Would Indonesia Get A Lots Benefit From FTAs?

By: Group 1 (Agus Badrul, Catur Hadianto, Edy Wardoyo, Noorman Effendi, Yuni Suryati)

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Group 1 met Dr. Kasan, Special Advisor for International Relations, Ministry of Trade to discuss Indonesian FTAs

Indonesia will resume free trade and economic partnership negotiations with some important trading partners as President Joko Widodo’s administration steps up efforts to boost exports amid the country’s economic slowdown. The resumption of the negotiations was one of the government’s key programs to improve the country’s international trade. This plan would be the most drastic move undertaken by Joko Widodo’s administration to reinvigorate growth in Indonesia, which has been expanding at its slowest pace in six years. According to World Bank Indonesia’s economic expansion in 2015 was at its slowest pace since 2009, at 4.8 percent.[i]

Up to now, Indonesia has concluded eight free trade agreements (FTAs). There are six regional and two bilateral FTAs are in effect, specifically, the ASEAN free trade area (AFTA), ASEAN-Australia and New Zealand, ASEAN-China, ASEAN-India, ASEAN-Japan and ASEAN-Korea FTAs, as well as Indonesia-Japan EPA and Indonesia-Pakistan FTA.[ii]

Opening up Indonesia to more foreign trade and investment would be a big step as the country has a long history of protectionism and entrenchment. Those concluded FTAs opened up Indonesia’s economy to many benefits of trade liberalization, among others greater market access, the variety of high-quality products, greater competition and efficiency.

Nonetheless, the most significant reason why Indonesia jumps into the decision to resume FTAs negotiations is to catch up our neighbours, especially Vietnam, in obtaining greater global access and accelerating trade negotiation with trading partners. Vietnam has joined the TPP and recently formed FTA with the European Union. As a result of the deals, Vietnam will gain 10 – 14 percent rebate on tariffs rate.[iii] According to the European Commission’s data, Vietnam’s exports to the EU have gradually increased from 18.6 billion euros ($20.2 billion) in 2012 to 29.97 billion euros in 2015. Meanwhile, Indonesia’s exports to the EU have stagnated, from 15.5 billion euros ($16 billion) in 2012 to 15.3 billion euros in 2015.  This is such a discouraging fact for Indonesia as the largest economy in Southeast Asia and a country with a million of opportunities and resources.

In this regard, the government has decided to resume its FTAs. There are four FTAs negotiations, which are now underway: Indonesia-EFTA Comprehensive Economic Partnership Agreement (CEPA), Indonesia-EU CEPA and Indonesia-Australia CEPA. Meanwhile, Regional Comprehensive Economic Partnership (RCEP) between ASEAN and six other states, with China as the key driver, is already taken place and now getting close to its turnaround stage of negotiation.

Indonesia-EFTA CEPA would not only provides Indonesia with a bigger market access in Switzerland, Norway, Iceland and Lichtenstein, but would also provide a framework for cooperation and exchange of knowledge in various fields, such as manufacturing, maritime transportation, power plants (including geothermal), and can improve the competitiveness of our businesses.

Indonesia-EU CEPA covers issues of trade and business, including the reduction of trade barriers and liberalization of government procurement. A recent study of CSIS showed that a successful of Indonesia-EU CEPA would lead to increase Indonesia’s exports to EU by around US1.1 billion, a continued trade surplus and more incoming investment from the EU.[iv]

Indonesia-Australia will create the framework for a new era of closer economic engagement between both countries and open new markets and opportunities for private sectors, primary producers and service providers. Both sides also hope that the services sector will be a mainstay of the negotiation.

Furthermore, the RCEP involves all 10 ASEAN member nations plus Australia, China, India, Japan, Korea and New Zealand. The economies’ combined output would account for almost 30 percent of the world’s GDP. The RCEP is estimated to give income gains of approximately $644 billion by 2025, equal to 0.6 percent of the world’s GDP, due to the faster flow of goods, services, investment and labor across participating economies.[v]

In addition, to obtaining greater global access and accelerate trade negotiation with trading partners, there are several reasons why being part of the global trade game is important for Indonesia. First, trade and investment policy is a powerful engine of growth and can be used to promote economic reform. This reform becomes more important amid the current global economic slowdown. By concluding trade pacts, there are increasing trends of complementarity between Indonesia’s exports and it trading partners’ imports. Based on CSIS Survey, upon introduction of FTAs in Indonesia, it revealed that Indonesia export volume increased (62%) and the cost of exporting goods became cheaper (59%).[vi]

Second, trade agreements are expected to raise the competitiveness of its member. With FTAs, the competitiveness of business sector would strongly increase through policy measures designed to leverage the full potential of international trade to create jobs and growth. Indonesia needs to boost competitiveness in the midst of global and regional changes. Indonesia will be left behind by its neigbours if no progression. Otherwise, Indonesian export products will be subject to taxes of 15 to 20 percent, maybe higher. That means Indonesian products will not be competitive

Third, FTAs can continue to provide benefits to parties as the agreements are implemented, including through phase-ins and built-in agendas that encourage ongoing domestic reform. Mexico is a good example. Mexico’s decision to join NAFTA was mostly driven by the desire to boost the credibility of domestic reforms, rather than market access.

To conclude, President Joko Widodo underlined the need for swift transformation to respond to global changes and to leave behind old patterns. Productivity, work ethic, competitiveness, professionalism are keys. In the end, Indonesia would strive to catch up so that it would not be left behind. We should not ask what we would get from FTAs but what we are going to lose if we do not join it.

Jakarta, 28 August 2016

[i] http://www.worldbank.org/en/publication/global-economic-prospects#data

[ii] http://djpen.kemendag.go.id/app_frontend/contents/53-indonesia-in-fta

[iii] http://jakartaglobe.beritasatu.com/business/indonesia-must-join-tpp-trade-deal-risk-left-behind-trade-minister/

[iv] Damury, Yose Rizal. 2015. Study on the Impact of an EU-Indonesia CEPA. CSIS: Jakarta.

[v] http://www.thejakartapost.com/news/2014/02/27/asean-members-step-consolidation-rcep.html

[vi] Atje, Raymond, et.al. 2014. Impacts of FTAs in Indonesia: Study and Business Perspective Survey Result 2013: CSIS. Jakarta.

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