To make the deal taste better, China promised to finance various infrastructure projects in Indonesia. Should Indonesia seal the deal, I believe it is wise to have a closer look at the trade pattern Indonesia and China have undergone in the past several years.

Indonesia recorded a trade surplus with China in all product categories at US$2.8 billion in 2003. Indonesia reversed the surplus to deficit for the first time in 2008 with a total deficit of $926 million. The deficit jumped to $1.9 billion in 2009.

Under the balanced trade scheme as proposed in the Indonesia-China ministerial meeting last week, both countries have agreed to manage the two-way trade as balanced, sustainable and profitable.

This somewhat implies that China has promised not to allow the trade surplus in favor of China to occur, at least not so much.

However, as I was reading the news about this, I found myself wondering whether this is a promise or a fate. If you are wondering what I am talking about, let me put it this way:   

The substance of a free trade zone is the trade frameworks that are designed to allow trade in a specific zone to flow following the market forces.

To make that happen, trade barriers are removed, or reduced to an agreed-upon extent. If this is the case, I am wondering how balanced trade can be achieved under circumstances that are determined by market forces.

Suppose, the market interventions are implemented to achieve the balanced trade that has been promised, then the next question would be, which trade mechanisms, if there are any, other than trade tariffs, trade subsidies and trade quotas, would allow such interventions to happen when the law of supply and demand moves to find its equilibrium?

Basic economics teaches that supply and demand is determined by quantity — read quota, and price — read tariff and subsidy.

In the absence of tariffs through tariff elimination in the ACFTA, and in the presence of subsidies, assuming China’s possible currency manipulations are true, quota is the only one left for use.

If that is the case, now let’s change the course of the discussion.

Assuming quotas would be used to set the balanced trade, then, what is likely to happen is that China would tell some of many its state-owned enterprises to increase their demand of Indonesian products to meet the increasing demand of Chinese products by Indonesian consumers.

Nice numbers would appear on the books.

Balanced trade is a promise. Using the magic stick, balanced trade is now achieved. Therein lies the problem.

Bear in mind, Chinese state-owned enterprises do not buy Indonesian finished goods. They manufacture goods.

A closer look at the trade pattern between China and Indonesia from 2003-2009, however, will bring us to the discussion about fate.

Data from International Trade Center shows that Indonesia recorded a trade surplus with China in many manufacturing product categories in 2003.

For example, Indonesia recorded a trade surplus amounting to $109 million in electrical and electronic equipment.

Over time, the trade surplus decreased and Indonesia experienced a trade deficit in electrical and electronic equipment in 2007 of $117.3 million. The deficit in this category jumped to $1.9 billion in 2008.

The same surplus-to-deficit story happened to many other manufactured products such as textiles; made textiles; footwear; ceramic products; glassware; optical, photographic, technical and medical equipment; miscellaneous chemical products; plastic and articles; apparel; and accessories, to name but a few.

On the other hand, commodity products dominate Indonesia’s exports to China. A wide range of commodities from mineral fuels, nickel and tin, to rubber, palm oil and pulp and many more, amounting to $11.8 billion and making up 83 percent of total Indonesia’s export to China in 2008.

Commodities as a percentage of Indonesia’s total export to China surged to 90 percent in 2009 reaching $12.2 billion.  

With the underlying trade pattern as discussed, low-end manufactured products dominate China’s exports to Indonesia.

The elimination of trade tariffs in the ACFTA framework, together with China’s export subsidies through possible currency manipulations, if the US accusation on China’s currency practices are true, China’s low-end manufactured products will continue to flood the Indonesian market on a larger scale, and will simply displace Indonesian domestic manufacturers — primarily low-end manufacturers from the marketplace.

History teaches us, the economy prospers when traditional economic activities — read low productivity, undergo a structural transformation to modern economic activities — read high productivity. This is true from the history of the industrial revolution in 1840s through to the IT advancement that has been achieved today.

This suggests that only in the presence of science and technology, is it possible to accomplish the structural transformation from a low productivity economy to a high productivity economy.

Under the ACFTA, when many of our manufacturing industries are forced to exit the marketplace, including the efficient ones, instead of enhancing our low-end manufacturing to higher end manufacturing, we will very likely reverse our economy by purely relying on commodities — the so-called traditional economy.

In conclusion, this entire discussion about balanced trade suggests we look far beyond numbers. It is the fate of our nation that we must stand up for.

The writer is a graduate student at the International Business School, Brandeis University,
Massachusetts, US.

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