The Far Eastern Economic Review
Issue cover-dated 31st May 2001

Fire-Fighting

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 way."

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."