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Analysis: Pros and cons of Trade Ministerial Regulation No. 40/2020

The government has issued policies related to export and import activities by sea

Haris Eko Faruddin (The Jakarta Post)
Jakarta
Wed, June 3, 2020

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Analysis: Pros and cons of Trade Ministerial Regulation No. 40/2020

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span>The government has issued policies related to export and import activities by sea. The policies are contained in Trade Ministerial Regulation No. 40/2020 concerning provisions for the use of national sea transportation and national insurance for the export and import of certain goods.

In this regulation, it states that exporters who export coal and/or crude palm oil (CPO) and importers who import rice and/or goods for the procurement of government goods are required to use national sea transportation and national insurance.

This provision is specifically for sea transportation with a carrying capacity smaller than 15,000 deadweight tonnage (DWT). As for insurance, it is compulsory to use national insurance where national insurance must be administered by the national insurance company and/or government-established export financing institutions that have received a list of certificates from the minister delegated to the director general.

The government wants national shipping companies to compete with foreign shipping vessels. Domestic market transportation has been controlled by national companies, but international markets in export activities are still controlled by foreign ships.

The Transportation Ministry noted that only 3.8 percent of national shipping companies carried international cargo, while the rest was transported by foreign shipping companies.

The large potential volume of coal and CPO exports will drive the national shipping performance. Statistics Indonesia recorded that, in 2019, national coal exports would reach 459.1 million tons, an increase of 7 percent year-on-year (yoy) from the previous year.

The majority of national coal exports go to several countries in Asia, home to the three highest export destination countries in China at 147.4 million tons (32.1 percent), India at 122.4 million tons (26.7 percent) and South Korea at 30 million tons (6.5 percent). For national CPO exports, export volume in 2019 reached 28.3 million tons, an increase of 1.4 percent yoy from the previous year, with three highest export destinations being China with 5.2 million tons (18.3 percent), India with 4.6 million tons (16.2 percent) and the European Union with 3.4 million tons (12 percent).

On the import side, the volume of rice imports in 2019 reached 444,500 tons, down 80.3 percent yoy from the previous year. As for rice imports in 2019, Indonesia’s three biggest import locations were Pakistan at 182,600 tons (41.4 percent), Myanmar at 166,700 tons (37.5 percent) and Thailand at 53,300 tons (12 percent).

With the implementation of this policy, there are positive and negative impacts. The first negative impact is about the number of ships. On the distribution of ship sizes in Indonesia, which is less than 15,000 DWT, there are approximately 2,881 units.

This amount is still considered insufficient, considering the two commodities regulated in the policy are the main commodities exported by Indonesia with a large export volume.

For coal, the export volume in 2019 was 459.1 million tons, while for CPO the export volume reached 28.3 million tons. Under these conditions, new investment is needed to increase investment in procuring new ships.

The ship size limit at less than 15,000 DWT is the initial amount. Because if there is no limit on the size of the ship, it will be difficult for coal and CPO exporters to find available national vessels.

With the size limit of the ship smaller than 15,000 DWT, the Indonesian Coal Mining Association (APBI) said that the use of these national vessels could hamper some exports to several countries by around 5 percent.

Second, there are trade cost problems that will arise. The existence of this regulation will result in changes over trade on the export side of coal and CPO, which were originally free on board (FOB) to cost, insurance, freight (CIF) so that sellers, namely those in Indonesia, would look for transportation vessels.

On the import side of rice and government goods, there will also be a change in the terms of trade, which were originally CIF to FOB, so that buyers in Indonesia will look for shipping vessels. In the previous trading pattern, this change in trading patterns was difficult, incurred additional costs and caused Indonesian exports to not go through.

The availability of Indonesian-flagged vessels must also be increased so that the smooth process of coal and CPO exports will not get disrupted. If ships with a size smaller than 15,000 DWT are not available, coal and CPO cannot be exported; ships larger than 15,000 DWT could be used, but this would be very costly and the haulage would neither be optimal nor efficient.

Third, there is the issue of World Trade Organization regulations related to non-discrimination in international trade. This regulation requires equal treatment for international countries that carry out trade activities so that fair trade practices are created. With this, Indonesia must be prepared for the possibility of challenging the principle of non-discrimination in international trade.

Nevertheless, the positive impact of the enactment of Trade Ministerial Regulation No. 40/2020 is to provide protection for local shipping entrepreneurs so that the Indonesian coal and CPO export market is not controlled by foreign shipping companies, which then might improve the performance of national shipping companies.

The national shipping market has been protected by the cabotage principle policy in which national vessels carry 100 percent of transportation in Indonesian territorial waters, but export or import activities outside Indonesian territorial waters have not been regulated to require the use of national vessels. Opening up space for the domestic market to grow would lead to greater investment and allow the shipping ecosystem to grow rapidly.

To be able to implement this policy, the government, in this case the Trade Ministry and the Transportation Ministry, must work together so that this policy has no obstacles in its implementation. The Transportation Ministry must ensure the availability of a national fleet of ships to meet the transportation needs of coal and CPO exports, as well as the import needs of rice and certain items procured by the government.

If the conditions conducive for such shipping do not exist, the government must provide support in financing the procurement of new ships, as well as provide guarantees for infrastructure; interest subsidies can also be considered.

If this proves to be smooth and there are no obstacles, both in terms of exports and imports, then the maximum size limit of ships could possibly be raised to above 15,000 DWT.

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Regional analyst, PT Bank Mandiri

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