T

he beauty of a trade agreement lies in its hypothetical win-win and mutual benefits for the countries involved. The beauty could turn into the beast should a country fail to manage benefits and costs once an agreement is entered into. This premise also applies for Indonesia, which is currently intensifying efforts to conclude more trade agreements, adding to the eight implemented agreements bilaterally and under the ASEAN framework.

Indonesia has concluded three new bilateral trade agreements with Chile, Australia and European Free Trade Area (EFTA) countries. Negotiations with the European Union are under way and so are negotiations with some African countries.

The negotiations with South Korea will be reactivated, and the talks with Peru and Russia will be initiated. Since 2012, Indonesia and other 15 parties of the five ASEAN Plus One FTAs have been struggling to conclude the prolonging negotiations for a Regional Comprehensive Economic Partnership (RCEP).

Trade agreements — in the simplest form of preferential trade agreement, wider coverage of free trade agreement, up to the deep and far reaching agreement of comprehensive economic partnership — are aimed at creating free trade amongst the parties.

Free trade is created by eliminating barriers and preventing protectionist measures. Entering into trade agreements is assumed to lead to a fall in prices as countries can export and import a variety of goods and services at lower costs, and the capital can flow freely for investment to create a multiplier effect for the economy.

However, the benefits of trade agreements are not “manna from heaven”. Despite greater market access resulting from tariff reduction or elimination, export cannot be boosted if the specifications of the products do not fulfil the requirements for a particular country or fail to comply with non-tariff barriers.

Once an agreement is implemented, the industries should be ready to adjust their operations in a more liberalized environment. Otherwise, the agreement would create a trade imbalance as a result of the failure to exploit export opportunities and defend the position in the domestic market.

Take the Indonesia — Australia Comprehensive Economic Partnership Agreement (CEPA) as an example. Under the CEPA, Australia will get greater market access to livestock and agricultural products. Indonesia is granted with market access to almost all goods, and one of them is automotive, including electric vehicles.

Soon after the CEPA implementation, Australia will be able to export more cattle and beef, which has already gained strong popularity among Indonesian consumers. Meanwhile, Indonesia needs some time to develop its electric vehicle industry and adjust automotive products to match the preference of Australian car consumers, which might be different from the types produced by Indonesia’s manufacturers.

Indonesia must appropriately assess the potential benefits and costs of the negotiated agreements in order to build domestic confidence and support. The conclusion of the RCEP, for instance, should be based on strong justification beyond the jargon of the RCEP as a modern and high-quality trade pact covering sixteen countries and representing 30.4 percent of the global GDP and encompassing 47.8 percent of the global population. Wishful thinking that the RCEP could reduce global trade tension and protectionism amidst the United States and China trade war is also less significant than assessing the costs and benefits for the respective parties.

For Indonesia, the RCEP might not give net-benefits if the agreement does not provide greater market access in comparison to the existing five ASEAN Plus One FTAs, particularly for commodities facing high tariffs such as crude palm oil, rubber and wood products. Meanwhile, greater market access for export has to be traded-off with the same degree of access for import.

Widening market access for import stimulates trade creation from the more efficient foreign supplies of goods and services but is at risk of creating costs for certain domestic industries as a result of losing market share and deteriorating performance. The situation may bring people to accuse the trade agreement for the distressed industries and heightening pressures to adopt protectionist measures.

In fact, some major industries in Indonesia remain fragile when trade agreements are being implemented. The ceramic industry, for instance, still needs protection although it has been developed for decades. The industry is also supported by abundant raw materials (ball clay, feldspar and zircon) for ceramic tiles as factor endowment to create a strong competitive advantage.

The ceramic industry has had protection in the form of additional safeguard duties imposed on imported ceramic tiles since Oct. 12, 2018 with rates of 23 percent in the first year, 21 percent in the second year and 19 percent in the third year.

The safeguard is a trade remedy for domestic industry, which claimed to suffer serious injuries of decreasing market share, production capacity utilization and profitability, as a result of the impact of import boost, at 21 percent on average, during 2015-2017. Without the safeguard, the import would increase further following the final stage of tariff reductions from 20 to 5 percent under the ASEAN-China FTA since Jan. 1, 2018.

Much other empirical evidence shows that trade agreements could create virtually as many costs as they bring benefits. The evidence should not be a reason for pushing backward away from trade agreements, but to push forward near to a better strategy in managing the benefits and costs.

Pursuing more trade agreements must be done in parallel with strengthening the supply side through structural industrial transformation to upgrade competitiveness and value added along upstream and downstream chains.

Confidence in negotiating, concluding, signing, ratifying and implementing trade agreements should be on par with confidence in progressing industrialization.

Protecting certain industries is inevitable as a “measure of the last resort” to minimize the costs of trade agreements. Any trade remedy must be performed transparently, temporarily on a strict timeline to push structural adjustment, and in compliance with the respective agreements.

There should be a proper balance between the rights of producers to sustain businesses and the rights of consumers to get more affordable goods and services.
__________________________