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Indonesia does not know what to do with
the Free Trade Agreements (FTA) that it has signed. The nation, through
ASEAN, is partner to four FTAs with other ASEAN nations, China, Japan and
Korea. FTAs with India, Australia and New Zealand are under negotiation.
There has
been no vision from the government, trade associations or domestic
producers on how to benefit from the deals, such as by increasing
productivity and competitiveness, upgrading technology, promoting
research and development and training for firms on how to penetrate
foreign markets.
There also
have been no significant improvements to economic institutions, our
economic freedom, regulatory quality, the ease of doing business or
infrastructure. Pushed by the boom in the prices of raw materials and
short-term capital inflows, Bank Indonesia has occasionally allowed the
external value of the rupiah to appreciate. On the other hand, China
adopts a policy to undervalue its exchange rate to promote exports.
Indonesia is
not an attractive place to invest in manufacturing sector for
multinational companies. As a result, Indonesia has not been closely
linked to the regional production network of manufacturing industries and
remains a producer of raw materials and a supplier of uneducated and
unskilled labor to rapidly growing economies.
As domestic
producers in nearly every economic sector say that they cannot compete
with Chinese products at home and abroad, protectionist lobbies have
claimed that the ASEAN–China Free Trade Area (ACFTA) deal with China has
benefited China only.
Due to
domestic pressure, the government has resorted to a distorted trade
policy through quota and other non-tariff barriers (NTBs), which are
difficult to monitor and create rent-seeking opportunities for those who
are closely politically connected.
The objective
of trade and investment liberalization through FTAs is to improve
economic efficiency and international competitiveness without trade
diversion effect. The benefits of the reforms are not instantly felt, but
can only be reaped in the medium-and long-term.
In this
region, growing intra-regional trade and investment flows since the 1980s
have been driven by international fragmentation of production of
multinational corporations from industrializing East Asia, the US and
Europe. Inviting foreign direct investment (FDI) in manufacturing sector
is part of policy for industrialization in many countries in host
countries.
To attract
FDI, they have introduced unilateral liberalization of tariff barriers
and special provisions such as duty free imports in export-processing
zones. Unlike unilateral liberalization, the scheduled tariff
liberalizations for FTAs are subject to rules of origin. In addition to
agreeing to tariff liberalization, countries agreeing to FTAs have
improved the quality of their regulations, economic freedom and the ease
of doing business.
FDI in
manufacturing sector creates employment for the surplus of uneducated and
unskilled labor force in this region. Global supply chains have
drastically changed the structure and trade patterns of this region
toward automotive components and spare parts, electronics and increased
intra-regional trade.
In addition,
FDI brings in capital, new technology, better management skills and open
linkages to international market places to modernize the signing nations.
The framework
agreement on comprehensive economic cooperation to establish ACFTA was
signed during the seventh ASEAN-China Summit in Phnom Penh in November
2002. The agreement has three components: goods, services and investment.
The agreement on trade in goods and dispute settlement mechanism was
signed in November 2004. The agreement on trade in services was signed in
Cebu on Jan. 14, 2007 and the agreement on investment was signed in
Bangkok on Aug. 15, 2009.
China is the
main trading partner of ASEAN and absorbed 11.7 percent of ASEAN trade in
2011. Between 40 to 50 percent of export and import items in 2008 and
2009 were spare parts or components, which indicates a high level of
intra-industry trade in this region. The agreement on trade in goods
under ACFTA is progressive and divided into three tracks Early Harvest
Programs (EHP) and normal track and sensitive track programs.
The EHP
provides for an accelerated reduction of tariffs for selected agriculture
and manufacturing products between Jan. 1, 2004 and December 2006 for ASEAN
6 countries (Thailand, Malaysia, Singapore, Indonesia, Brunei Darussalam
and the Philippines). The deadline for tariff reduction for former
socialist ASEAN member countries (CLMV — Cambodia, Laos, Myanmar and
Vietnam) was extended to 2010.
ASEAN 6 and
China were to have reduced by at least 40 percent their respective
tariffs under the normal track to 0 to 5 percent in July 2005, by at
least 60 percent by January 2010, and to have eliminated all tariff,
except for items provided with flexibility, by January 2010.
All tariffs
under this track were to have been eliminated by 2012. The tariff rates
for sensitive list items, such as automobiles parts and components, are
slated to be lowered to 0 to 5 percent by Jan. 1, 2018, at the latest.
As a large
part of regional trade is intra-industry trade in the manufacturing
sector, the first thing to do is to improve investment climate to
attracting more multinational corporations to invest in Indonesia. This
requires improvement in economic institutions by improving legal and
accounting systems to protect private property rights and lower
transaction costs.
Market
failures have to be eradicated by better implementation of prudential
rules and regulations. Public sector failures need to be corrected by
corporatization of state-owned enterprises. The investment climate needs
to be improved and technical skill of the labor force need to be
upgraded. Meanwhile shortages in infrastructures need to be addressed.
The simple
theory of the real effective exchange rate (REER) is very instructive to
measure international competitiveness. The REER is the ratio between foreign
and domestic prices, measured in the same currency. External
competitiveness improves if foreign prices are higher than the domestic
ones.
The REER says
that there are two ways to improve competitiveness. First, we must avoid
currency appreciation. Some countries, such as China, use currency
depreciation to help boost exports. Second, we must improve technical
productivity to lower domestic prices.
There are a
wide range of policies to lower domestic cost including improvements in
business climate and increasing labor productivity. These also include
training on how to penetrate foreign market by disseminating information
on the FTAs and foreign health and safety standards as well as education
on how to comply with regional content requirement.
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