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ndonesia is viewing the rise of China with a two-sided coin of wisdom as a hope and a threat.

The hope is that Indonesian companies can gain access to one-fifth of the world market, whereas the threat is that China may seize shares of the Indonesian domestic market with its relatively competitively priced products.

Let’s have a closer look to see if Indonesia and China are friends or foes.

It is true that trade deficits between Indonesia and China have been mounting. Indonesia has a trade deficit with China that amounts to US$4.7 billion, in which $5.6 billion was contributed by trade deficits in non-oil and gas products, meaning Indonesia recorded surpluses in oil and gas. Non-oil and gas exports from Indonesia to China totaled $14.1 billion, while non-oil and gas imports were $19.7 billion in 2010.

First, imports from China were dominated by capital goods and intermediate goods, which contributed around 47 and 35 percent, respectively, to total non-oil and gas imports from China in 2010. Consumer goods contributed only 11 percent to total non oil and gas imports in the same year.

Second, Indonesia is perceived by China as a huge potential market. Based on Economist Intelligence Unit data, the average wage of Chinese production workers stood at $1.25/ day while Indonesia’s was only $0.96/day in 2010. In this case, Indonesia should not be worried about labor intensive competitive products.

Instead, Indonesia should look at that statistics with the positive perspective that this could be an attractive factor for investments; particularly reallocation investments from China. In fact, foreign direct investment from China to Indonesia increased from $95 million in 2005 to $323 milion in 2010.

Third, there have been increases in the use of Certificate of Origins (CoO) followed by increases in the value of exports using CoO. The increase in the use of CoO – one of the free trade agreement facilities – shows efficacies in the trade agreement and that the private sector benefits from that. The total number of CoO has increased from 19,491 certificates in 2007 to 24,235 certificates in 2010, which has been accompanied by an increase in the value of exports using CoO facilities from $2 million in 2007 to $5.3 million in 2010 (research division, Directorate General of Foreign Trade, Trade Ministry of Indonesia, 2011).

Fourth, it is expected that there will be some adjustments that Indonesian firms have to make in the short term. Some local companies may lose their domestic market share as a consequence of the adjustment, but in the long run competitive producers and consumers will benefit.

Some quick proposals responding to this issue could be safeguards and antidumping or countervailing duties. Theoretically, there is no economic ground for such actions. Implementing antidumping could result in reducing trade gains received by consumers by enjoying lower prices; implementing safeguards should be followed by careful examinations that certain industries are actually affected by certain actions, in this case the trade agreement, not by other factors or simply that they are no longer performing.

With regards to export subsidies, Indonesia should, as quoted by Dixit, probably reply with thank-you notes instead of implementing retaliatory measures of countervailing duties.

While I myself am not a big fan of bilateral or multilateral agreements, considering trade diversions and complications for business players created by multiple trade agreements, we cannot turn back time to the period when Indonesia had signed on to agreements or not (or if Indonesia had more power in determining goods agreed to in trade agreements), let’s not put all the blame on free trade agreements. With or without a trade agreement, sooner or later, Chinese products will surely flood the Indonesian domestic market.

What Indonesia can do now is optimize trade agreements as an instrument to drive more reform and push firms to be more competitive and specialized in certain sectors where they hold comparative advantages.

While it might be too early to justify the overall effect of trade agreements, it is never too late to continue trade, investment, infrastructure and logistics reforms at the national, local and firm levels so that Indonesia can enjoy more gains from economic agreements.

The writer is a lecturer in the Department of Economics at the University of Indonesia and an economist in the private sector development unit at the World Bank, Jakarta. The opinions expressed are her own.