Saturday, December 5, 2009

Is Indonesia Ready for the Free Trade Fray?

Globalization and trade liberalization have become an unavoidable part of the modern, interconnected world. All countries, including Indonesia, are affected by the trend toward trade liberalization, with free trade blocs or free trade agreements on the rise, both bilaterally and regionally. According to the World Trade Organization, the number of free trade blocs has now reached almost 250, with 168 of them already in the implementation phase.

The proliferation of these FTAs is in part due to the effect of the slow-moving WTO negotiations. In seeking more efficient alternatives, even WTO member states are taking the initiative to form free trade blocs. These states fear that they will otherwise lose their traditional spheres of market dominance, which could be diverted into the hands of their FTA partners.

This same process is seen at the regional level. As a dynamic community, the Association of Southeast Asian Nations will see opportunity in forming economic cooperation blocs to boost the region’s economic growth and contribute to rising levels of prosperity.

With this in mind, Asean and regional giant China have decided to step up their commitment to progressive trade liberalization in the form of an Asean-China FTA. This is scheduled to begin to gradually take effect in 2010 for the six older Asean members — Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand. The four other members — Burma, Cambodia, Laos and Vietnam — will join in 2015.

Under this Asean-China partnership, participating countries will be able to enjoy the benefits of trade creation and trade diversion, which will occur because of the lowering of tariffs. In addition, the regional bargaining position becomes stronger in terms of drawing trade partners and investors, both foreign and domestic.

In general, a regional free-trade bloc will lead to an expansion in trade and the eradication of trade barriers. It will also aim to step up trade between partner states. Key to this arrangement is the elimination of both tariff and non-tariff barriers between members.

But many see the Asean-China free trade bloc as offering more negatives than positives for Indonesia. They argue that it has the potential to erase domestic-market opportunities for the national manufacturing sector. It is estimated that the agreement may lead to an annual Rp 35 trillion($3.7 billion) in lost market opportunities. Under the agreement, import duties on 6,682 items from 17 industrial sectors would be dropped to zero. Those industrial sectors certain to face difficulties in competing with Chinese products are textiles and textile products, steel, machinery and equipment, and agricultural products.

Those four sectors are seen as not yet having a strong industrial structure, from upstream to downstream. Furthermore, ever since Asean-China tariff liberalization began to be implemented in 2005, the Indonesian trade surplus has continued to weaken. The growth of Indonesian exports to China has not been proportional to the growth of Indonesian imports from China. Data from the Indonesian Chamber of Commerce and Industry (Kadin) shows that a continuously decreasing Indonesian trade surplus with China led to a $3.61 billion deficit in 2008. Trade in the non-oil and gas sector suffered the largest deficit, plunging from a surplus of $79 million in 2004 to a deficit of $7.16 billion in 2008.

But in line with the globalization process, the Asean-China FTA should be allowed to go forward, and Indonesia must be involved in it.

What is needed now is immediate government action to safeguard domestic markets and industries. The government also needs to prepare anticipatory measures before implementation of the FTA. Before engaging in further liberalization of the trade sector, the government needs to take steps to restrict imports, especially consumer products. The trade minister issued a decree in 2008 to prevent illegal imports from entering the country.

But the decree will be insufficient as long as it is not supported by quick action to protect local markets and industries The government must at the least provide assistance in attracting investment to support industry.

We can learn from the actions of China when it embraced capitalism in 1974. The line it took was that “it is better for China to make money,” and the Chinese market consequently opened up. After opening its market, the Chinese government focused on advancing the country, with protecting its infrastructure and industry as the top priority. China did not focus on trivial things like where the raw materials came from, where industries were located or where products would be sold. The focus was rather on industrial growth.

Importantly, the Chinese government ensured the country’s industries first met domestic market needs. Only then could they begin to explore markets overseas. Indonesia can learn from the success of China in protecting its local markets and industries. To protect consumers, the government needs to enforce standard labelling practices and the obligation to obtain certification for consumer goods. If necessary, the government can cooperate with local investors in building testing facilities for consumer products.

Additionally, regulations on human resources and labor should be improved.
Logistics and infrastructure should also be improved so that costs are competitive with those in China. The government must work to create an equilibrium and should be
responsible for providing incentives for domestic industries. If this can be done, our domestic industry will be ready to compete in a free trade setting. The Jakarta Globe Op-Ed by Yeane Keet

Yeane Keet is the deputy secretary general of Gabel and the deputy chairman of Kadin’s Permanent Committee for Innovation and Productivity.

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