23/11/2012 (International Centre for Trade and Sustainable Development) - Export restrictions are not new to the global trade picture and policy toolbox. Yet, their notable rise over the past decade has pushed forward the need to enhance the current understanding of the use of export restrictions on natural resources. This article presents two Southeast Asian case studies: Indonesia’s palm oil export tax regime, and Vietnam’s export ban on raw timber. It aims to illustrate the varied policy rationales behind such restrictions and their far-reaching impacts.

Export restrictions on the rise - for multiple reasons

A rapidly growing world population and expanding “global middle class” is driving demand for food and other natural resources, in a context where no one single country is completely self-sufficient. While, in the past, export restrictions sought to boost fiscal revenue, today’s application of such restrictions take place for a variety of reasons. Some countries have imposed export restrictions to enhance food security. Restrictions have been used on a temporary basis in times of poor harvests or limited global supplies of key agricultural products such as wheat or rice. Countries have also applied export restrictions to encourage local industrial development and to attract investment in downstream industries, such as in the cases of timber and fisheries.

With increasing environmental awareness, export restrictions have been implemented with the aim of contributing toward environmental protection and natural resource conservation as well. Restrictions have played an important role in reducing environmental degradation in the mining of minerals, especially where a country’s regulation or implementation capacity is weak, and has provided incentives for technological advances enabling efficient production.

Export restrictions are being strategically applied by trading countries in key resource sectors. They are increasingly seen as a necessary and useful regulatory tool that supports resource management and the broader goals of sustainable development.

Indonesia’s palm oil export tax regime

Indonesia recently implemented a new export tax regime on palm oil, which is illustrative of the current use of export restrictions. Indonesia used to be mainly a supplier of unprocessed palm oil to global markets. The picture will most likely change in the near future, as its newly implemented regime aims at developing Indonesia’s own downstream industry and thereby promoting exports of processed palm oil.

Palm oil is currently the world’s most widely used edible oil product, and its consumption is growing rapidly. The oil is mainly used for the manufacturing of cooking oils, frying fats, margarines, as well as for a wide range of other food products. In 2009, India, China and the EU accounted for 52 percent of global imports of palm oil, importing 6.8, 6.6, 5.4 million tonnes of the product each.

Malaysia and Indonesia are the world’s largest producers of palm oil, accounting for approximately 87 percent of global palm oil production in 2009. Recently, Indonesia surpassed Malaysia as the largest producer, with Indonesia producing 18.3 million tonnes, followed by Malaysia with 17.4 million tonnes. Both countries export the vast majority of their palm oil output, contributing 91 percent of total world palm oil exports. Malaysia’s exports are higher and have until now dominated the refined palm oil market. Its refined palm oil exports in 2010 accounted for 70 percent of its total exports; whereas Indonesia’s processed palm oil exports represented 43 percent of its exports.

Both neighbouring countries have employed export restrictions on palm oil. In Malaysia, the duty on exported crude palm oil (CPO) has been in place since 1960 as a price control mechanism. However, a significant change took place in 1976 when an export duty was introduced on processed palm oil (PPO). The duty was lower for PPO than CPO, thereby encouraging the development of the downstream industry. This was further strengthened in 2001, when Malaysia completely eliminated export duties for PPO. Currently, the export tax levied on CPO in Malaysia falls in the range between 10-30 percent. Export restrictions have aided the development of Malaysia’s refining industry, as its share of world processed palm oil increased from 2 percent to a high of 78 percent, standing now at around 50 percent.

Indonesia has likewise imposed export restrictions on palm oil, but for other distinct reasons. Palm oil is the raw material of the main cooking oil consumed by Indonesians. Therefore, during price spikes and periods of strong global demand, Jakarta has used export taxes to ensure sufficient domestic supply of cooking oil at moderate price levels. The mechanism benefited consumers by ensuring access to and controlling domestic CPO supply and the price of cooking oil.

However, recent developments have changed the landscape. On 15 August 2011, the Indonesian government revised its duty structure for palm oil. In response, a new export tax regime came into effect exactly a month later, substantially lowering export taxes for processed oil products, while raising them for crude. As a result, the export tax gap between the two products has widened, with the aim of encouraging the downstream industry.

Indonesia’s new export tax regime has affected the regional dynamics of the palm oil market. Indonesia’s new regime is now more closely aligned to Malaysia’s structure, thereby affecting Malaysian refiners. This is further compounded by the fact that Kuala Lumpur has issued CPO duty-free quotas, reducing the availability of domestic crude for processing. Malaysia’s rising imports of processed palm oil in February 2012 and rising share of CPO exports in general is an indication that Malaysian palm oil processors are losing their share of processed palm exports to Indonesia. It is important to note that Malaysia recently started importing CPO from Indonesia to supplement its stock for processing, but Indonesia’s new regime will now draw more of its CPO to its own refineries, limiting supply to Malaysia. Indonesia’s export tax reforms will certainly hurt the competitiveness of Malaysian downstream producers.

India is likewise reported to be affected by Indonesia’s new export tax regime. India is the world’s largest buyer of vegetable oils and the government faces pressure to make imports of refined palm oil costlier in order for Indonesia’s new regime not to threaten Indian refiners. India currently buys about 6 million tonnes of crude palm oil every year from Indonesia for processing into cooking oil and other food products. India’s refining industry could be severely hit if more refined palm oil were to be imported from Indonesia. Yet, India could also face a shortage of refined edible oils as Indonesia will most likely export less crude as a result of its new export tax regime. Clearly, the regional implications of Indonesia’s new export tax regime on palm oil are not negligible.

Vietnam’s export ban on raw timber

Vietnam, a prominent player in the timber industry in Southeast Asia, has likewise employed export restrictions, but with a different rationale. Vietnam’s timber sector has undergone a huge transformation over the last decade.  Its export regime may not have been the key factor within the overall policy-mix that has helped usher in reforestation and forest conservation, but it has been consistent with the goal of developing an export-led industry with higher value-addition and one that promotes better stewardship of its domestic forest resources.

Vietnam’s furniture industry is booming. The country has emerged as a regional timber processing centre for Southeast Asia, second only to China as an exporter of wood products in the region. At the turn of the millennium, the wood processing industry became increasingly export orientated, with total export revenue from furniture exports reaching US$3.4 billion in 2010. In 2009, there were approximately 3,400 wood processing enterprises operating in the country. The growth of Vietnam’s wooden furniture sector has been encouraged by the government through a range of measures such as relaxing regulations to enable private ownership of companies and promoting the industry to overseas markets. Vietnam’s main export markets - the US, EU, Japan, and China - account for about 90 percent of its total exports.

Vietnam has recently undergone a “forest transition,” shifting from net deforestation to net reforestation in the 1990s. The country experienced widespread logging in the 1980s and early 1990s, which led to significant forest loss. In 1943 Vietnam contained 14.3 million hectares (ha) of forest cover, but had lost six million hectares of natural forests by 1995. However, over the past decade its forest cover has been on the rise, and by the end of 2009, Vietnam recorded 13.2 million ha of forests.

This remarkable change in forest cover is a reflection of Vietnam’s forest protection policies since the 1990s. In 1992, the government began imposing controls on the logging industry, greatly reducing logging quotas in natural forests. Moreover, in 1993 logging in Vietnam was banned in protected areas and reserves and on all natural forests in the country’s northern provinces. In 1998, the ban on commercial logging in natural forests was extended to 58 percent of natural forests. Likewise, over the years, extraction quotas for large-diameter logs have been decreased considerably. As a result of these measures, logging is now restricted to production forests comprising both natural and plantation forests. More recently, Vietnam’s Forest Development Strategy 2006-2020 aims to increase the forest cover to 47 percent by 2020, and ensure that at least 30 percent of production forests are certified as sustainably managed. In addition, Vietnam has been embarking on a REDD+ mechanism since 2009.

Export restrictions have been an element in Vietnam’s efforts to conserve its forests. In 1992, in alignment with imposing logging controls, the government issued a ban on the export of raw cut and sawn wood. Export duties are also applied to natural resources such as forestry products.

Overall, these forest protection policies and regulations have shifted the source of wood used for Vietnam’s wood production industry from natural forests toward plantations and imports. Exports have also undergone a shift from raw towards value-added processed wood. Vietnam’s use of export restrictions have contributed toward, and been aligned with, forest conservation and the development of its downstream and wood processing industry.

Likewise, Vietnam’s policies have had regional implications. As the government tightened domestic logging policies, and the country simultaneously continued to develop its domestic timber processing sector, Vietnam has turned to imported raw timber as a major part of its wood supply. Approximately 70-80 percent of wood required for its industry is imported from abroad today. Of these imports, roughly half are from illegal sources. As such, Vietnam has emerged as a major destination for illegal timber, especially from its neighbouring countries Cambodia and, more recently, Laos. In fact, some have argued that Vietnam has protected its forests and developed its economy by “exporting” or “outsourcing” deforestation to its neighbouring countries.

Concluding remarks

These two illustrative examples provide some insight as to the reasons why export restrictions are employed by governments, and the resulting impacts - some unintended or unforeseen - they can entail. In both cases, export restrictions have been pursued to support sustainable development objectives. In the case of Indonesia, the new export tax regime aims to harness economic benefit from palm oil by promoting the development of its own downstream industry. Vietnam’s export restrictions have likewise promoted its wood processing industry, but have also been aligned with the wider environmental goal of forest conservation.  Similarly, in both cases, export restrictions intended at addressing domestic issues have resulted in noticeable regional trade implications. Indonesia’s new regime has affected the regional palm oil market, having repercussions for both Malaysia and India. Likewise, Vietnam’s “contradictory” policies of simultaneously protecting its natural forests and developing its wood processing industry, has resulted in its deforestation being “exported” due to mostly illegal timber imports from its neighbouring countries Cambodia and Laos (although both countries also ban the export of logs).

Indonesia and Vietnam have applied export restrictions on two key natural resources - palm oil and timber - geared towards exports. Yet, the context in which both countries resorted to restrictions and their actual form is different. This reinforces some ways in which export restrictions can be a multi-faceted and potentially powerful trade policy tool.