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Jakarta Post

Why we should fight trade circumvention

  • Yuafanda Kholfi and Tagara Primadista

    The Jakarta Post

Jakarta   /   Thu, April 1, 2021   /   03:48 pm
Why we should fight trade circumvention Quality control: A worker at an aluminum steel factory in Cikarang industrial estate in Bekasi, West Java inspects the quality of the product for export on Oct. 4, 2019. (Antara/Fakhri Hermansyah)

The dynamics of international trade with the implementation of antidumping duties, quotas and amid trade wars has resulted in the phenomenon of trade circumvention schemes to avoid sanctions and take advantage of the bilateral situation between trading partner countries.

Whether we realize it or not, Indonesia is being dragged into this situation as a third country or destination country. Previously, circumvention was limitedly defined as the avoidance of antidumping duties, then the Organization for Economic Cooperation and Development (OECD) defined this term as "Dealing with World Trade Organization (WTO) commitments such as a commitment to limit agricultural export subsidies. Includes: avoiding quotas and other restrictions by changing the country of origin of a product; measures taken by exporters to avoid antidumping duties or countervailing duties".

Basically, exporters do trade circumvention to avoid antidumping and quota measures. Several countries already have anticircumvention laws, such as the United States with the 2015 Trade Facilitation and Trade Enforcement Act (TFTEA), as well as Australia, the European Union, Argentina, Brazil, India, Mexico, South Africa and Turkey.

Trade circumvention usually involves some kind of rerouting. This kind of rerouting is similar to reexporting or transshipment, even though the terms may sometimes be used interchangeably. Both reexporting and transshipment are defined as legal indirect exporting through intermediaries in third countries.

Reexports need to clear the customs in the third countries, while transshipment does not. Neither reexports nor transshipment involve a change of the certificates of origin (C/O). By contrast, rerouting in this context means a type of indirect exporting with a change of C/O illegally from the true origin country to a third country, often motivated by tariff evasion.

A thesis by Henrik Olsson from Lund University defined at least four types of circumvention; minor modifications, assembly operations, transshipment and incorrect customs declarations.

A minor modification could consist of a change in the composition or the form of a product. Circumvention by assembly operations could take place in third countries or in the importing country. Transshipment of goods could circumvent antidumping duties in a similar manner. Instead of shipping goods for assembly in a third country, it is just shipped via the same country, which is not subjected to antidumping measures. The last type of circumvention that is mentioned is making incorrect customs declarations concerning the origin, tariff classification or value of the imported goods.

As the third country on circumvention scheme, Indonesia is becoming the transit place to change the country of origin by having an Indonesia certificate of origin C/O, so the exporter will be spared from antidumping or retaliation duty from the country of destination. An example of circumvention is when China exports a commodity to the US through Indonesia because of the additional import duty.

In the middle of US-China trade tensions, many commodities such as wood, electronics, and machinery from China are subject to additional duty when they are exported to the US. Wood products from China will get 25 percent additional import duty for import to the US. To avoid the additional import duty, Chinese exporters send it to Indonesia first, and then reexport it to the US using Indonesia C/O illegally, so the country of origin is changed to Indonesia.

Other than becoming a third country, Indonesia is also suffering as the target country of trade circumvention.

A paper released by the Trade Ministry concluded that a third country circumvention scheme took place when an antidumping import duty was implemented for steel products from China in 2010, import of the same product from Singapore increased substantially. Examples of losses due to trade circumvention can be observed on the antidumping cold rolled coil (CRC) commodity based on the same study in 2016.

This study concluded that the value of losses due to circumventing minor modification practices in the cold rolled coil (CRC) case was estimated at US$130.4 million to $151.3 million with an allegedly evasive import volume of 173,900 tons. 

Not only affecting import revenue, trade circumvention also affects Indonesia’s export commodities since partner countries put additional import duties for suspected trade circumvention schemes by Indonesian exporters. One example is the EU that implemented antidumping import duties for bicycles from Indonesia. 

India also put countervailing import duties for hot rolled steel from Indonesia, before they temporarily revoked it in February 2021. Our solar panel product is also become suspect of trade circumvention by India and subject to safeguard import duty from 2018, before the India government revoked it in August 2020.

Trade circumvention can cause the implementation of antidumping import duty and other related measures to be ineffective. The ineffectiveness of that policy will make the local industry suffer, like what happened to our main local steel supplier, PT Krakatau Steel recorded net loss in recent years due to the large number of imports of steel products.

Reflecting on what happened in other countries, Indonesia has to periodically analyze and evaluate the implementation of antidumping duty for several products like steel products from China, particularly comparing the importation of those commodities from other countries that are suspected to be the third country for circumvention.

Collaboration between government agencies by exchanging data and information related to circumvention indication is needed to detect the flow of goods, relation of the company’s entity, and also the cash flow when a suspected company has detected circumvention in their transaction.

The Finance Ministry, specifically the Customs and Excise Duty Directorate General, has the initiative strategies based on data analytics to detect trade circumvention.

From the law aspect, Indonesia should draft a legal rule that defines and regulates many aspects of circumvention. By having an anticircumvention law, it is hoped that all stakeholders can better understand the definitions. 

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Yuafanda Kholfi is a senior data analyst and Tagara Primadista a business analyst at the Customs and Excise Information and Technology Directorate, the Finance Ministry. The views expressed are personal.