More smiles than frowns from Cafta

Bruce Gale, Senior Writer

IN RECENT weeks, thousands of demonstrators have taken to the streets in Jakarta, Surabaya and other Indonesian cities echoing the demands of industry groups that the recently implemented China- Asean free trade agreement (Cafta) be renegotiated. Critical commentaries in the local press have also affected the popularity of President Susilo Bambang Yudhoyono and added to his difficulties with the new Parliament.

But do those in Jakarta who want Indonesia to pull out of Cafta really understand the economic issues involved?

There are good reasons for suggesting that the benefits of the trade agreement far outweigh any short-term losses. The industries most often cited by critics as likely to suffer - textiles, clothing and furniture manufacture - have been on the decline for more than a decade as low-wage countries such as Cambodia and Vietnam have begun competing with Indonesia on international markets.

Cafta can certainly be expected to accelerate this decline. But since China-made goods have been smuggled into the country for years, the expected flood of legal imports may not have as great an impact on local industry as many fear.

The extent of the smuggling can be seen in the glaring discrepancies in the trade data concerning low-end textile and garment products. According to the Indonesian Central Statistics Agency, imports of these products from China were worth just US $202 million (S $284 million) in 2005. Chinese export figures, however, suggest that the real value amounted to more than US $700 million.

Interviewed by The Straits Times in Jakarta earlier this month, Vice-Minister of Trade Mahendra Siregar sought to put the issue in perspective. Of the 7,000 tariff lines facing progressive reductions since 2005 under Cafta, he said, about 1,600 reached zero levels last month. And of these, only about 228 are in dispute. This latter figure represents 3 per cent of the total tariff lines in the agreement, or about 6 per cent of Indonesia's total imports by value in 2008-2009.

The government is now seeking permission to maintain these 228 tariff lines for another two years rather than cut them completely as required under Cafta.

One major benefit of the wider agreement is that it gives local investors access to cheaper raw materials. Developers can now purchase steel more cheaply - a factor that will help boost government efforts to improve infrastructure. It could even encourage local producers to improve their efficiency by joining more experienced partners. Already, state-owned Krakatau Steel appears to be adjusting to the new reality. Last year, the company announced a joint venture with South Korean steel giant Posco to construct an integrated US $6 billion steel mill in Indonesia's Cilegon.

Mr Mahendra agreed that infrastructure inadequacies (notably in telecommunications, roads, airports and seaports) also raised the cost of production. 'There are so many anecdotal cases saying that it is cheaper to import goods from Japan than between Indonesian islands,' he said. But he was also quick to point out that the situation was much better now than five or 10 years ago, when - in some cases - even the basic facilities did not exist.

While conceding that unanticipated delays in the implementation of major projects could have affected Indonesia's current competitiveness, Mr Mahendra argued that such delays were now far less likely. This was because many of the regulatory frameworks that had impeded development in the past have been improved.

Land procurement regulations that previously held up large infrastructure projects, for example, have been revised. Legislation passed last year has also made it possible for private companies to conduct business in additional infrastructure-related sectors such as railways. 'Discussions are now under way with several parties to take advantage of the new possibility,' said Mr Mahendra.

The Vice-Minister also sees a positive side to the Cafta controversy: 'We have been relatively slow in producing results with regard to infrastructure bottlenecks in the past. Now, because of this pressure, the momentum will increase.'

Indonesia comes out of the free trade agreement well compared to many other South-east Asian nations. Most Asean countries have economies far more highly dependent on international trade than Indonesia's is. They also produce manufactured goods that compete with China directly. Indonesia's main exports, however, are commodities such as oil, gas, coal, palm oil and rubber - all of which are in high demand in China.

Cafta offers Indonesia great strategic advantages. A few inefficient industries may suffer short-term difficulties as a result of its implementation. But the real threat to Indonesia's economy comes from the actions of ministries such as agriculture and industry that have responded to political pressure by announcing non-tariff barriers designed to shield the domestic producers from cheap Chinese imports. Thinly disguised as quality control measures, such moves are not likely to be well received in Beijing.

Chinese retaliatory measures aimed at Indonesian exports could cost the country dearly.

bruceg@sph.com.sg