced the EU Deforestation-Free Regulation (EUDR), a ban on products linked to deforestation. The EU mandates that anyone importing or exporting commodities linked to forest degradation into or out of the EU market must prove that the products do not originate from recently deforested land or have contributed to forest degradation. Commodities heavily linked to deforestation include cattle, coca, coffee, palm oil, rubber, soy, and wood. Penalties under this ban include the confiscation and denial into the EU market of non-compliant products, as well as a fine up to 4 percent of total annual turnover in the EU. 

Indonesia and Malaysia, collectively accounting for 85 percent of the world’s palm oil production with Indonesia leading in both palm oil and biodiesel production, are directly impacted by the EUDR, leading to tensions in their bilateral relations with the EU. The Indonesian government described the EUDR as discriminatory toward small farmers, who may face difficulties following the new regulations. Indonesia’s coordinating minister for economic affairs has gone as far as to criticize the EUDR as “regulatory imperialism,” expressing frustration at the EU for “[building] walls” while Indonesia tries to facilitate trade and develop its economy. Malaysia has accused the EU of placing a double standard on richer nations, claiming that when the interests of economically powerful regions are tested, rules are relaxed. 

Malaysia and Indonesia filed separate complaints against the EU to the WTO in response to the EUDR, arguing the ban to be discriminatory. Malaysia’s complaint, filed in January 2021, was decided in favor of the EU in March 2024. While the WTO noted “unjustifiable discrimination” against Malaysia in the formulation of the EU’s policy, it maintained that the EU had the right to make rules against the import of crop-based fuels for environmental reasons. As a result, while the EU does not need to withdraw their regulations, they must adjust them to be less discriminatory. Meanwhile, Indonesia requested that their complaint, filed in August 2023 regarding biodiesel specifically, be suspended one day before the result of Malaysia’s case was published. Indonesia’s complaint was decided by the same WTO panel as Malaysia’s, with their verdict expected to be revealed the same day.

Despite the unfavorable WTO ruling, Malaysia viewed the verdict as a victory. Minister of Plantations and Commodities Johari Abdul Ghani declared that the WTO’s ruling “demonstrates that Malaysia’s claims of discrimination are indeed justified,” and that Malaysia intends to continue defending their palm oil market against trade barriers. Malaysia has made attempts to safeguard this industry since the EUDR was enforced, announcing a deal with China in September 2023 to double their palm oil exports. The $533 million (2.5 billion ringgit) deal followed the signing of an MoU in April 2023, promising to enhance palm oil trade and stabilize the palm oil global supply chain. These developments highlight the continuing prevalence of palm oil in the global market—while the EU may place significant bans on palm oil, other countries still seek the commodity, redirecting trade flows toward other global importers. 

Malaysia is also making efforts to demonstrate progress toward sustainable palm oil. In April 2024, Minister Johari called on the EU to act fairly on enforcing such “strict” environmental laws, emphasizing that Malaysia is working toward their ambitious climate goals. Malaysia is taking alternative measures to prove palm oil harvesting is sustainable, with the country currently working with Japan to turn felled palm trees into biomass for renewable energy. Palm trees are typically felled when they decrease their yield, and are left to decompose, emitting methane gasses and becoming breeding grounds for termites. But while the project is sustainable, the biggest question is whether recycling these palm trees will become profitable. 

While Malaysia found ways to export palm oil elsewhere, Indonesia focused on safeguarding palm oil domestically amid nationwide cooking oil shortages. In April 2022, Indonesia placed a total ban on palm oil exports, including crude and refined palm oil. While acknowledging that the ban would hurt its position in the international market, Indonesia stressed the need to prioritize addressing nationwide shortages. Indonesia was criticized for this decision, with some analysts emphasizing the ban would further increase the price of palm oil around the world. And just a month later, Indonesia lifted the ban to ease the global market and resumed its status as the top palm oil exporter in the world. But with the EUDR in place and top palm oil importers like China experiencing slowed economic growth, Indonesia faces an increased strain on palm oil exports. As a result, Indonesia faces a new predicament: with increased palm oil production and lower exports, how can the country maintain its reputation as a palm oil powerhouse?

Indonesia has turned to biodiesel not only to safeguard its palm oil export market but also to showcase its sustainable palm oil innovations. In August 2023, Indonesia expanded its mandatory B35 biodiesel program, which now blends conventional fuel with 35 percent biodiesel fuel to increase renewable energy consumption in the region. By increasing biodiesel usage, Indonesia is reducing oil imports, creating an export market of more affordable fuels. Indonesian president-elect Prabowo Subianto intends to increase this mandatory program to B50, with the current Indonesian government considering implementing B40 later this year. Indonesia has also applied biodiesel to the sustainable aviation fuel industry, flying its first commercial flight using a palm-oil blended jet fuel in October 2023. The United States has supported Indonesia’s sustainable palm oil efforts, with the United States Agency for International Development (USAID) and the Roundtable on Sustainable Palm Oil’s Memorandum of Understanding encouraging the country’s sustainable palm oil production. The memorandum emphasizes cooperation between key stakeholders, which includes working with local governments and the private sector to improve environmental governance and land-use planning.

While the EUDR may have closed some export doors on both Indonesia and Malaysia, both nations have found other markets to pursue, emphasizing that palm oil is not going to be globally eradicated any time soon. Instead of trying to eradicate unsustainable palm oil via trade barriers, the EU should restructure its dialogues with both Indonesia and Malaysia to discuss opportunities for sustainable palm oil solutions. Belvinder Kaur Sron of the Malaysian Palm Oil Council goes as far to argue that “you can’t impose legislation and then come after and say, ‘Come have a dialogue.’” Dialogues must be reworked to occur before future regulations, to ensure transparency between the EU and Indonesia and Malaysia. These dialogues should also include the most impacted groups in the room, which are palm oil smallholders and farmers, to create more opportunity for innovative projects and solutions. 

The EU should also take note of collaborative projects between other countries when considering potential sustainability programs with Indonesia and Malaysia. USAID’s Smallholders Oil Palm Project Support notably strives to enhance economic growth in Liberia by increasing the incomes of smallholder oil palm producers in exchange for reducing palm oil-related deforestation. Additional contributions to the project include providing Liberian farmers with modern farming methods and irrigation technology, as well as providing access to credit for low-cost palm oil manufacturers. By working with Indonesia and Malaysia to create similar solutions, the EU can not only maintain strong trade relations with global palm oil powerhouses, but also assist both nations in their climate transitions. 

Lauren Mai is a program coordinator and research assistant for the Southeast Asia Program at the Center for Strategic and International Studies in Washington, D.C.

Lauren Mai
Program Coordinator and Research Assistant, Southeast Asia Program