Authors: Ica Cahayani and Agata Nina Puspita*
It is too early to state that Indonesia will not increase the tariff for palm oil because in Indonesia, food oil or palm oil are still in the short supply. Many Indonesian people complained to the government because the price of palm oil or food oil has increased from December 2021 to January 2022. In March 2022, the price of Indonesian palm oil decreased, but from a procurement perspective, there was a shortage. The following table is the increasing price of food oil in Indonesia.
Table 1: The Comparison of Oil Commodity Price
|Commodity||Unit||December 2021||January 2022||February 2022||March 2022|
|Bulk Cooking Oil||Lt||17.600 IDR (1.23 USD)||18.100 IDR (1.26 USD)||15.900 IDR (1.11 USD)||16.800 IDR (1.17 USD)|
|Cooking Oil||Lt||18.600 IDR (1.30 USD)||19.100 IDR (1.33 USD)||16.200 IDR (1.13 USD)||18.500 IDR (1.29 USD)|
|Premium Cooking Oil||Lt||20.200 IDR (1.41 USD)||21.000 IDR (1.46 USD)||17.400 IDR (1.21 USD)||20.500 IDR (1.43 USD)|
Source: Basic Needs Market Monitoring System Ministry of Trade (https://ews.kemendag.go.id/)
The problems faced by Indonesia are not only fulfilling domestic demand, but also the pressure from abroad, especially India, which has pushed Indonesia to loosen restrictions on palm oil exports. Global food oil scarcity continues to occur due to the conflict in Ukraine which caused a stagnation in the export and import of sunflower seeds. In connection with that, sunflower seed oil could not be produced and the world depends on palm oil.
Sunflower seed oil is a food oil produced in Europe and one of them is in Ukraine. In other words, the Ukrainian conflict has given major impact to the scarcity of sunflower seed oil. Based on the statement delivered by the UN General Secretary, Antonio Gutteres on 14 March 2022, Ukraine and Russia are countries which have contributed 30% of global sunflower oil providers and contributed to food security in developing countries, Africa and the Middle East. Thus, the unresolved conflict has led to a scarcity of sunflower seed oil even though the market demand for edible oil is very high. It is very possible that if the conflict continues, it will cause not only food oil but also other food crises. This happens because Ukraine is the largest wheat producing country in Europe. Ukraine could be said as “European Bread Basket” which means that Europe’s food dependence on Ukrainian wheat is quite high. Therefore, if the conflict continues, it will not only cause the scarcity and the increase in the price of sunflower seed oil, but it will also trigger another food crisis. The following figure is the data of sunflower seed oil prices which have continued to increase since February 2022.
Figure: Sunflower Seed Oil Price
The conflict issues have impacted the scarcity of sunflower seed oil. The continuing of global food oil scarcity is also caused by global climate change that triggers drought. One of them is that soybean oil is limited in production so that the demand for Indonesian palm oil is very high. Soybean oil could not cover the scarcity of sunflower seed oil because Argentina and Paraguay as the world’s largest soybean producers are also experiencing a drought so that soybean crops fail.
In addition, soybean oil could not cover the scarcity of sunflower seed oil because Argentina and Paraguay as the world’s largest soybean producers are experiencing drought so that soybean crops fail to harvest. Soybean oil prices reached 58.500 IDR per litre on 19 March 2022. Indonesia as the “world bag of palm oil” experienced fluctuations in oil prices, which was also experienced by Indonesian people. The price of food oil in the future market has increased in order to anticipate that sunflower seed oil could not be produced in the long term and the sunflower seed oil market is in danger of disappearing if the Ukrainian conflict does not end soon.
Global food oil crisis is not only a nightmare for the global community buat also the Indonesian people. Indonesia as a palm oil producing country has a good opportunity to produce palm oil for export and fulfil the demand for oil in the global market. On the contrary, Indonesia must be fully aware of the need for food oil in the country in order to not experience a shortage. One of the ways is by increasing the export tariff of palm oil in order to be able to achieve a balance in the existence of palm oil in the country and in the global market because food oil or palm oil must be able to be controlled. If the price of food oil or palm oil could be controlled, food oil crisis could be avoided in the long term.
If the conflict in the European region continues, the global food crisis will not only occur in the scarcity of sunflower seed oil and soybean oil but also will place a sufficient burden on palm oil production to fulfil the demand for food oil in the future global market. There will be a number of other problems that will arise if the conflict continues and the food crises in other sectors will also experience will also experience shortages over time. The following table is the price of palm oil and soybean oil.
Table 2: Palm Oil and Soybean in Market Prices
|Closing Date||CPO FOB Indonesia||CPO FOB Malaysia||SBO Rotterdam ex-mill|
|8 March 2022||1,785.00||1,810.36||1,939.67|
|9 March 2022||1,910.00||1,939.62||2,032.83|
|10 March 2022||1,970.00||1,951.11||2,015.93|
|11 March 2022||1,910.00||1,876.79||1,985.80|
|14 March 2022||1,850.00||1,812.59||1,992.72|
|15 March 2022||1,815.00||1,762.70||1,962.91|
|16 March 2022||1,780.00||1,779.22||1,962.56|
Source: Palm Oil Analytics (https://www.cpopc.org/market-trends/palm-oil-market-prices/)
The Indonesian government’s policy is based on a statement from the Ministry of Finance of the Republic of Indonesia that the regulation increases tariffs in order to reach US$375 per ton of crude palm oil (CPO) when the international market price increases above US$1,500 per ton. Besides, Indonesia’s government through the Ministry of Trade of the Republic Indonesia stated that the government would increase the upper limit on the overall export tax on palm oil combined with an increase in import duties of 80% to reach US$675 per ton. The reason for doubling the upper limit on palm oil export tariffs is in order to prevent companies from overdoing it without thinking about the scarcity of domestic oil. Therefore, there must be a balance between exports and imports so that crude oil is distributed properly.
The increase in global oil prices is caused by conflicts in sunflower seed oil producing countries which support 30% of the world’s food oil demand; and global climate change which has caused two oil-producing countries to experience drought so that production could not be maximised. In addition, the only thing that supports the world’s food oil demand is Indonesian palm oil. Therefore, Indonesian economic policy makers take a firm stance in responding to the global food oil demand. One of them is by adding palm oil export tariffs.
The addition of the export tariff limit is stated in the Minister of Finance Regulation No. 23/PMK.05/2022 regarding changes to the current Minister of Finance Regulation No. 57/PMK.05/2020 which concerns Service Tariffs for the Public Service Agency of the Palm Oil Plantation Management Agency at Ministry of Finance. The policy of increasing palm oil export tariffs becomes the part of Indonesia’s economic policy in responding to the global food oil crisis. In accordance with the opinion of K. J. Hostli, it is stated that foreign policy is an idea in forming a formulation with the aim of solving problems that occur in a country. It becomes the reason for Indonesia to increase palm oil exports tariffs. In the midst of the global food oil crisis, increasing export tariffs is an economic policy step that will certainly be carried out by not only Indonesia but also other countries. Increasing tariffs is also due to Indonesia following fluctuations in the global market prices.
*Agata Nina Puspita, Student of Department of International Relation, Gadjah Mada University, Indonesia.
The Waning Supremacy of the Petrodollar Economy
Since the 1970s, the US dollar has been the undisputed reserve currency around the globe. Agreements with Saudi Arabia (and many other Middle Eastern countries) cemented the global oil trade in the greenback currency. Trading oil and gas futures denominated in the US dollar solidified the position of the United States as the hegemon of Global trade – a shift from the traditional gold standard. While the Euro surfaced as a strong contender in the 90s, the dollar-denominated finance still flourished. And economies like China and Russia had no choice but to hold US Treasury securities and accumulate massive dollar reserves. However, multiple geopolitical and economic factors are now turning the tide against the supremacy of the US dollar. Rapid globalization was already a ticking bomb situation for the greenback. But now, China’s rise as the next potential powerhouse and Russia’s exclusion from the dollar-embedded SWIFT system is catalyzing this historic transition.
The tread towards de-dollarisation is not exactly a novel phenomenon. The infamous drift to exclude the US dollar originally spurred in Latin America in the 90s. In response to US sanctions, Venezuela attempted to shift away from the status quo by opting for oil payments in yuan over the US dollar. Chile resorted to Consumer Price Index (CPI) indexation to attract foreign investments in local securities over US Treasuries in the secondary market. However, due to weak supplementary monetary policies and crippling economic crises, the trend of de-dollarisation steeply reversed during the 2008 financial crisis. Since then, no significant development has threatened to derail the dominance of the US dollar. Yet, the booming Asian markets and the implicit rift between the United States and Saudi Arabia could be the next bad omen.
Saudi Arabia is the world’s largest Crude exporter, amounting to about 17.2% of the Global Crude oil exports (by value). Over decades, Saudi Arabia has been one of the core allies of the United States in the Middle East. Economically, the kingdom has served as the largest Crude supplier to the United States. Moreover, as Saudi Arabia leads the Organization of Petroleum Exporting Countries (OPEC), the United States has enjoyed a sway over Global oil prices. Since the oil trade is denominated in the US dollar, it has allowed successive US governments to run massive trade deficits without any budgetary concern. Geopolitically, the Saudi kingdom has been a US proxy in the Middle East to counter its arch-rival Iran. After the landmark Iranian revolution in 1979, Saudi Arabia further climbed the ladder of US preference in the region. However, with a shift from Republicans to Democrats, the two allies have inched apart to a certain extent.
Over the years, the United States has relented its dependence on imported oil by building its own strategic reserves. For example, the US imported an estimated 2 million barrels per day of Saudi Crude in the 1990s. That figure fell to mere 500,000 barrels per day in 2021 – a drop of 75% in a couple of decades. On the political front, the Saudi royalty has been particularly dissatisfied with Biden’s policy in the Middle East. Biden’s decision to unilaterally withdraw support for Saudi Arabia in the Yemen war distanced the kingdom from the US administration. A subsequent spree of Houthi attacks on Saudi oil facilities has further incensed the royalty. To add oil to the fire, Biden’s desperation to salvage the outdated Nuclear Deal with Iran has virtually alienated the kingdom to the point of indifference.
The implications are not complex to spot. Since Russia launched its onslaught against Ukraine in February, Saudi Arabia has actively refused to pay heed to Biden’s calls to expand Crude supply quotas and suppress Global oil prices. Instead, the OPEC+ alliance – OPEC members, Russia, and other allied producers – stuck to its original plan to modestly raise the June output target by 432,000 barrels per day. The brutal indifference to the Western calls has an underlying reason besides the concurrent row with the United States. The reason is the growing China-Saudi cooperation. Over the past few years, Saudi’s structure of the international oil trade has undergone a fundamental change. That is predominantly due to increasing cooperation of China which is not just limited to the energy sector. Under the hood of its Belt and Road Initiative (BRI), China has also objectively expanded its potential presence in the kingdom through bilateral cooperation in infrastructure, trade, and investment.
According to the American Enterprise Institute’s China Global Investment Tracker, cumulative Chinese investments in Saudi Arabia reached $43.47 billion in 2021. According to data released by the Chinese General Administration of Customs (GACC), China imported an estimated 542.39 million tons of Crude oil in 2020 – comprising more than 25% of the kingdom’s total Global oil exports. Sources from Saudi Arabia’s top securities regulator suggest that the kingdom’s Sovereign Wealth Fund may soon start investing in Chinese companies after years of limiting its overseas holdings in the US and Europe. Official sources suggest that Saudi oil giant Aramco is in talks to strike a partnership with the Chinese petrochemical consortium. Recently Aramco also finalized a $10 billion deal with Chinese petroleum companies. All the factors unambiguously point in a single direction – Saudi Arabia is leaning away from the US to China. Naturally, the de-dollarisation of trade and investments would facilitate bilateral relations with China.
There are, however, some drawbacks to the petroyuan when compared to its counterpart. While China’s financial markets have exponentially grown over the past few decades, they are still relatively illiquid compared to the US capital markets. Moreover, the massive $13.4 trillion eurodollar market extensively facilitates trade in European markets. Meanwhile, trades in yuan would be limited to China and subject to manipulation from the People’s Bank of China. Thus, trades settled in yuan would be an inconvenience to the smooth operation of trade and short-term deposits. However, these problems could be resolved if petroyuan is used as a barter for investments in China.
Like Saudi Arabia, economies like Russia and Iran have also inched closer to Asia. Russia, for instance, has consistently voiced its propensity to shift toward the Cross-Border Interbank Payment System (CIPS) – a transaction system clearing international settlements and trade in the Renminbi – to trade its oil in Asia under western sanctions. India has openly defied the US pressure by purchasing roughly 15 million barrels of oil from Russia since the invasion of Ukraine. The Russian Crude now accounts for about 17% of Indian imports – up from less than 1% before invasion. The rudimentary reason is cheaper oil in Roubles, especially when Europe is still weighing an embargo on Russian oil. Even Iran has notoriously traded Crude with China under US sanctions by abandoning the US dollar for settlements.
Some economists may argue that even combined, the effect of de-dollarisation would be gradual and uneconomical. But we need to understand that the historical context is skewed, and ground realities today are comparatively different. Firstly, the economies in Asia are significantly less dollarised than the emerging economies of Latin America discussed in the existing literature. Secondly, the Asian economies – particularly China and India – are much more significant in terms of size and monetary policy. Even a shift towards semi-dollarisation could upend the clout of the United States and significantly reduce the power of US sanctions.
The US lawmakers are understandably irked by the defiance of the OPEC+ alliance. Recently, a US Senate Judiciary Committee passed the No Oil Producing or Exporting Cartels (NOPEC) bill to amend the US antitrust law. If passed by the full Senate and House, the US Attorney General would gain the authority to expose OPEC+ countries to lawsuits for possible collusion, bypassing the sovereign immunity guaranteed to OPEC+ nations. While similar motions have been filed and failed over the past two decades, the notable highlight is the US desperation in the face of helplessness. Saudi Arabia already warned the US lawmakers in 2019 that such a bill, if passed, would force its move to trade oil in different currencies. Today, with Europe’s belated timeline to phase away from Russian Crude to China’s expanding influence in Eurasia, it seems the inevitable transition from the petrodollar may strike sooner than initially expected – if expected at all!
Chinese Maritime Strategy: Further Expansion and Progress
The Belt and Road Initiative represents a shift in China’s global perspective as well as an update to its role and status in the international system, as announced by Chinese President Xi Jinping. Reviving the Silk Road as a means of connecting China with the rest of the globe was the biggest initiative so far. This initiative will connect China with the Arab Gulf states and the Mediterranean through Central Asia. The maritime silk road will connect China’s coast with Europe by way of the South China Sea and the Indian Ocean. It will also connect China’s coast with the South Pacific by way of the South China Sea.
The “string of pearls” strategy, which refers to a network of Chinese military and commercial facilities and relations on the length of the sea lines of communication, which extend from the Chinese mainland to the Horn of Africa, was used to secure Beijing’s global vision of military protection, diplomatic networking, and economic cooperation.
Some scholars believe that this would be a major threat to Britain which relies on the Commonwealth, China is gaining more influence in South Asia through the China-Pakistan Economic Corridor and the loan diplomacy, which weakens British influence in the Indian ocean. It also challenges Britain in the strategically important Malacca channel.
Experts mention that a state may only be considered powerful when it completely dominates its geographical surroundings. Aside from its strategic location on the international trade route, where 40 percent of all trade passes through the South China Sea and 30 percent of all oil traded globally. Beijing places a high value on the security of China’s regional environment.
China has overtaken the United States to become the world’s largest naval force – but experts believe that the mere comparison of the number of ships neglects many crucial elements that define the efficacy of any naval power.
The United States maintains, so far at least, a huge edge in many naval capabilities, as it has 11 aircraft carriers compared to China’s two. It also excels in the numbers of submarines, destroyers, cruisers, and huge nuclear-powered vessels. But it is projected to considerably enhance the size of the Chinese fleet.
Former Chinese People’s Liberation Army colonel Zhou Bo, currently at Tsinghua University in Beijing, says it is “extremely necessary” for China to build its navy in order to confront the maritime dangers it faces. He particularly says that “the largest challenge we are experiencing is what we regard as US provocations in Chinese territorial seas.” The US Navy expects that the total number of warships owned by the Chinese Navy would expand by 40 percent between 2020 and 2040.
Controlling waterways is a priority for Beijing. Attempts will be made to broaden its maritime presence outside the Indian Ocean, if possible. It is clear from this that China is interested in building strategic fulcrums around the world, such as huge ports equipped with sea cables and digital networks, as well as superior logistics services that might be used for military purposes if necessary.
China and the Indo Pacific Economic Framework
The Indo Pacific Economic Framework (IPEF) signed by a total of 13 countries, on May 23, 2022, in Tokyo is being dubbed by many as a means of checking China’s economic clout in Asia and sending out a message that the US is keen to bolster economic ties with its allies and partners in the Indo-Pacific.
Many Chinese analysts themselves have referred to the IPEF as ‘Economic NATO’. China has also been uncomfortable with the Quadrilateral Security Dialogue (Quad) which consists of US, Australia, Japan and India , and has referred to Quad as an ‘Asian NATO’ – though members of the grouping have categorically denied that Quad is an ‘Asian NATO’.
Countries which joined the US led IPEF are Australia, Brunei, India, Indonesia, Japan, South Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, and Vietnam. These countries together account for 40% of the global GDP. The four key pillars of the IPEF framework are; supply-chain resilience; clean energy, decarbonisation and infrastructure; taxation and anti-corruption; and fair and resilient trade.
While launching the plan, US President, Joe Biden said:
‘We’re here today for one simple purpose: the future of the 21st Century economy is going to be largely written in the Indo-Pacific. Our region,’
US Commerce Secretary Gina Raimondo while commenting on the IPEF said that it was important because it provided Asian countries an alternative to China’s economic model.
A few points need to be borne in mind. First, many of the countries — Australia, Brunei, Indonesia, Japan, South Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, and Vietnam – which have signed the IPEF are also part of the 15 nation Region Comprehensive Economic Partnership (RCEP) trade agreement of which China is a key driver (Indonesia, Phillipines and Myanmar have not ratified RCEP). RCEP accounts for 30% of the world’s GDP. Trade between China and other member countries has witnessed a significant rise, year on year in Q1 of 2022.
Second, many of the countries, which are part of the IPEF, have repeatedly said that they would not like to choose between China and US. The Singapore PM, Lee Hsien Loong who was amongst the first to hail the IPEF, has emphatically stated this point on a number of occasions. In an interview to Nikkei Asian Review on May 20, 2022, Lee Hsien Loong reiterated this point. In fact, Lee Hsien Loong even pitched for making China a part of the Comprehensive and Progressive Partnership for Trans Pacific Partnership (CPTPP) (TPP the precursor to the CPTPP was a brain child of the US). Said the Singapore PM:
‘We welcome China to join the CPTPP,’.
Here it would be pertinent to point out, that China had submitted an application for joining the CPTPPIN September 2021. In the interview, Lee Hsieng Loong did state that countries in Asia needed to have good relations with US, Japan and Europe.
Indonesia’s Trade Minister Muhammad Lutfi who attended the signing of the IPEF on behalf of the President Joko Widodo stated that he did not want to see IPEF as a tool to contain other countries.
One of the reasons why many countries are skeptical about the IPEF is the fact that it does not have any trade component. A number of ASEAN member states have pointed to the IPEF making no mention of tariffs and market access as one of its major draw backs. At the US-ASEAN Summit, held earlier this month Malaysian Foreign Minister, Ismail Sabri Yaakob had referred to this point. Like many other countries, Malaysia has welcomed the IPEF, but in the immediate future sees RCEP as a far greater opportunity.
US President Joe Biden has not deviated significantly from the policies of his predecessor, Donald Trump, with regard to trade and the US is unlikely to return to the CPTPP at least in the immediate future. Biden and Senior officials in his administration have spoken about the need to check China’s growing economic influence, specifically in Asia, and to provide an alternative model. While the US along with some of its Indo Pacific partners has taken some steps in this direction (only recently, leaders of Quad countries during their meeting at Tokyo announced that they would spend USD 50 billion, in infrastructural aid and investment, in the Indo Pacific.
Given his low approval ratings, and diminishing political capital it is unlikely that he is likely to change his approach towards trade significantly. US Trade Representative Katherine Tai said the TPP was ‘fragile’, and that there was no domestic support for the same.
In conclusion, while the IPEF does have symbolic importance it is important to bear in mind that many signatories themselves have close economic relations with China and would not like to get trapped in competition between US and China. Unless the US re-examines its approach towards trade, which is highly unlikely, and unless countries which are part of the Indo-Pacific vision are able to strengthen economic cooperation, China is likely to dominate Asia’s economic landscape – even though there is growing skepticism with regard to the same.
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