The Impact of Trade Liberalization on the Indonesian Palm and Coconut Oil Market

The Indonesian government has reduced its export taxes on the palm oil industry. The magnitude of the changes and their distributional consequences of the tax removal are empirical issues, and are uncertain in both short- and long-term. This paper estimates the impact of the elimination of the crude palm oil export tax on the Indonesian palm oil and coconut oil sectors. We constructed a model of Indonesian palm oil and coconut oil markets which includes relationships to explain: plantings, supply, demand, and exports. These relationships are somewhat unique in that these markets are modeled directly incorporating export taxes in the export function, and by using an inverse demand for cooking oils. We have investigated the use of time series procedures to specify the form of the statistical relationships. These estimated relationships were assessed using battery misspecification tests comparing their consistency with the underlying market structure, examining the findings front previous research, and evaluating their ability to provide more accurate representation of the market than traditional specifications. After linearizing the estimated models, we measured the effect of removing the export tax in the palm oil market on the palm and coconut oil markets. The export of crude palm oil increased immediately after the export tax was removed, decreased the availability of crude palm oil in the domestic market, reduced the amount of palm cooking oil produced, and increased the palm cooking oil price. The removal of the export tax also affected the coconut oil market, in such a way that it increased the price of coconut oil and increased the production of coconuts. Overall, the total quantity of cooking oil consumed and the total expenditure of cooking oil decreased, so did the supply of palm oil and coconut oil. Keywords: export taxe