Trade Competitiveness in Malaysia’s Palm Oil Sector

2015

Abstract

Malaysia is currently the world’s largest producer and exporter of palm oil. Total exports of Malaysian palm oil products amounted to 25.7 million tons compared to 24.6 million tons in 2012. In terms of value, exports decreased from RM71.4 billion in 2012 to RM61.4 billion in 2013. At the same time, Malaysia’s export duty is relatively higher than other competitor countries like Indonesia. Several policy interventions such as tariff and non-tariff barriers have been enacted by importing countries on crude palm oil and other palm oil products. When looking solely on exports from Malaysia, it appears as if Malaysia has lost its competitiveness in the palm oil sector. However, some companies have resorted to foreign direct investment (FDI) in Indonesia due to attractive labor and land costs. Hence, the main objective of this study is to evaluate existing trade policies by both exporter and importer countries. Specifically, we develop a new framework to measure export competitiveness by incorporating FDI outflows from Malaysia to Indonesia in the palm oil sector. Unlike previous studies, which
use only tariff measures weighted by trade, we construct a trade restrictiveness index that includes both tariff and non-tariff barriers enacted by major importers of Malaysian palm oil. This trade restrictiveness index may signal potential export market destinations as it shows the degree of liberalization. Using the gravity model, we then include the trade restrictiveness index to estimate export demand of palm oil. This study recommends suitable trade policies to enhance competitiveness and productivity of palm oil production and exports.

Project Leader

Norlin Khalid (Faculty of Economics and Management, Universiti Kebangsaan Malaysia (UKM), nrlin@ukm.edu.my)