We argue that the US-China trade war is very likely to continue, but in a different way. Biden stated in his inauguration speech that vaccinations, fiscal stimulus and more positive trade politics, not a trade war, will improve the condition of the global financial market and the global economy. As we know, President Biden has inherited a highly tense relationship with China from his predecessor, former president Donald Trump.

We believe that Biden will take a more diplomatic approach to China in bilateral trade and investment. His approach may use diplomatic pressure to urge China to comply with the international standards on fair trade practices, labor protection and intellectual property rights. As we know, these are key US issues for protecting national economic interests and have been applied for decades, particularly under the Bill Clinton presidency.

More specifically, we find that the US strategy for China is to inspect unfair subsidies on Chinese exports to protect its domestic producers. Another strategy is to retain onshore manufacturing of high-value and critical supplies such as medical equipment, 5G telecommunications hardware and electric vehicles.

Although the US-China trade war is unlikely to end quickly, we can still expect the volume of international trade to increase gradually and the global economy to recover steadily with the start of COVID-19 vaccination programs.

According to data from the World Trade Organization (WTO), the volume of world merchandise trade in the first three quarters of 2020 fell 8.2 percent year-on-year (yoy) compared to 2019. Additionally, the WTO forecast that world merchandise trade would see a 9.2 percent overall decline in 2020.

Trade performance has been divergent during the COVID-19 business cycle, as lockdowns and travel restrictions imposed significant supply-side constraints on national economies while reducing output and generating high unemployment.

However, the WTO estimates that world merchandise trade in 2021 could grow 7.2 percent. The organization elaborates that this projection depends on the rapid deployment of effective vaccines and robust monetary and fiscal stimulus measures once lockdowns are eased in some countries. Trade plays a critical role in responding to the pandemic by allowing countries to secure access to food and medical supplies as well as facilitating IT products and other services. Consequently, international trade cooperation is essential as we move forward and resolve any outstanding trade issues that arose amid the pandemic.

Last year, Indonesia was the 22nd largest trading partner to the US, which shows that Indonesia tightened its trade cooperation with the US. However, Indonesia still ranks below other ASEAN countries in US trade, after Vietnam (10th), Singapore (16th), Malaysia (18th) and Thailand (19th).

Statistics Indonesia (BPS) data show that overall goods exports and imports between Indonesia and the US from January to November 2020 was US$24.4 billion. The total value of Indonesia’s goods imports from the US in January-November 2020 was $7.7 billion, or a 9.4 percent year-on-year (yoy) decrease from $8.5 billion in the same period in 2019. On the other hand, the total value of Indonesia’s goods exports to the US was $16.7 billion in January-November 2020, or a 3.7 percent yoy increase from $16.1 billion in the same period in 2019.

Data from the Investment Coordinating Board show that US foreign direct investment (FDI) in Indonesia totaled US$480 million from January to September 2020, or a 36.6 percent yoy decline from US$757 million in 2019. The US was the eighth largest source of FDI in Indonesia, led by mining, manufacturing and nonbank holding companies.

Moreover, Indonesia and the US made a joint statement in 2015 on strengthening their long-term partnership, which aims to enhance broader economic cooperation. Indonesia and the US also hold regular consultations under the US-Indonesia Trade and Investment Framework Agreement (TIFA). Signed in 1996, the TIFA serves as a key platform for the two countries to address bilateral trade and investment issues.

However, Indonesian exporters were still unable to take full advantage of the opportunities. Annual growth of Indonesia’s exports to the US averaged only 2.8 percent in 2010-2019, whereas Vietnam’s annual export growth to the US averaged 17.7 percent during the same period. Indonesia should focus on seeking a regional trade agreement with the US to have more tariffs eliminated, achieve deeper economic ties and increase its export performance.

Biden’s trade policy seems to be more measured and certain than his predecessor’s. His policy emphasizes more multilateralism in contrast to Trump's policy, which advocated more bilateralism. Biden has also signaled that the US will rejoin various international treaties from which the US withdrew over the past four years under Trump, such as the Trans-Pacific Partnership (TPP). Trump withdrew the US as a signatory of the TPP, a massive regional trade agreement that was the legacy of former president Barack Obama’s Asia-Pacific policy. Perhaps Indonesia should reexplore the TPP, since the US will be rejoining the agreement.

Last November, the US government extended its import duty exemption facility, the Generalized System of Preferences (GSP), for more than 700 Indonesian products. The GSP extension and limited trade deal will positively impact US-Indonesia trade, which is projected to reach $60 billion by 2024.

What should Indonesia do in order to capitalize on this opportunity? We suggest the following strategies. The first is to map Indonesia’s potential or flagship products in the US through market intelligence by empowering its diplomats at Indonesian embassies. Second, the Indonesian government and stakeholders should prepare prominent exporters to use the GSP facility.

Third, Indonesia should analyze the US market and its main competitor, which China has left vacant as a result of the trade war. Fourth, Indonesia should participate more intensively in the supply chain of American-made products or in the domestic supply chain of products intended for exporting to the US, in particular by attracting more investments to Indonesia.

In the long-term, Indonesia should also deepen its bilateral trade relationship with the US. Indonesia should also be more involved in regional and multilateral cooperation in which the US engages, as Biden is likely to support strengthening such cooperation.

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Analyst at the Bank Mandiri chief economist’s office

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