China’s ambitious mega project called the BRI (Belt and Road Initiative) is an opportunity for Indonesia to get new sources of funding for infrastructure development. However, the bigger long term benefit will likely be seen in the latter’s tourism industry, rather than in trade.

Under the initiative, the Chinese government, assisted by multilateral funding agencies that are also affiliated to China, will provide loan financing to developing countries that are aggressive in building infrastructure.

Ongoing infrastructure development in emerging Asian countries, like Indonesia, has to anticipate urbanization, middle class growth and achieve an economic growth target. For Indonesia, there is one more factor that is no less important, namely to improve it competitiveness when it comes to international trade.

The quality of ports, airports and inter-connecting roads will certainly reduce the high cost of transportation and distribution of goods and result in competitive prices for exported goods.

Currently, China is Indonesia’s main trading partner with US$1.9 billion in exports, according to trade data of the Central Statistics Agency (BPS) released in August. The United States comes in at second place with $1.6 billion in exports and Japan with $1.3 billion.

Likewise, most international goods that Indonesia bought are from China with an import value of $3.1 billion. Japan trails in second place with an import value of $1.4 billion, followed by Thailand with $799 million.

The Indonesia-China trade balance has consistently shown a deficit, meaning that import value from China is bigger than Indonesia’s export value. The trade deficit has been going on for quite some time, and is widening. In 2009, Indonesia experienced a trade deficit with China worth $2.5 billion that swelled to $14 billion last year.

There are several factors behind such a widening deficit. First, the price of Indonesia’s main commodities such crude palm oil (CPO) and coal have decreased, and second the tighter competition with other commodity producers such as Malaysia for CPO products.

And third, an increase in the volume of steel imports from China amid massive infrastructure development in Indonesia. The last factor is trade barriers imposed by China on certain goods from Indonesia like rubber and palm oil.

The Indonesian government held a bilateral meeting with the Chinese government last year to improve the deficit gap. At the meeting, the Chinese government agreed to buy more Indonesian products and encourage more Chinese tourists to visit Indonesia.

The category of goods exported to China, compared to those imported from the country, is said to be the cause of the trade deficit. According to BPS data, Indonesia’s largest exports to China are commodities such as coal, CPO, pulp and gas. Meanwhile, the country’s largest imports from China are cellular phones, electronic equipment, iron and steel.

The value added in these raw commodities is far lower than that of semi-finished goods or finished goods such as electronic equipment, iron and steel. Not to mention the risk of commodity price fluctuations that can easily slash export value.

Indonesia is lagging behind its ASEAN peers in terms of high value-added exports to China. Last year, ASEAN’s total exports to China were $113.3 million. The three largest exporters are Singapore (37.8 percent), Thailand (20.8 percent) and Malaysia (21 percent). Indonesia only contributed 14.8 percent.

The category of goods exported by each ASEAN member is also better in terms of value added. Exports from Singapore, Malaysia and Philippines to China are dominated by electronic equipment and machinery. While in Indonesia’s case, it is dominated by commodities.

Improving the quality of infrastructure as a result of BRI is expected to increase the competitiveness of Indonesia’s export sector. Increased competitiveness will be reflected in the more competitive prices of Indonesian manufactured goods in global markets.

However, whether the improvement in export competitiveness, thanks to the BRI scheme, will be sufficient, or not, to improve Indonesia’s trade deficit over China is subject to further examination.

One thing for sure is that BRI will strengthen connectivity between China and the countries along the route. It is in line with China’s philosophy to bring the legendary Silk Route into the 21st century to create stronger regional economic integration.

Currently, China is seeing over-capacity in its local productions, while at the same time the domestic demand has yet to absorb production. Thus, BRI becomes a strategic way to transfer excess production outside China.

Furthermore, China has aimed a “Made in China” vision, highlighting its ambition to become the world’s biggest manufacturing power by producing and exporting high-tech goods such as the next-gen ICT (Information Communication and Technology), robots, spacecraft equipment, renewable energy technology and high speed railway systems.

BRI is part of China’s efforts to reach this vision by 2025. As Indonesia will possibly need more such goods to meet the domestic industry’s needs, the BRI is surely opening door to the largest market in Southeast Asia.

In reality, automation and robotic technology is no longer in the realm of science fiction. A hospital in Jakarta has been using robotic technology to perform operations. One of the country’s banks has also introduced a digital financial services assistant in the form of an avatar.

Looking from the composition of Indonesia-China goods and China’s vision in 2025, it seems to be hard for Indonesia to minimize the trade deficit gap if the government does not make rapid fundamental changes.

First, downstream industry must be accelerated to start contributing to exports. This is to increase the value of export commodities, by shifting from CPO to oleo chemical products. Second, the tourism sector must be boosted. Indonesia’s tremendous charm and distinctive nature, as well as its culture, are
valuable and must be marketed to the world.

The existence of BRI, which aims to increase regional connectivity, strongly supports the ideal to make Indonesia’s tourism sector widely accessible. Like the Chinese proverb says: “To become rich, one must first build roads.”

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The writer is a senior research specialist at Mandiri Institute

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