On 31 January 2020, the United Kingdom (UK) left the European Union (EU). According to the UK’s Prime Minister Boris Johnson, this meant not only the UK’s regaining its sovereign authority, but also for the country re-emerging “as a campaigner for global free trade”. Firstly, this is reflected in the fact that, since ‘Brexit’ day, the UK has retaken an independent seat at the World Trade Organization (WTO), allowing the UK to take part, in its own right, in all WTO matters and negotiations. Secondly, it means that the UK will now be able to engage in bilateral trade negotiations, with the proclaimed intention to have 80% of total UK external trade covered by preferential trade agreements (PTAs) by 2022.
‘Brexit’ and the current repositioning of the UK within the global trade community will affect both international trade, as well as the UK’s domestic regulatory framework. As long as the UK was part of the EU, the exclusive competency for trade matters rested with the EU. With ‘Brexit’, the UK has, in principle, regained this competency.
Before the consequences of ‘Brexit’ will take full effect, however, the EU and the UK have entered into a transition period, which is currently scheduled to end on 31 December 2020, during which the UK remains part of the EU Customs Union and the EU Single Market. Therefore, trade in goods and services between the EU, the UK, and other WTO Members will remain, de jure, largely unaffected until that time. Importantly, during the transition period, the UK will be able to negotiate, sign and ratify its own preferential trade agreements with third countries, which may then enter into force after the end of the transition period.
Therefore, the transition period presents a crucial moment to explore future trade opportunities with third countries like Malaysia and to start shaping the UK’s domestic regulatory framework.
Increased Malaysian palm oil exports to the UK?
The UK has underlined that, in its rapprochement to the Asia-Pacific region, it would seek close alignment with Malaysia. Within ASEAN, Malaysia is the UK’s second most important trading partner by trade volume, ranking only after Singapore. From Malaysia’s perspective, the reconfiguration of the UK’s global trade relations presents an important opportunity to advance its bilateral trade interests with the UK, which ranked 19th among Malaysia’s biggest trading partners in 2019. Malaysia’s historical close ties to the UK should be an asset in this process.
As Malaysia is the world’s second biggest producer and exporter of palm oil, which accounts around 4 % of Malaysia’s total export value in 2019, the commodity represents a key element on Malaysia’s trade agenda. In a meeting with the UK’s Foreign Secretary Raab, during his visit to Malaysia in February 2020, Malaysia’s ex-Foreign Minister Datuk Saifuddin Abdullah expressed the hope that the UK would increase its palm oil imports from Malaysia. Already in the past, Malaysia had repeatedly asked the UK for support regarding its palm oil exports and, in February 2020 , a delegation of Malaysian Government officials visited the UK to invoke the “close historical ties and good relationships as Commonwealth countries” in order to persuade the UK advocate on behalf of its palm oil interests within the EU.
In 2019, Malaysia’s global palm oil exports amounted to approximately USD 8.9 billion, of which around 15% (i.e. USD 1.3 billion) were destined for the EU, including the UK. Total palm oil imports by the UK was around 500,000 MT (pls refer to table 1) and Malaysia’s share is 13 % in 2019 (pls refer to graph 1). ‘Brexit’ and the UK’s independent trade policy now provide the opportunity to shift trade flows to the benefit of Malaysia and Malaysian palm oil.
Table 1: U.K. – IMPORTS OF PALM OIL BY COUNTRIES (‘000 MT)
A more favourable view on palm oil?
Apart from the mere trade volumes, ‘Brexit’ might allow for an important reset of the debate on palm oil and the policies affecting it in the UK. In recent years, palm oil has increasingly come under political pressure over claims of the alleged unsustainability of its production process, as well as in regards to its nutritional value. Most importantly, the EU has ‘blacklisted’ palm oil as unsustainable in the context of its revised Renewable Energy Sources Directive (the so-called RED II), under which EU renewable energy benefits for palm oil will gradually be phased-out by 2030, which will likely amount to a de facto ban of the commodity because it will render palm oil uncompetitive as a feedstock for the production of biofuel to be sold in EU.
Graph 1: UK IMPORT OF PALM OIL, BY COUNTRY OF ORIGIN IN 2019 (MT)
Against this backdrop, Malaysia puts its hopes on the post-‘Brexit’ UK to promote a more trade-friendly and fact-based approach for palm oil. In an opinion piece by a professor at the University of Bolton in the UK, written with the assistance of the office of Malaysia’s ex-Prime Minister, Mahathir Mohamad, denounced the EU’s approach as “blatant hypocrisy” and underlined that “post-Brexit Britain would be free to follow” a course that incentivises “sustainable palm oil production rather than pursuing boycotts and protectionism”.
Malaysia has already taken important steps in the direction of sustainability by making its Malaysian Sustainable Palm Oil (MSPO) certification scheme mandatory since 1 January 2020. Not all palm oil is unsustainable, quite the contrary in fact, when it comes to Malaysian palm oil. For years now, the Malaysian palm oil industry has been engaging in a number of initiatives to ensure that palm oil is produced in a manner that is respectful of the environment and does not contribute to unsustainable deforestation and climate change. In relation to palm oil and health, in 2016, Italy’s Superior Health Institute issued an opinion on the possible health consequences related to the use of palm oil as a food ingredient. According to the opinion, there is no direct evidence in the scientific literature that palm oil, as a source of saturated fatty acids, has a different effect on cardiovascular risks than other fats with a similar percentage of composition of saturated fats and mono/polyunsaturated fats, such as, for example, butter. Therefore, palm oil consumption does not correlate per se to higher risk factors for cardiovascular diseases in average consumers. Hopefully, the UK will now place science, facts and unbiased evidence at centre stage in defining its policies and adopting measures that may affect palm oil.
‘Brexit’, the opportunity to negotiate preferential market access for palm oil
Beyond the political dimensions, Malaysia should strive for preferential market access to the UK so as to increase its palm oil export volume and market share (pls refer to diagram 1). Even though under the EU tariff schedule, which the UK applies until the end of the transition period, there are no tariffs on crude palm oil for technical and industrial uses, other products under the palm oil tariff line are subjects to duties of up to 12.8 %.
Diagram 1: U.K.: IMPORTS OF PALM OIL BY COUNTRIES IN 2019 (‘000 MT)
With ‘Brexit’ and the prospect of an independent UK tariff schedule, these tariffs should be back on the table. The departure of the UK from the EU will also bring up the topic of tariff-rate quotas (TRQs), which determine the quantities of goods that may be imported duty-free or at reduced tariffs (in-quota rates and volumes). Once a quota is filled, the regular higher tariff (the out-of-quota rate) applies. The out-of-quota tariff rate can be significantly higher than the in-quota tariff. Currently, the UK, as part of the EU’s Customs Union, does not maintain its own TRQs, but the EU-wide TRQs also apply to the UK.
In view of ‘Brexit’, these TRQs are currently being recalculated and reallocated by both the EU and the UK. To date, the EU does not apply any TRQs for palm oil – but with ‘Brexit’ and the UK’s future independent trade policy, depending on the UK’s future tariffs on palm oil products, the establishment of TRQs for certain palm oil tariff lines should be considered.
During his February 2020 visit to Malaysia, UK Foreign Secretary Raab underlined the UK’s will to work proactively with Malaysia to promote biodiversity and prevent deforestation, which may be read as a statement of support regarding Malaysia’s approach to sustainable palm oil. Regarding a preferential trade agreement between the UK and Malaysia, Secretary Raab put the focus on a multiparty approach, underlining the UK’s ambition to become part of the Comprehensive and Progressive Agreement for Transpacific Partnership (CPTPP) – a preferential trade agreement between 11 countries in the Asia-Pacific, including Malaysia.
Better enforcement of labelling rules?
For years now, an increasing number of food business operators has been engaging in anti-palm oil campaigns, labelling many of their food products as ‘palm oil-free’. The trend started in Belgium and France, but has since then spread to other EU Member States including the UK. While those ‘palm oil-free’ or ‘no palm oil’ claims and labels are, arguably, illegal under EU and EU Member State law, the rules are not properly enforced by EU Member States’ authorities policing the market for false and misleading labelling and claims. A prominent examples of an anti-palm oil campaign in the UK is the case of Iceland Foods Ltd, the UK’s leading frozen food company and retailer, which, in 2018, had announced to refrain from palm oil in all its own label products, accompanied by an anti-palm oil marketing campaign and “no palm oil” labels on its products.
Currently, EU regulations on food labelling and on nutrition and health claims directly apply in the UK, implemented, for example via the UK’s Food Information (England) Regulations 2014 and the Nutrition and Health Claims (England) Regulations 2007. It can be expected that, over time, the UK will review its food law and make adjustments. In this context, a better regulation of so-called ‘free from’ claims should be considered for authorities to better address misleading and anti-competitive labelling and related marketing campaigns, such as those against palm oil.
An opportunity for the UK, for Malaysia, and for palm oil
In view of the multitude of effects of ‘Brexit’, it should first and foremost be considered as an opportunity for all parties involved. The UK is in the process of mapping out its future trade policy, which, if played well by the Government of Malaysia, should benefit Malaysia and its palm oil industry. At the same time, ‘Brexit’ will allow the UK to draft its own rules, including on food labelling. Working with the UK, Malaysia can achieve important trade benefits for palm oil.