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European Union

Indonesia's Palm Oil Industry Faces New Challenges Amid EU Trade Pact

Strategic Insights

— 2 min read

The Indonesia-EU Comprehensive Economic Partnership Agreement (IEU-CEPA) has been signed, allowing Indonesian palm oil to be sold in the EU with zero tariffs. However, other obstacles are looming, including the European Union's Deforestation Regulation (EUDR), which requires exporters to carry out due diligence and provide documentation proving that their palm oil did not come from recently deforested areas. This could pose significant challenges for small palm farmers, who control over 42% of Indonesia's palm oil plantations, and may risk exclusion from supply chains if they cannot meet the new regulations.

Key Takeaways:

  • The IEU-CEPA agreement will allow around 80% of Indonesia's exports to enter the EU tariff-free, but this does not guarantee smooth exports due to other regulatory barriers.
  • The EU will demand palm oil imports to comply with the EUDR from December this year, requiring exporters to carry out due diligence and provide documentation proving that their palm oil did not come from recently deforested areas.
  • Small palm farmers, who control over 42% of Indonesia's palm oil plantations, may struggle to meet the new regulations and risk exclusion from supply chains.
  • The Indonesian government needs to provide clear rules regarding land cultivation for smallholders and establish a national traceability system to minimize export rejection.
  • The EU is keeping a close watch on environmental protections in Indonesia, including traceability of plantation origins and pressure on European importers to prove due diligence.
  • Civil society groups in Indonesia have warned that sustainability certification schemes could simply turn into tools of greenwashing, allowing companies to project a "green" image without making meaningful changes on the ground.
  • Indonesia is far behind Malaysia on palm yields, with an average national productivity of 12.8 tons of fresh fruit bunches (FFB) per hectare, compared to Malaysia's 19 tons per hectare under its Malaysian Sustainable Palm Oil (MSPO) certification.
  • Malaysia leads in certification standards and logistics efficiency, and experts warn that all ASEAN producers face the same EUDR hurdle.
  • Expanding Indonesia's exports of related products such as biodiesel, palm-based cosmetics, and chemicals derived from palm oil could provide opportunities, but experts stress that credible sustainability compliance and a trusted traceability system are essential to maximize the benefits of the EU deal.

Statistics:

  • 80% of Indonesia's exports will enter the EU tariff-free once the IEU-CEPA agreement takes effect.
  • 42% of Indonesia's palm oil plantations are controlled by small palm farmers.
  • Indonesia's average national palm oil productivity is 12.8 tons of fresh fruit bunches (FFB) per hectare.
  • Malaysia's average palm oil productivity is 19 tons per hectare under its Malaysian Sustainable Palm Oil (MSPO) certification.
  • The Indonesian Ombudsman reported that Indonesia loses billions of dollars in revenue due to low palm oil productivity.
  • The EU will demand palm oil imports to comply with the EUDR from December this year.

Sources:

  • "EU and Indonesia Open 'Exciting New Chapter' in Trade with Free Trade Deal." DW, 2023.
  • Eddy Martono, Chairman of the Indonesian Palm Oil Association (GAPKI), interviewed by DW, 2023.
  • Bhima Yudhistira, Executive Director of the Center of Economic and Law Studies (CELIOS), interviewed by DW, 2023.
  • "Indonesia's Palm Oil to Enjoy Zero-Tariff Access in EU." Antara News Agency, 2023.
  • Walhi (Friends of the Earth Indonesia) and Indonesia for Global Justice (IGJ) statements to DW, 2023.

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