Benefits of Trans-Pacific Partnership and issues to look out for

Benefits of Trans-Pacific Partnership and issues to look out for Anwar Nasution  ;  Emeritus professor of economics, University of Indonesia, Jakarta

                                               JAKARTA POST, 07 Desember 2015

                                                                                                                                                           

                                                                                                                                                           

Indonesia should join the Trans-Pacific Partnership (TPP) as a way to promote structural reform. Such reform would include restructuring state-owned enterprises (SOEs), improving the investment climate, improving economic efficiency and productivity to create jobs for the nation’s surplus labor and promoting exports. The spectacular experience of East Asia indicates that East Asian countries have become more developed and prosperous during the past 60 years mainly due to their greater penetration into international markets through trade and incoming private investment. The People’s Republic of China (PRC), which started deregulating its economy in 1978, 12 years after Indonesia in 1966, has grown much faster than Indonesia. Its currency, the renminbi (RMB), is now an elite international currency and a member of the International Monetary Fund’s special drawing rights. During Mao Zedong’s years, nobody held the RMB as a store of value. By contrast, our rupiah moves like a yo-yo and it is very much affected by short-term capital flows. Using Mao Zedong’s terminology, Deng Xiaoping adopted “capitalist roaders” by inviting foreign direct investment (FDI), owned by foreign capitalists, to create job opportunities for China’s labor surplus, to modernize the economy and to promote the export of agricultural and manufacturing products. Starting as a poor country with assembly plants to produce cheap and low quality industrial goods and products, China’s gross domestic product (GDP) is now bigger than the GDP of Japan and its export value is the second biggest in the world after Germany. The communist country is the biggest recipient of FDI among emerging economies and is now a major military power in the Asia Pacific. FDI brings in not only capital but also skills and technology as well as networks of international markets. Severe international market competition forced companies in China to increase efficiency, reduce costs, move to higher value-added products and upgrade the quality of production. Because of these trends, the PRC now exports its own telecommunications sets, computers, aircraft, high-speed locomotives and nuclear generating plants. Indonesia, on the other hand, remains a producer and exporter of unprocessed raw materials and a borrower from China. Because of limited job opportunities at home, Indonesia exports its uneducated and low-skilled labor surplus all over the world. Other options for the unemployed are to work in the non-formal sector, such as peddlers and ojek (motorcycle taxi) drivers with very low productivity. The objective of America’s TPP trade agreement is to achieve “free and open trade and investment” in the Asia Pacific. Such an objective mimics the ambitions outlined in the Bogor Goals crafted in an Asia-Pacific Economic Cooperation (APEC) forum 20 years ago. The TPP now has 12 member countries but is largely a free trade agreement between two big countries, the US and Japan. Trade between these two economic giants accounts for about 60 percent of the TPP’s economic benefits. Of the 12 members, four are members of ASEAN, namely: Brunei, Malaysia, Singapore and Vietnam. Another three ASEAN countries have already expressed interest in joining the TPP: The Philippines, Thailand and Indonesia. In contrast to other regional trade agreements, such as Asia Free Trade Agreement (AFTA), Regional Comprehensive Economic Partnership (RCEP) and APEC, the TPP is legally binding. Previous economic agreements have all been voluntary agreements. One of the main goals of the TPP agreement is to avoid the use of exchange rate manipulation by partner countries as a policy to strengthen their competitiveness and promote exports. But domestic implementation of monetary policy, such as quantitative easing, is accepted because it is not regarded as currency manipulation. Like other trade agreements, the TPP aims to liberalize trade and investment by reducing tariffs and eliminating non-tariff barriers for agricultural and manufacturing products. Of course, Indonesian agriculture is small-scale and cannot compete with Australian, New Zealand or US agricultural businesses. The TPP gives ample time for member countries to partially liberalize sensitive products such as rice, sugar and dairy products. Vietnam will be given more time to move to a market-based economic system. Aside from goods and services, the TPP also liberalizes financial services, the insurance industry, telecommunications and air parcels and other transportation services. The TPP will standardize the regulation of business competition, assistance to small and medium scale business, the environment and labor standards as agreed to by the International Labor Organization. A number of issues in the TPP pose primary problems for Indonesia, Vietnam and Malaysia. The transition from the socialist system to a market-based economy is more difficult in Vietnam. The first issue is related to SOEs. Unlike in Singapore, SOEs in Indonesia still demand capital injections from the government. These injections cause fiscal costs as they are treated by politicians as tools of corruption, collusion and nepotism.  Indonesia’s construction companies missed the construction boom in the Middle East during the oil boom of the 1970s and early 1980s. They also missed the more recent construction boom in Africa. Our state-owned banks only compete with Western Union to transfer the remittances of Indonesian migrant laborers working in overseas markets. Our state-owned plantations cannot compete with companies owned by private entrepreneurs like the Eka Cipta or Salim Groups. The interest rate of the recapitalization of bonds issued by the government to state-owned banks in 1998 will continue to burden the government budget in the years to come. The second issue is related to government procurement. Malaysia uses government procurement to strengthen the economic position of bumiputra (indigenous Malay) to address racial imbalances. Like Indonesia, Vietnam is a true believer in state-owned enterprises. In addition, state procurement is also used as a tool of corruption by politicians. The third issue relates to the ban on high tariffs for tobacco products designed to protect public health. The fourth issue is related to agricultural products such as Japanese rice, Australian sugar and Kiwi butter as well as small-scale farming in Japan and other Asian countries. The fifth issue particularly affects advanced economies because the TPP gives greater power to the corporate sector to enforce strict intellectual property rights globally. The TPP agreement transfers such power from national sovereignty to corporations in cases of investor-state dispute settlements relating to intellectual property rights such as pharmaceutical intellectual property rights, patents, patent linkage and data exclusivity and copyright enforcement. ●