The EFTA-Indonesia Template for Sustainable Palm-Oil – and for Human Rights?

by Dr Charlotte Sieber-Gasser*

The members of the European Free Trade Association (EFTA), Iceland, Norway, Liechtenstein and Switzerland, and Indonesia recently concluded a Comprehensive Economic Partnership Agreement (CEPA) with a potentially ground-breaking new regulatory mechanism to strengthen sustainability through trade: specifically, Chapter 8 “Trade and Sustainable Development” (TSD) introduces binding obligations with regard to the extra-territorial application of non-product related process and production methods (here: sustainable palm oil) for the first time worldwide. A closer look reveals the potential of the new regulatory mechanism to strengthen sustainability through trade beyond sustainable palm oil. The main challenge remains the effective willingness of prospective trade partners to include sustainability and human rights concerns in international trade agreements. In the case of Switzerland, evidence suggests that the economic incentive to switch from conventional to sustainable palm oil production due to CEPA is limited at best, which may explain why the new regulatory mechanism could be included in CEPA in the first place.

Race-to-the-Bottom and Non-product Related Process and Production Methods

Non-product related process and production methods (npr PPMs) cover the way a product or commodity is being produced. They typically deal with labour standards, the protection of the environment and of human rights, or climate change mitigation in production – standards which do not affect the quality of the final product or commodity, but concern the people and resources involved in the production process (for an illustrative example and legal discussion, see here). Differentiating between imports based on npr PPMs therefore constitutes in principle a violation of the non-discrimination obligation in World Trade Organization (WTO) law.

The legal prohibition of differentiation between imports produced in compliance with high environmental, labour and human rights standards and other imports contributes to the economic incentive for producers to outsource their production to places where standards are low and, hence, production is cheap. This so-called “race-to-the-bottom” in npr PPMs has been identified as one of the downsides of economic globalization.

By reference to the general exceptions, differentiation based on npr PPMs might be justifiable in WTO law (see also here). However, the issue remains largely untested – and contested – on the multilateral level (for more on this, see here). In contrast, it is generally agreed that differentiation in preferential trade agreements complies with WTO obligations (see Article XXIV GATT; Article V GATS). Preferential trade agreements may, hence, incorporate legally binding rules and obligations on the basis of npr PPMs (such as environmental and labour standards and human rights) provided both trading partners agree. As Bronckers & Gruni (here) and many others show, however, WTO members have to date done so rarely, if at all: up until today, TSD chapters are for the most part limited to the adoption and/or implementation of international core environment, climate, human rights and labour treaties, and non-compliance remains non-sanctionable.

Incentivising Race-to-the-Top through Bilateral Trade Agreements

Here is where CEPA enters unchartered territory and links trade preferences with compliance with npr PPMs for the first time: in the very specific case of palm oil, CEPA tariff preferences only apply to imports from Indonesia, which comply with the “laws, policies and practices aiming at protecting primary forests, peatlands, and related ecosystems, halting defore

station, peat drainage and fire clearing in land preparation, reducing air and water pollution, and respecting rights of local and indigenous communities and workers” (Articles 8.10(2):a and 8.10(2):e). Importing CEPA parties (i.e. the EFTA-states) will establish domestic control systems to ensure that only palm oil and its derivatives produced in line with Article 8.10 benefit from preferential treatment. In Switzerland, this means that importers of Indonesian palm oil and palm oil derivatives have to prove RSPO-certification (international sustainability standard established by “Roundtable on Sustainable Palm Oil”), if they want to benefit from CEPA tariff reductions. The domestic processes of import control and governance in Switzerland are established in a separate ordinance, de facto moving responsibility for enforcement to Swiss authorities. Therewith, CEPA creates an enforceable, tangible economic incentive to switch from conventional to sustainable production, while avoiding bilateral trade conflicts by limiting enforcement to import control and governance of domestic importers.

Potential and Pitfalls in the Case of Switzerland: Appraisal of CEPA incentives for sustainable palm oil production

The CEPA preferences for sustainable palm oil successfully overcome a number of regulatory challenges normally standing in the way of strengthening sustainability through trade: 1) they comply with WTO obligations; 2) they respect national sovereignty; and 3) they are binding and enforceable with minimal effort. By incorporation of private standards which are considered particularly suitable for the assessment of sustainability in trade in palm oil and its derivatives, CEPA benefits from existing private structures in place for the extra-territorial verification of compliance with sustainability standards.

The CEPA incentive for sustainable palm oil production addresses the concern that an increase in bilateral trade might lead to an increase in deforestation. The economic incentive for sustainable palm oil production is, hence, meant to avoid such negative side-effect of bilateral trade liberalization. Given that deforestation is not a purely Indonesian problem, commitments of EFTA-states regarding – for instance – reafforestation would have contributed to a more balanced, equal and nuanced outcome of CEPA negotiations.

In Switzerland, the CEPA incentive for sustainable palm oil clearly also takes into account concerns raised by Swiss farmers who were opposed to trade liberalization with Indonesia: they fear for their market share in the supply of vegetable oils to the food industry. Hence, it cannot be ruled out entirely that the motivation behind the incorporation of the incentive for sustainable palm oil in CEPA actually was protectionism and not necessarily the rescue of primary forests and peatlands in Indonesia.

But why did Indonesia agree then to this arrangement? In previous years, around 90% of Indonesian palm oil exports to Switzerland were intended for animal feed. Given that palm oil imports for animal feed are tariff-free in Switzerland, Switzerland was unable to offer additional – and hence unable to link imports for animal feed with sustainability standards. The remaining approx.10% of Indonesian palm oil exports to Switzerland destined for the food industry were already RSPO-certified prior to the conclusion of CEPA – not because of state intervention, but because of private sector demand for sustainable palm oil. Hence, Indonesian producers of sustainable palm oil are offered slightly better market access to Switzerland through CEPA compared with present day – while the producers of non-certified palm oil would, in any case, not have been able to secure additional market shares in the supply of vegetable oils to the Swiss food industry.

Lessons for Human Rights in International Trade

The CEPA template for economic incentives in international trade for a race-to-the-top in npr PPMs could certainly also be applied to human rights. Evidence from CEPA shows that the CEPA incentive hinges upon a suitable private standard and upon private structures for the extra-territorial verification of compliance. In addition, consumer-driven preferences for sustainable production clearly affect the assertiveness of the relevant negotiating position in international trade negotiations. If those conditions are met with respect to a specific human rights concern, clearly such a concern could be met with a similar incentive.

Until proven otherwise, and while the real impact of the CEPA incentive on the palm oil industry in Indonesia remains uncertain – the assumption remains that a similar, even bolder incentive in a future trade agreement will actually make a difference.

* Dr. iur. Charlotte Sieber-Gasser, MA, is a Senior Researcher and Lecturer at the Department of Public Law, University of Lucerne, Switzerland. She specializes in international trade regulation and legal issues of democracy and of sustainable development.

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