Coconut has traditionally played an important role in Indonesian  economy . Its  area , which is amounting to 3.5 million hectares and dominated by smallholders (98%), is the largest among the areas of perennial crops. It provides employment to more than 1.2 million people and contributes around 0.63 per cent to total foreign exchange earnings. Although the Indonesian governm ent continuously intervenes with coconut development, various problems are persistently encountered. The problems which are interrelated include trade inefficiency, imbalanced margin distribution, interlocked market, low quality, low farmer income, small farm scale, and inappropriate cultivation, maintenance and management. Moreover, the prospect of coconut market is getting worse because of the pressure  of palm  oil which has comparative  advantage in Indonesian domestic market. To alleviate those problems, in June 1991, the government released a packet of policy, known as Pakjun’91, which was proposed to liberalize oil palm and coconut trade. The impacts of this policy on coconut smallholders and trade are the focus of this paper. In addition , the  progress  of coconut trade  prior to the policy is also briefly elaborated as a historical background.