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As most of the regional Free Trade Agreements (FTA) in South
East Asia started in the early 2000s and came into effect in January 2010,
additional economic cooperation, namely Regional Comprehensive Economic
Partnership (RCEP), Trans Pacific Partnership (TPP) and Asia Pacific FTA
(APFTA) have become an open notion.
By December
2011, APEC members have 110 Regional Trade Agreements/Free Trade Agreements
implemented (44 of which were intra-APEC RTA/FTAs) and 129 RTA/FTAs signed
(49 of which were intra-APEC RTA/FTAs). Indonesia itself has engaged in no
less than six bilateral and regional FTAs: ASEAN Free Trade Agreement
(AFTA), Indonesia Japan Economic Partnership Agreement (IJEPA), ASEAN-China
FTA (ACFTA), ASEAN-Korea FTA (AKFTA) as well as complementary top-ups of
bilateral agreements with its dialog ASEAN partners, namely India (AIFTA)
and Australia and New Zealand (AANZFTA).
There are at
least two main effects of an economic cooperation, here referred to as FTA.
First is a
direct effect. The agreements generally focus on tariff reductions and will
increase trade flow as well as decrease prices for consumers. In addition,
an FTA’s rules and trade policy bindings will reduce uncertainty and
expected cost, which may be more important to the investment decisions of
firms than a reduction in the applied tariff affecting existing trade flow.
Second is an
indirect effect. It is asserted that FTA has dynamic effects such as
expanding business scale, increasing product variety through sharing
information and the latest innovations among business, as well as moving
domestic policy reforms forward.
While the
effects of an FTA on expanding business scale, increasing product variety
and pushing forward domestic policy reforms, might not be feasible, its
effects on trading flow is quite noticeable, as illustrated by the number
of Indonesian businesses using the facilities of trade agreements. There
has been a dramatic uptake in the use of tariff preference by Indonesian
exporters.
To enjoy a FTA,
the use of Certificate of Origin (COO) among Indonesian firms to enter
markets with preferential access has increased, which has been accompanied
by increases in the value of exports.
The total
number of COOs issued by Indonesia — within AFTA, IJEPA, ACFTA, AKFTA and
AIFTA framework — has increased from 26,085 certificates in 2007 to 205,775
certificates in 2010, which has been accompanied by an increase in the
value of exports using COO facilities from US$1.9 billion in 2007 (2
percent of total value of non oil and gas exports) to $19.9 billion (16
percent of total value of non oil and gas exports) in 2010 (author’s
calculation based on data from Ministry of Trade of Republic of Indonesia,
2011, please note: There was no sufficient data on the use of COO of
AANZFTA).
The increase of
the use of COO shows the efficacies of trade agreements and that the
Indonesian private sector is benefiting from trade agreements.
However, learning
from the implementation of FTAs, there are at least two main constraints to
optimize the use of existing FTAs. First, the reciprocal tariff rate
treatment can be an extremely complicated style of tariff concession.
Second, the costs for compliance with rules of origin (ROOs) naturally
exclude a large number of firms to use the FTA scheme in their trading.
It is estimated
that the costs of compliance with ROOs are ranged between 3 and 5 percent
of the final product prices. As a result, only a limited number of firms,
particularly the large-sized firms can enjoy the use of a preferential
tariff schemes (small and medium enterprises [SMEs] may enjoy Free Trade
Agreement facilities if they are linked to large firms either as suppliers
and/or customers).
While the
overall trade and investment performance of Indonesia has improved in
recent years, there is considerable room for further improvement in
business licensing, customs clearance, finance and logistics services to
further accelerate trade and investment, and moreover, how to optimize the
use of economic cooperation to improve overall welfare. ●
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