Monday, June 18, 2012

Indonesia’s new protectionist trade policies: a blast from the past

Indonesian trade policy is going backwards. In the past year the government has introduced a range of new policies that inhibit trade and threaten the Indonesian economy. Three key policies are worth singling out.

First, there are new regulations on horticultural imports. Horticulture can only enter Indonesia at select ports, which excludes the busiest port of Tanjung Priok in Jakarta. New regulations also state that only registered importers can deal with horticulture imports. To become a registered horticulture importer a firm must get a recommendation from the designated directorate general at the Ministry of Agriculture.

Second, in May 2012 the government passed a new regulation on imports of finished goods. Unlike in the old legislation, a general importer is now only allowed to import goods that fall under one heading, and an importing producer is now only allowed to import finished goods for market testing and as complementary goods. This new regulation fills the legal vacuum left by the Supreme Court’s annulment of regulation No. 39/2010, which governed the import of finished goods by importing producers. But the new decree also regulates imports of finished goods by general importers.

The third new policy is the regulation of exports of 65 mining commodities including nickel, tin, gold, copper, silver, lead, zinc, chromium, platinum, bauxite, iron ore and manganese. These commodities will be subject to a 20 per cent export tax. Also, to be legally eligible to export these 65 commodities miners are required to be registered exporters and all exportation needs to be verified by surveyors. For a firm to become a registered mining exporter it must apply to the Ministry of Trade, and only after they have first secured an approval from the Ministry of Energy and Natural Resources.

The last time Indonesia actively used such behind-the-border barriers to trade, in particular non-automatic import licensing, was in the late 1970s and early 1980s. But as these policies failed to foster economic growth, Indonesia undertook major economic reforms from 1985, including trade policy reforms. Exports and economic growth have increased substantially since then. Rapid export growth was a significant contributing factor to Indonesia’s high growth in the late 1980s and 1990s.

The new policies on horticultural, finished goods and mining trade will contribute to a further downturn in Indonesia’s exports, which are already expected to decline due to slower growth in the county’s two main export markets: the EU and US.

The products that Indonesia exports contain many imported components. This is especially true for Indonesia’s manufacturing exports, which make up the bulk of Indonesia’s export basket. Non-oil mining exports play a similarly fundamental role in Indonesia’s export sector thanks to high prices. Yet the new regulations will have profound negative effects on manufacturing and mining.

Indonesia’s involvement in East Asian production networks remains limited. These new policies will further distance Indonesia from the Asian factory network and erode the country’s competitiveness.

So, why is Indonesia moving toward an inward-looking trade policy?

A more restrictive import regime is expected to safeguard Indonesia’s trade balance, which is experiencing a substantial decline and became negative in April 2012. This trend is the result of a bleak outlook for the global market, so passing additional regulation is not wise. The government is concerned because while Indonesia’s exports remained high in the first quarter of 2012, imports have increased significantly. Yet more than 70 per cent of Indonesian imports are still raw materials. Another 20 per cent are capital goods. Consumption goods account for only 7 per cent of imports. It is clear from this breakdown that Indonesia’s imports fuel its exports and are crucial to the value-adding aspects of the Indonesian economy and, perhaps more importantly, that these figures do not differ from historical trends. With such a basket of imported goods, adopting a more restrictive import regime will harm Indonesia’s competitiveness by increasing the cost of components and other raw materials.

The government has ironically suggested that the new import restrictions will accelerate Indonesia’s transformation from an exporter of low-value-added goods to an exporter of high-value-added goods. To encourage this transformation the government uses incentives such as tax breaks for producers of high-added-value commodities, and disincentives such as export taxes on unprocessed commodities. How import restrictions can possibly assist in this process is unclear.
A major driver of these import restrictions is the simple need to boost government revenue. 

Indonesia’s government failed to reduce the country’s fuel subsidy earlier this year, and is now facing a budget deficit of approximately 300 trillion rupiah (equivalent to US$32 billion or 3.6 per cent of its GDP). Fees and charges in the new import regime are a reliable and much-needed revenue stream.

But mortgaging Indonesia’s trade competitiveness to ease the budgetary pressure is short sighted and dangerous. Indonesia’s exports are the engine of its economy. Imposing restrictions on imports jeopardises Indonesia’s long-term growth prospects. The government should abandon the new regulations and focus on balancing the budget through sensible long-term economic management.

Titik Anas is Research Fellow at the Centre for Strategic and International Studies, Jakarta.

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