EU’s palm oil ban in Pakistan’s favour

In December 2015, Denmark, France, UK, Germany, Netherlands, and Norway signed the Amsterdam Declaration declaring themselves supporters of 100 percent sustainable palm oil in Europe. Their intention to end illegal logging and deforestation by 2020 was all part of the declaration.

Following the declaration, a report was made to the European Parliament in 2017 that stated that deforestation causes climate change and brings social and economic problems. Palm oil was identified as a major driver of deforestation. This led to the EU Resolution of 2017 under which the trade bloc will be phasing out palm oil based bio-fuels completely by 2020.

At $6.8 billion, India is the single largest importer of palm oil. As a trade bloc however, EU’s imports of $7.5 billion in 2017 make it the most important consumer of palm oil. Of this about a third is used for biodiesel while the rest is used for the food and chemical industries. The ban therefore will not reduce EU’s palm oil imports to zero.

However, since demand for biodiesel is growing and a large percentage of it is made from palm oil, the ban impacts the future increases in imports by EU. Since Indonesia and Malaysia are the main suppliers, are intricately linked (read “Global politics of palm oil” published on October 30, 2018) and have invested heavily in increase in palm oil production, their exports are likely to be impacted.

EU’s ban on palm oil for biodiesel production can impact Pakistan in two ways. Firstly, basic demand and supply dynamics indicate that prices of palm oil will decrease as EU phases out its imports. Since palm oil is a staple on the import bill, this is good news for the CAD. Of course it can be argued that volumetric increase will nullify price decrease but as the past few months import trends have shown, increase in quantity has not resulted in an increase in dollar amount spent. (Read “Palm oil and ghee,” published on December 7, 2018).

Secondly, decrease in EU’s importance as a consumer allows Pakistan to be in a stronger buying position. Despite being an important importer and having trade agreements signed with both major palm oil producing countries, Pakistan has yet to leverage its buying power to increase exports to them. (Read “Leveraging purchasing power,” published on November 15, 2018) As EU’s imports wane, Pakistan could use its increased significance as a market to negotiate higher allowance of crude palm oil imports as well as higher exports. The European Union’s ban could work in Pakistan’s favour if this opportunity is capitalised.