Wednesday, September 15, 2010

Indonesia Stands to Gain From China Trade Deal, but Workers Must Wait

The Asean-China Free Trade Agreement that came into effect this year has been hailed as a landmark pact in promoting the further liberalization of trade between China and Southeast Asian countries and increasing opportunities for investment across the region. However, while the economic gains may prove significant, one lingering question is whether they will mask a number of regional and national issues faced by Asean member states.

Employment is one of the areas where there will be winners and losers. Ask any laborer and he will say that being employed is the most critical aspect in his life. Ask any government about its policies on employment and underemployment and its officials will say that solving these problems are their highest priority, since not only is an employed workforce productive, it is also stable and conflict-free.

And yet, despite this thirst for work and this commitment to provide it, many Indonesian laborers continue to fall by the wayside. Some of the unemployed blame their plight on the ACFTA. But while it is true that China’s competitive advantage in labor-intensive exports may have a negative impact on local manufacturers (and much research on this topic remains to be done) , the agreement offers undeniable benefits.

China’s voracious appetite for natural resources such as oil and natural gas, as well as its dependence on intermediate goods such as raw denim and man-made staple fibers, provide a highly lucrative opportunity for manufacturers in Indonesia. Likely this will lead to more manufacturing — and more jobs. Moreover, as China’s standard of living and population grow, China will have to import more food, agricultural products, raw materials and industrial components to fuel the growth of its urban conglomerations.

But will goods coming the other way negate this?

The large influx of cheap Chinese goods, coupled with direct competition with China in the export markets, could lead to the demise of less competitive manufacturers, triggering a rise in unemployment numbers. Mindful of such labor issues and knowing that a short-term remedy to unemployment is still far off, the Indonesian government surely believes that the long-term benefits of the trade agreement are worth it.

Most Asean countries are aware that they cannot currently compete with China in the manufacture of labor-intensive products, given China’s low wages, low unit costs and enormous domestic market. Some likely knew they would be forced to improve the quality of their existing products and boost production efficiency in order to maintain or increase their shares in the market.

An interesting example of this lies in the readjustment taking place in Indonesia’s denim industry. As a whole, the country’s textile industry is less competitive than China’s, but the denim industry itself is highly competitive. In its success, it serves as an example for other industries on how to reap the benefits of the trade deal, such as by taking advantage of cheaper production costs made possible by more sophisticated machinery.

But for Indonesian laborers, here lies the rub. A knowledge economy that advocates innovation, raising product quality and boosting technical efficiency will entail a shift from labor-intensive modes of production to capital-intensive. In theory, if the market expands rapidly enough — even with the move from labor-intensive to capital-intensive manufacturing — the overall size of the gain from this shift should have the potential to absorb a pool of skilled workers who would have otherwise been under-utilized in low-productivity occupations, which dominate the informal and formal sectors.

The immediate question is whether a restructuring in export-oriented production, such as denim production, is capable of absorbing the displacement of workers from less competitive industries, and whether it can compensate for these immediate losses. Certainly, the answer would be clearer if the government used public spending in areas where it had traditionally held some power, such as in making access to credit easier, improving infrastructure and promoting national industries as world-class firms worthy of investment.

But even without this assistance, many unskilled laborers worry that a rise in skilled employment is a rise out of their reach. For them, a move away from labor-intensive to capital-intensive industries is a step in the wrong direction. However, another potential benefit of the trade agreement might prompt workers to reconsider their stance.

China is seen by many as a direct competitor to Asean members for foreign direct investment, and there are fears that closer integration will push investors away from the region. China’s global competitiveness — through its access to an abundant, cheap and well-trained workforce and huge market potential — has already made it a hot spot for foreign investment, regardless of the ACFTA. Asean member states, meanwhile, can still benefit from the trade agreement in at least two ways.

First, if foreign investors come to view China and the Asean as a single region through the connectivity brought about by trade pacts like the ACTFA, those nations will benefit as complementary parts of a larger market. Simply put, while Asean countries supply the raw material and China delivers the final product, consumers in both areas are available as purchasers of the final product.

Second, a strong China can have an anchoring effect, bolstering itself and Asean countries as sustainable trading partners who could reap economic benefits, including long-term foreign investments in new industries, as well as improvements in infrastructure and human capital. Though Indonesian workers may have something to smile about in the future, present-day concerns about joblessness naturally paint a less cheery picture for some. With some government direction, however, the future could arrive sooner than we think.

By Nathan Roesmandi intern at Strategic Asia, a Jakarta-based consultancy promoting cooperation among Asian countries. Jakarta Globe

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