Trade outlook promising enough, but could be better

Andi Haswidi, The Jakarta Post, Jakarta

The negotiations under the World Trade Organization (WTO) framework may well end in a stalemate, but that will unlikely shatter the faith in multilateralism, with more and more groupings of countries embracing free-trade agreements (FTAs).

Interestingly enough, as a response to China's high-flying economy, ASEAN has emerged as a leading force in paving the way for future multilateral deals, such as those with Japan, Korea, China and the European Union (EU).

And as a precursor and also a stepping stone to greater integration, some of the ASEAN members have already entered into bilateral FTAs with the above strategic partners, notably with Japan.

The bilateral deals vary from one country to another, and so does the readiness of each country in terms of existing technical and social infrastructure for reaping benefits -- something that is clearly seen in the case of Indonesia's trade deal with Japan.

Indonesia's deal with Japan came in a the form of an economic partnership agreement (EPA) -- a wider cooperation deal than an FTA, which usually centers on the elimination of tariff-based trade barriers.

The Indonesia-Japan EPA also covers an investment and capacity-building agreement, and was signed by President Susilo Bambang Yudhoyono and the then Prime Minister Shinzo Abe on Aug. 20 in Jakarta.

It is easy to be sceptical over the deal based on fear that Indonesia could be swallowed up by Japan, but most trade analysts agree that it is timely to tie knots with the country's long-time industrial partner to catch up with other regional countries in tapping into the global production chain of manufactured products, particularly the electronics and automotive sectors.

The partnership deal aims not only at increasing bilateral trade between the two countries, but also to boost Indonesia's economic competitiveness, which in turn will leverage export growth, through a shift from commodity-driven exports to added-value products.

Indonesia's full-year exports are expected to achieve the target of a 14.5 percent increase from last year's historic record of US$100 billion, as hinted by the latest report from the Central Statistics Agency (BPS).

The January-October period witnessed an increase of more than 13 percent to $93.26 billion compared to the same period last year. It is expected that the figure will increase at a faster pace leading up to the year-end, as the annual trend always reveals a peak in demand from the northern hemisphere near the end of the year due to the northern winter.

"It seems that this year's exports will beat last year's record of $100 billion," BPS chairman Rusman Heriawan.

Despite the good trade performance, the figures could have been much higher had it not been for the sluggish performance of some manufacturing industries and also the inability of both mining and oil companies to ramp up production to take advantage of the high prices on global markets.

Since the 1997 crisis, manufacturing industry has been lagging in competitiveness as compared to key regional peers due to a sluggish investment climate largely stemming from the inflexible labor market, lack of supporting infrastructure, such as electricity, roads and ports, redundant bureaucracy, inconsistency and deep-rooted corruption.

Meanwhile, in the oil and gas sectors, although we did see new investments this year, there has not been a significant increase in production capacity, especially in the oil sector, which is suffering from aging oil wells, all amid the massive price increases on the global markets.

Steps have been taken, at all levels of governments, to address the problems, such as through revising the Investment Law and taxation legislation, reforming the tax service, simplifying business application procedures, providing various kinds of business incentives and so forth.

Two of the most important, if not actually historic, events were, first, the establishment of Batam, Bintan and Karimun islands as free trade zones (FTZs) in October, with export-oriented businesses being exempted from tax on imported production materials, plus being offerred some other fiscal incentives.

And, second, the launch of the National Single Window scheme, an on-line customs clearance service for importers and exporters, earlier this month at Jakarta's Tanjung Priok Port.

Though the new FTZ has been widely welcomed by investors as indicated by various new investment commitments valued at a minimum of Rp 17 trillion in the first year alone, some concerns remain, such as the fact that the islands are shackled by infrastructure problems, such as electricity, water supply and, most of all, learning from Batam's experience as a bonded zone, smuggling.

After Tanjung Priok Port, the NSW will soon be rolled out to nine other major ports next year, just in time for the implementation the ASEAN Single Window, which is a prelude to the ambitious goal of making ASEAN a single market and production base with an integrated monetary system by 2015.

By that juncture, some plans for multilateral trade deals with strategic partners could still be justified, pending the continuation of the ongoing internal reforms. These had better be successful or else Indonesia will be left as nothing more than a market with more than 240 million-hungry consumers instead of a powerful production force.

There's still a long way to go as, despite all the progress, Indonesia is still ranked very low as regards most of the key indicators of a good investment climate.

The World Bank's 2008 Doing Business report, which rated 178 countries according to their performance in 11 areas related to ease in doing business, ranked Indonesia 123rd, better only than the Philippines among ASEAN's six original members

Another survey, this time from the World Economic Forum, says that Indonesia did not improve its ranking in the global competitiveness index in 2007-2008, and is still stuck in 54th place, way below Singapore, Malaysia and Thailand.

Still, Indonesia has seen steady improvement, not only as regards export growth, but also its global market share, partly thanks to the Trade Ministry's trade diversification strategy to non-traditional export destinations, such as the Eastern Europe, the Middle East and South America.

Investment has also partly regained its health, with foreign direct investment approvals rising 177 percent to $36.75 billion in January-October from the same period last year.

As for the remaining reforms needed in the face of global trade liberalization, Trade Minister Mari Elka Pangestu once said that one of the government strategies to fast track internal reforms was by "locking" this into the fast-moving multilateral deals, especially within the ASEAN platform.

Time will tell whether such a strategy achieves its purpose. In the meantime, the government has promised to continue supporting significant growth in the country's trade volume, by between 11 percent and 13 percent for exports over the next two years, according to Mari.
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