Balancing Trade

Indonesia

Economic News

22 Jul 2010
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Faced with a likely decline in exports in some of its major markets, the Indonesian government is preparing measures to boost its balance of trade by making it more difficult to import various goods that can be produced domestically.



The risk of these policy measures is that they could be perceived as economic protectionism, which could dent Indonesia's reputation as an open and liberal market economy.



Indonesia's forecast export growth for 2008 is 12.8%, which would be the slowest in five years, according to Bloomberg data. Meanwhile, Trade Minister Mari Elka Pangestu recently announced that due to a pending slowdown in demand from the US, Europe and Japan - which collectively account for roughly one-third of all export sales - the government has further reduced its export growth target for 2009 from 11.5% to 10.9%. Additionally, Pangestu has stated that while not as severe, the country will be affected by a slowdown in China, Indonesia's fourth largest and fastest growing export market.



The lower forecast follows a recently announced decline in the overall economic growth of 5.5-6%, compared to an earlier estimate of 6.3%.



In order to mitigate the impact of a growth slowdown in exports on the country's industrial base, the government is actively looking to implement measures to protect and boost domestic competitiveness.



One such measure comes in the form of an indirect trade barrier, with the government having declared that it will heighten the supervision and implementation of Indonesian National Standard (SNI) requirements. SNI, which is imposed on a number of strategic product categories such as steel, tires and packaged goods, is aimed at controlling the quality of products that can be marketed within the country.



Christopher Chan, president director of PT Gajah Tunggal Tbk, the country's largest integrated tire producer, told OBG, "The intent of SNI, in the case of tires, is to ensure that tires reaching the Indonesian consumer meet minimal national safety criteria. We currently export heavily to the likes of Europe and the US, where importers have to meet their own accreditation standards. It is entirely fair, and to Indonesia's benefit, both for producers and consumers, that the country increases its domestic quality requirements."



Diah Maulida, director general of foreign trade at the Trade Ministry, recently declared that the government will raise SNI requirements and enforcement on several products, including food and beverages.



"We'll identify what kinds of goods we really need to import. ...We will enforce the implementation of SNI and boost the identification of smuggled products", she told the local press, additionally stressing that none of the measures under consideration would be in breach of international trade regulations.



New SNI measures may include stricter anti-dumping policies; a greater requirement for Indonesian language ingredient labels on food and beverage products; and the requirement of Indonesian language user manuals for electronic devices such as mobile phones and radios.



Ketut Kuardhana Linggih, vice president of the Indonesian Chamber of Commerce for trade and distribution, told the local media, "SNI will hold back imports, especially illegal ones, for six months to a year while exporting countries adjust to Indonesian regulations. ... Requiring Indonesian ingredient labels and user manuals are the simplest measures that can be applied."



The government has stated that the rationale behind the planned barriers is to protect export dependant nations, such as China, from dumping their products in Indonesia to offset slowing demand in the US and Europe. The fear is that attempts by other countries to dump their overproduction of goods into Indonesia would come at the expense of local industries looking to shift their focus to the domestic market as overseas demand dampens. Overall, these measures should guard against the smuggling and imports of unnecessary goods that could otherwise be produced locally.



A further policy to boost the competitiveness of domestic manufacturers is the Finance Ministry's plan to scrap duties on certain raw materials that are not made, or are considered to be produced in insufficient volume, domestically. Raw materials critical to eleven industries have been identified, with the industries selected depending on whether their products have wide domestic consumption and employ a large number of people. Those industries chosen include shipbuilding, heavy equipment, electronic components and coal-fired power generators.



This should give a further boost to the real economy, as decreasing production costs will result in lower selling prices, making prices more competitive with illegally imported products.



While these initiatives are still in preliminary stages, President Susilo Bambang Yudhoyono announced in early October the formation of a dedicated team to devise more concrete and integrated measures to maintain a positive balance of trade. The team will be chaired by Mohammad S. Hidayat, chairman of the Indonesia Chamber of Commerce and Industry (Kadin), and will comprise a selection of economic ministers, bankers and business leaders.

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