Analysis of Factors Influencing the Export Competitiveness of the Largest CPO Exporters to the European Union's Main Markets

Abstract

Crude palm oil (CPO) is one of the most heavily traded vegetable oils in the world, with Indonesia and Malaysia jointly supplying more than 80% of global production. Although both countries maintain a Revealed Comparative Advantage (RCA) above one in the European Union (EU) market, their competitiveness trends have diverged sharply across destination countries between 2010 and 2024, raising the question of which structural and institutional forces explain this variation. This study examines the influence of economic distance, real effective exchange rate (REER), rule of law, and the Renewable Energy Directive II (RED II) policy on the export competitiveness of the largest CPO exporters, Indonesia and Malaysia, in the four main EU import markets (Germany, the Netherlands, Italy, and Spain) during 2011-2024. Using panel data of 112 observations from eight exporter-importer country pairs, the study applies a Fixed Effect Model (FEM) with White cross-section robust standard errors, selected through Chow and Hausman tests. The results show that economic distance has a significant non-linear, inverted U-shaped, effect on RCA, while RED II has a significant negative effect, reflecting its function as a sustainability-based non-tariff barrier. REER and rule of law show no significant effect, suggesting that CPO trade, as a homogeneous primary commodity, is less sensitive to short-term exchange rate movements and domestic institutional quality than to external trade-cost and regulatory factors. The model explains 59.8% of the variation in export competitiveness. These findings imply that EU sustainability regulation, rather than macroeconomic or institutional conditions, is the dominant force shaping CPO export competitiveness, offering practical direction for trade diplomacy and sustainability certification strategies for Indonesia and Malaysia.