Palm Oil Diplomacy

9 May 2018 Jarryd de Haan, Research Analyst, Indian Ocean Research Programme

Background

Li Keqiang, the current Chinese Premier of the State Council (sometimes referred to as the Prime Minister), recently concluded a visit with Indonesian President Joko “Jokowi” Widodo, from 6-8 May. Li’s visit came at the invitation of Jokowi and the leaders discussed trade and investment, focussing particularly on introducing more Indonesian agricultural goods to the Chinese market. The biggest takeaway from the meeting was Li’s commitment to expanding China’s intake of Indonesian palm oil. Following his visit to Indonesia, Li will fly to Japan for a meeting between China, Japan and South Korea.

Comment

During the visit, at a joint press conference with Jokowi, Li expressed interest in increasing China’s quota of palm oil imports from Indonesia by at least 500,000 tonnes (worth approximately $530 million). This constitutes a sizeable increase from the 2.6 million tonnes of Indonesian palm oil exported to China in 2017. This is a small boon for Indonesia’s palm oil industry, amidst concerns surrounding a push by the European Union (EU) to regulate palm oil imports from unsustainable sources. Earlier this year, on 17 January, European lawmakers approved a number of draft measures to meet climate goals, which included a ban on the use of palm oil in biofuels, a move that Malaysia called ‘crop apartheid’. The EU’s strong stance against palm oil is a concern for Indonesia as Europe makes up approximately fifteen per cent of its export market.

As mentioned in a previous Strategic Weekly Analysis, if the EU eventually regulates its palm oil intake, Jakarta will have to rely on other markets, such as China. It is unlikely that the Indonesian government will be able to satisfy EU standards, as only a small number of palm oil plantations in the country currently adhere to its own national standards (Indonesian Sustainable Palm Oil Foundation, or ISPO) which are less stringent than the main international certification standard (Roundtable on Sustainable Palm Oil, RSPO). The EU Parliament has also openly criticised both of these standards for failing to limit greenhouse gas emissions and prevent forest and peat land fires; meaning that its own regulations are  likely to be much stricter. Expanding into more receptive, less regulated, markets will be the best course of action for the Indonesian palm oil industry, although its non-conformance to EU standards may further damage the reputation of South-East Asian palm oil in the global market in the longer-term.

The quota increase can also be seen as a way to alleviate Indonesia’s concerns about its trade deficit with China, although realistically it contributes very little. Prior to the visit, the Jakarta Post reported that Jokowi would try to push for a better trade balance. According to 2017 statistics, Indonesia’s trade balance with China is heavily skewed in Beijing’s favour, with Jakarta exporting $31 billion, but importing $46 billion. While the increased palm oil quota is a step towards reducing that trade deficit, an extra $530 million is a drop in the bucket when looking at the $15.3 billion deficit that Indonesia faces.

Overall, Li’s visit to Indonesia ended on a positive note. Although there was no ground-breaking progress in economic relations, China has made a number of small steps towards expanding trade, while also accommodating Indonesian concerns.

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