Determinant Factors of Indonesia Palm Oil Export to Major Importing Countries : an Error Correction Model Analysis

In modeling Indonesian palm oil international trade, dynamic econometric model which puts emphasis on cointegration and error correction is applied to develop a representative model captureing both long run and short run effects of changes in the model’s variables and subsequently the nature of the import market. The import demand analysis observes that: (1) aggregate income is the principal factor that stimulates palm oil import demand of the main consumers, i.e. China, India and EU countries, and (2) the demand is elastic in the short and long run with high rate of adjustment. The export demand side examines effects of (1) the income and price changes to importer’s preferences of palm oil from Indonesia and Malaysia, and (2) shifter in form of exported commodity, that is from crude palm oil (CPO) to processed palm oil (PPO). Indonesia’s total export supply generates negative response toward any changes on price export. Such a response is justified with hindsight that Indonesia as the largest producer of palm oil is also the massive consumer itself, and moreover, the commodity shifter from CPO to PPO. Palm oil import tariff imposes insufficient effect in distorting palm oil trade volumes. Consequently, reducing import tariff is less effective in rising the volume of imported palm oil, vis-à-vis, than if there are adjustments in aggregate income