[EXPLAINER] Why Malaysia is considering a ban on palm oil exports to the European Union

Malaysia and Indonesia have for years been at loggerheads with the European Union over curbs on imports of palm oil, which the two countries say are trade barriers and protectionist measures for the bloc's domestic oilseed industries.

The EU deforestation regulation is in addition to an EU renewable-energy directive, announced in 2018, that requires the phasing out of palm-based transportation fuels by 2030.

The bloc has also set a separate safety limit on food contaminant 3-MCPD esters for palm oil compared to soft oils derived from crops such as soybean, canola and sunflower.

Indonesia and Malaysia, which account for 85% of the world's palm oil exports, have filed separate World Trade Organisation suits against the EU over the renewable-energy directive.

The palm oil producers say they have taken steps to meet EU requirements, including stepping up their national sustainable palm oil certification standards and improving environmental protection and food safety standards, but that the bloc keeps imposing new restrictions.

EU officials say their regulations do not target any one country and are aimed at ensuring that commodity production does not further drive deforestation and forest degradation.

Bursa Malaysia's benchmark crude palm oil futures FCPOc3 have yet to react to Malaysia's proposal, although some traders said they see it as a bearish signal.

Some in the palm industry view the proposed ban as a knee-jerk reaction that will hurt the sector, and others laud Malaysia for putting its foot down.

Malaysia said it will discuss with Indonesia the possible ban and other strategies to tackle the EU measures, as both have agreed to increase cooperation to fight “discrimination” against the commodity.

It is not clear whether Malaysia is considering a direct ban on exports to the European Union or enacting tariffs.

The EU accounts for 9.4% of Malaysia's export volume in 2022. Malaysian Palm Oil Board data indicates that exports to the 27-member bloc have been declining since 2015.

In 2022, Malaysia’s exports to the EU fell 10% from the previous year to 1.47 million tonnes. That is a 40% plunge from 2.43 million tonnes in 2015.

The Malaysian Biodiesel Association last year urged industry officials to come to terms with a steady decline in shipments of palm-based biofuels to the EU.

The palm oil industry makes up about 5% of Malaysia's economy. Malaysia has in recent years actively explored new markets to offset losses from Europe, including food-importing countries in the Middle East, Central Asia and North Africa.