Short-term indicators provide some worrisome signs. The most important indicator is exports, the negative effects of which can be transmitted through two channels.

First, the US and China’s economies are facing economic slowdowns because of the trade war. The slowdowns in turn generate lower demand for goods and cause both economies to import less. Indonesia’s exports to China have declined by 13 percent to US$5.7 billion in the first quarter of 2019 compared with the fourth quarter of 2018, according to Bank Indonesia.

Likewise, exports to the US fell 8 percent to $4.2 billion. Since both countries are among Indonesia’s top-five trading partners (with China being the largest), the economic consequences could be extensively damaging.

The second channel is through the potential spread of protectionist trade policies to other countries. This means some countries may take some retaliatory measures to protect their economies from the trade war and become more protective. However, this channel is less straightforward since it is hard to forecast and may take a longer time to materialize.

On top of the effect of the trade war on Indonesia’s exports, China and, to smaller extent, the US are also forced by the trade war to divert trade to new markets, including Indonesia. As a consequence, Indonesia may expect higher imports from this trade diversion.

This effect is particularly bad in sectors with low competitiveness and productivity. For instance, in the tire industry, imports from China increased 90 percent from a year earlier to $158 million during the first half of 2018. This was mainly driven by Chinese tire exporters entering Indonesia’s market, thus resulting in intensified competition.

The impact was also felt in the steel sector. Because of the inability of local manufacturers to meet domestic demand, Indonesia imported almost 8 million tons of steel in 2018 and a large portion of the imports came from China. If the trade war is prolonged, we can expect more Chinese steel producers to send their products to Indonesia.

Another negative impact was also felt in the capital and foreign exchange markets. The Jakarta Composite Index fell to its lowest point at 5,827 on May 17 from about 6,500 throughout February to April. Similarly the rupiah also weakened to above 14,400 per dollar from its strongest point of 13,920 per dollar in February.

These sharp market volatilities may generate further uncertainties and cause people to become reluctant to invest in Indonesia.

In contrast to Indonesia, other countries in the region, particularly Vietnam, Thailand and Malaysia, may actually become beneficiaries of the trade war over the long term.

A report by the ASEAN+3 Macroeconomic Research Office (AMRO) released in May provides a comprehensive analysis of the impacts of the trade war on ASEAN countries.

The report suggests that a small reduction in China’s apparel production would be offset by higher production in Vietnam, thanks to its low labor costs, adequate infrastructure and predictable regulatory environment. It also points out the possible relocation of electronics and machinery plants from China that would benefit low-cost manufacturing countries such as Malaysia and Thailand.

So, what are the lessons to learn?

For sure, becoming a more protectionist country amidst a trade war is not a wise idea. On the contrary, Indonesia should participate more in the global supply chains, just like its regional peers Thailand, Malaysia and Vietnam.

As mentioned above, Indonesia is considered a market destination by other economies and, ironically, we often proudly call ourselves a consumption-driven economy that does not depend much on international trade.

However, being a market economy makes Indonesia the target of other exporting countries and the lack of competitiveness, such as low-cost manufacturing or a technological advantage, would make it hard for local manufacturers to compete with exporters from other countries, just like the case studies mentioned above.

By integrating our economy into global supply chains, local producers would be encouraged to become more competitive, either through technological innovation, production efficiency or low-cost manufacturing.

As a consequence, we would not only be participating in international trade as a consumer, but also as a supplier. This would not only improve our trade balance — which has been performing poorly in the recent years because of a reliance on commodities — but also increase our exposure to global technological spillovers and positive externalities that can improve our domestic industry’s competitiveness even further.

The government has undertaken many reforms to make the economy more competitive. Improvements in logistics and infrastructure are probably the most obvious ones, as reflected by the improving World Bank’s logistics performance index in 2018.

However, that is still not enough. Some policies, such as the border-trade-related policies, show some inconsistencies, which send mixed signals about whether the government is actually promoting international trade or is against it. In other words, a more consistent policy framework is necessary to support the whole plan, which should be supported further by a more efficient bureaucracy.

As we expect the trade war to last much longer than initially anticipated, policy consistency and predictability and interministerial coordination have become more urgent than ever.

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The writer, a graduate of the University of Manchester in the United Kingdom, is a professional in the financial sector.

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