World Palm Oil Market under Freer Trade: Implications for Malaysia

Abstract

The establishment of the WTO in 1995 moves the world economy into a new unprecedented era of comprehensive freer world trade, including agricultural trade. A host of vegetable oils are traded in the world market. These oils are highly interchangeable in many uses, as they exhibit minor differences in their physical and chemical characteristics. Massive govern ment intervention over the years has influenced the existing patterns of trade in vegetable oils. This article discusses potential adjustments that would occur in world palm oil market when countries liberalized domestic protectionism and trade enhancement measures in vegetable oils under WTO rules. It is expected that trade liberalization in vegetable oils would benefit most the low cost producers of vegetable oils ? Malaysia and Indonesia. For Malaysia, however, the combined factors of rising cost of farm production associated with increased labour wages as well as increasingly inelastic land supply for ex-situ oil palm expansion potentially neutralize the benefits of trade liberalization in vegetable oils. Policy implications for Malaysia include the dire need to restructure the oil palm industry from its present focus on upstream activities towards high technology oleo-chemical industry.