Effects of Trade War and Trade Spats on Palm Oil Exports

Background

Trade war and spats are high stake game which affects trade between the countries involved as well as their trading partners. The existing US-China trade war, China-Canada trade spat, India Malaysia trade spat and the new EU Delegated Act which imposes a trade restriction on palm oil exports to EU are major trade war and spats affecting the palm oil trade. Their impact on palm oil imports will be analysed in the next section.

Impact on palm oil trade

Currently, the USA and China are the two biggest economies in the world. The trade war between these two countries had created a direct and indirect effect on other countries trade with these countries. The trade war started in 2018 when President Donald Trump began to impose tariffs and other trade barriers on goods from China. In response to US trade measures, the Chinese government accused the Trump administration of engaging in protectionism and imposed counter-measures to restrict imports of US goods and services.   

On 6th July 2018, China imposed a 25% additional tariff on US soybean imports on top of the normal 3% tax paid. The hike in tariff  led China’s soybean import from USA tofall by  49.4% or 16.2 million MT to 16.6 million MT in 2018. The drop in soybean imports reduces soybean crushing activities which led to a reduction in soybean oil production.

Palm oil benefited from the reduced availability of soyabean oil in the local markets and the imports rose by 231,100 MT to 5.4 million MT in 2018.

With the high tariff on the US soyabean imports maintained in 2019, China’s palm oil imports recorded an all-time high palm oil imports of 7.6 million MT.

US-China trade tension eased in 2020 when the two countries signed phase 1 trade deal on 15th January 2020. Under this agreement, the US cut some tariffs on Chinese goods. In exchange, China pledges to purchase more of American products. Following the signing of the agreement, China increases sharply the imports of US soybean. For Jan. – Oct. 2020, China total soybean imports from the US increased by 13.3 million MT or 14.9% to 101.8 million MT.

The increase in soybean imports is also driven by higher demand from the soybean crushers. In 2020, the hog sector continued to recover from the African Swine Fever. With this recovery, more soymeal is needed to feed the growing hog population. This led to higher demand among the soybean crushers to crush more soybeans to produce a higher amount of soymeal to feed the rising hog population. The increase in soybean crushing activitues affected palm oil imports. MPOC Shanghai forecasted that China’s palm oil imports for 2020 will drop between 1.2 million to 1.5 million MT to a range between 6.2 million MT to 6.5 million MT in 2020.

Source: Oilworld

The trade spat between China and Canada was triggered by the arrest of Huawei Technologies Chief Executive Officer Meng Wan Zhou on 1st December 2018. While Canada is preparing to extradite Meng Wanzhou, on March 1, 2019, China revoked the license of Richardson International, Canada’s largest canola distributor, to export canola to China. A second Canadian canola seed producer, Viterra also had its license revoked on March 26.

With the license of Canada’s two top canola exporters being revoked and stringent regulations being imposed on the imports of Canadian canola, China’s imports of canola from Canada declined substantially by 46.9% or 2.1 million MT from 4.4 million MT to 2.3 million MT from 2018 to 2019. Reflecting on the sharp dropped in China’s rapeseed imports, China’s rapeseed crushing for 2019 declined by 1.5 million MT or 16.0% to 7.8 million MT. As a result, rapeseed oil production fell by 16.0% or 585,400 MT to 3.1 million MT in 2019. The reduction in the rapeseed oil availability led the premium of the rapeseed oil price over other edible oils to increase (refer to chart 3). It increases palm oil thecompetitive edge over rapeseed oil in the China edible oil market.

Source: Bloomberg

Traditionally, India has been a major destination for Malaysian Palm Oil Products (POP). Malaysian palm oil exports to India reached its peak in 2019, registering a total volume of 4.27 million MT (MMT). This abnormal increase in 2019, from 2.6 MMT in 2018, was a direct consequence of preferential import duty on Malaysian Refined products under the MICECA. This anomaly was removed in September 2019 but subsequent exports were affected by a trade spat resulting from geopolitical factors.

The then Malaysian Prime Minister made certain statements at international forums and these were deemed by India to be interference in its internal affairs and as being a distortion of facts. This resulted in a short-term negative stance towards anything to do with Malaysia, including a call by a trade body to avoid Malaysian imports. The situation riled not only the policymakers but also the common man on the street.

This coincided with the Indian Government’s desire to protect the Indian refining industry against unethical imports of Refined products from neighbouring countries under other trade agreements, resulting in a blanket requirement of import licences for all imports of Refined products. How much the geopolitical spat had to do with a subsequent reduction in Malaysian palm oil exports to India is difficult to quantify but the more damaging impact was on relations between the two nations.

Added to these factors was also the impact of the Covid-19 induced decline in imports of all vegetable oils. Malaysian palm oil exports to India for the first half of 2020 suffered a significant decline of 85% to 0.39 MMT. Major palm oil exporters responded to the situation by channelling their exports to other markets such as Pakistan, ASEAN countries and China.

The situation has improved since then. A change in the political leadership resulted in a change in perception in India, resulting in obliterating, to a large extent, the negative feelings. Trade relations further improved between the two countries after Malaysia signed a deal to buy a record of 100,000 tonnes of Indian rice. (Source: Reuters, 19 March 2020 ). Besides improved trade relations, rising palm oil imports are also attributed to the drop in palm oil stocks in India as demand picks up along with the improved pandemic situation.

India-Malaysia trade relations go back 2000 years. With a little more understanding of the dynamics at play, trade spats can and should be avoided as they don’t benefit anybody.

Source: SEA, MPOC Market Intelligence

In the case of the EU, the region imposed a new Non-Trade Barrier (NTB) which affected palm oil used for biofuel production. This NTB placed under EU’s New Delegated Act will gradually reduce the use of high-risk Indirect Land Use Changed (ILUC) feedstocks for biofuel production starting 2024. The usage of vegetable oils in the high-risk ILUC category for biofuel production will be reduced to zero by 2030. Unfortunately, palm oil is included under these high-risk feedstocks. Indonesia and Malaysia are the world’s top two producers of palm oil are moving towards challenging this EU directive in WTO.  The two countries claimed that the EU is using scientifically flawed evidence to arrive at their decision. The two largest producers of palm oil claimed that the EU’s policy is discriminatorily aimed at protecting local oilseed producers.

However, the EU’s New Delegated Act has yet to impact palm oil imports as the policy will come in effect only in 2024. Palm oil is still the most produced and competitively priced feedstocks which make it the preferred choice for EU biodiesel production. About 60% of EU palm oil imports are used for biodiesel production. The proportion of palm oil imported for the production of biodiesel is expected to drop when the EU’s New Delegated Act is implemented in 2024. Malaysian and Indonesian governments have gone through a series of negotiation with their EU counterpart to overturn the decision but nothing avails. In the same time, the Malaysian government is working together with the Malaysian palm oil industry to identify new markets as a substitute to the European market once the EU’s New Delegated Act comes into act.  

Source: Oilworld

Conclusion

Palm oil may gain or loss in trade spat and trade war. It is also observed that major palm oil-producing countries have strategically implemented strategies and programmes to circumvent the negative effects of trade war and trade spat on palm oil imports. These programmes are carried out mainly by the government through its agencies as well as the private sectors who are involved in the palm oil business. The efforts are mostly in the form of improving the inter-government relationship and disseminating narratives written on the goodness of palm oil and sustainability.

On the industry level, physical seminars, webinars and business matching are among the programme which is being organized to forge better relationship and understanding between buyers and sellers. A special bond between the traders may have a strong influence on the decision.

Prepared by:  Lim Teck Chaii  Bhavna Shah & Muhammad Kharibi 

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