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Malaysia’s Palm Oil Sector Pays for Prime Minister’s Tough Talk on India

FILE - A worker unloads palm oil fruits from a truck inside a palm oil factory in Salak Tinggi, outside Kuala Lumpur, Malaysia, Aug. 4, 2014.

India’s boycott of Malaysian palm oil over Prime Minister Mahathir Mohamad’s rebuke of New Delhi’s handling of Kashmir and Muslim migrants may deal a heavy blow to Malaysia’s economy this year, the more so if it expands to other key commodities.

But some economists say the nominally punitive move may have as much to do with India’s growing fixation with correcting its bilateral trade deficits in an Asian echo of U.S. President Donald Trump’s “America First” push.

India is by far the largest importer of palm oil from Malaysia, the world’s second largest producer after Indonesia. The versatile fruit extract is used in everything from pizza dough to soap and biofuels.

In October India’s top vegetable oil trade body, the Solvent Extractors Association, urged its members to stop buying Malaysian palm oil over Mahathir’s “unprovoked pronouncement” and “in solidarity with our nation.” To New Delhi’s consternation, the prime minister of Muslim-majority Malaysia had reproached India for stripping statehood from its portion of Kashmir, which also has a Muslim majority, and later over legislative amendments that appear to deny Indian citizenship to Muslim migrants from some countries.

FILE - Kashmiri Muslims offer prayer inside Jamia Masjid in Srinagar, Indian controlled Kashmir, Dec. 18, 2019.
FILE - Kashmiri Muslims offer prayer inside Jamia Masjid in Srinagar, Indian controlled Kashmir, Dec. 18, 2019.

Earlier this month, Mahathir’s media adviser, A. Kadir Jasin, said Malaysia should respond with its own boycott of Indian exports and by tightening restrictions on Indian migrants. But Mahathir soon dismissed the idea, conceding that Malaysia was too small to retaliate against India, a country of 1.35 billion people to Malaysia’s 31.5 million.

Yu Leng Khor, a political economist and principal of Segi Enam Advisors, a consulting firm that studies the region’s trade in palm oil and other commodities, said Malaysia needed India far more than vice versa and would wield little leverage in a reciprocal trade war.

Malaysia exported about $8.53 billion worth of goods to India between January and November of last year while importing only $5.35 billion from the country over the same period, according to the latest figures from the Malaysia External Trade Development Corporation, a state enterprise.

Malaysia’s palm oil industry, a pillar of the national economy, has tied its fortunes to India in particular in recent years. Nearly 1 in every 4 tons of palm oil Malaysia exported in 2019 landed in India.

“In the last couple of years, it is the biggest market for Malaysia, and it delivered a huge increase in volume and traded value in 2019, and this [boycott] is a big slap-down now,” Khor said.

Though New Delhi publicly denies reports by Reuters news agency that it has told Indian importers to shun Malaysian palm oil, it has moved refined palm oil imports to the “restricted” list, forcing traders to jump through cumbersome new hoops. Khor said that alone could cost Malaysia up to $1.4 billion, though it could try to make up some of the loss by selling India more crude palm oil and moving quickly to boost refined palm oil exports to other countries.

And if chatter in India’s press of expanding the boycott to electronics and other Malaysian import comes true, she added, the impact on Malaysia’s economy could be “quite major.”

FILE - Malaysia's Prime Minister Mahathir Mohamad speaks during the signing ceremony for Bandar Malaysia in Putrajaya, Malaysia, Dec. 17, 2019.
FILE - Malaysia's Prime Minister Mahathir Mohamad speaks during the signing ceremony for Bandar Malaysia in Putrajaya, Malaysia, Dec. 17, 2019.

Though Mahathir has stood by his rankling remarks, Khor said he will want to contain the damage.

Shankaran Nambiar, a senior fellow at the Malaysia Institute of Economic Research, agreed.

“It would be Malaysia’s turn to retaliate. But it appears that Malaysia is making reconciliatory moves, which implies that Malaysia doesn’t want relations to deteriorate. So at worst we have a standoff,” he said.

Last week Malaysia’s top sugar refiner, MSM Malaysia Holdings Berhad, an arm of state-owned palm oil producer FGV Holdings, announced a hefty hike in its raw sugar imports from India in what many see as a move to placate New Delhi.

That would suggest that the row is about more than pummeled pride.

Nambiar said India’s trade deficit with Malaysia may have been the tinder to which Mahathir’s reproof was the spark.

He noted that India’s new restrictions on refined palm oil imports apply to all countries, “Malaysia among them, although it ... seems that vessels carrying refined palm oil from Malaysia have been stuck at ports.”

Khor likened India’s moves to Trump’s own take on America’s trade deficits with other countries.

“I think it’s part of this overall thing that we’re seeing globally, right? That there’s this pullback and big questioning of trade relationships. ... Should there be an imbalance? Shouldn’t we all have a more equal trade balance?” she said.

“And I think in a global trade environment where trade relationships [are] being really looked at very carefully now — and with ... geopolitical and political sensitivities — I think, sadly, Malaysia played straight into it.”