Foreign Policy Research Institute A Nation Must Think Before it Acts Palm Oil: Malaysian Economic Interests and Foreign Relations
Palm Oil: Malaysian Economic Interests and Foreign Relations

Palm Oil: Malaysian Economic Interests and Foreign Relations

The relative importance of the factors that drive Malaysian foreign policy has long been opaque. Historically, decisions have been made within a small coterie of senior officials and without much debate or discussion of their policy options in civil society. As a result, observers are often left to guess as to what Malaysian leaders’ true foreign-policy priorities are from their occasional public remarks. Among the factors that they most commonly talk about are Malaysia’s economic interests, particularly those of its palm-oil industry.

Intuitively, palm oil’s significance makes sense. In 2020, palm oil constituted nearly 38 percent of the value of Malaysia’s agricultural output and contributed three percent to its gross domestic product. Meanwhile, palm-oil plantations cover about 18 percent of the country’s land, directly employ 441,000 people (over half of whom are small landholders), and indirectly employ at least as many in a country whose population numbers 32 million. Thus, it seems logical that Kuala Lumpur would pursue a foreign policy that seeks to advance and protect its country’s palm-oil industry, especially if it believes that industry is threatened.

Mahathir Mohamad’s second tenure as Malaysia’s prime minister from 2018 to 2020 provided the opportunity to examine just how important palm oil is to Malaysia’s foreign-policy decision-making. Over that time, Malaysia would confront multiple foreign-policy challenges involving all three of its top palm oil export markets: China, India, and the European Union (EU). How Malaysia handled those challenges revealed that its foreign-policy priorities can meaningfully shift, even at the expense of important economic interests.

Squeeze, Baby, Squeeze

Perhaps not surprisingly, palm oil is produced from the fleshy fruit of the oil palm. As vegetable oils go, palm oil is remarkably versatile, used in a wide range of applications: from biofuels to soaps to snack foods. Palm oil’s health and preservative qualities in foods are particularly prized in Asia. Meanwhile, its relatively high energy content and ability to blend well with other oils make it a widely used biofuel in Europe. And, its relatively low cost when compared to other oils endears it to both regions. As a result, global palm oil production quadrupled since the 1990s. In 2020, Malaysia produced about 30 percent of the world’s total. (Indonesia produced another 40 percent of the total.)

Palm oil’s rise to prominence in Malaysia did not happen without help. In the early 1980s, the Malaysian government, then also led by Mahathir, viewed palm oil as the solution to the problem of Malaysia’s declining rubber and tin production. The government put palm oil at the center of its economic development and poverty reduction schemes. In 1985, Mahathir even oversaw the nationalization and merger of Malaysia’s three largest palm-oil companies into a giant state-owned enterprise (SOE) in order to accelerate palm-oil production and spur its use overseas. As an added benefit for Kuala Lumpur, dividends from the SOE created a new revenue source for Malaysia’s government coffers.

Environmental Union

Unfortunately for the environment, expanding palm-oil production in Malaysia has traditionally meant clear-cutting old-growth rainforests to make way for new palm-oil plantations. By the early 2010s, that practice had drawn the ire of European environmentalists, who worried about the rapid rate of deforestation in palm-oil-producing Malaysia and Indonesia. When their protests failed to halt the two countries’ deforestation, they sought to achieve their goal by banning Europe’s use of palm oil. In 2018, they convinced the European Parliament to phase out the use of palm oil in European biofuel production by 2030.

Naturally, Malaysian leaders were appalled. The EU had been Malaysia’s third largest importer of palm oil. In response, Mahathir chastised the EU, arguing that it was “grossly unfair for rich countries to prevent poor countries from getting richer by not buying their products.” Going a step further, he accused the EU of starting a trade war to favor European rapeseed oil over Malaysian palm oil and urged the United Kingdom to break with the rest of Europe. He also took action, suspending negotiations for a Malaysia-EU free trade agreement and beginning the process to file a complaint against the EU’s anti-palm-oil measures with the World Trade Organization (which it did a year later). Mahathir’s vigorous defense of Malaysia’s economic interests clearly highlighted how important they were to his dealings with foreign countries.

Most Favored Nation

Mahathir’s deferential tone towards China further underlined the prominence of Malaysia’s economic interests. To be sure, Malaysian leaders have long tread carefully in their relations with Beijing to ensure access to what they saw as a huge export market. During much of his first 22-year tenure as prime minister, Mahathir did just that. His return to the prime minister’s office turned out to be more of the same. Indeed, he even came to see China (at least verbally) as leverage in Malaysia’s palm-oil dispute with the EU, threatening to shun European fighter jets and buy Chinese ones instead.

Still, Mahathir’s renewed accommodation of China during his second stint as prime minister was somewhat of a surprise, given his 2018 campaign rhetoric that cautioned against Chinese influence and criticized Belt and Road Initiative (BRI) infrastructure projects in Malaysia as “unfair.” Yet, after resuming his prime-ministerial post, he allowed almost all of those projects to proceed. He even flew to China to speak at its 2019 BRI Forum. On the other hand, he was mum over China’s internment of over a million Uyghurs in Xinjiang, despite leading a Muslim-majority country. He reasoned it was pointless to speak out against China, “a big trading partner of [Malaysia’s],” since doing so was unlikely to change things and could cause Malaysians to suffer. Mahathir pursued a similar line of thinking with respect to Malaysia’s sovereignty disputes with China in the South China Sea, despite increased Chinese harassment of Malaysian vessels there. While such foreign-policy choices may have seemed “subservient” (even to Mahathir), he could point to the fact that Malaysian palm-oil exports to China grew about 20 percent between 2018 and 2020.[1]

Diplomatic Dissonance

The sort of diplomatic tranquility that Mahathir seemed determined to maintain with China stood in stark contrast to the turmoil that he consciously stirred up with India. Speaking before the United Nations General Assembly in September 2019, Mahathir denounced India as having “invaded and occupied” Muslim-majority Kashmir, when New Delhi stripped its portion of the disputed region of its autonomy. Given India’s sensitivity over the issue, his accusation predictably prompted an angry backlash. India’s largest vegetable-oil traders soon boycotted Malaysian palm oil. When offered a chance to temper his comments, Mahathir refused, asserting that “we speak our minds, and we don’t retract or change.” Only a month later, he further antagonized India with the claim that its new citizenship law “deprived some Muslims of their citizenship.”

What made Mahathir’s statements all the more remarkable was that India was Malaysia’s top palm-oil importer. Indeed, India had been on track to import twice the volume of palm oil as China. Even with a boycott during the last three months of 2019, India imported 4.4 million metric tons of palm oil, compared to only 2.5 million metric tons for China. The next year, however, Malaysian palm-oil exports to India would plunge a staggering 38 percent. Despite such dire figures, Mahathir did not relent. Rather than try to protect Malaysia’s palm-oil industry, as he had with China and the EU, Mahathir seemed indifferent to the industry’s plight when he dealt with India.

Motivations Beyond Economic Interests

Though Mahathir may have believed India’s actions in Kashmir and its new citizenship law to be reprehensible, neither directly impacted Malaysia. By contrast, China’s challenges to Malaysia, from its costly BRI infrastructure projects to its competing claims in the South China Sea, do. Yet, Mahathir was willing to accept major economic losses to confront India, but unwilling to risk anything to come to terms with China, suggesting that factors other than purely economic interests drove his administration’s foreign-policy decisions.

When listening to Malaysian political leaders, it is easy to get the impression that their approach to foreign policy is based on a hardheaded appraisal of the country’s best economic interests. But foreign-policy decision-making within Malaysia is so opaque that it is difficult to know whether that is true and to what extent other factors are at work. What is clear from Mahathir’s actions is that economic interests, however important, are not always paramount in Malaysia’s foreign policy choices, and neither apparently is Malaysia’s long-held principle of non-interference in other countries’ domestic affairs.

The views expressed in this article are those of the author alone and do not necessarily reflect the position of the Foreign Policy Research Institute, a non-partisan organization that seeks to publish well-argued, policy-oriented articles on American foreign policy and national security priorities.

[1] United Nations, UN Comtrade: International Trade Statistics Database, retrieved on Feb. 1, 2021,