AFP/Alain Jocard and Christof Stache

One of United States President Donald Trump’s policy pillars is implementing policy that promotes free, fair and reciprocal trade relations. It was one of Trump’s commitments during the presidential election campaign in 2016 to restrict imports by increasing tariffs to reduce worsening trade deficits, particularly with China.

The trade war between the world’s two biggest economies is almost entering its second year, but there seems to be no resolution. The Group of 20 Summit in June in Japan could not reduce the tensions of the trade war.

In fact, the US-China trade war is into a hotter round as the US has in place an additional tariff of 15 percent on about 3,200 imported Chinese goods worth US$110 billion as of September.

The US government is also ready to take steps to increase tariffs on 555 other Chinese goods, including smartphones, in December. China immediately responded by raising additional tariffs of 5 percent and 10 percent on 1,717 American goods worth $75 billion.

In the long-running US-China trade war, Japanese investment bank Nomura predicts that Vietnam will be the biggest winner because many US companies import basic and auxiliary materials to avoid high tariffs.

Vietnam’s export volume increased 40 percent in the first quarter of 2019. The contribution of exports to gross domestic product (GDP) of Vietnam has increased to 7.9 percent.

Vietnam could reap big profits as its export goods are similar to those of China. Geographically, Vietnam is also located near China, and some products from China are relabeled in Vietnam to easily penetrate the US market.

In addition, according to World Bank data, Vietnam has received 23 companies that relocated from China. Chinese companies have started to move to Vietnam because of low labor costs and ease of import for industrial goods. Therefore, Vietnam has become a growing middle-income country.

During the trade war, the Vietnamese government has actively participated in bilateral trade agreements to escalate export growth and keep economic growth high. Vietnam is a member of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CTPP, or TPP without the US), which has grant access to North America (Canada and Mexico) and Oceanic countries (Australia and New Zealand).

In addition, Vietnam has a free trade cooperation agreement with European countries, known as the European Union-Vietnam Free Trade Agreement. As a consequence, Vietnam obtained EU Parliament approval regarding the export of its goods.

Indonesia could benefit from a trade war. Some Chinese products to the US market can be substituted by Indonesian products, such as electrical apparatus and electronic products such as televisions, microphones, and telephone sets (HS 85) and parts of games and toys, including video game consoles and machines (HS 95).

In addition, Indonesia has the opportunity in the US market to export rubber and rubber articles and furniture because the US revoked a Generalized System of Preferences (GSP) benefit to Turkey and India that made the price of products from both countries higher in the US.

There are three industries that should be strengthened so that they can penetrate the US market: electrical apparatus and electronic products, rubber and rubber articles and furniture. First, strengthening the electrical apparatus and electronic products industry is a must to improve competitiveness.

According to the International Trade Center on the INTRACEN website, the US is the third-largest export destination after Singapore and Japan, worth about $1.2 billion in 2018.

However, the competitiveness of electrical parts and the electronics industry in Indonesia might be lower because its overdependence on imported components at around 80 percent results in high production costs. Therefore, a transfer of technology policy is needed to create substitution industries.

Second, as almost half of Indonesia’s rubber products are subject to the GSP, Indonesia ranks sixth in exporting rubber to the US, worth $1.9 billion in 2018. Indonesia could maximize the export of rubber and articles thereof. However, the Indonesian rubber industry faces several problems, including inconsistency of rubber quality.

The supply of high-quality raw materials for rubber is lower than industry demand. Indonesia’s geographical location also causes high logistics costs.

Therefore, such conditions make Indonesia’s rubber products, such as new pneumatic tires, articles of vulcanized rubber and other rubber products, less competitive than three other competing countries (Vietnam, Malaysia and Thailand).

Third, Indonesia should develop the furniture industry. Indonesia was among the top 10 exporters in the US market with an export value of $0.9 billion in 2018. Almost 75 percent of exported Indonesian furniture is wooden.

The other furniture products are mattress supports, seat rattan, lamps and lighting fittings and medical, surgical, dental and veterinary furniture. Indonesia benefits from an abundance of sustainable raw materials for furniture, including wooden logs and their distinctive design, in competing with China, Vietnam and Malaysia in the US market. To improve the competitiveness of the furniture industry, the Indonesian government should review its plan to facilitate the export of raw logs, which has drawbacks for domestic industries. Moreover, the government might lower the value-added tax of logs to decrease the cost of production.

In conclusion, to take advantage of the US-China trade war, strengthening these three industries should be prioritized. Indonesia would benefit from a boost in economic growth from this, not only in the short term but also in the long term.

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Esther Sri Astuti is program director at the Institute for Development of Economics and Finance (Indef) where Dendy Indramawan is research assistant.

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