Why trade liberalisation should be part of Indonesia’s economic diplomacy

Photo by BBC World Service on Flickr.
Photo by BBC World Service on Flickr.

 

Indonesian President Joko “Jokowi” Widodo has made economic diplomacy a focus of his foreign policy. The president personally instructed ambassadors in February to use their postings to seek economic opportunities for Indonesia, becoming innovative salespeople for the country. The Ministry of Foreign Affairs has even created a task force for economic diplomacy. Although positive, these measures do not address Indonesia’s fundamental challenge in its economic diplomacy: the need to embrace trade liberalisation.

 

Without a clear trade policy – and less frequent anti-free trade rhetoric in Jakarta – the best efforts of Indonesia’s diplomats to promote the country’s economic potential will be doomed to only modest success.

 

To date, Indonesia’s economic diplomacy has been separate from trade policy and confined to encouraging diplomats to promote Indonesia’s exports and attract more foreign investment. This approach is underpinned by a mercantilist standpoint, namely the belief that high net exports and direct foreign investment are the best ways to improve people’s prosperity.

 

This mercantilist logic has resulted in Indonesia’s careful, but ambiguous, stance on free trade. Officials often state that Indonesia is ready for free trade as long as the deal protects Indonesia’s national interest. But what is the national interest?

 

It is often said that a trade surplus is in the national interest. But a trade surplus means nothing if a large proportion of the population ends up paying more for goods that could have been cheaper under lower tariffs. Free trade deals can advance the national interest even while increasing Indonesia’s trade deficit, as Indonesia’s economy benefits from lower prices of consumer goods in Indonesia and decreased costs of imported materials for Indonesian businesses. Pursuing more free trade deals, including through bilateral mechanisms, will also open wider access for Indonesia’s commodities.

 

This logic is not well recognised by Indonesian politicians. Many are reluctant to promote economic liberalisation and lack understanding of the concept of comparative advantage in international trade. The minister for agriculture, for example, has promised to achieve food self-sufficiency by restricting imports of food commodities despite the fact that Indonesia clearly does not have the capacity to increase production to the levels necessary to meet demand from its large population.

 

At present, Indonesia has far fewer bilateral free trade agreements compared to its ASEAN neighbours. Thailand has six, Malaysia eight and Singapore 21 but Indonesia only has two bilateral agreements: one with Japan and a preferential trade agreement with Pakistan. The Philippines has recently announced plans to pursue more free trade agreements. Even Vietnam, which once had a more protectionist economic structure, has recently concluded free trade agreements with the Custom Union of Belarus, Russia and Kazakhstan, South Korea, and the EU. In contrast, Indonesia-EU talks have not progressed far, even though Indonesia was the first ASEAN country approached by the EU for a bilateral agreement after the suspension of ASEAN-EU talks in 2009 because of human rights issues in Myanmar. Australia also has recently signed bilateral agreements with Japan, Korea and China, and is intensive talks with India. But it has no agreement with Indonesia, its close neighbour.

 

Indonesia is active in regional free trade negotiations through the ASEAN Economic Community and the ASEAN-led Regional Comprehensive Economic Cooperation (RCEP), a proposed free-trade agreement between the 10 ASEAN states and Australia, China, India, Japan, South Korea and New Zealand. The RCEP accounts for about 28 per cent of global trade and 30 per cent of the world’s GDP, and therefore offers significant economic opportunities for Indonesia and the other countries involved. Despite the opportunities offered by the RCEP, it remains difficult to predict the extent of goods and services covered by the scheme. During the third RCEP ministerial meeting in Kuala Lumpur in August, member countries agreed to extend the deadline from 2015 to 2016 because of deadlocks over a number of issues, including rules of origin, which specify the country of origin of products and affect their treatment in trade.

 

The ASEAN Economic Community, meanwhile, may offer fewer opportunities than many hope. With the exception of Singapore, Southeast Asian nations do not, in fact, trade much with one another and the agreement allows for many negative lists that impede true free trade.

 

Trade Minister Thomas Lembong has expressed a desire for Indonesia to join the recently concluded Trans Pacific Partnership within two years. This plan will no doubt come up against popular arguments suggesting that the deal will threaten domestic producers and state-owned companies and will require significant adjustment costs and national laws. On the other hand, not joining TPP could mean that Indonesia misses out on the US market for its main commodities, such as apparel, rubber and footwear, in which Malaysia and Vietnam now have comparative advantages. Although some have speculated that the TPP will be on agenda of President Jokowi’s US visit this week, it is unlikely that it will be discussed during bilateral meetings. Given Indonesia’s geographical location and the fact that the RCEP includes all of its main trading partners except for the United States, the RCEP should remain a higher priority for now.

 

Understanding the uncertainties in multilateral and regional schemes, Indonesia needs to more actively pursue bilateral agreements as part of its economic diplomacy framework. Stalled negotiations, such as with Korea and the EU, need to be revived. Standing on the sidelines, however, while its neighbours cement bilateral agreements will only ensure that Indonesia misses out. Bilateral agreements would not necessarily replace multilateral and regional talks, but their comparative speed and simplicity means that countries involved in bilateral agreements could derive greater benefits from trade while they wait for multilateral and regional deals to be inked.

 

Unfortunately, free trade remains an issue few Indonesian politicians are willing to touch, with the result that the new Trade Law (Law No. 7 of 2014) is a setback for trade liberalisation. It allows the government to implement both tariff and non-tariff barriers in order to “protect national interests” and “improve national competitiveness”, the effectiveness of which are of course debatable and could easily be politicised.

 

Economic diplomacy needs to be strengthened through more active trade policy. Free trade is not a zero-sum game. As the world trading system becomes more integrated, Indonesia needs to be careful not to be left behind.

 

Awidya Santikajaya is PhD candidate at Australian National University. His PhD research concentrates on comparative foreign policies of non-BRIC emerging powers, using Indonesia, South Africa and Turkey as case studies. His study is funded by the World Bank-Government of Indonesia’s SPIRIT scholarship. He holds a master of international relations from The Johns Hopkins University and a bachelor degree in economics from University of Indonesia.

Categories: Analysis Economy

Tags: Jokowi, Trade