Striking deals: Leveraging bilateral and multilateral agreements to boost trade

Indonesian authorities are making moves to liberalise commerce by leveraging existing bilateral and multilateral trade agreements and moving ahead with closer integration with traditional partners. While its trade policy has not always been consistent in its liberalisation in recent years, eliciting complaints through the World Trade Organisation (WTO), the authorities seek to balance the priorities of import-substitution, populist pressures for protectionism and the opportunities of greater integration with global trade. A wave of new trade pacts under deliberation, covering goods and services and investment, should serve as bellwethers of Indonesia’s appetite for wholesale liberalisation.

Tariff & Non-Tariff Barriers

As a founding member of the WTO, Indonesia grants at least most-favoured-nation (MFN) treatment to all trading partners, with an average applied trade-weighted tariff of 2.5%, according to the Heritage Foundation. Following a five-year tariff harmonisation up to 2010, the average simple tariff dropped from 9.5% to 7.8% between 2006 and 2012, with average tariffs on industrial goods at 7.5% and those on agricultural goods at 9.5%, according to the WTO.

While some 85% of tariffs are now in the 0-10% range, a number of non-tariff barriers remain. These restrictions were relaxed in April 2013 following high food-price inflation, but trading partners see such attempts as symptomatic of inconsistent trade policy. Technical barriers like sanitary standards are an issue, though the main non-tariff measures hindering trade include licensing and quota regimes, trade logistics inefficiencies (including Indonesia’s high cost of logistics, which amounted to 27% of GDP in 2012, according to the World Bank), intellectual property, public procurement procedures and subsidies. Meanwhile, restrictions on investment in the services sector remain high: the OECD’s 2012 Index of Investment Freedom ranks Indonesia as the second-most-restrictive of the 55 countries reviewed.

Disputes

Since 2005 Indonesia has been involved in 13 trade disputes through the WTO, including five as a complainant, four as a defendant and four as a third party. A recent controversial example was the imposition in 2012 of import quotas and strict licensing rules for importers of horticultural and animal products, restricting imports through four secondary ports, which elicited a request-for-consultation by the US (the first step toward a formal complaint) at the WTO in January 2013. Other examples of restrictive trade practices by Indonesia include the 2009 Mining Law’s minimum domestic sales requirement for coal producers (at a sub-market price), and rules introduced in May 2013 limiting the number of convenience stores and restaurants that a multinational company can operate in partnership with local investors.

Examples of Indonesian complaints under the WTO include cases against the US and Australia regarding export restrictions on Indonesian cigarettes and a request-for-consultation on EU anti-dumping measures covering fatty-alcohol imports.

Trade Agreements

Despite such frictions, Indonesia is party to six multilateral free trade agreements (FTAs) through ASEAN as well as bilateral FTAs with Japan since 2007 and Pakistan since August 2013. Southeast Asia’s largest economy also has 63 bilateral investment treaties and 17 other investment agreements, according to the UN Conference on Trade and Development (UNCTAD), which range from dual-taxation treaties, the latest signed with Hong Kong in November 2012, to sector-specific liberalisation efforts.

Accounting for some 40% of the bloc’s GDP, Indonesia stands to benefit from the ASEAN Economic Community (AEC), expected to take shape by end-2015 (see Country Profile chapter). While the ASEAN agreement contains important exceptions for banks and financial services, whose liberalisation is extended to 2020, liberalisation of trade in goods and services as well as investment within the region should support multinationals’ investments in expanding production and supply chains regionally. This trend is already pronounced in the automotive and electronics segments, for instance (see analysis). In the meantime, ASEAN has multilateral FTAs in place with key Asia-Pacific countries, including China, India, Japan, South Korea, Australia and New Zealand. While these FTAs did not provoke a surge in trade in and of themselves, trade has grown consistently over the past decade – Indonesia-China trade increased fourfold to reach $66.2bn in the seven years to 2012, for instance. China is intent on further developing two-way market access. “In the immediate future the two sides must work to elevate the level of the China-ASEAN Free Trade Area by opening up our markets,” Chinese President Xi Jinping said.

The conclusion of these FTAs has brought tariffs with those involved down to the 0.8-5.9% range, according to the WTO. The cost of applying for Certificates of Origin (COOs), required to prove eligibility under the FTAs and ranging from 3% to 5% of the final cost of products, according to the Ministry of Trade (MoT), means that larger firms and sub-contractors have benefitted much more than small and medium-sized enterprises. Nonetheless, the number of COOs under the various ASEAN FTAs surged from 26,085 certificates covering $1.9bn in trade (equal to 2% of total non-hydrocarbons trade) in 2006 to 205,775 COOs covering $19.9bn in trade (16% of non-hydrocarbons trade) by 2010, according to MoT data. The government sees the potential in FTAs. Indeed, the MoT expects an immediate impact of an additional $100m in bilateral trade in the first year as a result of the Pakistan-Indonesia FTA, and an extra $1.5bn-2bn in trade in 2014.

Ongoing Negotiations

The MoT aims to expand market access for key non-hydrocarbons exports, placing the highest priority on 10 products: textiles, footwear, rubber, palm oil, forestry products, shrimp, cocoa, coffee, automobiles and electronics. While these are established exports, the MoT plans to expand trade in goods where exports are marginal, like leather, medical appliances, medicinal herbs, essential oils, processed food, fish products, spices and handicrafts. Indonesia’s preferential market access under the Generalised System of Preferences (GSP) with the EU, but also the US and European Free Trade Association (EFTA) countries, is slated to end in 2014. As such, a number of new FTAs are under negotiation to replace the existing scheme.

After the failure of attempts by the EU to negotiate an ASEAN-wide multilateral FTA, the bloc has sought bilateral trade agreements with individual ASEAN members since 2009, known as Comprehensive Economic Partnership Agreements (CEPAs). Indonesia has also held eight rounds of negotiations toward an FTA with EFTA since 2010. “Political and private-sector support for a CEPA between Indonesia and the EU is there, although the devil will be in the details of negotiations once they start,” Oliver Oehms, senior advisor on trade and development at the Indonesian Chamber of Commerce and Industry (KADIN), told OBG. “Negotiations since 2010 on an FTA with the EFTA countries – Switzerland, Norway, Iceland and Liechtenstein – are ongoing, but with the sectoral preferential market access conferred by the EU’s GSP expiring in 2014 already, a new trade framework with the much larger EU market is equally, if not more, important.”

In parallel, Indonesia is part of a 12-nation effort led by the US for a Trans-Pacific Partnership (TPP), an FTA covering 800m people and some 40% of global GDP. While exploratory discussions on bilateral FTAs with India, Chile and Iran are also under way, the most comprehensive liberalisation efforts involve negotiations with the EU and US, separately. Sectoral policies such as Indonesia’s agricultural support schemes will be one determining factor, and the EU is intent on including all so-called Singapore issues in the CEPA negotiations. These include rules on public procurement, intellectual property, e-commerce, the role of state-owned enterprises and access for services and investment, a source of friction with most countries regionally. The TPP negotiations, which are secret but which the US trade representative hopes to conclude by end-2013, are said to include all Singapore issues as well.

Despite the pressure exerted by the looming end of the GSP in 2014, the value of Indonesia’s trade with the EU is overshadowed by the 70% of its trade focused on Asia. While trade with the EU accounts for 9% of Indonesia’s total trade, the bulk of this is with countries or in sectors not covered by the GSP, according to World Bank estimates.

Reciporcity

While Indonesia lags regional peers like Thailand and Malaysia in the number of trade pacts in force, its authorities are conscious of the need to secure preferential market access to support the expansion of its non-hydrocarbons exports. This will require reciprocity from Indonesia. Whereas such trade deals are significant in lowering average tariffs, Indonesia must work on facilitating trade for smaller exporters (see analysis), but also in dismantling non-tariff barriers to trade. Improving the country’s business climate and developing its trade logistics to seize opportunities will also be crucial to helping monetise greater access. “We must end our logistical inefficiencies and increase Indonesia’s ability to compete among ASEAN member states,” Suryo Sulisto, the chairman of KADIN, told OBG.

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