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FEER: Fire-Fighting (Palmoil/Vajpayee)
By S. Jayasankaran
25/5/2001 8:17 pm Fri
The Far Eastern Economic Review
Malaysia's palm-oil exports to India have been jeopardized by poor
bargaining tactics at the WTO
By S. Jayasankaran/KUALA LUMPUR
INDIAN PREMIER Atal Bihari Vajpayee's recent three-day state visit to
Malaysia refocused attention on Kuala Lumpur's palm-oil woes.
Malaysian disquiet over high Indian tariffs on palm oil may have been
deserved. It could have more to do with Malaysian ineptitude during
World Trade Organization negotiations than with any Indian unfairness.
But it's led to a novel solution--that of using counter-trade--to a
potentially serious problem.
After petroleum, vegetable oils comprise the second-largest import
bill for India. In a late-February move to protect domestic farmers,
Delhi hiked tariffs on Malaysian palm oil to a cumulative, and
whopping, 92% while tariffs on soya oil--from the U.S. and Brazil, for
instance--remained at 45%. India imports almost 25% of Malaysia's
palm-oil exports and is its single biggest market. Not unreasonably,
the rise sparked appeals from Malaysian leaders to Vajpayee to "level
the playing field."
The appeals were more plaintive than outraged, which may have puzzled
avid readers of Malaysia's media. The reason: India's move is
consistent with WTO rules, a fact little reported by the local press.
Trade negotiations last year saw the Americans secure a tariff cap of
45% on soya-bean oil exports to developing countries. Meanwhile, the
tariff cap on palm oil is set at 300%, implying that Malaysia, the
globe's biggest palm-oil producer, wasn't paying attention. "Our
negotiators seemed to have been sleeping on the job," snorts a senior
Malaysian industry executive.
Prime Minister Mahathir Mohamad has already conceded as much. "There
is a disparity [between soya and palm oil] and this is the result of
not being alert during WTO negotiations," he told reporters in late
March. "If they [Malaysian negotiators] don't study things carefully,
they may commit themselves to something that will affect us later."
The bilateral issue has underlined the significance of Malaysia's
traditional markets at a time when palm-oil prices, at 730 ringgit per
tonne ($192), are at a seven-year low. "The danger, going forward, is
that we will begin losing share in our biggest market," says the
senior industry executive. "After that, it could be downhill all the
Despite low prices, palm-oil exports earned almost 15 billion ringgit
for Malaysia last year, down from 23 billion ringgit in 1999. That's
significant enough, but what makes it pressing is its political
importance: Over 180,000 smallholders, almost exclusively Malay,
depend on it for a living. Mahathir is premier because he is president
of the United Malays National Organization, the country's dominant
political party, whose core constituency comprises ethnic Malays.
There are other problems. Indonesia, the world's second-largest
palm-oil producer, is also affected by the same tariffs in India. But
its cheaper rupiah allows Indonesian producers to substantially
undercut Malaysia, giving them an edge in markets like India.
Kuala Lumpur's response is to maintain market share via some
sweeteners. On May 15, Indian rail-constructor Ircon signed a $1.8
billion agreement with Malaysia's Transport Ministry for a giant
rail-electrification project stretching from Kuala Lumpur to Padang
Besar on the Thai border. Although details have yet to be ironed out,
India has essentially agreed to accept payment in palm oil.
The deal isn't carved in stone as it was only a memorandum of
understanding, but Vajpayee, in remarks to the Indian media, flagged
that as one of the high points of his visit. It could be one reason
why he promised to "review" the duties on Malaysian palm oil, with a
caveat that it should be "within existing internal constraints." Lim
Keng Yaik, Malaysia's minister of primary industries, seemed resigned
in his response, saying, "I don't expect an immediate answer [but] his
promise to review the situation is good enough for us."
Given steadily increasing production costs at home, Malaysian
producers may ultimately have to move to India to tap what the
International Monetary Fund already rates the "world's fourth-largest
economy in terms of purchasing-power parity." Veena Sikri, India's
high commissioner to Malaysia, is all for it: "That would be a win-win
solution for everyone," she says. "We have over 300 million people
with international purchasing power. Another third are lower middle
class. That's as big a market as you can get."