Jakarta suffers downside of free-trade deals

Indonesia is gearing up for further trade liberalisation via a number of trade deals, but a lack of competitive edge in its exports and capacity to sell will prevent the country from reaping maximum benefits of increased market access, experts say.

Exports have already doubled in just five years to US$200 billion (5.96 trillion) in 2011, but the biggest share is still commodities such as coal and palm oil, instead of manufactured goods.

“Free-trade agreements will certainly boost exports, but we should be aware that most of our exports are raw materials and energy sources, which are unfortunately the most competitive export items,” said Hendri Saparini, an economist at the economics, trade and industry research institute Econit.

The heavy reliance on commodities has dragged down the nation’s exports as, among others, prices tumble amid weaker overseas demand during the protracted global crisis.

Indonesia’s exports plunged to $190.04 billion last year, down 6.6 per cent from the previous year, whereas imports perked up to $191.67 billion, up 8.2 per cent. This caused the country’s first-ever annual trade deficit, of $1.65 billion.

The deficits are even more discouraging in the trade of manufactured goods, as imports expanded higher than exports, industrial statistics suggest. Indonesia ran a deficit of $12.25 billion with China from January-October last year on the back of imports of electronics and telecommunication devices.

Indonesia has sealed free-trade deals with Japan bilaterally and has made similar pacts with China and South Korea together with other members of Asean, but has yet to reap the benefits of these deals. 

“We still export goods with limited added value, such as textiles and electronics, but in contrast, import products of high added value, like machinery and airplanes,” said Agus Tjahajana, Industry Ministry director general for international trade cooperation.

Industrial players said most sectors were not ready to fight in the global market, or even face the tougher battle with imports in the buoyant domestic market, caused by the ease in trade barriers, particularly the removal of import duty.

Garment and textile makers have seen a considerable rise in exports to Japan and South Korea since the implementation of the Indonesia-Japan Economic Partnership Agreement (IJEPA) and the Asean-Korea Free Trade Agreement (AKFTA), according to Indonesian Textile Association (API) chairman Ade Sudrajat. “However, it’s much more because our products do not compete head-to-head with their manufacturers. When it comes to China, we lose because their production is much more efficient, allowing them to sell their output at lower prices,” Ade said.

Challenges are growing as worker’s wages have surged in the past several years, while other factors supporting production like energy costs are on the rise, according to Indonesian Employers Association (Apindo) chairman Sofjan Wanandi.

In its recent report “Picking up the Pace: Reviving Growth in Indonesia’s Manufacturing Sector”, the World Bank points out the prevalence in the Indonesian manufacturing sector of the “missing middle”: A large proportion of small firms, defined as having between 5 and 19 employees, and a comparatively small number of middle-sized firms, defined as having between 20 and 100 employees, moving up from small into large ones.

“This condition explains why we are now importing a huge amount of raw material and intermediary goods,” said Faisal Basri, an economist from the University of Indonesia.

As an example, he cited the automotive industry, which had seen imports climb as the sector grew considerably, in line with a strong domestic demand for two- and four-wheelers.

Institute for Development of Economic and Finance economist Enny Sri Hartati said that the low competitiveness of domestic industries could also stem from the structure of Indonesia’s market, which in the past had been characterised by oligopoly and in certain cases, monopoly.

“When the free-trade agreements came into effect, our local players that had long benefited from the market structure were shocked because they suddenly had to face open competition,” Enny said. “Boosting competitiveness is important for manufacturers to thrive amid tighter global competition, and the simple way is to decrease the prices of our products,” Enny added.