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Indonesia in economic cooperation fever

As most of the regional Free Trade Agreements (FTA) in South East Asia started in the early 2000s and came into effect in January 2010, additional economic cooperation, namely Regional Comprehensive Economic Partnership (RCEP), Trans Pacific Partnership (TPP) and Asia Pacific FTA (APFTA) have become an open notion

Lili Yan Ing (The Jakarta Post)
Jakarta
Mon, February 4, 2013

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Indonesia in economic cooperation fever

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s most of the regional Free Trade Agreements (FTA) in South East Asia started in the early 2000s and came into effect in January 2010, additional economic cooperation, namely Regional Comprehensive Economic Partnership (RCEP), Trans Pacific Partnership (TPP) and Asia Pacific FTA (APFTA) have become an open notion.

By December 2011, APEC members have 110 Regional Trade Agreements/Free Trade Agreements implemented (44 of which were intra-APEC RTA/FTAs) and 129 RTA/FTAs signed (49 of which were intra-APEC RTA/FTAs). Indonesia itself has engaged in no less than six bilateral and regional FTAs: ASEAN Free Trade Agreement (AFTA), Indonesia Japan Economic Partnership Agreement (IJEPA), ASEAN-China FTA (ACFTA), ASEAN-Korea FTA (AKFTA) as well as complementary top-ups of bilateral agreements with its dialog ASEAN partners, namely India (AIFTA) and Australia and New Zealand (AANZFTA).

There are at least two main effects of an economic cooperation, here referred to as FTA.

First is a direct effect. The agreements generally focus on tariff reductions and will increase trade flow as well as decrease prices for consumers. In addition, an FTA’s rules and trade policy bindings will reduce uncertainty and expected cost, which may be more important to the investment decisions of firms than a reduction in the applied tariff affecting existing trade flow.

Second is an indirect effect. It is asserted that FTA has dynamic effects such as expanding business scale, increasing product variety through sharing information and the latest innovations among business, as well as moving domestic policy reforms forward.

While the effects of an FTA on expanding business scale, increasing product variety and pushing forward domestic policy reforms, might not be feasible, its effects on trading flow is quite noticeable, as illustrated by the number of Indonesian businesses using the facilities of trade agreements. There has been a dramatic uptake in the use of tariff preference by Indonesian exporters.

To enjoy a FTA, the use of Certificate of Origin (COO) among Indonesian firms to enter markets with preferential access has increased, which has been accompanied by increases in the value of exports.

The total number of COOs issued by Indonesia — within AFTA, IJEPA, ACFTA, AKFTA and AIFTA framework — has increased from 26,085 certificates in 2007 to 205,775 certificates in 2010, which has been accompanied by an increase in the value of exports using COO facilities from US$1.9 billion in 2007 (2 percent of total value of non oil and gas exports) to $19.9 billion (16 percent of total value of non oil and gas exports) in 2010 (author’s calculation based on data from Ministry of Trade of Republic of Indonesia, 2011, please note: There was no sufficient data on the use of COO of AANZFTA).

The increase of the use of COO shows the efficacies of trade agreements and that the Indonesian private sector is benefiting from trade agreements.

However, learning from the implementation of FTAs, there are at least two main constraints to optimize the use of existing FTAs. First, the reciprocal tariff rate treatment can be an extremely complicated style of tariff concession. Second, the costs for compliance with rules of origin (ROOs) naturally exclude a large number of firms to use the FTA scheme in their trading.

It is estimated that the costs of compliance with ROOs are ranged between 3 and 5 percent of the final product prices. As a result, only a limited number of firms, particularly the large-sized firms can enjoy the use of a preferential tariff schemes (small and medium enterprises [SMEs] may enjoy Free Trade Agreement facilities if they are linked to large firms either as suppliers and/or customers).

While the overall trade and investment performance of Indonesia has improved in recent years, there is considerable room for further improvement in business licensing, customs clearance, finance and logistics services to further accelerate trade and investment, and moreover, how to optimize the use of economic cooperation to improve overall welfare.

The writer is an economist at the Economic Research Institute for ASEAN and East Asia (ERIA) and a lecturer at the University of Indonesia. The views expressed are her own.

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