ASEAN-China free trade
deal: Let’s face the

In the last few months, domestic business players, industry associations, policy makers and analysts are “suddenly” discussing the potential threat from the zero percent tariff implementation on China’s products under the ASEAN-China Free Trade Agreement (ACFTA) scheme, effective starting Jan. 1, 2010.  

Most people would concur  the implementation of ACFTA would adversely impact Indonesia’s  manufacturing and trade performance.

That 14 industries are asking for a delayed implementation of ACFTA proves this. These include textiles, steel, tires, furniture, cocoa processing, medical equipment, cosmetics, aluminium, electronics, downstream petrochemicals, flat glass, shoes, machine-tools and automotive goods.

Most Indonesians would agree the country needs more time to compete with China’s products and that delaying implementation of free trade would be a good thing.

But, we believe that no matter when the free trade deal is implemented, the result would be the same: Indonesia’s industries would not be ready. It is high time Indonesian companies face the music for being poorly prepared, instead of keeping up the past practice of hiding behind government protection.   

China-ASEAN relations started up in 1990 when Qia Qichen, China’s  Foreign Minister, attended the opening session of the 24th ASEAN Ministerial Meeting in Kuala Lumpur and expressed China’s interest in cooperating with ASEAN.  

In November 2000, China proposed a free trade area with the 10 ASEAN states. In 2002, ASEAN members and China announced the Framework Agreement for ASEAN-China economic cooperation.

The schedule for the tariff cuts for ASEAN 6 countries (i.e. Indonesia, Malaysia, Singapore, Thailand, the Philippines and Brunei) began in 2003 with 60 percent out of 8,626 tariff posts falling to 0 percent. In 2007, 80 percent of total tariff posts fell to 0 percent while in 2010, 100 percent of the total 8,626 tariff posts must be cut to 0 percent.   

Indonesia had 7-10 years to prepare its industries to implement ACFTA and is not the only country with a trade deficit with China. SoThailand has one too. Of the ASEAN 4 countries (Indonesia, Malaysia, Singapore, and Thailand), only Singapore and Malaysia have managed trade surpluses with China this year.  

The three biggest commodity exports to China have been Mineral Fuels, Oils & Products, Animal or Vegetable Fats and Oils and Machinery or Electrical Equipment (ME).

Mineral fuels and vegetable oils contributed 51.2 percent of China’s total imports from Indonesia. The country is not competitive when it comes to textile products and footwear which only contributed 1.6 percent of its exports to China.

On the flip side, China’s exports to Indonesia have been dominated by Machinery, Electrical Equipment, Base Metals and Articles and Textiles and Textile Articles. These contributed more than 60 percent of China’s exports to Indonesia.

China’s exports to Indonesia are mostly manufacturing products while China’s imports from Indonesia are minerals or natural resources.

From this, we conclude that Indonesia’s domestic industry would suffer from the implementation of ACFTA. But would a delay help?

We believe not. Even with a delay, various Indonesian industries would face the same problems, particularly given that some products from China are state-subsidized.

Based on a World Economic Forum (WEF) report, Indonesia’s Global Competitiveness Index was ranked 55 in 2008-2009, the lowest among its ASEAN peers (i.e. Singapore, Malaysia and Thailand).

To counter this, Indonesia needs to make structural changes impacting upon the country’s manufacturing sectors. These include dealing with mark-ups and inefficiencies, which result in lack of competitiveness for Indonesian products.  

From the government side, we also need to see support for the manufacturing sector in the form of infrastructure development such as roads and electricity in order to promote efficiency.

According to the Ministry of Public Works, Indonesia’s total funding requirement for infrastructure development in 2010-14 would amount to Rp 400 trillion, of which 50 percent will be allocated for road development.

Nevertheless, project implementation remains challenging due to lack of government supporting regulations and weak horizontal inter-departmental and vertical coordination.

With such deep-rooted problems facing Indonesian industries, there will be no short-term panacea (read: a delay would not help).

The sooner we face the music and compete against other ASEAN countries and China, the faster competitiveness for Indonesian companies will emerge. It’s time to play catch-up with Malaysia and Singapore. Only through short-term hardships will we pave the way for Indonesia’s improved trade performance in the longer run.  

The writer is an economist at PT Bahana Securities

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