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Trade war looms after Malaysia shocker

Nov. 14: A Malaysian move to drop India and China from a $3.8-billion railway project, one of Asia’s biggest infrastructure deals, may spark trade reprisals involving palm oil, whose biggest buyers are the two loser countries.

A confrontation could also put pressure on the new Malaysian Prime Minister, Abdullah Badawi, officials said.

Malaysia gave the job of building a dual-track, 600-km railway — its priciest infrastructure project — to politically well-connected Malaysia Mining Corp (MMC) and Gamuda Bhd just before former Prime Minister Mahathir Mohamad left office on October 31.

The deal has sparked concerns about trade retaliation — state-owned Indian and Chinese firms had signed letters of intent with Malaysia amid some fanfare to build the railway — and whether the Malaysian consortium can complete the project.

MMC is the flagship of Syed Mokhtar Albukhary, one of Malaysia’s most prominent tycoons and a close friend of Mahathir. The new Prime Minister, whose maiden speech to parliament focused on the need for more transparency and integrity in the public sector, has come under pressure from within, as well as outside the government, to review the deal.

A senior official of the Indian Railway Board said that though there has been no official communication from Malaysia, “we have already sent a formal letter to the ministry of foreign affairs to seek a clarification from the government of Malaysia”.

“The railway ministry cannot directly seek a clarification since the project was given to us as part of bilateral agreements between the Prime Ministers of the two countries,” he added.

Beijing has been silent since China Railway Engineering Corp lost out to the Malaysian group, which won the deal with a bid nearly $1.5 billion less than the India-China consortium. The project is part of a planned trans-Asia railway from Singapore to China, spanning 5,500 km. Malaysia had planned to defray the costs by providing eight million tonnes of palm oil to India and China over a five-year period.

While palm oil dealers said they had not seen any visible impact yet on trade or prices from the controversy, Malaysian primary industries minister Lim Keng Yaik said he had received complaints from local shippers that their palm oil cargoes had been rejected by China and India purportedly because of low quality. He did not give details. “The easiest way to retaliate is by using palm oil,” he said.

But industry experts in India were not so sure. “Demand for palmolein is higher than supply,” said Sandeep Bajoria, chairman of the Central Organisation for Oil Industry and Trade, a private body.

Officials in India think Malaysia should pay in some way for cutting Indian Railway Construction Co (IRCON) out of the deal. “The cancellation hurts us, as it was a government-to-government contract,” a senior official of the ministry of external affairs said. “India may not consider Malaysian companies in awarding new projects such as infrastructure development,” he added.

Malaysian construction firms are working on 51 projects in India, mostly involving road building, worth a total of $3.2 billion. Gamuda itself is building several highways in India.

Indian oil traders said the government may be prompted to hike import duty on palm oil. The agriculture ministry had proposed to the finance ministry over a month ago to raise the import duty on refined palm oil to 85 per cent from 70 per cent. No decision has been taken. Under its World Trade Organisation pact with Malaysia, India could raise duties by a maximum 300 per cent.

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