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Jakarta Post

Insight: Is Indonesia ready to join the Trans-Pacific Partnership ?

  • Lili Yan Ing

    The Jakarta Post

Jakarta   /   Fri, October 30, 2015   /  06:16 pm

Will Indonesia join the Trans-Pacific Partnership (TPP), a US-led free trade agreement of 12 countries in the Asia-Pacific region? Yes or no? The main issue lies not with yes or no, but with how ready Indonesia is for this and how to set up deregulations or regulations in order to meet all standards set in the trade pact.

Indonesia is among the countries that are quite active in engaging in free trade agreements (FTAs). As of this year, it has eight FTAs in effect, of which six are regional FTAs and two are bilateral (i.e., the ASEAN free trade area, AFTA; the ASEAN-Australia and New Zealand, ASEAN-China, ASEAN-India, ASEAN-Japan and ASEAN-Korea FTAs; the Indonesia-Japan EPA and Indonesia-Pakistan FTAs), with a ratio of FTA-trade coverage of 67 percent.

For a small economy (in terms of its contribution to the world'€™s total trade) like Indonesia, there are at least two good things derived from regional trade agreements. The first is an expansion of investment. While the direct impacts on trade might be questionable in the beginning, rising investment may follow as an answer.

Second, regional agreements could drive unilateral domestic reforms. In the case of Indonesia, InaTrade (an online system for obtaining trade-related licenses) and a negative list of investments to clarify the permitted level of foreign equity are two products of domestic reforms that were mainly driven by regional commitments.

Unlike conventional trade agreements, the TPP covers not only trade in goods, services and investment, but also involves an extensive coverage that is beyond any trade agreements. The TPP covers 30 articles starting from trade in goods to trade in services, from investment to dispute settlement, from labor to environment and exceptions.

In brief, in the trade in goods, the TPP covers the elimination of about 11,000 tariff lines, including some on sensitive agricultural products like rice, wheat, sugar, barley, beef, dairy products and starch corps. In services, TPP covers areas like banking, insurance, construction, logistics and accounting, travel and tourism, consulting, app and game development and graphic design. In investment, it covers, among other things, repatriation of funds and capital transfers, fair compensation in the case of expropriation, prohibition on performance requirements such as for local content or technology localization requirements.

In addition, it also covers an investor-state dispute settlement, which is an instrument of public international law that grants an investor the right to use dispute settlement proceedings against a foreign government. Lori Wallach, the director of Public Citizen'€™s Global Trade Watch, deems it inappropriate to elevate an individual investor or company to equal status with a nation-state to privately enforce a public treaty between two sovereign countries.

On top of the coverage in the trade in goods, trade in services and investment agreements, there are three main challenges Indonesia may likely face.

The first is government procurement. All government procurements and their processes should be transparent, predictable and '€œnon-discriminatory'€. Indonesia may face a real challenge in the sense that in its reallocation of the fuel subsidy the government aims to spend Rp 150 trillion (US$12 billion) on infrastructure for which intervention might particularly be needed to expedite projects.

The second is the need for labor regulations. The TPP grants freedom of association and the right to collective bargaining and also agrees to have laws governing minimum wages. The challenge for Indonesia is that it should be able to improve the capacity of labor unions or any collective bargaining associations in the sense that they will exercise this leverage of their rights for better productivity and working conditions and to govern the setting of minimum wages in a constructive manner for all three parties involved (the government, unions and businesses).

The third concerns copyrights and patents. The TPP may grant extensions to copyrights and patents ,including patents on medicines that prevent the making of generic medicines, which leads to consumers paying for higher-cost patented medicines for a longer period '€” the lifetime of the author plus 75 years on copyright and 20 years on patents '€” which are longer than agreed in the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

These are only small parts of the TPP for which Indonesia should be prudently prepared.

The bright side of President Joko '€œJokowi'€ Widodo'€™s stated intention of joining the TPP is that the market may see that Indonesia will seriously assure investors (particularly from Singapore, Japan and the US '€” respectively the largest and second-and fifth-largest FDI investors in Indonesia) that they will enjoy investment protection and preferential tariff rates for their exports and imports when they invest in Indonesia, the same treatment they get when they have their investments in Malaysia, Singapore or Vietnam, which are currently members of the TPP, and improve trade and investment by reviewing trade policy from a very extensive point of view.

Whether Indonesia will eventually decide to be a member of the TPP (it may take about a year and a half to ratify the TPP framework in the existing member countries and it may take two to three years before they decide to open up for new members, so Indonesia has two to three years to prepare), we should keep in mind that the market will not only respond to the number of FTAs Indonesia has been negotiating and signing, but more importantly its consistency in implementing its commitments to regional and multilateral trade agreements and consistency in overall trade policy.

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

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