EU’s ‘standard risk’ label on Malaysian palm oil clouds upcoming FTA talks

The European Union’s (EU) ‘standard risk’ label on Malaysian palm oil has thrown a wrench into next month’s free trade agreement (FTA) talks, economists said.

The classification, they said, sends a provocative signal at a time when both sides are hoping to reboot stalled discussions after more than a decade.

Williams Business Consultancy Sdn Bhd director Dr Geoffrey Williams said it also reflects the EU’s intent to use non-tariff barriers as its main negotiating tool, echoing past failed strategies.

“This is a disappointing start to the FTA talks and signals that the EU intends to leverage non-tariff trade barriers based on their own unverified and disputed sustainability criteria as their main negotiation tool.

“It is exactly the same bullying tactic used by the United States (US), but through non-tariff barriers rather than tariffs,” he told Business Times.

Malaysia and the EU are set to resume FTA negotiations next month, nearly 13 years after talks stalled over disagreements on procurement access and sustainability requirements.

Universiti Utara Malaysia Associate Professor Dr Irwan Shah Zainal Abidin said the ‘standard risk’ classification could negatively impact the tone of the upcoming talks, especially since palm oil remains one of Malaysia’s key export commodities to the EU.

“This classification, rather than a ‘low risk’ label, will certainly have negative implications for the renewed FTA discussions, particularly for Malaysia,” he said, adding that palm oil will be a central point of contention.

Formal negotiations between Malaysia and the EU were first initiated in 2010 but were suspended in 2012 after little progress was made on key issues.

Williams said the current posture from the EU suggests little has changed since the talks first began.

The negotiations, he said, were hindered by two key demands from the EU namely access to federal government procurement and entry into Malaysia’s automotive sector.

To advance these goals, Williams said the EU employed non-tariff sustainability restrictions on palm oil and imposed stringent technological standards on electrical and electronic products as bargaining tools.

“They failed to reach an agreement then and it looks like they intend to pick up where they left off. So the EU-Malaysia FTA risks becoming a repeat of history, ending in either overly extended negotiations or complete failure again,” he added.

Irwan said the EU’s risk assessment may be based on outdated data or misconceptions, rather than the current realities on the ground.

He argued that the ‘standard risk’ label is deeply flawed and should be contested, suggesting it likely stems from inadequate engagement or entrenched bias against palm oil.

“The reality is that deforestation linked to palm oil is no longer the case in Malaysia,” he added.

Irwan also pointed to the implementation of the Malaysian Sustainable Palm Oil (MSPO) certification, which has been mandatory since 2020, as a key policy shift that the EU appears to have overlooked.

“There is a need for the EU to consider country-specific contexts. Not all palm oil production leads to deforestation, certainly not in Malaysia,” he added.

In contrast to the EU’s rigid and outdated frameworks, Williams said Malaysia has demonstrated greater agility in forging trade deals.

He pointed to Malaysia’s swift conclusion of an FTA with the United Kingdom and a tariff arrangement with the US within weeks.

This, he added, highlighted the stark difference in negotiating pace compared to the EU, whose “efforts remain bogged down”.

The EU’s recent move to assign Malaysia a ‘standard risk’ designation under its EU deforestation regulation (EUDR) has also drawn sharp criticism from the Malaysian Palm Oil Council.

It argued that the label unfairly undermines Malaysia’s national sustainability standards, particularly the MSPO scheme.

Williams echoed this concern, calling the designation a unilateral and protectionist tool.

“It is simply a way of making life difficult for Malaysian palm oil producers by saying the MSPO standards are too weak and pose a sustainability risk.

“It is a unilateral negative product label rather than an actual ban,” he said.

Under the EUDR, countries and commodities are classified into three categories namely low risk, standard risk and high risk.

The classifications determine the level of scrutiny and due diligence required for goods such as palm oil, soy and timber entering the EU market.

A ‘low risk’ status means simplified checks, while ‘high risk’ implies stringent controls. ‘Standard risk’, which Malaysia has been assigned, subjects exporters to the full due diligence requirements under the regulation.

“A ‘low risk’ designation would reassure EU buyers that Malaysian palm oil was generally safe from compliance breaches that could halt production or sales,” Williams said.

“But with the ‘standard risk’ tag, it damages brand perception, consumer confidence and puts pressure on Malaysia to engage EU consultants to fix so-called operational gaps.”

According to Irwan, Malaysia’s palm oil sector is among the most efficient globally and contributes positively to climate goals.

This efficiency is reflected in palm oil’s significantly higher yields compared to other oil crops such as sunflower and soy, along with its role as a carbon sequester.

Labelling Malaysia as ‘standard risk’ without accounting for these advantages, he argued, overlooks the broader environmental context.

Given this, he stressed that any credible risk classification must be based on a holistic evaluation of a country’s overall climate impact.

“Any country that has achieved zero conversion of natural forest should not be classified as ‘standard risk’.

“There is still time for Malaysia to engage with the EU and highlight the real progress being made, especially by smallholders working to reduce forest loss and degradation,” he added.

Malaysia exported about 1.07 million tonnes of palm oil to the EU in 2023, representing about 7.1 per cent of its total palm oil exports.

The export value of crude palm oil alone amounted to roughly US$446 million, with a volume of 392,811 tonnes, making the EU one of Malaysia’s key markets.

Despite this, trade volumes have shown signs of strain. Between July 2022 and March 2023, Malaysia’s palm oil exports to the EU fell by around 30 per cent, totalling 426,000 tonnes over the period.

The decline has been attributed in part to regulatory uncertainty and shifting EU sustainability requirements.

Tags: talks, Free Trade Agreement, non-tariff trade barriers, European Union, Malaysia, palm oil, agreement