EU Deforestation-Free Regulations

On the island of Borneo, Malaysia, palm trees stretch as far as the eye can see. Malaysia is the world’s second largest palm oil producer after Indonesia. However, the European Union’s (EU) recent policies threaten to affect its status as Malaysia’s biggest export. The EU’s Renewable Energy Directive (‘RED II’) and the related European Union Deforestation Regulation (‘EUDR’), categorise palm oil biofuels as high ‘indirect land-use change’ (‘ILUC’) risk. On December 9, 2019, Indonesia challenged this alongside Malaysia at the World Trade Organisation (‘WTO’) . The primary contention raised concerned the EU’s restrictions on palm oil imports and their environmental concerns.

In March 2024, the WTO Panel ruled for EU but found its strict regulatory requirements constituted unjustifiable discrimination against Malaysia, violating GATT’s Special and Differential Treatment principles. The panel noted the EU’s application of a “rigid and unbending requirement” that other Members are mandated to adopt “essentially the same” regulatory standards, rather than standards which are of “comparable effectiveness,” is a gross violation of Part IV, GATT. This blogpost investigates these claims and demonstrates the EU’s perpetuation of climate colonialism while keeping the wheel of the resource curse moving. 

Regulatory Background

In 2015, the EU launched the EU’s Circular Economy Action Plan (‘CE Plan’), promoting an economic model that will “modernise the EU industrial base to ensure its global competitive edge.” The European Parliament defines a circular economy as a “model of production and consumption,” which is in sharp contrast to the traditional linear model, based on a ‘take-make-consume-dispose’ approach. The circular economy promotes sustainable practices to maximise resource lifespan and minimise waste. The CE Plan sets targets for landfill, reuse, and recycling by 2030. Central to this Plan is the reduction of greenhouse gas emissions and the minimisation of ecological harm due to deforestation and biodiversity loss. Consequently, the EU palm oil restrictions align with the Plan’s primary objective to mitigate such harmful impact.

While the EU claims these measures are ‘necessary’ for environmental sustainability, palm oil-producing countries, particularly Malaysia and Indonesia, have taken issue with the EU’s RED II policy, citing the EUDR. The EUDR mandates that any state importing or exporting commodities linked to forest degradation into or out of the EU market must prove that the product has been produced in a deforestation-free manner. Article 4 and 5 of the mandate specifically oblige ‘operators’ and ‘traders’ to show that the product has not originated from deforested land or have contributed to forest degradation. The EU mandate also enforces penalties for non-compliance, including market denial and fines up to 4% of the annual turnover. To balance sustainability goals with trade obligations, it justifies anti-deforestation measures under GATT, relying on Article XX, to argue they are essential and non-discriminatory.

EU’S GATT Defence: Article XX GATT

Article XX allows WTO members to justify measures that would otherwise violate GATT obligations if they are necessary for public policy goals such as environmental protection and human health, provided they do not constitute arbitrary or unjustifiable discrimination. In response to Malaysia’s WTO claims of discrimination, the EU argued its anti-deforestation measures fall under the “three-pillar exceptions approach” of Article XX (a), (b), and (g). Below is a critical analysis of the EU’s defence under each pillar, the Malaysian response to the defences, and the panel’s findings: 

Article XX(b) permits exemptions if a measure is deemed “necessary to protect human, animal or plant life or health”. The EUDR prioritises minimising environmental and ecological damage associated with unsustainable palm oil production.

The EU relies on Article XX’s two-tiered analysis to argue that the EUDR is provisionally justified. The EU contends that according to the text of GATT each member has the liberty to define “public morals, life, health, and conservation according to its values and determine the desired level of protection”. Hence, the EU claims that restricting palm oil imports from sources that contribute to environmental degradation is necessary to protect global biodiversity and ecosystems, which ultimately contribute to harmful impacts to human health.

Article XX(g) exempts measures “relating to the conservation of exhaustible natural resources”, provided these are applied in conjunction with domestic restrictions. The EU argues its import regulations aim to conserve exhaustible natural resources like forests by discouraging environmentally harmful practices such as Malaysia’s primary agricultural practice of ‘slash-and-burn’. This argument is cogent when considering forests and biodiversity as “exhaustible resources” due to the irreversible damage of deforestation.

The chapeau of GATT Article XX requires that a measure shall not result in “arbitrary or unjustifiable discrimination” or constitute a “disguised restriction”. In this context, the EU has demonstrated that its regulations are not only aimed at legitimate objectives of their policies, but are also applied consistently without targeting specific countries or products in an arbitrary manner (this claim is further unpacked in sub-part 3). 

Necessity Test 

Article XX requires that the measure must be ‘necessary’ to achieve the legitimate objective it claims to protect, which involves two requirements: 

1. There is a genuine link between the restriction on palm oil imports and the conservation of resources or protection of health; and
2. The measure is not more trade-restrictive than necessary.

The EU frames climate change as an ‘emergency’, citing biodiversity loss linked to biofuel production under ILUC. It argues that GATT lacks provisions for climate crises, as its ‘emergency’ clauses, i.e. Article XIX and XXI, address only safeguards and security interests. Underscoring Indonesia’s and Malaysia’s slash-and-burn practices, confirmed by satellite data, the EU justifies restrictions on palm oil feedstock to curb deforestation. The panel recognised this lexical oversight in the GATT framework and appreciated EU’s stance as ‘necessary’ for anti-deforestation policies. 

Non-Discriminatory Application 

In order to find whether the measure at issue is an arbitrary or unjustified discrimination against Malaysia, the Appellate Body cited the following grounds:

1. existence of non-discriminatory alternatives
2. failure to make “comparable efforts” to “facilitate access” to goods from all Members
3. discrimination resulted from the failure to take into account different circumstances that may occur in the territories of other Members
4. discrimination resulted from the application of a ‘rigid and unbending requirement’ that other Members adopt the regulatory standards.

The EU’s palm oil restrictions facilitate its broader environmental goals to curb deforestation, based on scientific criteria rather than targeting specific countries or engaging in trade protectionism. The EU allows sustainably certified palm oil imports through certification schemes, enabling Malaysia to export if its meets environmental criteria, underscoring that the measure is not an outright ban. 

However, the panel found the EU’s measures to be ungermane. Malaysian palm oil was disproportionately targeted against other vegetable oils which equally contribute to environmental concerns. Moreover, the panel based its decision on the EU’s study on the ILUC risk of palm oil, using outdated data from 2008 and 2016. It held that the report was plagued with “deficiencies”. Furthermore, if Malaysia wants to comply with the EUDR obligations, the developing state lacks the resources to implement the stringent traceability and reporting systems. 

The EU’s regulations favour vertically integrated companies, which dominate the European market and can more easily meet high traceability standards. RED II requires geolocation data for commodity production, placing a disproportionate compliance burden on Malaysia’s smallholders, who produce 40% of its palm oil across 816.1 thousand hectares. By enforcing traceability measures – requiring geolocation data and polygon maps – the EU disregards the structural realities of Malaysia’s smallholder supply chains, which operate informally with minimal documentation. These costly requirements, far exceeding the smallholder’s market value, effectively marginalise independent smallholders who lack government support and resist consolidation into commercial estates as they are driven by the sentiment of “keeping the land in the family”. In imposing such unilateral policies without regard for the regional contexts, the EU echoes its colonialist control over resource economies, dictating terms that entrench inequality and breach the UN SDG principle of “leaving no one behind”. 

The acknowledgement of the Panel of the above grounds is a victory for Malaysia despite the unfavourable WTO ruling. As the Minister of Malaysian Plantations and Commodities, announced, the ruling “demonstrates that Malaysia’s claims of discrimination are indeed justified”. The EUDR exemplifies a form of climate colonialism that disregards the agency of developing nations in determining their own destinies. Instead of recognising domestic sustainability initiatives by Indonesia and Malaysia like the Malaysian Sustainable Palm Oil initiative (‘MSPO’),  which began enforcing sustainability standards since 2011 and 2013, the EU continues to enforce unilateral policies that disproportionately burden Malaysia and Indonesia. Such a careless approach to policy implementation circles back to the politics of the natural resource curse theory; while dismissing Malaysia and Indonesia’s Common But Differentiated Responsibility towards climate change, the EU continues to compel economically disadvantaged nations to conform to policies unilaterally crafted by a wealthier state. 

As per several EUDR-MSPO gap analysis reports, the 2020 version of MSPO meets the regulatory requirements of the EUDR principles, including the prohibition of palm oil sourced from deforested land after December 2019, as outlined in Article 3, EUDR. Additionally, the Malaysian government introduced the homegrown MSPO Trace System, in compliance with Article 9 and 10, EUDR.  Yet, instead of fostering cooperation through Article 28, EUDR, which allows compliance partnerships, the EU maintains a top-down approach. Without financial and technical support, millions of smallholders risk exclusion, while large corporations dominate compliance. 

The EU’s benchmarking system exacerbates this by classifying countries as ‘high’, ‘standard’ or ‘low risk’ based on deforestation. Indonesia and Malaysia, despite sustainability progress, will likely be deemed high-risk, facing severe trade restrictions. Originally scheduled for implementation by December 2024, this classification has delayed the implementation of the EUDR until December 2025. This delay offers temporary relief but underscores the EU’s unchecked regulatory dominance. 

Conclusion

The RED II and the EUDR on palm oil imports reveals a broader pattern of environmental policies which are ostensibly aimed at promoting sustainability, but end up perpetuating modern climate colonialism, dictating development terms to the Global South. By mandating stringent compliance measures that disproportionately impact Malaysia and Indonesia’s palm oil industries, the EU imposes a one-size-fits-all approach which fails to account for the socio-economic realities of these nations. The EU’s policies continue to prove that the logic of capital determines most things under the veneer of a notional equality of law. The EU’s regulatory measures, even when justified under GATT provisions, exposes the contradictions between the EU’s environmental goals and its disregard for the developmental context of less developed countries. As Malaysia and Indonesia continue to face mounting challenges in meeting the EU’s high standards, it becomes increasingly evident that without a shift toward inclusive cooperation, the EU will continue to move the goalposts, reinforcing these very inequalities it claims to combat.