ASEAN Economic Bulletin Vol. 27, No. 2 (2010), pp.

17384

ISSN 0217-4472 print / ISSN 1793-2831 electronic

DOI: 10.1355/ae27-2b

The Effect of Export Tax on

Indonesias Crude Palm Oil (CPO)
Export Competitiveness
Amzul Rifin

Crude palm oil (CPO) is one of the main export commodities of Indonesia. Besides an export
commodity, it is also an essential raw material in producing cooking oil. In order to secure
the availability of domestic CPO, the government of Indonesia imposed an export tax policy
in September 2004. The objective of the export tax was to control the price of cooking oil at
an affordable rate. The objective of this study is to describe the export tax policy on CPO
imposed by the Indonesian government and to analyse the effect of the export tax on
Indonesias CPO export competitiveness compared with Malaysia, the main competitor. An
export ratio equation between Indonesia and Malaysia is constructed using monthly data. The
dependent variable is CPO export of both countries, meanwhile the independent variables
include price ratio, export tax difference, refined palm oil export ratio, and exchange rate
ratio. The result shows that Indonesias export tax policy will cause CPO export competitiveness to decrease.
Keywords: Crude palm oil (CPO), export tax, Indonesia.

I. Introduction

was projected that 77 per cent of palm oil

domestic consumption was utilized in 2008 (CIC
2004).
Second, palm oil is a labour-intensive sector
and it contributes to employment. As palm oil
plantations are located mainly outside Java island,
this sector is important for poverty alleviation in
the other islands. In 1997, Indonesias oil palm
industry employed over 2 million people (Casson
1999).
Thirdly, palm oil is a strategic commodity for
Indonesias exports. In 2007, palm oil export

Palm oil has played an important role in the

Indonesian economy. First, palm oil is considered
to be a strategic sector since it is the raw material
of the main cooking oil consumed by Indonesians
(Soetrisno and Winahyu 1991). Over the years,
Indonesias domestic consumption of palm oil has
increased steadily. In 1990, the consumption of
palm oil was around 1.3 million tons and in 2007
the consumption increased to 4.87 million tons
(United States Department of Agriculture 2008). It

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reached US$7.8 million, about 6.9 per cent of

Indonesias total export which has increased from
4 per cent in 2003 (UN COMTRADE 2008).
Indonesia and Malaysia are the major
producers of palm oil. Both countries contribute
almost 87 per cent of the total world production
in 2007. Indonesia is the largest producer of palm
oil with the production of 18.3 million tons
followed by Malaysia with 17.4 million tons.
Meanwhile, in the export market, both countries
contribute 91 per cent of the total world palm oil
export, with Malaysia being the highest with 13.7
million tons, followed by Indonesia with 13.3
million tons in 2007 (United States Department
of Agriculture 2008).
In September 1994, in order to maintain the
availability of palm oil in the domestic market, the
Indonesian government introduced an export tax.
Based on a Decree of the Ministry of Finance No.
439/KMK.017/1994, an export tax was imposed to
control the price of cooking oil, which used crude
palm oil (CPO) as its main component. Moreover,
the CPO export tax was imposed to encourage
refined palm oil industry to develop by setting low
CPO prices. The export tax covered four types of
palm oil products. These are: CPO, refined
bleached deodorized palm oil (RBD PO), crude
olein (CRD olein), and refined bleached
deodorized olein (RBD olein).
Several empirical studies on the impact of palm
oil export tax on Indonesian economy has been
conducted, namely Larson (1996), Marks, Larson,
and Pomeroy (1998), Susila (2004), and Putri
et al. (2006). These studies reveal that the export
tax policy will mainly benefit consumers and hurt
farmers. Hasan, Reed, and Marchant (2001)
analyse specifically the effect of palm oil export
tax on Indonesias export competitiveness. The
authors use export share as the instrument to
measure competitiveness. Meanwhile Mohammad,
Fauzi, and Ramli (1999) and Amiruddin (2003)
analyse the interaction between Indonesias and
Malaysias palm oil industry in the presence of
government policy such as export tax.
This study will focus on CPO rather than palm
oil, which consists of CPO and refined palm oil,

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since most of Indonesias export is in the form of

CPO. Moreover, other studies focus on the effect
of the export tax on welfare while little attention is
given to the effect on export. The objective of the
study is to describe the export tax policy imposed
on CPO and how it affects Indonesias CPO export
competitiveness compared with its main rival,
Malaysia. In addition, the export tax calculation in
this article is more specific compared with other
articles published.
A brief overview of the export tax policy that
has been imposed in Indonesia is provided in
section II. A discussion on the export tax policy in
Indonesia and Malaysia is provided in section III.
In sections IV and V, the model and data used in
the empirical analysis will be explained. This is
followed by a discussion of the main result in
section VI and lastly, some conclusions are
presented in section VII.
II. Crude Palm Oil Export Tax Policy in
Indonesia
The government of Indonesia has issued several
regulations regarding palm oil export. Before
1978, palm oil was an export-oriented commodity.
Production and export volume increased rapidly,
and export volume reached 7299 per cent of the
total production (Djauhari and Pasaribu 1996).
Since 1978, with the issue of government policy
concerning the allocation of palm oil for domestic
purposes, palm oil was no longer an exportoriented product. This policy was implemented
because of the scarcity of palm oil as a raw
material for cooking oil. This policy caused palm
oil exports to decrease. In June 1991, the
government abolished the policy by eliminating
the domestic quota of palm oil in order to increase
its export and attract more investments to the
palm oil sector (Pahan 2008).
The trade liberalization policy in 1991 resulted
in an increase in both domestic price of cooking
oil and the volume of palm oil export. Concerned
with the higher price of cooking oil, the
government issued a new policy by imposing
export taxes on palm oil products in September

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Export Tax = Export tax tariff Check price

Export volume exchange rate

1994. The government issued a Decree of

Ministry of Finance No. 439/KMK.017/1994 to
tax CPO, RBD PO, CRD olein and RBD olein.
The formula to calculate the export tax was
as follows:

However, when the check price has not been

determined yet, the calculation of the export tax is
as follows:

Export Tax = Export volume Export tariff

(Base Price FOB Price)
Exchange rate

Export Tax = Export tax tariff FOB value

exchange rate

The Free on Board (FOB) price is determined

by the Ministry of Finance every month based on
average prices of the world market during the
previous two weeks, while the base price is the
maximum export price which was free from
export tax. The tax rate would get smaller as the
difference between base price and export price
gets bigger. The complete export duty structure for
crude palm oil can be seen in Table 1.
The decree was implemented up to June 1997.
During the implementation, the effective export
tax rate1 of CPO ranged from 0 per cent in August
1996 to the highest of 22 per cent in December
1994 (Figure 1).
In July 1997, based on the Decree of Ministry
of Finance No. 300/KMK/1997 the calculation
method for export tax was changed to the
following formula:

The FOB value is the total export value stated on

the Commodity Export Report or on the Certain
Commodity Export Report.
The new calculation differs from the earlier
formula. In the previous calculation, the export tax
depends only on the difference between the FOB
price and the base price, and only the base price is
determined by the government; meanwhile other
variables, such as base price and export tariff, are
fixed. The new calculation of export tax depends
on the export tax tariff and the check price
determined by the government. Therefore, the
government can determine the magnitude of the
export tax depending on the price of domestic
cooking oil. When the domestic price of cooking
oil is high, the government will impose a high
check price and export tariff.

TABLE 1
Export Duty Structure of Indonesian Crude Palm Oil According to
Decree of Ministry of Finance
No. 439/KMK.017/1994
Product

Price Levels

Crude Palm Oil (CPO)

Base Price: US$435

Additional:
First 35 (435470)
Next 35 (470505)
Next 35 (505540)
Next 35 (540575)
Next 35 (575610)
Balance (P>610)

Duty/ton
0%
60%
56% (EP BP)
52% (EP BP)
48% (EP BP)
44% (EP BP)
40% (EP BP)

NOTE: EP: export price;

BP: base price.

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FIGURE 1
Effective Export Tax Rate of Crude Palm Oil
(September 1994June 1997)
16%

Effective Export Tax

14%
12%
10%
8%
6%
4%
2%
0%
94
19

95

96
19

19

97

19

Years

SOURCE: Authors calculation.

price kept increasing. The price reached its peak in

March 2008 and began to decline afterwards. With
the sharp price decrease, the government again
revised the regulation concerning the export tax
tariff in October and December 2008 (Table 2). In
the latest regulation, the minimum price when the
export tax was implemented increased from
US$550/ton to US$700/ton, causing the export tax
in November to drop to 0.
To sum up, the government implements export
tax on palm oil products to guarantee the
availability of CPO for producing cooking oil at
an affordable price and to develop the downstream
industry of palm oil. The calculation of export tax
has changed twice during its implementation. The
first export tax was measured using the difference
of export price and base multiplied by a certain
tariff. It was later changed based on the export tax
tariff and check price. During the first few years,
the export tax tariff was constant and the check
price was determined on a monthly basis, although
for several years the check price was constant.
Recently, the export tax tariff fluctuates depending
on the international price of CPO.

The export tax tariff is determined by the

Minister for Finance, while the check price is
determined by the Ministry of Trade on a monthly
basis based on the international price of CPO in
Rotterdam, Netherlands. During JanuaryApril
1998 the government banned palm oil export due
to limited supply of domestic palm oil product. In
addition, the effective export tax rate fluctuated at
the beginning of the policy implementation in
1997 and 1998. From October 2000 until June
2007, the effective export tax was relatively stable
but in July 2007 the government increased the
export tax tariff from 1.5 per cent to 6.5 per cent,
causing the effective export tax to increase
(Figures 2 and 3).
In September 2007 the government issued
another decree regarding the export tax tariff. Based
on the decree, the export tax tariff was set to a
reference price based on the international price of
crude palm oil in Rotterdam. Because of the high
international price of CPO, this decree was issued
to secure the CPO for domestic consumption
especially for making cooking oil. The decree was
revised in February 2008 when the international

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FIGURE 2
Effective Export Tax Rate of Crude Palm Oil
(July 1997December 2002)
70%

Effective Export Tax

60%
50%
40%
30%
20%
10%

02
20

01
20

00
20

99
19

98
19

19

97

0%

Years

SOURCE: Authors calculation.

FIGURE 3
Effective Export Tax Rate of Crude Palm Oil
(January 2003December 2008)
25%

Effective Export Tax

20%

15%

10%

5%

2008

2007

2006

2005

2004

2003

0%

Years

SOURCE: Authors calculation.

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TABLE 2
The Export Tax Tariff of CPO based on Decree of Ministry
of Finance No. 159/PMK.011/2008 and
No. 223/PMK.011/2008
Reference Price (US$/ton)

Export Tax Tariff (%)

< 700
701 P < 750
751 P < 800
801 P < 850
851 P < 900
901 P < 950
951 P < 1000
1001 P < 1050
1051 P < 1100
1101 P < 1150
1151 P < 1200
1201 P < 1250
P 1251

0
1.5
3
4.5
6
7.5
10
12.5
15
17.5
20
22.5
25

SOURCE: Ministry of Finance, 2008.

III. The Comparison of the Export Tax Policy

between Indonesia and Malaysia

TABLE 3
Duty Rates on Export of Crude Palm Oil
from Malaysia

The CPO export tax calculation in Malaysia is

similar to the calculation used by the Indonesian
government from September 1994 to June 1997.
The formula is based on the difference between
export price and base price which is fixed at
RM650 (Table 3).
Comparing the effective export tax between
Indonesia and Malaysia, it can be inferred that
during 1998 until June 1999, the Indonesian CPO
effective export tax was higher than Malaysias
but after that period Malaysias effective export
tax was higher (Figure 4). This does not indicate
that Indonesias CPO export is more competitive
than Malaysias since one of the objectives of the
Malaysian export tax was to encourage its palm oil
processed industry to gain higher value addedness.

Price (RM/ton)
First RM650
Next additional RM50
Next additional RM50
Next additional RM50
Next additional RM50
Plus on the balance

Malaysia. The dependent and independent

relative form comparing Indonesia against
Malaysia is to incorporate the effects of
competition between the two countries. By using
the relative form, it can incorporate a thirdcountry effect into the model which minimizes
specification error arising from the fact that trade
flows depend on cost of purchasing goods not

The export ratio equation investigates Indonesias

CPO export competitiveness compared with

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0
10
15
20
25
30

SOURCE: Amiruddin (2003).

IV. Empirical Analysis

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Duty (%)

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FIGURE 4
Malaysia and Indonesias CPO Effective Export Tax
(September 1994December 2007)
70%

Effective Export Tax

60%
50%
40%
30%
20%
10%

07
20

20

06

05
20

04

03

20

20

02
20

20

01

00
20

99
19

98
19

97

96

19

19

19
1994
95

0%

Years

Malaysia

Indonesia

SOURCE: Authors calculation.

only from an exporting country but from other

competitors (Jin and Koo 2003). Besides Jin and
Koo (2003), Xing and Wan (2006) also use ratio
variable as an dependent variable to explain the
relation between FDI and exchange rate in Asian
countries.
The equation is written as follows:

where
X : CPO export (ton)
P : domestic price of CPO (rupiah or ringgit)
ER : exchange rate (rupiah/US$ or ringgit/US$)
TX : effective export tax (%)
XR : refined palm oil export (ton)
CPI : consumer price index (2000 = 100)
subscript I indicates Indonesia, and M Malaysia.
The dependent variable is the ratio between
Indonesias CPO export and Malaysias CPO
export. The equation investigates the competitiveness of Indonesias CPO export compared
with Malaysias CPO export.
The first independent variable is the real
domestic price between the two countries which is
the proxy of production cost. The coefficient is
expected to be negative; it means that when the
price ratio decreases the export ratio is predicted
to increase.
The second variable is real exchange rate. The
coefficient is expected to be positive. When the

PI

XI
CPI I

ln
= 0 + 1 .ln

P
X M t
M CPI
M t
ER I

CPI I

+ 2 .ln

ER M

CPI M t
+ 3 (TX I TX M ) t

XR I
+ 4 .ln
+ t
XR M
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rupiah depreciates relative to the ringgit, the price

of CPO in the terms of rupiah will decrease, hence
export ratio will increase.
The next variable is refined palm oil ratio. The
inclusion of the variable is to analyse the effect of
the higher value-added palm oil product on CPO
export. The coefficient is expected to be negative.
It assumes that the two products are substitute
products. It means that higher refined palm oil
export will decrease export of CPO since it is
utilized to produce refined palm oil.
The last variable is the difference between the
two countries effective export tax. The effective
export tax variable analyses the effect of both
countries export tax policy to the export ratio.
Starting from July 1997, the two countries
implemented export tax policies with different
methods of calculation. The coefficient is expected
to be negative, which means that a smaller
difference in effective export tax will increase
Indonesias export competitiveness to Malaysia.
In determining the adequacy of the model,
several tests are conducted. The Jacque-Bera
statistic is utilized to test the normal distribution of
the standardized residual or the normality test. If
the residual is normally distributed than the
Jacque-Bera stastic should not be significant. The
Lagrange Multiplier (LM) test is conducted to
detect serial correlation. The null hypothesis is
that there is no serial correlation problem. Lastly,
the Breusch-Pagan-Godfrey (BPG) is used to test
for heteroscedasticity. The null hypothesis is that
there is no heteroscedasticity.

Meanwhile, the data of Malaysias palm oil came

from the Malaysia Palm Oil Board (MPOB). The
effective export tax is calculated by the author.
VI. Estimation Result
The result of the equation which explains
Indonesias competitiveness compared with
Malaysia is reported in Table 4 which is calculated
using ordinary least square (OLS) method. Two
equations are constructed: the first is that all
variables are in the same time frame (no lag
variables); on the second equation the price ratio is
in the lag form. The objective of incorporating the
lag variable is to take into account the information
lag of the price between the two countries.
The diagnostic test on both equations show that
the residual is normally distributed and there is
no indication of serial correlation and heteroscedasticity. In the first equation, the result
indicates that all the variables are significant
except for the price ratio. In addition, only refined
palm oil export ratio sign is different from the
hypothesis which is negative. The difference exists
because there is an interaction between the two
countries palm oil industry. Malaysia is the fifth
largest Indonesian CPO export destination in 2007
(UN COMTRADE 2008). Although Malaysia is
the second largest producer of palm oil, the
country also imported palm oil mainly in the form
of CPO, especially from Indonesia. This is caused
by three reasons: first, Indonesia is the largest
producer of palm oil. Second, recently several
Malaysian companies invested in Indonesia in the
palm oil sector, such as opening palm oil estates
and CPO refineries. In 2002, these companies
planted almost 250,000 hectares of palm tree in
Indonesia, which is about 5 per cent of the total
area of palm trees (Teoh 2002). These companies
export CPO to Malaysia in order to be processed
into refined palm oil. Lastly, CPO imported from
Indonesia2 is needed to supply the palm oil
industry in Malaysia for producing several
products of refined palm oil which is to be
exported.
In order to explain the positive coefficient of the
refined palm oil ratio, the variable must be

V. Data Sources
The data used in constructing the export ratio
equation is monthly data from January 2001 until
December 2007, which is collected from various
sources. CPO and refined palm oil export of
Indonesia was compiled from Statistics Indonesia.
Domestic price of CPO in Indonesia is taken from
the Statistical Estate of Indonesia. Nominal
exchange rate and consumer price index of
Indonesia and Malaysia are from the International
Financial
Statistics
(IFS)
database
of the International Monetary Fund (IMF).

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TABLE 4
The Export Ratio Estimates
Variables

Equation 1

Equation 2

Constant

11.5155
(2.9123***)
0.5147

12.1926
(3.0238***)
(1.3772)

1.5971
(3.2021***)
0.0971
(5.2504***)
0.6113
(5.4604***)
0.5174
21.1756

0.7576
(2.0955**)
1.7117
(3.3858***)
0.1022
(5.2387***)
0.6482
(5.7995***)
0.5169
20.8601

Real Price Ratio

Real Price Ratio (1)
Real Exchange Rate Ratio
Effective Export Tax Diference
Refined Palm Oil Export Ratio
R2
F-stat
Diagnostic test
Jarque-Bera
LM 2 (1)
LM 2 (2)
LM 2 (3)
LM 2 (4)
BPG 2

0.5318
0.2429
0.3263
0.2637
0.3925
0.5007

0.5246
0.2455
0.3473
0.3081
0.4025
0.2892

NOTE: The number in the parenthesis is the t value.

*** significant at 1 per cent.
** significant at 5 per cent.

analysed. An increase in Indonesias refined palm

oil export will cause a decrease in CPO export
including exports to Malaysia. Hence, Malaysias
CPO which is intended to be exported will be used
to produce refined palm oil to replace the CPO
import from Indonesia. As a result, Malaysias
CPO export will decrease. Therefore, when the
refined palm oil export ratio increases, caused by
an increase in Indonesias refined palm oil export
and decrease in Malaysias refined palm oil
export, it is predicted to increase the CPO export
ratio. This is caused by the decrease in Malaysias
CPO export which is larger than the decrease in
CPO export of Indonesia.

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A 1 per cent depreciation of the rupiah compared to the ringgit is predicted to increase export
ratio by 1.5971 per cent. Depreciation in the rupiah
will make CPO from Indonesia cheaper which
creates more incentive for producers to export their
CPO. Jin and Koo (2003) also reveal that exchange
rate is one of the important factors in determining
the U.S. market share of wheat in East Asia.
The focus of this paper is on the effective export
tax variable. The implementation of export tax
will decrease the domestic price, while increasing
the export price. Figure 5 illustrates the effect
of export tax at a rate of t. The domestic price
of export falls to pt, reducing the sum of
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FIGURE 5
The Imposition of Export Tax
Price

S
A

p*t= pt + t
pF

pt
C
D

Xt XF

Quantity of exports

SOURCE: Helpman and Krugman (1989).

imposition of export tax has long-lasting, negative

effects on the competitiveness of the Indonesian
palm oil industry. On the other hand, this finding
indicates that the export tax policy has been able to
meet one of its objectives, which is to limit CPO
export in order to supply to domestic refined palm
oil industry. As argued by Susila (2004) the policy
has been an effective instrument to control domestic
CPO and the price of cooking oil.
The second equation employs a one month lag of
price ratio. The result indicates that the price ratio
becomes significant at 5 per cent level. This shows
that the export ratio is influenced by the one month
lag of price ratio instead of the price ratio in the
same month. The other variables have relatively the
same coefficient with the first equation.
Comparing with other coefficients of the
independent variables, the effect of export tax is
relatively small. On the other hand, only the
export tax variable is under the control of the
government. Therefore, the government can
determine its level such as in the case when the
international price decreases, the government can
set the export tax to 0 per cent.

consumer and producer surplus by the area of

pFDCpt. However, the tax yields revenue equal
to after tax volume multiplied by the tax rate or
the area of p*t ACpt. The loss of tax is equal to
the area of BCD, while a terms of trade gain
equal to the area of p*t ABpF (Helpman and
Krugman 1989).
The econometric result reveals that a 1 per cent
increase in the effective export tax difference is
predicted to decrease the CPO export ratio by
0.0971 per cent. Therefore an increase in
Indonesias effective export tax relative to Malaysia
will decrease Indonesias CPO export assuming a
constant Malaysias CPO export. After July 1997,
the export tax calculation was different between the
two countries. Indonesia relied on the figure
determined by the government; meanwhile
Malaysias calculation depended on the FOB price
of CPO which is determined by the market. Hence,
when Indonesias government increased either
check price or the export tax rate, it will decrease
the competitiveness of CPO export compared to
Malaysia. This findings support the result of Hasan,
Reed, and Marchant (2001) which showed that the

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The implementation of export tax has conflicting

results. By imposing export tax, CPO export will
decrease but, on the other hand, the government
needs to control the availability of domestic CPO
to be processed into cooking oil and to keep the
price affordable. Therefore, the government must
correctly determine the magnitude of the export tax
which at least minimizes the negative effect of both
objectives. The imposing of export tax tariff based
on the international price is a proper policy to
protect the cooking oil consumer and also to
support farmers and exporters.

the calculation was changed in 1997. In September

2007, coping with the high international price of
CPO, the government set the export tax tariff
according to the international price of CPO. By
imposing the export tax policy, the Indonesias CPO
export competitiveness will decrease.
The decrease of the export competitiveness has
positive and negative impacts. The policy will hurt
the palm oil industry since it causes exports to
decrease. Meanwhile, the positive impact is that
the decrease in competitiveness will hopefully
encourage the CPO producer to sell the product
domestically in order to process it into refined
palm oil which has greater value added than CPO.
This will make it more profitable to export the
product in the form of refined palm oil.

VII. Conclusion
Export tax policy has been imposed since 1994 and

NOTES
The author wishes to thank Professor Masayoshi Honma (University of Tokyo), Professor Yuqing Xing (National
Graduate Institute for Policy Studies) and Dr Jayant Menon (Asian Development Bank) for providing useful
comments and suggestions.
1.

From the period of September 1994June 1997, effective export tax is calculated as follows:
(FOB BP)*TR
Tx =

FOB

where FOB is the FOB CPO price, BP is the base price and TR is the CPO tax rate. Meanwhile the second
method which is implemented from July 1997 is calculated as follows:
CP *TR
Tx =
P

where CP is the check price and P is the international price of CPO.

2.

From 1990 to 2007, in average 83.24 per cent of Malaysias CPO import came from Indonesia.

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Amzul Rifin is Graduate Student at the Department of Agricultural and Resource Economics, Graduate School of
Agriculture and Life Sciences, University of Tokyo; and Lecturer at the Department of Agriculture, Faculty of
Economics and Management, Bogor Agricultural University, Indonesia.

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