EFTA-Indonesia: Accelerating the Transition to (More) Sustainable Trade?

This Sunday, 7 March 2021, Switzerland holds a popular referendum on the ratification of the Comprehensive Economic Partnership Agreement (CEPA) between EFTA states (Switzerland, Liechtenstein, Norway and Iceland) and Indonesia. It is the first time in the history of Switzerland that a popular vote will decide the fate of a non-European Free Trade Agreement (FTA). This is per se remarkable, given that Swiss citizens are asked to express their opinion in a popular vote on more or less anything up to four times a year, and that Switzerland is party to 32 FTAs worldwide already. 

Ratification of FTAs and (Semi-)Direct Democracy

FTAs have not been subject to a popular vote since the ratification of the FTA between Switzerland and the EU in 1972 (mandatory referendum): until 2003, the Swiss constitution did not submit FTAs to the optional referendum, hence, their ratification was outside the scope of direct democratic participation. Following a partial revision of the Swiss constitution in the late 1990s, the scope of optional referenda was extended and meant to encompass FTAs as a general rule. However, shortly after introducing the new scope of optional referenda, the Federal Council adopted – with the support of the National Assembly – the so-called “general practice of standard agreements”: FTAs were not subject to the optional referendum after all as long as the agreement was more or less in line with the scope of previously ratified FTAs. 

The practice remained undisputed until the FTA between Switzerland and China was not subjected to an optional referendum in 2014 despite considerable resistance in civil society and the fact that the agreement shared minimal similarities with previously ratified agreements (for more on this, see here). Subsequent political pressure finally led to the abandoning of the general practice of standard agreements in 2019; CEPA is the first FTA subject to the optional referendum, for which the required 50’000 signatures were collected. It is also only the second FTA to be ratified since the formal abandoning of the general practice of standard agreements.

Unholy Alliance

Typically, FTAs are considerably less disputed in Switzerland than Bilateral Market Integration Agreements with the EU. In part, this explains why CEPA is the first ever FTA which is subject to a public vote following the successful collection of the required number of signatures, while the same has happened in the ratification process of Bilateral Agreements with the EU several times over the past 20 years. The signatures were collected by various interest groups ranging from the conservative to the left wing of the political spectrum in Switzerland: They found common political ground in the protection of Swiss farmers against foreign competition, and in general concerns regarding implications of trade liberalisation for the protection of the environment, of the climate, and of core labour standards. As was recently confirmed in a popular vote on corporate responsibility, a razor thin majority of Swiss voters tends to favor protectionist and sustainable trade policy over presumably “unchecked” trade liberalisation.

New Regulatory Mechanism: Accelerating the Transition from Conventional to Sustainable Production Through Preferential Trade Liberalisation

In consequence, public discourse centers on one specific aspect of CEPA: The limitation of preferential treatment to RSPO-certified palm oil. EFTA successfully negotiated a trade agreement encompassing a regulatory distinction between conventional and sustainable production. While preferential treatment of sustainable production only applies to palm oil in CEPA, the regulatory mechanism deserves a closer look, since it could basically also be extended to other products and commodities in the future:

CEPA Chapter 8 (Trade and Sustainable Development), Article 8.10 (Sustainable Management of the Vegetable Oils Sector and Associated Trade), establishes that “all vegetable oils and their derivatives traded between the parties are traded in accordance with” (Article 8.10(2):e) “laws, policies and practices aiming at protecting primary forests, peatlands, and related ecosystems, halting deforestation, peat drainage and fire clearing in land preparation, reducing air and water pollution, and respecting rights of local and indigenous communities and workers” (Article 8.10(2):a). The provision is, however, excluded from the scope of CEPA dispute settlement, along with the rest of Chapter 8.

Instead of burdening Indonesia with the enforcement of CEPA Article 8.10, importing CEPA parties (i.e. the EFTA-states) establish domestic control-systems to ensure that only palm oil and its derivatives produced in line with Article 8.10 benefits from CEPA preferential treatment. In Switzerland, this means that importers of Indonesian palm oil and palm oil derivatives have to prove RSPO-certification, 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.

The same regulatory mechanism could be extended to other goods and products in future trade agreements. Ideally, tying preferential treatment with a particular processing and production standard accelerates the transition from conventional to more sustainable trade: By rewarding “good” processing and production methods, international trade agreements are able to create economic and regulatory incentives for producers to meet sustainability goals. Such a re-orientation of FTAs would also fit nicely with more recent shifts in public opinion in Switzerland and elsewhere: Opening markets only for “good” products and commodities is both limiting foreign competition and taking into account more general concerns regarding implications of trade liberalisation for the environment, the climate, and labour.

Remaining Uncertainties

There are good reasons why other countries have to date been reluctant to introduce a comparable regulatory mechanism in their FTAs: First, it establishes heavy dependence on a particular (private) standard or “label” and on certification processes which are oftentimes not entirely transparent and fair. Unintended consequences cannot be excluded. Second, it is both patronising domestic consumers and foreign producers and therewith also revives outdated and failed policies of the Post-Washington Consensus. Hence, it is not entirely certain that preferential treatment limited to certified products and commodities will necessarily benefit the environment, the people and the climate the way it is intended to. 

In the case of Indonesian palm oil, circumstances are quite unique: According to the Swiss State Secretariat for Economic Affairs, almost all of palm oil and palm oil derivatives imported to Switzerland 1) are already certified (due to consumer preferences), and 2) originate in Malaysia. Preferential treatment of RSPO-certified Indonesian palm oil is therefore unlikely to change the overall share of certified palm oil imported to Switzerland, but may perhaps lead to a shift from Malaysian to Indonesian origin. This may be the reason why Indonesia was prepared to agree to the CEPA regulatory mechanism for certified palm oil in the first place – Indonesia gains a competitive advantage vis-à-vis their main Malaysian competitor.

Finally, since only a small share of Indonesian palm oil is currently RSPO-certified, it is possible that – contrary to what is intended – new palm oil plantations will be established in Indonesia as a consequence of the CEPA regulatory mechanism: it is easier to achieve certification for a newly established plantation, than for an existing plantation for which the required documentation for the RSPO-standard is unavailable or difficult to attain.

Implications of the Popular Vote 

CEPA is the first FTA in the history of Switzerland which is subject to a popular vote following the successful collection of 50’000 signatures. The focus of political campaigning on certified palm oil alone therefore misses the opportunity to address the more general – and more critical – underlying issue of Swiss voters with free trade: unless Switzerland engages in a public opinion-forming process on the benefits and desired orientation of international trade liberalisation, Swiss negotiators risk negotiating FTAs which are no longer able to secure a majority in a popular vote as they are misaligned with public opinion. Such a popular rejection of an FTA would be harmful for the reputation of Switzerland and leave its impact on future trade negotiations. 

In the case of CEPA, polls suggest that the agreement will be accepted. The main argument which appears to convince a majority of Swiss voters is the preferential treatment of certified palm oil. Given that FTAs will continue to be subject to the optional referendum and remain disputed, it is to be expected that henceforth every EFTA or Swiss FTA will need to encompass at least one similar provision in order to meet the threshold of securing the support of a majority of Swiss voters. Implications for on-going and future trade negotiations involving Switzerland are therefore – alas mostly unintended – in any case considerable.

Finally, independent from the particularities of Swiss democracy, others are well-advised to observe how the new CEPA preferences for certified palm oil translate into practice. Potentially, EFTA is about to set a precedent for the future of extra-territorial consideration of sustainable processing and production standards in international trade relations.

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