T

he ASEAN-China Free Trade Agreement (ACFTA) has been in effect for 16 months. However, the focus of concern now has been directed toward imports from China.

Even though the agreement involves trade with ASEAN, the trade effects with these countries after the signing of the ACFTA still receives little attention.

This is understandable because competition from Chinese products is perceived to be more threatening for Indonesian products compared with products from other ASEAN countries.

As with other free trade agreements, ACFTA is intended to bolster economic growth in the region through expanded trade. As import tariffs went down to zero, or near zero percent, prices of goods would be cheaper and consumer spending would increase, and this would boost economic growth. So the theory goes.

Unfortunately, in reality things could be more complicated. Some business sectors might get hurt if they have to close their businesses and have to lay off their workers, worsening unemployment problems. Advocates of free trade argued that in the long run the benefits for the national economy would outweigh the costs, contributing to higher economic growth and welfare.

The problem is that the benefits from free trade are not readily apparent. The losses incurred by some sectors of the economy in the form of business closures and worker layoffs are more visible. And of course, this could invite spontaneous negative reactions. This is what happens when people begin to look at the affect of ACFTA and the surge of imports from China on Indonesian businesses.

A wide range of imported Chinese products have flooded Indonesian markets, ranging from textiles, garments, footwear, electronics, toys, furniture, steel, chemicals and machinery. It is hard for Indonesian companies to compete with imports from China that sell at lower prices and with reasonable quality.

Reports on losses and closures of Indonesian companies resulting from their inability to compete against imports from China have been pouring in. A flurry of activities have been taking place among government officials and ministers to stop the damage. They are preparing to take several measures, including invoking safeguards, anti-dumping policies and other countervailing actions allowed in the agreement.

Up until 2005, the Indonesian non-oil trade deficit with China was small, but since 2006 there has been a significant rise in the deficit, when it reached US$1.3 billion in 2007. A year later at the onset of the global financial crisis, the deficit rose dramatically to $7.2 billion as Indonesian imports from China jumped 88 percent.

Even after ACFTA took effect, the deficit remained high, rising by $1 billion to $5.4 billion in 2010. In the first two months of 2011, the deficit was nearly $1 billion, signaling that this year the deficit with China could be getting worse, especially given that the growth of the consumer-driven Indonesian economy remains strong while China is putting a break on their stellar growth out of fear of overheating and the possibility of a bubble.

One could argue then that even without ACFTA, Indonesian imports from China are bound to rise as demand from the Indonesian manufacturing sector for raw materials and machinery remains strong. Excluding consumer goods, China is becoming a major supplier for many Indonesian industries.

Despite some pain suffered by certain Indonesian businesses, it should not be overlooked that non-oil Indonesian exports to China in 2010, the first year ACFTA was implemented, expanded by a robust 57 percent, compared with imports from China that grew 46 percent.

But despite ACFTA, there has not been a marked shift in the structure of Indonesian trade with China. Since 2009 through the first two months of 2011, Indonesian non-oil exports to China remains 11 percent of the total Indonesian non-oil export.

Over the same period, Indonesian non-oil imports from China remained at 18 percent of its total non-oil imports. The degree of complimentary requirements between the two economies — Indonesia needs more raw materials and capital goods while China needs more commodities and energy — would ensure that there would not be a significant shift in their trade structures for some time.

If Indonesia’s trade deficit with China reflects the degree of the competitive strength of Indonesian products, then obviously there is a case for improving the competitive strength on the Indonesian side. But unfortunately the balancing of trade between RI and China could not be done through slowing down Indonesian imports from China.

So the strategy for attaining balanced trade would be to push Indonesian exports to China by making Indonesian companies more competitive. This could only be achieved when the structural problems that result in the high cost economy could be eliminated. But this would take a long time because of the ineptitude of the government bureaucracy and an inability to immediately address the problems of insufficient infrastructure, a poor business climate, illegal imports and smuggling. The pain of many Indonesian businesses stemming from competition from China would endure for some time.

While the government is working hard to level the playing field for Indonesian trade with China, let’s not lose sight of the effect of Indonesian-ASEAN trade after ACFTA. The trade between ASEAN and Indonesia has always been in favor of the later. Indonesia’s non-oil trade surplus with ASEAN rose to $3.1 billion in 2010 from $2.4 billion in the previous year.

To what extent this increase in surplus was attributable to the implementation of ACFTA is yet to be determined, but certainly ACFTA has had an impact, although it might not have been so significant. Already in the first two months of 2011, Indonesian non-oil exports to ASEAN surged 46 percent, significantly higher than 32 percent in 2010. At the same time our import growth from ASEAN slowed down from 32 percent to 29 percent.

In the first two months through February this year, Indonesia’s trade surplus with ASEAN more than tripled to $1 billion compared with the same period last year. If the trend continues, it is likely that the surplus would reach $6 billion by the end of 2011, twice as much as in 2010. While many efforts are being directed at improving trade with China, it is also important to sustain the gains from Indonesian trade with its ASEAN partners.

The writer is an economist.