Does Chinese Vegetable Oil Consumption Have Positive Implications for the Indonesia-China Trade Balance?

Indonesia is the world's CPO producer country, and at the same time, Indonesia also the largest exporter of CPO in global market. Some of the main countries that are becoming export destinations for Indonesia CPO are India, China, the European Union, USA and Pakistan. Empirically, it is seen that the phenomenon of widening gap in Chinese vegetable oil consumption patterns, where consumption growth is higher than domestic production growth. This boosted Indonesia's CPO exports to China and subsequently had an impact on the Indonesia-China trade balance. Analytical method used is ordinary least square (OLS), which is arranged in two-equation models. Findings of this study conclude that (a) Indonesia's CPO exports to China are affected by the increase in consumption of vegetable oils in China. This is consistent with the expected hypothesis; (b) the value of Indonesia's CPO exports to China has a positive impact and helps reduce Indonesia's trade balance deficit. This is consistent with the research hypothesis. Indonesia's CPO exports have a positive impact on the Indonesia-China trade balance, in particular contributing to overcome the Indonesia-China trade balance deficit. This research shows that CPO is Indonesia's strategic commodity that helps overcome Indonesia's trade balance deficit.


Introduction
China has an important role and position in global trade. Currently, the population of China reaches 1.4 billion people, or nearly one-fifth of the world's population (7.2 billion people) (UN, 2016). As the country with the largest population, China is trying to fulfil its domestic consumption and become one of the world's biggest producers of oil. By 2016, China is the world's major producer of soybean oil, with production of 15.58 million tons or 29% of the world's total production, followed by USA, with production of 10.22 million tons (or 19%). In the same year, China was also the second-largest producer of rapeseed oil, with production of 6.55 million tons (24.6% of total world production). The world's leading rapeseed producer is the EU-27, with a 36% share (USDA, 2018).
Although China is a major producer of the world, especially in soybean and rapeseed oil, China is a net importer country, its consumption far exceeds its domestic production. China's soybean oil consumption in 2016 reached 16.2 million tons (deficit 613,000 tons), and consumption of rapeseed oil reached 8.2 million tons (deficit 1.65 million tons). Likewise, with other vegetable oil sources, such as sunflower, China also imports 750,000 tons, with total consumption reaching 1.23 million tons, and domestic production only 450,000 tons. (PASPI, 2016). Many world countries are becoming consumers of soybean oil. In global trade, soybean oil is a thin market in the world market (Purba, 2017;Purba & Sipayung, 2017;PASPI, 2016). In 2016, domestic consumption reached 98.84% of total production. Exports, imports and re-export activities in global trade reached 11.6 million tons or 21.62 percent of the world's total production. The world's exporters of soybean oil are Argentina and Brazil. Although China and USA are the world's major producers of soybean, only contribute 4% in the world's soybean market, as well as producer countries as well as domestic consumers.
Unlike the case with CPO, where the volume traded in the world market reached 47.86 million tons or 73% of production produced by major producing countries. Like Indonesia, total production reached 35 million tons, and domestic consumption of 9.3 million tons, so that 73.5% of CPO can be exported to global markets. Similarly, Malaysia, with a total production of 21 million tons, Malaysia is able to export 18 million tons (85.71%). This is what drives CPO to provide a very large share in global vegetable oil trading. In this context, the most important contribution of CPO in the last two decades, is: "CPO feed the world". Based on the above background, the research question of this study is how is the effect of China's vegetable oil consumption on Indonesia's CPO exports and then how does it imply to overcome the Indonesia-China trade balance deficit? The objectives of this study are to analyze (a) the influence of China's vegetable oil consumption on Indonesia's CPO exports to China, and (b) the effect of Indonesian CPO exports on the reduction of Indonesia-China trade balance deficit.

Literature Review
Vegetable Oil Consumption is the composite of four major vegetable oil consumption, namely crude palm oil (CPO), soybean oil (SBO), rapeseed oil (RSO) and Sunflower oil (SFO). This pattern is reflected by the consumption percentage of the four sources of vegetable oil (Purba, 2017, Sipayung & Purba, 2015, Sawit, 2015. Export is the process of transporting goods or commodities from one country to another legally, generally in the process of trading. (Purba & Magdalena, 2017). Export value is obtained from the multiplication of export volume with the price of the commodity. While imports are trading activities that bring in (goods or services) from abroad (Sukirno, 2015). In this study, the exported commodity is crude palm oil (CPO), while the importing country is China.
Balance of payments is a record of financial flows showing the value of trade transactions and the flow of funds made between a country and another country within a certain period. The balance of payments can be divided into two main parts: current account and capital account balance. A balance sheet containing export and import transactions of goods is called the trade balance. The current account balance records expenditures and receipts (exports and imports) of goods and services together with net transfers. The current transaction provides an overview of the value of transactions resulting from the trade in goods and services (Salvatore, 1990).
Two main factors always affect the current account balance, the exchange rate of the domestic currency against the foreign currency and domestic net income. Changes in real exchange rates constantly affect current transactions, as they reflect the prices of domestic goods and services relative to foreign goods and services. Net domestic income affects the current account through its effect on total domestic consumer spending (Krugman & Obstfeld, 2005). Exports that are too low will cause the current account balance to be a deficit.

Research Methods
This study uses secondary data and categorized as quantitative research. Hypothesis testing is conducted to test the influence of independent variables on the dependent variable. The analytical method used is ordinary least square (OLS) with the following equation model:

The Development of Indonesia's Palm Oil Exports to China
In 2015, Indonesia's CPO exports reached 26.4 million tons. Indonesia's CPO exports to China amounted to 3.99 million tons (15.22%) and came in third after India (5.8 million tons or 21.96% of Indonesia's total CPO exports) and the European Union (4.23 million tons, or 16.03%). As Indonesia's palm oil industry grows, Indonesia has become one of the world's major CPO exporters, and even CPO has become one of the world's major vegetable oil sources, where the world's CPO consumption proportion has surpassed the dominance of soybean oil that for decades ranks first in vegetable oil world. This situation puts Indonesia in an increasingly important position in the world market, but on the other hand, the negative campaigns in the trade war on the world vegetable oil market are also increasingly strong in pressuring Indonesia. The superiority of palm that is unbeatable other vegetable oils, especially soybean oil, sunflower oil, rapeseed oil is in terms of productivity and the cheapest price compared to all three.
Indonesian CPO exports to export destination countries have different characteristics. In the period 2010-2015, Indonesia's CPO exports to China have the largest share proportion but tend to be constant from year to year, which is an average of 5 million tons per year. In the same period, the development of CPO exports to EU countries is in the second position and ranges from 3 to 4 million tons per year. So far, CPO exports to Europe still grow by 1.8% per year, but the position of CPO exports has begun to feel the pressure from the end consumer side, and the last few years began to decrease around 100,000 tons per year. This is a concern for Indonesia, where the trend of CPO exports to the EU if there are no strong efforts in Indonesian palm oil diplomacy to Europe, it is not impossible, CPO exports to the EU market will continue to decline in the future, and consumers want to develop a source of domestic vegetable oil (rapeseed and sunflower oil), though by paying a higher price. The spirit of nationalism can be implemented with various things, such as palm oil-free, labelling and various other policies.

Pattern of Vegetable Oil Consumption in China
The

Indonesia-China Trade Balance
China is one of the important export destination countries of Indonesia. Almost within the last decade, every year Indonesia's trade balance has a deficit with China. According to Statistic Indonesia, known as BPS, throughout 2017, Indonesia recorded a trade balance deficit with China of USD 10.23 billion in September 2017. This deficit is greater than that of Thailand with USD 2.84 billion and Australia USD 2.38 billion. During the cumulative period of January-September 2017, the value of exports to China reached USD 14.57 billion or a percentage of 13.02%. While the value of imports from China reached USD24, 81 billion or 26.07%. This shows the value of Indonesian imports is always higher than the level of exports. Indonesia's Trade Balance with China shows much higher import value than export value (Table 3, Figure 2).

Conclusion
When compared to the previous decade, it is seen today that the pattern of vegetable oil consumption in China has changed. There is a tendency to increase imports of large-scale CPO. It also increases the gap between Chinese vegetable oil production and consumption. The production growth rate is 8.5% per year and less than the 9.0% annual increase in consumption.
In the last three decades (1986-2016), palm oil (CPO) was ranked the largest in China's vegetable import structure and increasingly shifting the share of soybean oil. By 2016, the proportion of CPO imports has reached 69%, which has tripled in comparison with 1986 share (32%) while the role of soybean oil has been shifted from 55% in 1986 to 11% in 2016. There is no option for PRC other than importing ever larger CPO, as soybean oil is a thin market in the global vegetable market. The implications of the findings are that (a) the Indonesian palm oil industry has an important role in the acquisition of foreign exchange for Indonesia, (b) Indonesia's CPO exports have a considerable contribution in assisting Indonesia-China trade balance deficits.
Despite the apparent excess demand in Chinese vegetable oil consumption, the proportion of Indonesia's CPO exports is still relatively low but has opportunities to be increased. Therefore, the position of China must be seen as a strategic trading partner and a positive campaign for palm oil is still needed in the future. Also, further research suggestions are more in-depth research on soybean oil consumption in China, because China is a producer and consumer of global soybean oil.