The Jakarta Post - 26 February 2024
Environmental equity in the Indonesia-EU CEPA
By Indra Sanada Sipayung
As Indonesia and the European Union (EU) enter the 17th round of negotiations on their economic partnership from Feb. 26 to March 1, the agreement’s Trade and Sustainable Development (TSD) chapter stands as the main point of divergence.
The two parties have set an ambitious target of reaching a substantial conclusion before the year-end, but this requires overcoming the challenge of reconciling their differences in integrating sustainable development objectives within the framework of the Indonesia-EU Comprehensive Economic Partnership Agreement (IEU CEPA).
Drawing from its recent trade agreement with Vietnam, the EU has proposed that the TSD chapter should uphold high international environmental and labor standards to prevent a “race to the bottom” scenario, where competition is based on lowering standards.
However, the EU is reluctant to consider the trade and economic aspects of sustainable development. Instead, it seeks to maintain autonomy in implementing higher environmental and labor standards that are separate from the broader consideration of the TSD chapter, but can be justified as a “legitimate right to regulate”, even if such measures are trade restrictive or discriminatory.
In contrast, Indonesia advocates for a balanced approach that fosters mutually supportive relationships between the three pillars of sustainable development: economic growth, social development and environmental protection.
Through its trade agreement with the European Free Trade Association (EFTA), Indonesia emphasized that the TSD chapter should catalyze market incentives to encourage trade in sustainably certified products, especially in the forestry, fisheries and palm oil sectors. Indonesia thus believes that enforcing environmental and labor commitments should not be at the expense of trade and economic development.
Bridging these divergences necessitates an innovative approach to achieve equitable balance between trade and environmental considerations in the IEU CEPA’s TSD chapter. This approach entails several principles.
First, the TSD chapter should embed the principle of common but differentiated responsibilities (CBDR), recognizing the different historical and current contributions of Indonesia and the EU to the global ecological footprint.
The TSD chapter should therefore introduce environmental and labor standards that are realistic and attainable, allowing Indonesia the flexible application of these commitments considering its unique circumstances and capabilities, including legitimate objectives to pursue economic development, technological advancement, a just transition and national priorities. Failing to accommodate CBDR is equivalent to shifting the costs of environmental protection to Indonesia for the EU’s past ecological footprint.
Second, there should be mechanisms in the TSD chapter that address domestic measures affecting trade. The EU must acknowledge that its internal policies, such as the EU Deforestation Regulation, the Renewable Energy Directive (RED II) and the recent ReFuelEU aviation initiative, which negatively impact trade by targeting commodities like palm oil, are interconnected with broader TSD considerations.
Indeed, these regulations pose a significant threat to Indonesia’s palm oil products, which are a crucial component of the country’s export sector.
More importantly, these regulations also run counter to the global consensus on sustainable development as outlined in Principle 12 of the Rio Declaration. This principle requires parties to collaborate, guided by international consensus, in promoting sustainable development that balances environmental protection and economic growth, while explicitly cautioning against unilateral environmental actions that result in unjustifiable discrimination or disguised restrictions on trade.
Third, the TSD chapter needs to be flexible and allow for the gradual implementation of sustainability objectives while recognizing national sustainability standards.
In addition, both sides should work together to reduce the impact of their strict standards on small and medium-sized enterprises (SMEs) by providing alternative compliance mechanisms and technical assistance to Indonesian exporters, so they can build the necessary capacity to meet the required standards. This will help both Indonesia and the EU align their responsibilities fairly and equitably, without causing unfair disadvantages to either party.
Fourth, the TSD chapter should offer financial support and market incentives to facilitate sustainable growth. Rather than imposing strict regulations, the focus should be on promoting access to green financing and funding for biodiversity conservation to incentivize the parties to achieve sustainable progress.
In addition, both parties could explore innovative financial mechanisms that reward sustainable practices, such as payment for ecosystem services and equitable benefit-sharing from biodiversity utilization.
Fifth, the TSD chapter needs to establish consultation and enforcement mechanisms that respond to the diverse regulatory landscape. While most domestic environmental regulations aim to achieve legitimate objectives, there is a risk of excessive regulation leading to a “race to the top” situation, where too much good regulation can potentially undermine the integrity of the parties’ international trade commitments.
This overreach presents significant challenges for Indonesia in committing to trade and sustainability obligations with the EU, given the possibility of future trade restrictive measures under the European Green Deal. In this context, consultation mechanisms can help navigate the complexities of aligning domestic regulations with international trade commitments.
Lastly, in light of potential trade restrictive measures under the European Green Deal, the TSD chapter should incorporate provisions that safeguard Indonesia’s commercial interests. These provisions should aim to protect Indonesia’s key export commodities, such as palm oil, fishery and timber products, from unilateral measures that are not in line with TSD commitments.
One possible approach could be to require a standstill commitment from the EU, which would prevent it from introducing restrictive measures and instead provide greater market access and trade facilitation for specific palm oil, fishery and timber products derived from sustainable practices. This approach will ensure that sustainable progress under the TSD chapter is not hindered by unilateral regulatory measures.
The TSD chapter of the IEU CEPA presents a once-in-a-lifetime opportunity to forge an innovative economic partnership that addresses the global environmental challenges of the 21st century.
Both Indonesia and the EU have redefined their strategic interests, prioritizing green industrial policies while remaining open to collaboration and moving up the value chain with like-minded countries, particularly in sectors critical to the energy transition.
The TSD chapter is uniquely positioned to align with these strategic interests, provided that the parties can work toward a consensus that balances environmental goals and economic and social considerations. Ultimately, the TSD chapter should become a support mechanism for facilitating the two parties’ different paths of transition toward a common, sustainable future.
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The writer is a legal and foreign economic policy adviser at the Foreign Ministry. The views expressed are personal.
