Indonesia: Industry at a Crossroads

Indonesia

Economic News

22 Jul 2010
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Indonesia’s economy is gaining momentum but the country’s industrialists remain cautious, wary of the impact of a new trade agreement they fear could see the Indonesian manufacturing sector swamped by cheap Chinese imports.



On January 1, a free-trade agreement (FTA) between ASEAN and China came into force, with tariffs on more than 6600 lines from 17 sectors, including 12 manufacturing sectors, reduced to zero. Among the industries directly impacted by the agreement are clothing and textiles, electronics, steel, furniture and cosmetics.



Though little more than a month after helping to create the world’s third-largest free-trade area, Indonesia is looking to tariff protections for its industries as a short-term measure, until the country’s economy is better prepared to meet the challenge posed by an influx of Chinese products.



There have been claims carried in the media that millions of workers could be made redundant and thousands of small- and medium-scale manufacturers forced to close their doors due to the lower cost of Chinese goods.



The government has downplayed any possible threat to the domestic sector, while promoting the very real benefits of the FTA.



There will not be a major increase in imports from China, according to Chatib Basri, a senior official with the Finance Ministry, as there had been a steady, though illegal, flow of Chinese goods entering the market for years.



“We have been worried about something that has actually happened,” he said at the beginning of February. “Chinese products have already been here through smuggling. Now it is merely a case of legalising them.”



On February 2, the finance minister, Sri Mulyani Indrawati, said that increasing demand for Indonesian exports would help lay the foundation for future economic stability.



“We have an opportunity in natural resource-based commodities. Like it or not, the 0% tariff is our export opportunity,” he said during an address to parliament.



Indeed, Indonesia has many resources that the rest of the region wants, with crude palm oil and coal at the top of the list. However, well down that same list are manufactured goods, while at home imports could soon price locally made products out of the market.



Though having signed up to the FTA, and having touted its benefits, the government too is concerned over its impact on industry. As early as mid-January, the Indonesian foreign minister, Marty Natalegawa, raised the prospect of delaying the implementation of at least some parts of the FTA, or providing some support to local manufacturers.



“Indonesia remains fully committed to its FTA with China under ASEAN, but will also seek ways to address the domestic industry’s fears,” he said on January 10.



The government has lodged a submission with the ASEAN Economic Community Council seeking agreement to defer the lifting of tariffs on some 230 items covered by the FTA.



The government is also considering a number of steps to ensure the interests of manufacturers are protected. On January 26, the industry minister, MS Hidayat, announced he would propose compulsory verification for seven kinds of imported goods, including cosmetics, ceramics, steel, mobile phones and some automotive parts. Requiring verification of the countries of origin would curb illegal imports and help protect domestic industries, he said.



Another measure put forward by Hidayat to support local manufacturers was a scheme by which the Finance Ministry would continue to exempt 10 domestic industries from import duties on materials needed for production. Among the industries to see benefit from extended exemptions are ship-building, electronics, automotive and heavy industrial machinery makers.



According to Rahmat Gobel, the vice general chairman for industry, technology and marine resources of the Indonesian Chamber of Commerce and Industry, the government could do more to support the manufacturing sector. By further developing infrastructure and supplying electricity at a fair price, the government could contribute to growth in industry, he said in mid-January.



“In any case, the government must strengthen the industrial structure because industry could contribute significantly to economic growth if it is strong,” he said.



Economist Payaman Simanjuntak is one expert who believes the FTA could be used as an incentive to strengthen the industrial sector. Rather than raise concerns over the impact of the new agreement, Payaman says both the state and the private sector should work together to lift quality and productivity.



Employers, the government and unions should cooperate to upgrade workers’ skill levels so as to improve their productivity and enable Indonesian products to compete with those from China and other ASEAN countries, he said in an interview with local press on January 12.



“To beat the competition and make our products marketable, we have to improve workers’ skills to make them more creative and efficient in producing cheaper and better-quality products,” Payaman said.



Though it will be difficult for some Indonesian industries to compete head-to-head with their much larger Chinese rivals, if the private sector and the state combine to improve infrastructure, the industrial skills base and value-added production, the FTA with China may become a growth catalyst.

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