Indonesia in pursuit of trade liberalisation

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With an eye on boosting international trade relations and broadening exports, Indonesia is ramping up efforts to seal a raft of global trade agreements.

The country will be looking for improved market access to pave the way for its longer-term bid of becoming a member of the Trans-Pacific Partnership (TPP) agreement.

Finding a way forward

In mid-February the Indonesian government and the EU agreed to increase cooperation in the trading of key commodities, including palm oil and cocoa beans. The deal forms part of a broader bid to accelerate negotiations on a long-awaited Comprehensive Economic Partnership Agreement (CEPA).

Negotiations aimed at securing the deal have stalled since 2012, when both sides were unable to reach an agreement on key issues like tariff reductions, service liberalisation and foreign ownership restrictions.

According to Darmin Nasution, coordination minister for economic affairs, in early March the EU requested a 95% reduction of import duties on all traded goods and the removal of export duties. This has highlighted the complexities involved in the negotiations.

Speaking to local media, Darmin warned that reducing import duties by such a significant amount “could be a blow to domestic industries”.

Weighing the positives

Indonesia nonetheless remains keen to increase exports to EU countries, which have stalled in recent years on a weaker global economy and growing regional competition.

Reaching a deal with the bloc is seen as vital for improving the bilateral trade balance and competing with ASEAN rivals. At present, around 9.6% of Indonesia’s exports are destined for the EU, compared to a combined 23.1% sent to China and Japan.

“We are in the middle of tight competition with other ASEAN countries because currently they are aggressively opening their markets and exporting goods with higher level of competitiveness compared to Indonesia,” Bachrul Chairi, director-general for international trade cooperation at the Ministry of Trade, told media in mid-2015.

According to the latest European Commission figures, Indonesian exports to the EU have declined in recent years, from a high of €16.3bn in 2011 to €14.4bn in 2014. Meanwhile, Indonesia’s imports from the EU rose by 28.4% over the period.

With President Joko Widodo scheduled to make official visits to several EU countries in April, pressure is growing to move the dialogue forward.

Path to TPP

Ratification of the CEPA is also seen as a key step on the path to joining the TPP. While Indonesia was not among the initial 12 Asia-Pacific nations to sign the flagship treaty, the country is forging ahead with plans to join the bloc.

In February Indonesia cemented its intentions by signing an agreement in New Zealand, though a raft of regulatory changes will likely be needed in preparation for membership.

“Based on our estimation, at least 12 laws and bills need to be revised if we join the TPP,” Thomas Lembong, minister of trade, told media.

Acceptance to the TPP could yield important trade benefits for Indonesia. According to an analysis using the World Integrated Trade Solutions simulation model, Indonesia’s goods exports to TPP countries could rise by more than $3.76bn per annum if the country becomes a member. However, goods imports from member states are similarly expected to rise, by over $3.78bn per year, leaving a net deficit of $19m.

This compares to an estimated trade surplus of $1.6bn-2bn if Indonesia remains outside of the TPP, media reported.

Sceptics have also expressed fears that TPP membership risks flooding the local market with cheaper, imported goods from other member states.

However, Lembong remains convinced that the country cannot afford to miss out on the benefits of joining the bloc.

Advantages, he said, include the opportunity to reduce 18,000 tariff and other non-tariff barriers, including duties on textiles and apparel, which are some of Indonesia’s main exports to the US.

Bringing investors on board

Agreements like the TPP and the CEPA are seen as key for boosting investor confidence in Indonesia at a time when the country is being viewed by some as overly protective of domestic industry.

Lembong highlighted the examples of Panasonic, Toshiba and Ford, which recently announced plans to halt or scale back their operations in Indonesia.

He warned that international companies could be drawn to neighbouring markets, such as Vietnam or Malaysia, which have more competitive business environments and free or easy access to the EU and the US through the TPP and other trade arrangements.

Indonesian exports to these regions were still subject to relatively high import duties, he added.

“We're already losing in terms of tariffs to Europe by between 10% and 17%,” he said during the opening ceremony of the Ministry of Trade’s annual working meeting earlier this year.

Ratings agency Moody’s expressed a similar sentiment in November, saying TPP membership would be a credit positive for Indonesia’s sovereign rating, as participation would mitigate the negative effects of sluggish commodity prices on Indonesia's export performance.

With trade agreements a crucial part of the current administration’s strategy to progressively open the country to foreign investment, the government looks likely to persevere in its efforts to solidify outstanding deals

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