Indonesia-EU Trade Relations

Indonesia-EU Trade Relations
A Case Study of International Trade between South and North

by
Okta Nofri
A thesis submitted in partial fulfillment
of the requirements for the degree of
Doctor of Philosophy
in the field of Economics
Approved Dissertation Committee
Prof. Dr. Welf Werner

Committee Chairman
Prof. Dr. Margrit Schreier

Committee Member
Prof. Dr. Andreas Falke

Committee Member
Date of Defense: January 28, 2013
School of Humanities and Social Sciences (SHSS)

Acknowledgments
First and foremost, the author would like to thank Creator of the Universe for still giving
us the chance to take breaths with our lungs, to think with our brains, and to share
knowledge with others. This study is also made possible with the help of individuals as
well as institutions. Therefore, the author would also like to extend his deepest gratitude to
the following individuals and institutions:
1. The author’s principal supervisor and chairman of the Dissertation Committee, Dr. Welf
Werner, for sharing his knowledge in international political economy. His ideas, support,
and feedback from preparation to implementation of this study have been essential.
2. The author’s supervisor and member of the Dissertation Committee, Dr. Margrit
Schreier, for sharing with the author her expertise in empirical research methodology. Her
ideas and feedback from designing to application of the methodology have been helpful.
3. Member of Dissertation Committee, Dr. Andreas Falke, for investing his time as
external reviewer.
3. The author’s wife, son, and daughter—Ima, Hafidz, and Aqilah—for their patience in
accompanying the author during his study and stay in Bremen, Germany.
4. The author’s beloved father, Ir. Mayuni. Bs, and dearest mother, Misnardiati, as well as
his brothers and sisters—Nilma Yunarti, Yunaldi, Srimulyati, Susilawati, Suryani Aris, Da
Wahyu, and Da Yul—who have prayed for and paid sincere attention to me.
5. Jacobs University Bremen for excellent facilities, tuition waiver, as well as the
assistances from all the staffs of the dean, IRC and registrar, especially Peter Tsvetkov.
6. Deutsche Akademische Austauschdienst (DAAD) and staff, especially Frau Bergmann

and Frau Bossmann, for administrative as well as financial support.
7. All professors at the School of Humanities and Social Science (SHSS)–Integrated Social
Sciences (ISS) program of Jacob University Bremen, for any direct and indirect
contributions during the admission processes, colloquiums, seminars, and lectures.
8. SPECTARIS–Berlin, especially to Ms. Goldenstede and Mr. Bähren, for any support
during pilot testing and questionnaire dissemination in regard to scientific instruments.
9. All export-oriented companies from Indonesia and the European Union (EU) in six
selected product sectors for sharing their time, experiences, and knowledge to this study.
10. The author’s friends Sebastian, Mas Ari, Fadli, Ghalib, Teuku, Mbak Maya, Mas JJ,
Keluarga Pak Puji, Keluarga Pak Gerry, Pak Agus and all the members of the Indonesian
Student Association and Community in Bremen for their friendship, support, suggestions,
and assistance during his stay in Bremen.
The author wishes you all the best, and may God reward you for your sincerity.
Abstract
This case study is aimed at describing and explaining reciprocal trade relations between Indonesia
representing the South and the EU representing the North. This study uses both descriptive and
explanatory case studies. In the descriptive study, this study analyzes the trade volume and pattern
of two political entities. In this part, this study also calculates and analyzes the RCA index and
export performances. Results of the descriptive study have been used in selecting six cases. In the
explanatory study, trade incentives and barriers that increase and restrict exports, respectively, in
either direction are investigated. This involves the collection and analysis of firm level primary
data and secondary data. In analyzing collected data, this study uses one primary data and four
secondary data.
In the case of Indonesia’s exports to the EU, the application of different methods of analysis has
identified simple entry procedures, low technical barriers, good logistics, higher product quality,
larger market size, endowment factors, GDP, and past colonial relations as trade incentives. Data
analysis has also suggested that technical impediments, bad logistics, distance, high competition,
production capacity, tariff barriers, and market entry procedures are barriers to export volume. In
the case of the EU exports to Indonesia, data analysis has identified technology superiority, low
tariffs, innovation, larger market size, distributor/local partner, patent ownership, GDP, and product
quality as trade incentives of such exports. Data analysis has also revealed that higher tariffs,
corruption, distance, absence of a unified patent system, increasing cost of production, and market
entry procedures are barriers to the EU exports to Indonesia.
Hence, Indonesia and the EU should better formulate their future bilateral trade policy. Bilateral
trade partnership should contain promotion and elimination of regulatory trade incentives and
barriers in order to respectively create trade and avoid potential trade diversion. Efforts in reducing
trade data discrepancy and the need for continuation of similar research have also been
recommended.
Table of Contents
Page
Acknowledgments iii
Abstract v
Table of Contents vii
List of Tables xiii
List of Figures xv
List of Graphs xvii
List of Annexes xix
List of Abbreviations xxi
Chapter I Introduction 1
1.1 Problem Statement 1
1.2 Research Questions 3
1.3 Outline of Case Study 4
1.4 Limitation of Case Study 7
Chapter II Theoretical Framework 9

2.1 The Importance of International Trade 9
2.2 International Trade Theories 13
2.2.1 Classical Theories 14
2.2.2 Neoclassical Theories 15
2.2.3 New Trade Theory 17
2.3 Trade Pattern 19
2.4 Measuring Competitiveness 21
2.5 Trade Flows’ Incentives and Barriers 23
2.5.2 Barriers to Trade 24
2.6 Trade between the South and the North 26
2.7 Multilateral Trade Negotiations 29
2.8 Regional Trade Agreements (RTAs) 31
2.9 Bilateral Trade Negotiations 34
2.10 The Contributions of This Study 42
viii | Table of Contents
Chapter III Research Design and Methods 45

3.1 Main Concepts 45
3.2 Research Design 45
3.2.1 Descriptive Case Study 46
3.2.1.1 Data Collection for Descriptive Case Studies 47
3.2.1.2 Data Analysis for Descriptive Case Study 48
3.2.2 Explanatory Case Study 57
3.2.2.1 Case Selection 57
3.2.2.2 Data Collection for Explanatory Case Study 58
3.2.2.2.1 Primary Data Collection 58
3.2.2.2.2 Secondary Data Collection 60
3.2.2.3 Methods of Data Analysis for Explanatory Case Study 61
3.2.2.3.1 Method of Primary Data Analysis 61
3.2.2.3.2 Methods of Secondary Data Analysis 63
3.2.2.3.3 Conclusion Making and Contribution of Different Methods 68
Chapter IV Indonesian and EU Trade Pattern 71

4.1 Volume of Trade 71
4.1.1 Indonesian Trade Volume with the World 71
4.1.2 EU Trade Volume with the World 72
4.1.3 Indonesia and EU Trade Volume 74
4.2 Trade Structure 76
4.2.1 Indonesian Trade Structure with the World 76
4.2.2 Indonesian Exports Structure to EU 82
4.2.3 EU Trade Structure with the World 85
4.2.4 EU Exports Structure to Indonesia 89
4.3 Trade Partners’ Composition 91
4.3.1 Indonesian Trade Partners’ Composition 91
4.3.2 Indonesian Exports Destination to EU Members 94
4.3.3 EU Trade Partners’ Composition 95
4.3.4 EU Members’ Exports to Indonesia 98
4.4 Conclusions 98
Chapter V RCA Index and Export Performance Analysis 101

5.1 Indonesian and EU RCA Index 101
5.1.1 Indonesian RCA Index with the World as Reference 101
5.1.2 Indonesian RCA Index with the EU as Reference 103
5.1.3 EU RCA Index with the World as Reference 108
5.1.4 EU RCA Index with Indonesia as Reference 109
5.2 Indonesian and EU Export Performance Analysis 112
5.2.1 Indonesian Export Performance to the World 113
5.2.2 Indonesian Exports Performance to the EU 116
5.2.3 EU Export Performance to the World 120
5.2.4 EU Export Performance to Indonesia 122
5.3 Cases Selection 125
Table of Contents | ix
5.3.1 The Selection of Indonesian Cases 126

5.3.2 The Selection of EU Cases 127
5.4 Conclusions 128
Chapter VI Incentives and Barriers of Indonesian Trade Flows to the EU 131

6.1 Primary Data Analysis 131
6.1.1 Overview of Collected Data 131
6.1.2 Incentives of Indonesian Trade Flows to the EU 132
6.1.3 Barriers of Indonesian Trade Flows to the EU 134
6.1.4 Conclusions of Primary Data Analysis 135
6.2 Supply-Demand Analysis 136
6.2.1 Supply-Side Incentives of Indonesian Exports to the EU 137
6.2.1.1 Supply-Side Incentives in the Case of Coal 137
6.2.1.2 Supply-Side Incentives in the Case of FVOs 141
6.2.1.3 Supply-Side Incentives in the Case of Cork and Wood 144
6.2.2 Demand-Side Incentives of Indonesian Exports to the EU 146
6.2.2.1 Demand-Side Incentives in the Case of Coal 146
6.2.2.2 Demand-Side Incentives in the Case of FVOs 150
6.2.2.3 Demand-Side Incentives in the Case of Cork and Wood 156
6.2.3 Supply-Side Barriers of Indonesian Exports to the EU 157
6.2.3.1 Supply-Side Barriers in the Case of Coal 157
6.2.3.2 Supply-Side Barriers in the Case of FVOs 163
6.2.3.3 Supply-Side Barriers in the Case of Cork and Wood 165
6.2.4 Demand-Side Barriers of Indonesian Exports to EU 168
6.2.4.1 Demand-Side Barriers in the Case of Coal 168
6.2.4.2 Demand-Side Barriers in the Case of FVOs 170
6.2.4.3 Demand-Side Barriers in the Case of Cork and Wood 175
6.2.5 Conclusions of Supply-Demand Analysis 178
6.3 Gap Analysis of Indonesian Exports to the EU 180
6.3.1 Gap Analysis on Indonesian Export of Coal to the EU 181
6.3.2 Gap Analysis of Indonesian Exports of FVOs to the EU 181
6.3.3 Gap Analysis of Indonesian Exports of Cork and Wood to the EU 182
6.3.4 Conclusion of Gap Analysis 183
6.4 Complaints-Inventory Analysis 184
6.4.1 Complaints Reported by Indonesia 184
6.4.2 Complaints Notified by WTO 185
6.4.3 Conclusions of Complaints-Inventory Analysis 186
6.5 Gravity Model Application on Indonesian Exports to EU 187
6.5.1 Results of Single Linear Equation Model and OLS Estimation 187
6.5.1.1 GDP and Indonesian Export Volume 187
6.5.1.2 Population and EU Export Volume 189
6.5.1.3 Distances and Indonesian Export Volume 190
6.5.2 Results of Multivariable Equation Model and OLS Estimation 191
6.5.3 Conclusions of Gravity Model Application 193
6.6. Conclusions 194
x | Table of Contents
Chapter VII Incentives and Barriers of EU’s Exports to Indonesia 197

7.1 Primary Data Analysis 197
7.1.1 Overview of Collected Data 197
7.1.2 Incentives of EU Exports to Indonesia 198
7.1.3 Barriers of EU Exports to Indonesia 200
7.1.4 Conclusions of Primary Data Analysis 202
7.2 Supply-Demand Analysis of Exports Flow from the EU to Indonesia 202
7.2.1 Supply-Side Incentives of EU Exports to Indonesia 203
7.2.1.1 Supply-Side Incentives of Pharmaceutical Products 203
7.2.1.2 Supply-Side Incentives of Industry Special Machines 205
7.2.1.3 Supply-Side Incentives of Scientific Instruments 208
7.2.2 Demand-Side Incentives of EU Exports to Indonesia 210
7.2.2.1 Demand-Side Incentives of Pharmaceutical Products 210
7.2.2.2 Demand-Side Incentives of Industry Special Machine 213
7.2.2.3 Demand-Side Incentives of Scientific Instrument 215
7.2.3 Supply-Side Barriers of EU Exports to Indonesia 216
7.2.3.1 Supply-Side Barriers of Pharmaceutical Products 216
7.2.3.2 Supply-Side Barriers of Industry Special Machine 217
7.2.3.3 Supply-Side Barriers of Scientific Instruments 218
7.2.4 Demand-Side Barriers of EU Exports to Indonesia 219
7.2.4.1 Demand-Side Barriers of Pharmaceutical Products 219
7.2.4.2 Demand-Side Barriers of Special Industry Machinery 224
7.2.4.3 Demand-Side Barriers of Scientific Instruments 226
7.2.5 Conclusions of Supply-Demand Analysis 227
7.3 Gap Analysis of EU Exports to Indonesia 229
7.3.1 Gap Analysis of Pharmaceutical Products 230
7.3.2 Gap Analysis of Industry Special Machine 230
7.3.3 Gap Analysis of Scientific Instruments 231
7.3.4 Conclusion of Gap Analysis 231
7.4 Complaints-Inventory Analysis 231
7.4.1 Complaints Reported by EU 231
7.4.2 Complaints Reported by WTO 234
7.4.3 Conclusions of Complaints-Inventory Analysis 235
7.5 Gravity Model Application on EU Export Incentives and Barriers 236
7.5.1 Results of Single Linear Equation Model and OLS Estimation 236
7.5.1.1 GDP and EU Export Volume 236
7.5.1.2 Population and EU Export Volume 237
7.5.1.3 Distance and EU Export Volume 239
7.5.2 Results of Multivariable Equation Model and OLS Estimation 240
7.5.3 Conclusions of Gravity Model Application 242
7.6 Conclusions 243
Chapter VIII Summary and Recommendations 247

8.1 Summary of Research Findings 247
8.1.1 Indonesian Trade Pattern and Specialization 247
8.1.2 EU Trade Pattern and Specialization 249
Table of Contents | xi
8.1.3 Differences in Trade Patterns of Indonesia and the EU 251

8.1.4 Indonesia-EU Bilateral Trade 253
8.1.5 Indonesian Export Incentives and Barriers to EU 256
8.1.6 EU Trade Incentives and Barriers to Indonesia 256
8.1.7 Differences in Trade Incentives and Barriers 257
8.2 Bottlenecks 258
8.3 Dispute-Settlement Issues 259
8.4 Implication to Policy 261
8.4.1 Policy Recommendations for Indonesian Exports to EU 261
8.4.2 Policy Recommendations for EU Exports to Indonesia 265
8.4.3 Indonesia-EU Bilateral Cooperation 266
8.5 Continuation of Research 269
Reference List 273
Annexes 283
List of Tables
Page
Table 2.1: Index of Openness of Selected Countries 9

Table 2.2: GATT’s Negotiation Rounds 2 30
Table 3.1: Workflow of Data Analysis and Case Selection 3 49
Table 3.2: Illustration of Trade Performance Based Case Selection 4 53
Table 3.3: Illustration of Case Selection Process 5 57
Table 3.4: Illustration of Chi-Square Analysis of Primary Data Frequency 6 62
Table 4.1: Economic Size of Indonesian Major Trade Partners in EU in 2007 7 94
Table 5.1: Indonesian RCA Index with the World as Reference (1999–2008) 8 102
Table 5.2: Indonesian RCA Index with the EU as Reference (1999–2008) 9 104
Table 5.3: EU RCA Index with the World as Reference (1999–2008) 10 109
Table 5.4: EU RCA Index with Indonesia as Reference (1999–2008) 11 110
Table 5.5: Export Share of Indonesian Major Products in the World (2006–2008) 12 114
Table 5.6: Export Growth of Indonesian Major Products in the World (2006–2008) 13 115
Table 5.7: Export Share of Indonesian Major Products in the EU (2006–2008)14 117
Table 5.8: Export Growth of Indonesian Major Products in the EU (2006–2008) 15 118
Table 5.9: Export Growth of EU Major Products in the World (2006–2008) 16 121
Table 5.10: Export Share of EU Major Products in the World (2006–2008) 17 122
Table 5.11: Export Growth of EU Major Products in Indonesia (2006–2008) 18 123
Table 5.12: Share of EU Major Products in Indonesia (2006–2008) 19 124
Table 5.13: Selected Cases (Product Sectors) for Indonesia 20 126
Table 5.14: Selected Cases (Product Sectors) for the EU 21 128
Table 6.1: Observed Frequencies of Indonesian Export Incentives to the EU 22 133
Table 6.2: Chi-Square Test of Indonesian Export Flow Barriers to the EU 23 135
Table 6.3: The World’s Top 5 Exporters of Coal 24 138
Table 6.4: ICI’s Coal Grade Specification and Price Index (July 2009) 25 139
Table 6.5: International Coal Indexes from July–October 2009 (in USD) 26 140
Table 6.6: The World’s Top 5 Importers of Coal 27 147
Table 6.7: EU Import Tariffs for Selected Wood and Cork 28 176
Table 6.8: Incentives of Indonesian Export to the EU 29 179
Table 6.9: Barriers of Indonesian Export to the EU 30 180
xiv | List of Tables
Table 6.10: Gaps Found in Indonesian Exports to the EU 31 184

Table 6.11: Complaints Inventory Compiled by the GOI 32 185
Table 6.12: Indonesian Complaints in WTO’s Dispute Settlement (1999–2008) 33 186
Table 6.13: Regression Results of Equation 3.8 34 192
Table 6.14: Incentives and Barriers of Indonesian Export to EU 35 195
Table 7.1: Chi-Square Test of EU Export Incentives to Indonesia 36 199
Table 7.2: Chi-Square Test of EU Exports Barriers to Indonesia 37 201
Table 7.3: Indonesia’s Top 10 Pharmaceutical Companies in 2004 38 224
Table 7.4: Incentives of EU Exports to Indonesia 39 228
Table 7.5: Barriers of EU Exports to Indonesia 40 229
Table 7.6: Complaints Inventory Reported by the EU 41 232
Table 7.7: Regression Results for Equation 3.8 42 241
Table 7.8: Incentives and Barriers of EU Exports to Indonesia 43 244
Table 8.1: Differences in Trade Patterns of Indonesia and the EU 44 252
Table 8.2: Comparisons of Trade Incentives and Barriers 45 257
Table 8.3: Regulatory Barriers and Solutions to Indonesian Exports to EU 46 263
Table 8.4: Regulatory Bottlenecks and Solutions to EU Exports to Indonesia 47 266
List of Figures
Page
Figure 5.1: Indonesian Map 1 105

Figure 6.1: EU Food Safety Systems for Imported Food Products 2 174
List of Graphs
Page
Graph 2.1: Gains from International Trade 1 12

Graph 2.2: Active and Nonactive RTA (Notified to WTO) 2 32
Graph 3.1: BCG Matrix for National Export Performance Analysis 3 54
Graph 4.1: Indonesian Trade Volume with the World (1989–2008) 4 72
Graph 4.2: EU Export–Import Development (2000–2008) 5 73
Graph 4.3: Indonesian and EU Exports and Trade Balance (1989–2007) 6 74
Graph 4.4: The Structure of Indonesian Exports to the World (1967–2001) 7 77
Graph 4.5: Indonesian Export Structure to the World (1989–2007) 8 79
Graph 4.6: Indonesian Import Structure from the World (1989–2007) 9 82
Graph 4.7: Indonesian Export Structure to EU (1989–2007) 10 84
Graph 4.8: EU Export Structure to the World (1989–2007) 11 87
Graph 4.9: EU Import Structure from the World (1989–2007) 12 88
Graph 4.10: EU Export Structure to Indonesia (1989–2007) 13 90
Graph 4.11: Indonesian Main Export Destinations (2003–2007) 14 91
Graph 4.12: Indonesian Main Import Origins (2003–2007) 15 93
Graph 4.13: EU Export Destination (2003-2007) 16 96
Graph 4.14: EU Main Import Origins (2003-2007) 17 97
Graph 5.1: Export Performance of Indonesian Products in the EU Market in 2006 18 119
Graph 5.2: EU Top 10 Export Performance in the Indonesian Market in 2006 19 125
Graph 6.1: Monthly Trends of World Energy Price (1999–2009) 20 141
Graph 6.2: Indonesian Export of Fixed Vegetable Oil (1999–2008) 21 143
Graph 6.3: Indonesian Export of Cork and Wood to the EU and the World 22 145
Graph 6.4: Indonesian Coal Productions and Distributions (1980–2007) 23 146
Graph 6.5: Coal Consumption of Selected Countries (1999–2010) 24 148
Graph 6.6: Indonesian Coal Export Destinations (1999–2010) 25 149
Graph 6.7: World Exports of Fixed Vegetable Oils to the EU (FOB Price) 26 152
Graph 6.8: EU FVOs Market Development (in 1,000 tons) 27 154
Graph 6.9: World Price Developments of Selected FVOs 28 155
Graph 6.10: Trends of Particular Wood Price in Metric Ton 29 166
Graph 6.11: EU Members’ GDP and Indonesian Export Volume 30 188
xviii | List of Graphs
Graph 6.12: EU Members’ Population and Indonesian Export Volume 31 190

Graph 6.13: Distances and Indonesian Export Volume 32 191
Graph 7.1: EU Export of Pharmaceuticals to Indonesia (1999–2008) 33 205
Graph 7.2: EU Export of Industry Special Machines (1999–2008) 34 206
Graph 7.3 EU Export of Industry Special Machines to Indonesia (1999–2008)35 207
Graph 7.4: World Major Exporters of Scientific Instruments (1999–2008) 36 208
Graph 7.5: EU Export of Scientific Instruments to Indonesia (1999–2008) 37 209
Graph 7.6: Indonesian Imports of Pharmaceutical Products from the World 38 212
Graph 7.7: World Exports of Industry Special Machines to Indonesia (1999-2008)39 214
Graph 7.8: Indonesian Imports of Scientific Instruments (1999–2008) 40 215
Graph 7.9: Trade Partners’ GDP and EU Export Volume 41 237
Graph 7.10: Trade Partners’ Population and EU Export Volume 42 238
Graph 7.11: Distances and EU Export Volume 43 239
List of Annexes
Page
Annex 2.1: Profiles of Most Active Regional Blocs 1 283

Annex 2.2: Bilateral and Intra-Regional Trade Agreements Involving EU 2 284
Annex 2.3: Bilateral and Intra-Regional Agreements Involving Indonesia 3 285
Annex 3.1: The List of Products at Two Digits Level of SITC Rev. 3 4 286
Annex 3.2: Cover Letter Used for Primary Data Collection 5 287
Annex 3.3: Questionnaire Set Used in Primary Data Collection 6 288
Annex 3.4: The List of Visited Trade Fair in Indonesia and Germany 7 289
Annex 4.1: Indonesian Trade Flows with the World (1989-2008) 8 290
Annex 4.2: Indonesian and EU Bilateral Exports Development (1989-2008) 9 291
Annex 4.3: Developments of EU Exports and Imports (1989-2008) 10 292
Annex 4.4: Indonesian Trade Structure with the World (2007) 11 293
Annex 4.5: EU Trade Structure with the World (2007) 12 294
Annex 4.6: Structure of Indonesian and EU Bilateral Exports (2007) 13 295
Annex 4.7: Indonesian Exports to EU Members in 2007 14 296
Annex 4.8: Exports of EU Members to Indonesia in 2007 15 297
Annex 4.9: Top Ten Suppliers of Fuels to EU in 2007 16 298
Annex 4.10: Trends of Indonesian Most Exported Products to EU (1999-2007) 17 299
Annex 4.11: Trends of EU Most Exported Products to Indonesia (1999-2007) 18 300
Annex 5.1: RCA Index of Indonesian Exports to the World (1999-2008) 19 301
Annex 5.2: RCA Index of Indonesian Exports to EU (1999-2008) 20 303
Annex 5.3: RCA Index of EU Exports to the World (1999-2008) 21 305
Annex 5.4: RCA Index of EU Exports to Indonesia (1999-2008) 22 307
Annex 5.5: Trade Indicators Used in Selection of Cases for Indonesia 23 309
Annex 5.6: Trade Indicators Used in Selection of Cases for EU 24 311
Annex 5.7: List of Sub-Products under Selected Cases for Indonesia 25 313
Annex 5.8: List of Sub-Products under Selected Cases for EU 26 314
Annex 6.1: Indonesian and Malaysian Palm Oil Exports Pattern 27 317
Annex 6.2: EU Consumption of Fixed Vegetable Oil and Fats (in 1000 tones) 28 318
Annex 6.3: World’s Population Map 29 319
Annex 6.4: Indonesian Progressive Taxes on Exports of Palm Oil 30 320
xx | List of Annexes
Annex 6.5: Import Tariff Imposed by EU to Coal, Coke and Briquettes 31 321
Annex 6.6: Import Tariff Imposed by EU to Vegetable Oils 32 322
Annex 6.7: Import Tariff Imposed by EU to Wood Products 33 323
Annex 7.1: World Exports of Pharmaceuticals Products to Indonesia 34 324
Annex 7.2: World Exports of Industry Special Machinery to Indonesia 35 325
Annex 7.3: World Exports of Optical Instruments to Indonesia 36 326
Annex 7.4: Import Tariff Imposed by Indonesia to Pharmaceutical Products 37 327
Annex 7.5: Import Tariff Imposed by Indonesia to Special Industry Machinery 38 328
Annex 7.6: Import Tariff Imposed by Indonesia to Scientific Instruments 39 331
Annex 7.7: EU Complaints Listed in WTO’s Disputes Settlement (1999-2008) 40 333
Annex 8.1: World Tariff Profiles (Selected Countries and Years) 41 335
Annex 8.2: Statistics Discrepancy in Import of Civil Engineering Equipment 42 336
List of Abbreviations
AANZFTA ASEAN-Australia-New Zealand Free Trade Agreement

AEC Asian Economic Community
AFTA ASEAN Free Trade Area
AIFTA ASEAN-India Free Trade Agreement
ASEAN Association of South East Asian Nations
BCG Boston Consulting Group
BBC British Broadcasting Company
BOFIT Bank of Finland's Institute for Economies in Transition
BSE Bovine Spongiform Encephalopathy
BULOG Badan Urusan Logistik (Indonesian National Logistic Agency)
CACM Central American Common Market
CAFTA China-ASEAN Free Trade Agreement
CBI Centre for the Promotion of Imports from Developing Countries
CBU Completely Built Units
CCoW Coal Contract of Work
CEPII French Research Center in International Economics
CKD Completely Knocked Down
CIA Central Intelligence Unit
COMTRADE Commodity Trade Statistics Database
DAAD Deutsche Akademische Austauschdienst
DG Trade Directorate General for Trade
EAEC East Asian Economic Community
EAFTA East Asia Free Trade Agreement
EC European Commission
ECOWAS The Economic Community of West African States
EFPIA European Federation of Pharmaceutical Industry Association
EFSA European Food Safety Authority
EIA Energy Information Administration
ETSG European Trade Study Group
EU European Union
Eurostat European Statistic Agency
xxii | List of Abbreviations
FoE Friend of Earth

FoB Free on Board
FTA Free Trade Area
GATS General Agreement on Tariffs and Trade for Services
GATT General Agreement on Tariffs and Trade
GDP Gross Domestic Product
GMP Good Manufacturing Practice
GOI Government of Indonesia
HOS Heckscher-Ohlin-Samuelson
IMS Indonesian Medical Service
IDB Integrated Data Base
IEA International Energy Agency
IPR Intellectual Property Right
IPTN Industri Pesawat Terbang Nasional/National Aerospace Industry
ITC International Trade Centre
HACCP Hazard Analysis Critical Control Point
HS Harmonised System
IMF International Monetary Fund
ISS Integrated Social Sciences
Lembaga Penelitian, Pendidikan dan Penerangan Ekonomi dan Sosial/
LP3ES
Institute for Social Economic Research Education and Information
MEMRI The Ministry of Energy and Mineral Resources of Indonesia
MPOC Malaysian Palm Oil Council
NAFED National Agency for Export Development
NPIK Nomor Pengenal Impor Khusus (Special Import Identification Number)
RCA Revealed Comparative Advantage
OECD Organization for Economic Cooperation and Development
OTC Over the Counter
PTDI PT. Dirgantara Indonesia (Dirgantara Indonesia, Ltd.)
RCA Revealed Comparative Advantage
SCA Sustainable Competitive Advantage
SHSS School of Humanities and Social Science
SIPPO Swiss Import Promotion Programme
SITC The Standard International Trade Classification
SOE State Owned Enterprise
List of Abbreviations | xxiii
TBT Technical Barriers to Trade

TTBD Temporary Trade Barriers Database
TRIPS Trade Related Aspects of Intellectual Property Rights
UNCTAD United Nation Conference for Trade and Development
UNSD United Nation Statistic Division
VAT Value Added Tax
WEF World Economic Forum
WTO World Trade Organization
WWF World Wide Fund for Nature
Chapter I Introduction
1.1 Problem Statement
Tracing current trade relations between Indonesia and the European Union (EU) takes us
back to the 14th century, when the Portuguese and Spaniards began to open up the spice
trade in Southeast Asia (Reid 1993), which marks the long-lasting trade interdependency.
The current value of the trade volume of goods between Indonesia and EU has been
growing in a cyclical and bumpy form in the last two decades. Annually, Indonesia has
been experiencing an average trade surplus in the amount of USD 4.13 billion against EU.
As a matter of fact, the EU is the world’s largest single market, owning about 38% of total
world trade volume in 2007. EU is now becoming one of the most important export
market partners for Indonesia besides Japan and the US.1
Despite a steady performance of the overall trade statistics, both tariff and nontariff
trade barriers still exist. According to Soesastro and Basri (2005), 73% of Indonesian
exports to Japan enter duty free, but only one-third of its exports to the EU and the US
face zero tariffs. For this reason, we believe that Indonesia has been studying the
possibility of creating a free trade agreement with the EU and the US.2 Similarly,
complaints from the EU side have also been reported. The EU automotive industry has
registered complaints on the increase of Indonesian tax on motor vehicles, which entered
into force on September 1, 2001. Prior to that date, the tax level ranged 20%–50%,
whereas current applied tax rates range 10%–75%. This luxury tax is charged in addition
to import duties of 25%–50% for CKD (completely knocked down) vehicles and 45%–
1
EU is second largest market for Indonesian exports sharing 11.34% of Indonesian total exports to the world
in 2008.
2
Two feasibility studies towards Indonesia-US Free Trade Agreement have been written by Soesastro
(2004)) and by Peterson Institute (2007).
2 | Indonesia-EU Trade Relations
80% import duties for CBU (completely built units) vehicles plus 10% value-added tax
(VAT).
Nontariff barriers have also been an important issue in describing trade relations
between these two political entities. Many Indonesian commodity products like
aquaculture and fishery could not enter the EU market because of hazardous material
content exceeding the EU-required dosage. It simply shows the existing gap between the
entry requirements in force with the ability of developing countries like Indonesia to meet
the requirements for particular worth investigating reasons.
However, the above-mentioned barriers (cases) have not yet been scientifically
investigated as the influential factors explaining trade flows between Indonesia and the
EU. There are indeed limited discussions on trade incentives and barriers of trade relations
between Indonesia and the EU found in literatures. Most of the literatures, however, come
from officials of either the European Community (now EU) or the government of
Indonesia (GOI) reports (European Commission 2000a, 2000b; European Community
2001, 2006; Indonesian Mission for EU 2005). The trade incentives and barriers to trade
themselves have been rarely and broadly discussed. If any, it relies mostly on secondary
data sources, such as tariff rates, standards, and regulations. Furthermore, the question of
why one country has traded more with this country than another country remains less
investigated. As suggested by Crowell and Moring (2006) in their final project report to
EC, the new tools to better address market access issues are needed. This study is intended
to introduce the combination of both primary and secondary data analysis in addressing
trade incentives and barriers. This case study research is focused on identifying those trade
incentives and barriers using systematic methods. For selecting six product sector–based
cases, this study has used the results of an analysis of the patterns, specializations, and
Introduction | 3
performance of Indonesian and EU exports. This has been made possible with the help of
Balassa Index of Revealed Comparative Advantage (RCA) and the Boston Consulting
Group (BCG) matrix. Independent variables explaining the trade incentives and barriers
have been thoroughly investigated using five different methods of analysis (see Chapter
III).
The identification of the most influential trade incentives and barriers (independent
variables) that have respectively encouraged and restricted the trade flows (dependent
variables) between two political entities will be carried out through dissemination of
questionnaires. A gap analysis, complaints-inventory database, and a gravity model will be
used as well to compare the results. Since the stressing points of the policy
recommendation as the outcome of this study should redirect trade, purchasing, and
supplying policies toward long-lasting (sustainable) trade relations and increasing welfare,
the results of this study are expected to be very useful and interesting for stakeholders
within the supply chain in Indonesia as well as in the EU, including academics, policy
makers, companies, consumers, and civil society. The outcome can also be used as
reference for a feasibility study of a free trade agreement between Indonesia and the EU
sooner or later.
1.2 Research Questions
Based on the above background, this study should further be able to answer the main
research question on what form of trade policies should be formulated by Indonesia as one
of the Association of Southeast Asia Nations (ASEAN) member countries and the EU as a
single market in order to benefit more from their trade relation through the identification
of trade incentives and existing trade barriers that have encouraged and restricted trade
flows, respectively. This question could only be elaborated by answering the following
questions:
1. What do the trade patterns between Indonesia and the EU look like?
2. What can the Balassa Index of RCA and BCG growth matrix analysis tell us
about the current Indonesia-EU trade relation?
3. What are trade incentives of bilateral trade flows between Indonesia and the EU?
4. What barriers do Indonesian and EU suppliers face in accessing and entering each
partner market in general and in the selected cases?
5. What trade policy and future trade cooperation should be formulated by Indonesia
and the EU in order to gain more from trade?
1.3 Outline of Case Study
Before conducting the research, the author has determined the outline of study in order to
pinpoint key issues covered in accordance with the research questions. The outline of this
study consists of the detailed explanation of tasks and logical sequences of planned
research. This scope has been used as the basic document for controlling and evaluation
purposes. Hence, the scope of works of this study has covered the following issues:
a. International trade theory
Classical, neoclassical, and new theories of international trade are explained briefly as the
basis for research findings and trade policy consideration.
b. Study on international trade negotiations
A general study on world trade agreements such as agreements that have been concluded
in the context of a multilateral trading system like the General Agreement on Tariffs and
Introduction | 5
Trade / World Trade Organization (GATT/WTO), existing regional trade blocs, and
Indonesia-EU bilateral trade relations have been investigated. The outcomes of this study
have made it possible to discover the better path and form of future trade agreements
between Indonesia as a member of ASEAN and the EU. These efforts of study have been
based on the premise that a good bilateral and trans-regional trade agreement should create
trade and not contradict with multilateral trade agreement.
c. Trade patterns between Indonesia and the EU
The series of trade statistics from 1999 to the most updated year has been used to describe
the trade patterns between Indonesia and the EU. It consists of trade value, structure, and
partners’ composition. Basically, there are three important purposes in studying the
Indonesian and EU trade pattern. First, the trade volume including export, import, and
balance of trade can show us the current level of trade relations between Indonesia and the
EU. Export value, in particular, has been used as a dependent variable that will be
explained by trade incentives and barriers (independent variable). Second, the comparison
of the trade structure between Indonesia and EU has been used to see the interdependency
potential of two political entities, which is used as an argument to set priorities in the trade
policy formulation for promoting closer and more intense trade cooperation between
Indonesia and the EU. And third, trade partners’ composition will tell us about trade
intensity, creation, and diversion based on nationality and the development stage (South
and North).
d. Calculation and analysis of RCA index of the EU and Indonesian exports
In order to see the interdependency and ranking of most Indonesian and EU potential
products exported to each other, the Balassa Index of RCA has been calculated. The raw
data has been taken from UNSD COMTRADE and Eurostat to ensure the reliability of
statistical data used.
e. BCG matrix application to export performances of Indonesia and the EU
The correlation between the latest export performances with the market growth of
Indonesia and the EU in either direction has been investigated to map the position of
selected sectors (cases) on the BCG matrix.
f. Selection of cases
The combination of the RCA index ranking and products’ position on the BCG matrix
derived from trade flows (dependent variables) have been used to select six sectors-based
cases. The selected sectors are the embedded unit of cases within the main case study of
trade relation between Indonesia and the EU as one of good case of trade relations
between South and North in a larger scope.
g. Incentives and barriers of bilateral trade flows between Indonesia and the EU
Significant trade incentives and barriers that encourage and restrict the trade flows
between Indonesia and the EU in either direction have been identified using primary data
analysis, secondary data analysis, gap analysis, complaints-inventory analysis, and gravity
model application.
h. Recommendation of trade policy improvements and solutions for identified problems
The formulation of trade policy improvements and solutions for identified existing barriers
have been carried out based on results of the primary and secondary data analyses. The
stress of the policy recommendations should redirect trade, purchasing, and supplying
policies toward long-lasting (sustainable) trade relations as much as increasing welfare in
both political entities. The policy recommendations have been in the form of (1) the
Introduction | 7
improvement of knowledge on standards, market value, performance, life cycle
perspective, financial tools, and marketing to bridge the gap through technical assistance
by EU; (2) elimination of existing barriers to trade; and (3) the feasibility of an effective
bilateral trade agreement between Indonesia (ASEAN) and the EU. The key issues
resulting from this study, especially issues that come up from the primary data analysis,
that should be included in a form of future bilateral trade between Indonesia (ASEAN) and
the EU have been recommended.
1.4 Limitation of Case Study
Methodologically, this study has been divided into two phases as descriptive and
explanatory. This case study has focused on Indonesian and EU-27 trade flows of
merchandising goods. It includes all merchandising goods in the descriptive part and
selected product sectors (cases) in the explanatory part of the dissertation. Studies on
services are excluded here. For the analyses of the first and second methods in the
explanatory part of this study, three selected sectors for each political entity have been
selected and investigated. As for the other three methods of analysis applied in the
explanatory part, all product sectors have been included. Because of the limited
consolidated trade data at the beginning, this study has used data in either direction more
intensively from 1999 to 2006. However, an extended data series for 2007 and 2008 was
used at a later stage as soon as consolidated trade data became publicly available. This
extended data series has been used particularly in investigating changes in Indonesia and
EU trade patterns and specialization.

Chapter II Theoretical Framework
2.1 The Importance of International Trade
Revenue generated from international trade helps countries strengthen their economic
growth while reducing poverty. The welfare creation of doing trade has been proven by
many economists, while trade liberalization is an important step to benefit more from
trade (e.g., Bhagwati 2000; Krugman 2006; Obstfeld 2000; Frankel 2001; Hertel et al.
2004). It will be more efficient for countries to engage in international trade rather than
producing everything they want domestically. Nobody would suggest for instance that
Germany should grow its own cocoa plantation as raw material for chocolate. As another
example, Indonesia has stopped running the import-substitution policy, realizing its
inefficiency and ineffectiveness.3 The main important principle is that when countries sell
goods and services to one another, it is almost always done for their mutual benefits
(Krugman 2006).
Table 2.1: Index of Openness of Selected Countries

GDP* Export Population Index of Openness**
Countries (USD Million) (USD Million) (in Millions)
2008 2008 2008 2002 2004 2006 2008
EU 18,387,505 1,928,554 496,042 8.98 9.01 9.95 10.49

Indonesia 511,489 137,020 228,575 29.22 27.85 27.67 26.79
Japan 4,886,963 781,412 127,692 10.64 12.28 14.82 15.99
Malaysia 221,603 198,846 27,297 93.27 101.52 102.30 89.73
Singapore 188,261 338,176 4,668 141.67 181.16 193.40 179.63
Thailand 272,429 175,908 66,320 53.68 59.66 63.01 64.57
USA 14,441,425 1,299,899 304,718 6.51 6.89 7.74 9
Notes:
* = Gross domestic product at current price
** = Index of openness is the contribution of one country’s export to its GDP (in percentage)
Source: Authors’ calculation, export data from UNSD COMTRADE (2010), GDP and population
from IMF (2010)
3
In contrary to export promotion, import substitution is a strategy for economic development that replaces
imports with domestic production. It may be motivated by the infant industry argument, or simply by the
desire to mimic the industrial structure of advanced countries.
Table 2.1 presents the list of index of openness of selected political entities using
the common formula applied by most economists. Here, trades in services are excluded.
The index of openness of a political entity can be measured by comparing its annual
export value to its gross domestic product (GDP). The bigger the index value, the more
important the international trade for one country is. The index of openness also indicates
the dependency of countries’ economies to international trade.
In Table 2.1, it is evident that the importance of international trade for each
country differs considerably, which is in similar trends with the study by Husted and
Melvin (2004). It is obvious that developing countries depend more on international trade
compared with developed countries except Singapore. Singapore is a unique example of a
developed country that depends very much on foreign trade as shown by the impressive
index level. Its weaknesses in production factors like raw materials and labor have forced
this country to be an open-trading country, where outsourcing is a key success factor. The
strategic location in the heart of international trade traffic, English as the working
language and excellent infrastructure are among Singapore’s good assets for the open
market strategy.
Realizing that each country has its own strengths and weaknesses in production
factors, it should specialize naturally based on its possessed strengths in order to benefit
from the economics of scale.4 Therefore, it should know its measurable strengths and
weaknesses. This theory might have been used by developed countries in giving advice to
Indonesia that GOI should have reformed its national aerospace industry, PT. Dirgantara
Indonesia (PTDI), previously named Industri Pesawat Terbang Nasional (IPTN)5 a long
4
This is revealed in this study (see chapter on trade structure).
5
The history of this industry can be found in an official website at http://www.indonesian-
aerospace.com/history.
Theoretical Framework | 11
time ago. This advice is reasonable in the short term as it is financially not more efficient
and secure than importing the already highly standardized aircrafts from Europe and US.6
Despite huge investments in engineering and production facilities as well as various
technology achievements to its credit, the company has had limited commercial success
(Eriksson 2003).
Countries have trade relations for the benefit of all stakeholders in the market.
Therefore, trade barriers should be avoided. Gains from trade can basically be divided
into consumption gains and production gains that both will automatically generate
government gains (see Graph 2.1).7 Gilpin (1987) has explained that trade expansion has
produced many benefits related to the following:8
1. Technology diffusion that contributes to the economic welfare of all people
2. A demand or Keynesian effect on the economy that through the operation of the
“multiplier,” it stimulates economic growth and the overall efficiency of the economy
3. Benefits for individual firms as trade increases the size of the market, promotes
economies of scale, and increases the return on investment while also stimulating the
level of economic activity as a whole
4. Increased range of consumer choice
5. Reduction of the cost of inputs such as raw materials and manufactured components,
which then lowers the overall cost of production. Export-led growth has itself become
a major strategy used to acquire needed imports and promote economic growth.
6
Government of Indonesia (GOI) has renewed the license to National Airplane Industry on September
2007, although it has suffered from big loses and high debt. Concentrating as spare part supplier to Boeing
and Airbus in its latest development, IPTN (now PT. DI) has resumed as licensed production base.
7
The more people consume and produce the products due to market efficiency, price reduction and
extension of alternative products available in domestic market, the more gains the government can get.
8
Benefits (2) and (4) are consumption gains, while benefits (1), (3) and (5) related to production gains.
Graph 2.1 shows us clearly the shift of gains from trade both in the condition of
trade with tariff and without tariff (free trade). The answer of who will get more benefits
in a free trade condition is clearly the consumers (area P-p2-d) that belong to the largest
population of stakeholders in the market. Government surplus (b-c-f-e) and welfare
losses (b-a-e and c-d-f) will be reduced (in the case of tariff reduction) and transferred to
consumers’ surplus if the country agrees to eliminate tariffs. Government, in turn, will
get new surplus from other sources, which has been not fully shown in above graph. The
reduction of government surplus in the form of income from export-import tariffs will be
compensated by another surplus in the form of economic growth indicating welfare, low
inflation rate (price stability), and, of course, tax revenue from increasing income
(income tax) as well as consumption tax (VAT).
Graph 2.1: Gains from International Trade 1

P Domestic Demand
Consumers’ D Consumers‘ Domestic Supply
Surplus (a.t.) Surplus (b.t.)
S
Equilibrium without trade
yy o Government
p0 Surplus (a.t.)
y
b c
p1 Price after tariff
xx a f G e d
Tariffs
p2 World Price (Free Trade)
Producers’ e f
Surplus (a.t.) x Import after tariffs Welfare
Losses (a.t.)
Producers’ 0 q1 q3 q0 q4 q2 Q
Surplus (b.t.) Import without tariffs
Notes:
a.t. = after tariff, b.t. = before tariff, Q = quantity, P = price
Source: Authors’ illustration
In the condition of free trade, the domestic and imported products’ prices will be
lower due to the increasing level of domestic competition in terms of quantity of supply,
product quality, choices, and price. Therefore, part of the surplus previously enjoyed by
domestic producers should theoretically have been shifted to domestic consumers as
much as p1-b-a-p2, assuming that foreign producers’ and importers’ profit margins
remain constant. What most developing countries are afraid of is the destruction of
domestic producers that are mainly less competitive and not well prepared. However, free
trade could transfer the wind of change to domestic producers to be more creative,
innovative, and efficient in producing more competitive products. This can be seen from
the success of Indonesian domestic fast-food franchises inspired from imported
franchises. Clearly, free trade can bring new business ideas to a host country while
boosting entrepreneurship. However, free trade agreements that are selective to only
certain trade partners sometimes create trade diversion rather trade creation as the
genuine goal of free trade policy.
2.2 International Trade Theories
The literature study on international trade theories is useful for this research to get some
ideas and inspiration on how various determining factors have been considered. In fact,
those important factors mentioned in trade theories—technology, endowment factors,
supply-demand, barriers to entry, distance, competition, intellectual property right,
among others—have been taken into account in various strands in the analysis of this
study. The development of international trade theories, which have been influenced by
the dynamic development in society, from a bare subsistent society to an interdependent
world society and from the limited and simple needs to the complicated needs of
society—is eminently fascinating. It started from the classical theory of Adam Smith in
The Wealth of Nations (1776) and Ricardo’s comparative advantage (1871 [1817]) to the
Heckscher-Ohlin neoclassical theory of Pareto optimality up to the new trade theories of
the present day.
2.2.1 Classical Theories
Tracing back the development of free trade theories takes us back to the year of 1776,
when Adam Smith published his book. Adam Smith (Wealth of Nations 1776)
recommends that trade should be free and that nations should be specialized in what they
could do best so that they could become wealthy and powerful (e.g., Leslie 1817).
According to Smith, the division of labor in the nascent large-scale industries of England
provided the base for lowering labor cost, ensuring effective competition across countries
(Sen 2005:1012). The advantages of a territorial division of labor based on absolute
advantage9 are the foundation of Smith’s theory of trade (Ellsworth 1964). If one
country’s trade practices only based on the absolute advantage theory, it will only import
shoes from a country that can deliver the cheapest price for having absolute advantages in
shoe production.
Let’s put aside other factors like mobility, technology transfer, and foreign direct
investment, which might not have been considered so much in 1776. Then how did other
countries without any absolute advantages in any goods traded benefit from free trade?
Will it not create a deeper gap between the rich and the poor countries and boost the
monopoly of countries that have absolute advantage in the production of many goods?
The neoclassical economists might have considered those questions to come up with
neoclassical trade theories. Despite many critics, Adam Smith’s classic Wealth of Nations
9
Exporters with a given amount of resources are able to produce a greater output at less cost than any other
competitors.
deserves respect from the academic world, for his published theories have opened debates
that cherish new ideas in the next generation of trade theory development.
2.2.2 Neoclassical Theories
Building on Smith’s pioneering ideas, Ricardo (1817) established the theory of
comparative advantages as the fundamental rationale of free trade. He demonstrated that
the flow of trade between countries is determined by the relative (not absolute) cost of the
goods produced.10 The international division of labor is based on comparative costs, and
countries will tend to specialize in those commodities whose costs are comparatively the
lowest, while leaving other commodities to be produced by other countries so that gains
from trade exchange are possible (Ricardo 1871 [1817]).11 This theory has been criticized
mostly because of Ricardo’s static assumptions ignoring other relevant factors such as
transportation cost, role of demand, and the mobility of production factors (see, for
example, Sen 2005:1036).
The next neoclassical theory known as Heckscher-Ohlin-Samuelson (HOS,
1980s) has added some missing assumptions to the Ricardian theory, such as cost of
transportation and the mobility factors of production, and stressed the importance of
increasing returns to scale12 as an explanation of trade as well as the dynamic nature of
comparative advantage. Factors other than labor productivity have been added to the
theory, leading to a concept of relative-factors endowment as an explanation of trade
flows. At the same time, it laid a basis for free trade as Pareto optimal rather than on
grounds of comparative labor cost only. However, the failure of the supply-oriented HOS
10
Industrial revolution and the growth of industry are believed to have changed the situation.
11
Paul Samuelson has called Ricardo’s theory as “the most beautiful idea in Economics” although it
omitted the cost of transportation and assumes that the factors of production are mobile domestically. This
model is static based on two country model with close distance.
12
If we double the inputs of a production factor, the output should increase more than double.
theory to address the trade realities that demand for a country to have a certain level of
income per capita also plays an important role in the creation of trade exchange between
nations. This has been explained well by the Swedish economist Staffan Linder (known
as Linder hypothesis) as cited by Sen (2005:1015).
The central ideas of a neoclassical economics marginal utility13 theory and general
equilibrium theory were added to explain the missing terms of trade. The theory
maintains that a nation’s comparative advantage is determined by the relative abundance
and most profitable combination of its several factors of production, such as capital,
labor, resources, management, and technology. More specifically, a country will export
and import those products that are intensive in the use of its abundant and scarce factors,
respectively (El-Agraa 1983). This theory is becoming the most relevant in explaining the
exchange of manufactures for commodity in the case of North–South trade but is less
useful in explaining trade relations between industrialized countries (Gilpin 1987:175). It
is unfortunately less useful tool in explaining the up-to-date case of Southern countries’
increasing trends of manufactured export, including automotive.14 It has been obvious
that endowment factors and technology divergence do not always reveal themselves as
trade incentives explaining the trade pattern between the South and the North. In fact,
there are other factors that are worth investigating, such as industrial development,
foreign direct investment, and economic growth in less-developed countries. 15
13
The marginal utility of one product is the additional utility from one additional unit of that product.
14
Indonesia and Thailand current combined car production is approaching two million units a year
satisfying both domestic as well as export market to other developing countries.
15
Industrial development in Japan, Korea, China and India are a good example in this case (see “Japan late
development” in Lairson and Skidmore, 2003, p. 55).
2.2.3 New Trade Theory
Contributions delivered by Krugman (1979) and Deardorff (1984) caused the birth of the
new trade theory. In this new trade theory, the cross-border movement of a multinational
corporation becomes the central point of discussion instead of the political border. They
agree on the dynamic nature of comparative advantage as explained previously by Ohlin
and Samuelson. They emphasize on technology leading to economies of scale. The
theory of technology gap and product life cycle was introduced. According to Krugman,
the essence of a trade theory is the study of international industrial organizations. He
mentioned that the core of a trade theory is the increasing importance of foreign
investment of oligopoly corporations that can take advantage of increasing returns
(economics of scale), learning by doing, and barriers to entry against their rivals
(strategic trade policy).16 To a certain degree, this theory challenges the traditional
comparative advantage theory proposed by Ricardo.
Another new trade theory has used sustainable competitive advantage (SCA)
factors as dependent variable. This theory is also well known as resource-based theory.
Two of contemporary examinations of SCA concept have been carried out by Hoffman
(2000) from strategic marketing field and Barney and Clark (2007) from strategic
management field. According to Hoffmann examination, the theory of a sustainable
competitive advantage (SCA) was first introduced by Day (1984), while Barney and
Clark believe that it was Wernerfelt (1984). However, they agree that the term of SCA
was first used by Porter (1985). Hoffmann finds it interesting that there is no formal
conceptual definition presented by Porter in his discussion. She finally concludes that it
was Barney (1991) that has come to the formal definition of SCA, as quoted as follows:
16
While the Ricardo and H-O-S theories deal with inter-industry trade, this new theory deals with inter-
firm trade regardless the location where export trade and foreign direct investment are considered.
"A firm is said to have a sustained competitive advantage when it is implementing a

value creating strategy not simultaneously being implemented by any current or
potential competitors and when these other firms are unable to duplicate the benefits
of this strategy (italics in original)" (p. 102).
It is interesting to know what factors could contribute to creation of SCA. As
elaborated by Hoffmann (2000), Day and Wensley (1988) focused on two categorical
sources involved in creating a competitive advantage—namely, superior skills and
superior resources. Prahalad and Hamel (1990) suggested that firms combine their
resources and skills into core competencies to succeed in establishing an SCA in unique
and enduring ways. By combining resources in this manner, firms can focus on
collectively learning how to coordinate all employees’ efforts in order to facilitate growth
of specific core competencies with low cost and high speed.17 Barney and Clark (2007)
has elaborated that the resources of SCA are corporate culture, trust (in economic
exchanges), human resources and information technology. Barney (1991) believes that
not all firm resources hold the potential of SCAs, only those that possess four attributes:
rareness, value, inability to be imitated, and inability to be substituted.
In a nutshell, the dynamic changes of the world trade pattern as well as the
proliferation of trade theories explaining them has led to the conclusion that no single
trade theory is able to explain and fit all commodities, all political entities, and all times.
Therefore, it needs a specific description and explanation of the fact of trade relations
depending on the countries involved, time, and specifically the goods traded (the context
and case-dependent studies). Therefore, the development of international trade theories
will continue following the dynamics and complexity of the real situation of the
17
According to Prahalad and Hamel, three tests of core competencies are: (1) it provides potential access to
wide variety of markets; (2) it should give a significant contribution to the perceived customer benefits of
the end products and (3) that the core competencies should be difficult to imitate.
international trade transactions. This work is exactly aimed at exploring a case of trade
relations between Indonesia and the EU using the combination of research design and
methods that are relatively rare in the arena of international trade research (see details in
Chapter III). This way, it is expected that any trade incentives and barriers found in this
case study of Indonesia-EU trade relations would be the useful sources in the formulation
of their future trade policy and partnership.
2.3 Trade Pattern
Broadly, trade patterns can be defined as patterns of which goods are exported and which
are imported by each trading country. The trade pattern gives the information about the
international origin and allocation of resources. Describing the trade pattern of political
entities is very useful in identifying the impact of economic events and policies to an
economy. With economic events like a global financial crisis, the dynamics of the price
of commodities could change the trade volume of particular products while the internal
economic policy such as trade liberalization and industrial development could result in
changes in the trade structure of one country. Those factors have been considered as
influential accompanying the development of a bilateral trade pattern in the last two
decades. There are three items that should be described when talking about the trade
pattern; they are trade volume, trade structure, and trade partners’ composition that
exported and imported the goods.
Trade volume indicates the value of export and import one country has made with
its trading partner within a particular time frame using a particular currency, normally the
US dollar (USD). Export value means that the value of goods exported and reported by
one country based on a free on board price (FoB).18 It means that the freight and
insurance cost are excluded. The FoB system of calculation of one country’s trade
volume guarantees that the value is the exact value received by the seller in the origin
countries. On the contrary, import value is the value of goods imported by one country
based on cost, insurance, and freight price (CIF).19 This is the final value paid by the
importing country when the goods enter its border.
Trade structure simply describes the portion of a certain product group being
exported and imported by a country to and from, respectively, its trading partner. In this
case, the structure will be determined based on the product group using Standard
International Trade Classification (SITC) version 3. For this purpose, primary nonfuel
commodities, manufactured goods, fuels, and agricultural raw materials are used as the
main products. They represent, respectively, the calculation of SITC ((0+1+2+4)-68),
(5+6+7+8)-68, 3, and (2-22-27-28).20
The description of changing a country composition’s trade flow for both export
destinations as well as import origin is necessary to identify the shift of trade direction
and the existence of trade diversion. The shift of trade direction can be caused not only
by policy interventions and changes but also trade agreements, existing trade barriers, as
well as trade incentives. Higher import and export tax policies, for instance, are policy
interventions, while bilateral trade agreements and regional integration are ways of
18
FoB value system is the value of goods when they pass the ship's rail at the named port of shipment. This
means that the buyer has to bear all costs and risks of loss of or damage to the goods from that point. The
FOB term requires the seller to clear the goods for export (International Chamber of Commerce, 2000).
19
CIF value system is the value of good when it passes the ship’s rail at the named port of destination. All
cost including insurance and freight are all included (Incoterm, 2000).
20
UNSD’s reference for products and (SITC number) are respectively as follows: food and live animals
(0), beverage and tobacco (1), crude material/fuel (2), mineral fuel/lubricants (3), animal/vegetable
oils/fats/wax (4), chemicals/products NES (5), manufactured goods (6), machinery/transport equipment (7),
miscellaneous manufactured articles (8), non ferrous metals (68), oil seeds/oil fruits (22), crude
fertilizer/mineral (27), metal ores/metal scrap (28).
involving trade agreements. Growing demand and distance are both good examples for
incentives and barriers of trade influencing the shifts in the trade flows of a country. For
this, time series trade flows data is needed.
2.4 Measuring Competitiveness
Taking advice from trade theories, every country should accordingly know its own
competitive advantage in order to get benefits from the significant importance of the
information in the formulation of effective trade policies. As new trade theories have
suggested (see p. 16 of this dissertation), a firm (in our case a country) should pay more
attention to a particular sector that has a strong competitive advantage compared with
others. Afterward, it should find the trade partners offering the big and easy-to-access
market with higher purchasing power. Since the recognition of competitiveness is
important to benefit from international trade, then how is the competitiveness of one
country measured? Buckey (1986) has dealt with this kind of question when he made a
useful distinction between different measures of competitiveness. His points can be
explained as follows:
a. Performance is measured by looking at how well a country or sector of a firm has
done relatively to its rivals. Typical measures are export value (market share),
export growth, and profitability. Revealed comparative advantage (RCA) and
trade performance (portfolio) are specific measures of performance developed and
used primarily by international trade researchers, which is in line with this
measurement of competitiveness.
b. Measures of a competitive potential by looking at the availability or quantity of
inputs that produce superior performance, such as access to cheaper raw materials
or superior technology, lead to price-cost competitiveness and higher productivity
(endowment factors).
c. Measures of a competitive process are often qualitative in nature and seek to
measure the management process or how competitive potential is converted into
competitive performance.
A good example of the qualitative measurement of country competitiveness is a
methodology used by World Economic Forum (WEF) in preparing the annually
published The Global Competitiveness Report (WEF 2007). According to this
methodology, the competitiveness of one country is determined by four groups of factors.
They are basic requirements, efficiency enhancers, innovation, and sophistication factors.
The basic requirements include the condition of existing institution, infrastructure, macro
economy, as well as health and primary education (factors-driven economies). The
efficiency enhancers include higher education and training, market efficiency (goods,
labor, and financial), and technological readiness (efficiency-driven economies). Finally,
the sophistication factors consist of business sophistication and innovation (innovation-
driven economies), which have also been considered as the driving force of a country’s
competitiveness. However, this method has put aside the quantitative economic
performances such as export performances and productivity (outputs). As WEF’s method
focuses on measuring the current situation of qualitative inputs (competitiveness factors)
of countries, it excludes the availability and quantity of raw material for production. The
variations in the competitiveness measurement methods have been studied by Küter
(2009).
In a nutshell, one country can be said as having a competitive advantage only if it
has the ability to produce and deliver the good-quality products both domestically as well
as internationally at a competitive and reasonable price, with a good and fair management
process (by avoiding the breach of any agreed international trade regulations, including
those harming international competition law).21
2.5 Trade Flows’ Incentives and Barriers
Identifying incentives and barriers to trade is aimed at fostering the flow of goods traded
(trade creation) between two political entities. Basically, in order to optimize gains from
international trade, trade incentives should be promoted, while barriers to trade should be
avoided or eliminated through effective trade policies and agreements. If we look at the
nature of trade incentives, there are basically two types of them: they are regulatory
(man-made) and non-regulatory (endowment) trade incentives. This distinction works as
well in the case of barriers to trade. Both regulatory and non-regulatory trade incentives
and barriers can be managed through policies and agreements. However, given factors
(non-regulatory) such as distance and climate change are more difficult, time-consuming,
and costly to deal with. Distance as a barrier, for instance, can only be solved through
foreign direct investment, leaving unemployment at home and sending a large amount of
capital abroad. Other alternatives of the solution such as research and development in
transportation medium focusing on speed, safety, and efficiency in shipment should
remain a priority, although it would take time and a huge amount of investment.
2.5.1 Incentives to Trade
The incentives to trade influence trade flows between two political entities in a positive
way, hence they should be included in trade policy and agreement. It can be done by
21
Strategic trade policy has been widely implementing by many countries where governments issue trade
policy benefiting their domestic firms by protecting domestic market and giving subsidies. This type of
trade policy might have been responsible for the failure of Doha Round (see part 2.6, p. 25).
ensuring that the identified trade incentives are being promoted and free from any
restrictions. As a hypothesis, it is believed that some of these trade incentives might be
case dependent, which might not be applicable to other cases (such as product section,
countries involved, etc.).
According to the gravity model (Head 2003), the trade incentives augmenting trade
flows between political entities are income per capita (purchasing power), adjacency
(proximity), common language, colonial links, and border effects. Other authors (e.g.,
Srivastava & Green 1986) have identified distance, sectors (a product category), political
instability, culture including language, colonial past, membership in an international
economic organization, purchasing power, and market demand as possible incentives to
trade. In this case of Indonesia-EU trade relations, most of the trade incentives derived
from these two references have been considered in developing questionnaires for the
purpose of collecting the primary data.
2.5.2 Barriers to Trade
Markusens and Wigle (1990) argue that in order to increase the trade flow between the
South and the North, existing trade barriers must be identified and eliminated.22
However, before explaining this argument in more detail, it is necessary to first know the
definition of “trade barriers” itself. Deardorff (2008) defines trade barriers as follows:
An artificial disincentive to export and/or import (trade flows) such as tariffs, quotas or
other non tariff barriers.
Each trade authority and trade-related organization and agreement may have its
own definition on trade barriers. In order to avoid any confusion on the definition and for
22
This work will contribute to find out the existing barriers between Indonesia and EU in their
contemporary trade relations. The elimination of trade barriers can be done through free trade agreements,
economic partnership agreement and other format of policy intervention to free trade.
practical reasons, trade barriers have been defined for the purpose of this study as all
regulatory and non-regulatory factors restricting trade flows between two political
entities. Technically, there are two types of trade barriers, namely, tariffs and nontariff
barriers. Furthermore, tariff barriers can be divided based on the way they are calculated
(ad valorem, specific, compound duties), the way government decides it (autonomous
and conventional tariffs), imposition methods (single-, double-, and triple-column tariffs),
and kinds of taxes (taxes, duties, excise etc.). Nontariff barriers rose to prominence in the
1970s when the liberalization of tariffs was in practice. The prohibitions of import, quota,
subsidies, technical barriers, safeguard, and complicated administrative procedures are
regulated under Article XX of GATT.23
There are some motives of implementing barriers to trade. These are, among other
things, protecting domestic infant industries, reducing trade balance deficit, creating jobs
through foreign direct investment (Lee 2005),24 generating fiscal revenue, avoiding
dumping, political motives (e.g., embargo), and counterattacking (reciprocal approach)
(Tambunan 2004).25
In order to find out the incentives and barriers to trade flows between two political
entities, some methods are available. The first option is to ask short listed questions
directly to market actors (exporters) involved actively in export activities. The second
option is to do supply and demand side analysis using secondary data. The third option is
23
Quota is no longer allowed in textiles and clothing following the expiry of ten years transition period of
the Agreement on Textiles and Clothing (ATC) on 1rst of January 2005 while export subsidies have been
prohibited under Agriculture Agreement of WTO. In this study all possible trade barriers have basically
been covered since respondents have been given the chance to write down other factors that are not in the
list of questionnaire.
24
For example, the US trade restrictions on automobile imports in the early 1980 have encouraged
Japanese automakers to establish plants in that country. Some developing countries including Indonesia are
currently implementing this policy to tackle poverty and unemployment.
25
Food safety, animal health, plant protection, protect humans from animal/plant pest or disease, protect
territory from other damage from pests are motives considered as non barriers to trade and therefore to be
allowed by WTO.
the gap analysis of existing government measures and policies, including standards and
regulations in one sector’s target market with the ability of domestic exporters/producers
to comply. The fourth option is to look at the complaints inventory notified by market
access authority of political entities.26 The last option is to use the gravity model in
analyzing the possible impact of selected trade determinants to trade flows between two
political entities. Realizing the limitation of each method, this study intends to use all of
the above available options to come up with a more robust conclusion. The possibility of
using the combined option of methods to develop a new composite index of bilateral
trade incentives and barriers as an alternative to the available index is widely opened.
2.6 Trade between the South and the North
By definition, South-North terminology is not aimed at a geographical division, but
rather a socioeconomic and political one.27 In fact, some developing countries are located
in the Northern Hemisphere. Similarly, some developed countries are located in the
southern part of the globe. According to the socioeconomic definition, the South is
characterized by the poor, low and unequal wages and incomes, inefficiency, lower
productivity, and underdeveloped socioeconomic conditions (e.g. Nafziger 2006). In
contrast, the North is characterized by the wealthy, high and equal wages and incomes,
efficiency, high productivity, and well-developed socioeconomic conditions. In terms of
the political divide, most Northern countries are members of the OECD, while Southern
countries are non-OECD members.
26
In the case of EU as political entity, these complaints inventories are available in Directorate General of
Trade section 2 (DG 2). In Indonesia, the claim inventory reports will be kept by National Agency for
Export Development (NAFED)
27
Southern countries, also recognized as the third world, are those in developing stage of economic
development. They include Asian, Latin American, Eastern European and the former USSR, and African
countries. The North, also recognized as the first world including Western Europe, the US, Japan, Canada,
Australia and New Zealand. They are associated with more developed and wealthy political entities.
Trade relations between the South and the North have a unique form of
interdependencies. Most of the Southern countries have a comparative advantage in
natural resources and labor-intensive products, while Northern countries have more
strength in high technology, capital intensive- and innovative-based products. The
difference in comparative advantage might have shaped the structure of South-North
bilateral trade relations accordingly. As suggested by classical and neoclassical trade
theories (see pages 13 and 14), these differences in endowment factors should have
resulted in the interdependency and closer trade relation between them if they agree to
free trade. This has not always been the case,28 although the positive impacts of free trade
in most studies have been concerted.29 As cited by Head (2003:10), the study by Frankel
and Rose (in National Bureau of Economic Research Working Paper 7857) has found
that free trade agreements (FTAs) have tripled in volume of trade between partners.
In terms of trade volume, the level between the South and the North has been much
lower than it has been between the North and the North. This contradicts the conventional
endowment factors theory. The economic size like GDP has been considered as one of
the main causes.30 Other factors, like the market access problem, should also be
considered as some of the determining factors. In a nutshell, more case studies in trade
relations between the South and the North are demanded in order to give a robust
explanation for that. This study in particular could contribute, more or less, to this
endeavor as one of the case studies of trade relations between the South and the North.
28
Both developed and developing countries have always been involved in the war of tariffs and lately non
tariff barriers protecting access to each market. The conclusion made by Deardorff (2001) is that the
attempts done by the developing countries to escape from poverty will stimulate protection in the
developed countries.
29
Although effects vary tremendously from one FTA to others, on average they raise trade between
partners by around 50% (Head, 2003)
30
As highlighted by Silvente and Walker (2007) that a solid theoretical basis emphasizing that differences
in income per capita are detrimental to South-North trade referring Bergstrand (1990) and Ramezzanna
(2000).
As far as South and North traditional supply chain relations are concerned, in which the
South traditionally supplies low-cost labor and raw materials while Northern countries
supply the capital and difficult-to-imitate research-oriented products, this case study very
much fits into it. Nevertheless, it is important to note that in understanding the very
complex and comprehensive characteristics of South-North trade relations, this case
study has not been intended and might not be able to represent all of the characteristics of
South-North trade relations, but good examples of cases (see also Section 2.10, p. 41).
Therefore, considering the methods used in this study for future reference under the topic
of South-North trade relations in particular is very much recommended.
In search of an explanation for trade volume between the South and the North,
studies have been conducted. An experiment by Markusen and Wigle (1990) using the
numerical general equilibrium (NGE) model has brought them into the following
conclusions:
a. Global free trade and the increase of the endowment factor, such as industrial
development, in the South both individually increase South–North trade by a
much greater percentage than the increase in North–North trade.
b. When the two changes are combined, the volume of trade between the South
and the North becomes significantly greater than the volume of North–North
trade.
These conclusions signify that free trade and industrial development in the South both
individually or collectively would increase the volume of trade between South and North.
In other words, promoting the two incentives would create trade specifically between the
South and the North. Therefore, the South should not be afraid of free trade as much as
the North should not worry about industrial development in the South. In general, the
current situation has signified quite the opposite in that it has caused a widening gap in
some cases.31 But for a few cases, such as India, China, and Brazil, FDI inflow has
promoted industrial development in those countries that, according to Wang et al. (2011),
has delivered major contributions in narrowing the existing gap between the South and
the North.
2.7 Multilateral Trade Negotiations
The General Agreement on Tariff and Trade (GATT) was introduced to eliminate barriers
to trade as increasing international trade outpaced production in the 1950s. However, it
did not eliminate the barriers to trade at once but rather through a series of tariff-cutting
exercises (see Table 2.2). The 47-year journey of GATT has obviously reduced
international trade tariff. However, nontariff barriers have been identified as an
increasing problem to free trade.
Following the results of Uruguay Round, the WTO was then established in 1995
as the successor of the GATT. As an umbrella, the WTO has three main agreement
structures: General Agreement on Tariffs and Trade for goods (GATT), the General
Agreement on Tariffs and Trade for Services (GATS), and Trade-Related Aspects of
Intellectual Property Rights (TRIPS). These agreements are flexible; they can be
renegotiated and complemented from time to time, and they are currently organized
under the Doha Development Agenda—mandated in the fourth ministerial conference in
Doha, Qatar, in November 2001. The negotiations include agriculture and services.
31
The gap between the poor and the rich countries can be seen in the form of contribution in international
trade, GDP/capita and market capitalization.
Table 2.2: GATT’s Negotiation Rounds 2

Year Place/name Subjects covered Participants
1947 Geneva Tariffs 23

1949 Annecy Tariffs 13
1951 Torquay Tariffs 38
1956 Geneva Tariffs 26
1960–1961 Geneva-Dillon Tariffs 26
1964–1967 Geneva-Kennedy Tariffs, antidumping measures, special 62
treatment for developing countries
1973–1979 Geneva-Tokyo Tariffs, nontariff measures, 102
antidumping and subsidies agreements,
and GSP
1986–1994 Geneva-Uruguay Tariffs, nontariff measures, agreements 123
on trade in services (GATS),
intellectual property (TRIPS), dispute
settlement, textiles, agriculture,
creation of WTO, etc.
Source: WTO (2006b)
Unfortunately, in July 2006, President Lamy suspended the Doha Round
negotiations for the next five years because of a basic disagreement on steps to end
agricultural subsidies in developed countries and demands from developed countries to
emerging and developing economies to liberalize their market for high-tech products. The
most recent round of negotiation—which took place on July 23–29, 2008, in Geneva—
broke down after failing to reach a compromise on agricultural import rules. Negotiations
were not expected to resume until 2009. Nevertheless, intense bilateral negotiations
mostly between the US, China, and India were held in the end of 2008 in order to achieve
consensus. Unfortunately, these negotiations did not result in any progress. The breach of
the Doha Round at the multilateral level is a signal that other forms of trade liberalization
should be considered as an alternative option. The question is whether it should be
achieved bilaterally, regionally, intra-regionally, or a combination of them. Powerful
countries like the US, EU, and Japan have actively promoted those different approaches
in negotiations with their different trading partners (see section 2.9 on competitive trade
liberalization).
The three main characteristics of the current move toward PTAs are their North-
South orientation, the inclusion of trade in services, and beyond-border liberalization
(Ravenhil 2006; Guerrieri & Dimon 2006). The lack of experience of developing
countries with this new trend in the world trade policy does not only concern Indonesia in
particular but also a rising number of Southern countries. So far, research has focused
primarily on the strategies of main players like the US, the EU, and Japan. What the new
trade policy environment means for developing countries is less clear (Nofri & Werner
2008). Following the Cancún Ministerial Conference in 2003 and its critique of the
treatment of developing countries in the WTO, the major question is whether developing
countries will be able to better represent their interests in a world of strong BAs and
PTAs rather than within the WTO, which grants them special rights through special and
differential treatment. At the end of the day, time will tell us the true story.
2.8 Regional Trade Agreements (RTAs)
The increase of RTAs have been obvious in the last half of a century related to the
WTO’s Article XXIV and GATS Article V.32 It has tripled in number in the last ten years
(see Graph 2.2 and Annexes 2.1, 2.2, and 2.3). Graph 2.2 shows that the number of
notified RTAs has surpassed 350 in 2007. Some 200 of those RTAs are still active. The
scene is quite different from other paths of trade liberalization; the famous multilateral
trade round (Doha Round) has run into difficulties due to unresolved bargaining on the
elimination of agriculture subsidy in developed countries versus high-tech tariff
32
While article XXIV deals with free trade area agreement in goods, GATS V deals with trade in services.
liberalization in the developing world. It seems that the increase of bargaining power of
the group of developing nations at multilateral level, especially the G-20 members, has
changed the landscape of international trade diplomacy significantly. Woolcock (2007)
argues that the stagnation of the Doha Round trade talks has given a fresh impetus to
regionalism worldwide. If this is true, then what is the impact of regionalism to the future
of multilateral trade talks?
Graph 2.2: Active and Nonactive RTA (Notified to WTO) 2
Source: WTO (2008)
The question of whether regionalism would support multilateral trade
liberalization or hinder it had been addressed during a World Bank conference in 1992. It
was the time when two eminent economists, Larry Summer33 and Jadish Bhagwati,34 had
different views on this matter.35 Bhagwati had more or less the following arguments on
answering the question (Baldwin 2004:2):
a. Regional-based trade liberalization is a substitute of multilateral trade liberalization for
two reasons. First, it dampens nations’ enthusiasm for further multilateral
liberalization. Second, regionalism diverts policy makers’ attention from WTO rounds.
33
Larry Summer was the head of the World Bank’s research department at the time.
34
Jadish Bhagwati is Arthur Lehman Professor of Economics and Professor of Political Science at
Columbia University.
35
Summer supported the regionalism while Bhagwati opposed it.
b. Regionalism shifts power in worrying directions for two reasons: First, it fosters
greater dominance of small nations by hegemonic powers. Second, it increases the
chances of inter-block trade war.
In contrast, Summers looks at the positive impact of regional liberalization as a
whole while undermining the discriminatory impact warned by Bhagwati. According to
Summers’ view, post-WWII regionalism has resulted in a great deal of tariff removal,
and there is no clear evidence that regionalism has sidetracked multilateralism in the
capitals that matter (Baldwin 2004:2, 4). Summers sees regionalism as the other way to
Rome (free trade). The most important thing for Summers is that regionalism has the
similar goal with multilateralism, namely, freeing trade—only the path and method are
different. The proliferation of competitive bilateral trade liberalization nowadays flows
exactly in this direction.
A study from Tang (2005) using a modified gravity model on the cases of
NAFTA, ANZCER, and ASEAN reveal that free trade has different effects on these three
cases. Trade diversion with nonmember countries is eminent in the case of ANZCER. In
the case of ASEAN open regionalism (without custom union), trade with nonmember
countries has increased significantly (trade creation). Surprisingly, the formation of the
NAFTA free trade area has no significant effect on trade with nonmember countries. In
the case of EU closed regionalism, despite the potential discriminatory impact it has to
nonmember countries, EU has given free tariff access to neighboring (trade association)
and developing countries (GSP scheme).
To this point, the effect of regional-based trade liberalization differs across the
globe. It sometimes creates a clear discrimination against nonmember countries, but
sometimes goes in other direction. This phenomenon has acknowledged once again the
importance of context-dependent case-by-case studies of trade relations, including in
understanding the free trade effects. This has encouraged political entities to do studies
on the possible effects of doing free trade with some trading partners. The clear picture of
today has shown us that regionalism is in fact superior to multilateralism in terms of
liberalizing trade. Regional talks have gained momentum, while multilateral talks have
been delayed (see Graph 2.2).
Will the rapid growth of trading blocs hinder the half-century process of one
world, one market under a multilateral system at the end?36 Whatever the alternative form
and level of future trade negotiation and cooperation are, it should follow the same
direction—namely, diminishing barriers to trade both tariffs and nontariff barriers based
on mutual and reciprocal approach. We believe that only with this perspective, economic
activities around the globe can contribute in increasing world trade volume, speeding up
the transfer of technology, maintaining economic growth, creating jobs, and lowering
inflation.
2.9 Bilateral Trade Negotiations
In addition to active regional trade blocs with its different level of commitments, there
are also trade agreements ratified at bilateral level, namely, agreements between two
political entities that are legally binding.37 These bilateral trade agreements are often
made in the form of a customs union (CU), free trade area (FTA), association, or
economic partnership and cooperation (EPA). Those preferential trade agreements
(PTAs) are notified either under Article XXIV of GATT or Article V of the GATS.
36
There are eighteen active trade blocs in the world at the moment. European Free Trade Area (EFTA) and
2019 in force African Economic Community are inactive trade blocs; the rests are listed and explained in
more details in annex 2.1.
37
The list of bilateral trade agreements involving EU and Indonesia is to be learned in annex 2.2 and 2.3.
Around 78% of trade agreements notified to WTO are bilateral trade agreements (WTO,
2008). If the Doha Round cannot be continued and the multilateral trade negotiators
could not arrive to a consensus in the near future, trading entities from developed and
developing countries will be trapped in complicated and overlapping bilateral trade
agreements. In this context, Brülhart et al. (2007) have recognized that the suspension of
the Doha Round in 2006, however, has revived the tension between the EU commitment
toward multilateral trade liberalization through WTO and the EU ongoing concern with
regional as well as bilateral agreements with third countries (non EU members) including
with members of ASEAN.
The change in strategy of three traditional superpowers—namely, the US, the EU,
and Japan—from multilateral trade negotiation toward a bilateral approach has been
observed. The term ‘competitive trade liberalization’ has emerged. This term can be
understood in yet another way (Bergsten 1996). The three key players have more
leverage than other countries in shaping the agendas of PTAs because of their large
domestic markets and their trade policy expertise (Nofri & Werner 2008). US trade
policy, for example, which has in recent years targeted developing countries in Latin
America, the Middle East and North Africa (MENA), and the Asia-Pacific region,
including ASEAN, has used BAs to set high standards for free trade arrangements and to
revitalize initiatives for PTAs that had faltered, such as the Free Trade Area of the
Americas (FTAA) and the Asia-Pacific Economic Cooperation (APEC). Examples of
bringing new dynamics to the liberalization process through BAs are the US-Singapore
pact and Singapore’s initiatives to establish a so-called Pacific 5 (P5) at the heart of an
APEC free trade area as well as talks with Chile, the Dominican Republic, and members
of the Andean Community.

The main idea behind competitive trade liberalization is countries that are not
included in these bilateral initiatives come under pressure to rethink their position in
negotiations on regional PTAs as new pacts that are negotiated without their participation
are likely to result in discrimination against them. In Latin America, for example, US
initiatives are aimed at provoking Brazil and its Mercosur partners to conclude the FTAA
negotiations. In the case of ASEAN, Indonesia, Thailand, and Malaysia have been
seriously considering an FTA with the US and the EU in a bilateral format as Singapore
has already jump-started the FTA with the two superpowers.
Current development shows us that foreign trade policy choices are case
dependent. While EU has concluded an FTA format with Mexico, Indonesia might or
might not get an FTA ticket with EU only through ASEAN. Concerning ASEAN, the
signature of binding the ASEAN Charter on November 2007 could make the EU policy
toward ASEAN more sensible. Despite the existing weaknesses of ASEAN as trading
bloc, its binding charter could shape ASEAN to become another type of a strong regional
integration that could spread to the East Asian Economic Community (EAEC) or even
further to the Asian Economic Community (AEC).
Indonesia has been active in bilateral and regional as well as multilateral trade
negotiations (triple-track diplomacy). In terms of a bilateral track, Indonesia concluded a
bilateral trade agreement with Japan in 2007, which took effect in July 2008, the so-
called Japan-Indonesia Economic Partnership Agreement (JIEPA). JIEPA is an advance
bilateral agreement combining market access to products as well as movement of natural
persons. As an immediate consequence of JIEPA, 80% of Japan’s tariff lines and 58% of
Indonesia’s tariff lines had been cut to 0%. Apart from Indonesian interest in accessing
Japan’s market for its lower-skilled labor and labor-intensive products, it is also in
Japan’s interest to secure its energy supply from Indonesia while maintaining its “flying
geese paradigm” of industrial development in Asia. In fact, Japan has remained as
Indonesia’s second-largest source of FDI in 2012, opening a substantial amount of job
opportunities to Indonesians (Sentana 2013). Japan has also been the largest source of
Indonesian foreign debt for decades. Japan’s export-oriented FDI in the Indonesian
manufacturing industry has also helped in changing Indonesia’s export structure, which is
mentioned in Chapter IV of this dissertation.
In terms of a regional track, Indonesia has long been one of the pioneers and
committed core members of ASEAN Plus. Recent developments in ASEAN are
monumental. Indonesia and nine other countries concluded a framework agreement for
the ASEAN FTA (AFTA) in January 1992, the ASEAN FTA in January 2002, a
framework agreement for the China-ASEAN FTA (CAFTA) in November 2002, the
China-ASEAN FTA in 2010, a framework agreement for the ASEAN-India FTA
(AIFTA) in 2003, and a framework agreement for the Korea-ASEAN FTA (KAFTA) in
December 2005; ratified the ASEAN Charter in November 2007; and concluded the
ASEAN–Australia–New Zealand FTA (AANZFTA) in February 2009. The major pillar
of the ASEAN Plus agreement included the progressive liberalization of tariff and
nontariff barriers of goods and services, rules on origin, investments, movements of
natural persons, and dispute settlement issues. Mostly, the liberalization schedule
distinguishes between six wealthier members (Brunei Darussalam, Indonesia, Malaysia,
the Philippines, Singapore, and Thailand) and the other four member states (Cambodia,
Laos, Myanmar, and Vietnam) with a five-year delay in activation.
The theory of competitive liberalization is obvious in the case of Indonesian
involvement in ASEAN Plus trade negotiations. Starting with the proactive trade
diplomacy of China, the concluded framework agreement38 in 2002 has led to the launch
of the China-ASEAN (6) FTA in 2010. The initiative of China has triggered another two
key Asian players, Japan and South Korea, and Australia and New Zealand to later
conclude agreements with ASEAN. Japan prefers a bilateral approach with individual
members of ASEAN, starting with Singapore, while Korea has combined the approaches
taken by China and Japan.39 The famous ASEAN Plus Three might form the largest
single market in the world, covering about 25% of the world’s GDP and 32% of the
world’s population.
At the East Asia level, ASEAN Plus leaders are also headed to the East Asian
Free Trade Area (EAFTA). The development has been relatively slow compared to
ASEAN due to many conflicting interests of the participating countries. As an
illustration, the integration of East Asia will definitely affect some key players, such as
the United States, Russia, Australia, New Zealand, and of course, the European Union.
To some degree, the conflicting interests between developing countries and developed
countries that restricted the Doha Round negotiations can also be found in the ongoing
integration of East Asia as a single market. It is predicted that the integration of East Asia
could be one stepping-stone and trigger the formation of the largest single market in the
future, beyond the WTO, apart from the launch of the awaited transatlantic FTA between
the EU and the United States.
In the case of Indonesian involvement in an FTA with ASEAN Plus Three, only
the impact of the FTA with China (CAFTA) has currently attracted Indonesian
stakeholders’ attention. As the consequence of CAFTA, 90% of tariff lines have been set
to zero in 2010 for nonsensitive products (normal track). As for sensitive and highly
38
. The framework was amended in October 2003 (Soesastro 2005).
39
. Korea started the agreement bilaterally with Singapore in 2005 before initiating the Korea-ASEAN FTA
(KAFTA) four months later.
sensitive products, the MFN tariff line was reduced to 20% in 2012 and will be 0%–5%
by 2018. For Indonesia, the FTA with China through ASEAN has been a public debate
from the beginning. It had been predicted that Indonesia will only be an alternative
market for cheap Chinese products and direct investment, including sectors that are
considered to be sensitive for Indonesia like textiles and labor-intensive manufacturing.
Observing goods sold at shopping centers in big cities in Indonesia, we can find evidence
of the strong influx of imported goods from China. It is sometimes hard to distinguish
between locally made products from imported goods due to the absence of labeling. As
long as the Indonesian consumer is served with more alternatives of cheaper and better-
quality goods resulting from tougher competition, then it is fine. But if the portion taken
by imported goods is remarkably huge and subsequently harms small and medium
enterprises (SMEs), then it is everybody’s problem. In many cases, Indonesia does not
yet have efficient and mature SMEs to compete in terms of price and quality with
products from China, which offers not only a gigantic market for Indonesian goods but
also highly competitive products for the Indonesian consumer.
The Indonesian trade deficit in April 2013 reached its highest level since May
2008 (Noviani & Sari 2012). Our own analysis using the latest trade statistics reported by
Statistics Indonesia (BPS 2013) reveals that the decline in Indonesian export growth has
shrunk the trade surplus, resulting in an annual trade deficit amounting to US$1.66 billion
in 2012 and US$5.60 billion in 2013 (until August). As the average growth of exports has
been lower than imports in the last two decades, Indonesian annual trade balance position
might change from sustainable trade surplus in the last decade to persisting trade deficit
in the years to come. It is important to note, however, that the FTA with ASEAN plus
China is not the only potential factor in the decline of Indonesia’s trade surplus. To be
fair, internal and external factors like the increasing dependence of Indonesia on imported
oil and the world economic crisis should also be taken into account.
To make an evidence-based conclusion, an analysis of Indonesia’s recent trade
flow statistics with China has been carried out (raw data from Comtrade 2013). The
evidence reveals that the ASEAN-China FTA has increased the bilateral trade volume
between Indonesia and China by more than 205% in the five years since 2007. Indonesia
has accumulated a trade deficit amounting to US$24 billion, which is an increasing trend.
The reason why Indonesia has suffered from a trade deficit is because Indonesia has
recently imported more manufactured goods from China. The deficit level for these
products has nearly tripled in the five years since 2007. The biggest portion of the
increase in China’s exports has been identified as scientific instruments (SITC 87) and
specialized machinery for industries (SITC 72). Two products are from the difficult-to-
imitate research-oriented products group, which covers 58% of China’s exports to
Indonesia, amounting to US$17 billion in 2011. Labor-intensive goods represent 29% of
China’s exports to Indonesia, amounting to US$8.4 billion in 2011. More than 30% of it
comes from textile products (SITC 26 and 65), the industry to which Indonesia pays
attention to create jobs at home. It might be because of the evidence that many
economists and leaders of domestic civil society have suggested the GoI get back to
negotiation table with China for revisions aimed at protecting affected domestic
enterprises.
In response to this pressure, the subsequent trade policy change of the GoI from
outward-looking to inward-looking is in line with the change of leadership in the
Indonesian trade ministry. The main objective of the current policy of the GoI is actually
to add value to its natural resources, including commodities at home, while promoting the
domestic manufacturing industry through two tracks of direct investment, foreign and
domestic. Export restrictions and bans on strategic raw commodities like rattan and coal,
increasing technical barriers for imported goods like horticulture and pharmaceuticals,
and new regulations for modern retailers are a few examples of those inward-looking
policies. The negative effects of pursuing such policies might bring back the bad
experiences the country had during its import substitution strategy in the 1970s in the
case of long-term implementation.
However, the unpredictable impact of concluding an FTA with neighboring Asia
should not stop Indonesia from exploring alternatives. Apart from Japan and South
Korea, Indonesia’s FTA with ASEAN Plus involves countries that have relatively similar
trade structures—namely, labor-intensive manufactured products such as textiles,
agriculture, small and medium scale enterprises, electronic appliances, and other
industrial products generated through foreign investment (intraindustry trade). The trade
structure factor distinguishes the Indonesia-EU proposed FTA from what it has
concluded with its Asian neighbors. It is believed that an FTA in merchandising goods
between Indonesia and the developed EU would bring less harm to Indonesia’s sensitive
sectors and domestic industries compared to an FTA with developing countries.
Traditionally, Indonesia and the EU have relatively different export structures caused by
endowment factors. Different conditions might apply for an FTA for the service sector,
which is not within the scope of this study.
The integration of ASEAN into a single market might not be regarded as a threat
to the EU’s supply chain. In fact, the EU has been delivering both technical and financial
assistance to the ASEAN integration process (Cameron 2010). But rapid developments in
the integration of ASEAN Plus as well as East Asian integration do need the special
attention of EU stakeholders because trade relations between ASEAN and so-called Plus
countries (Japan, South Korea, Australia, and New Zealand) are a South-North type of
FTA. It bridges trade interdependency of different structures of trade, similar to the case
of ASEAN-EU trade interdependency. Considering this trade dependency and other
significant factors like distance and business culture, trade diversion from the EU to the
ASEAN Plus countries is foreseeable. Based on statistical analysis using data from 2007
to 2011, the EU’s share of Indonesian exports and imports is declining. The EU’s share
of Indonesian imports and exports has declined, respectively, from 10.32% (rank 3) in
2007 to 7.05% (rank 5) in 2011 and from 11.74% (rank 2) in 2007 to 10.09% (rank 3) in
2011. Therefore, it is no wonder why there is a supply shortage of strategic commodities
on the EU side at the moment. Based on the above analysis, there is no other way for the
EU but to keep its commitment to providing market access and incentives to those
strategic commodities while strengthening its influence and cooperation with ASEAN in
particular. The EU should be more proactive in initiating a future FTA with ASEAN as a
group or with its individual member countries. For Indonesia-EU, in particular, trade
incentives and barriers resulting from this study should be taken into account in any
future trade agreement.
2.10 The Contributions of This Study
Based on analysis of the above theoretical framework, following gaps have been
considered as important to address and deserve more attention from international political
economists:
a. The lack of empirical research on South–North trade relations
b. Limited scientific study on Indonesia-EU trade relations

c. The need for continuous study on incentives and barriers to trade between the
South and the North to get more positive gains from the reciprocal trade
agreement approach
d. The need for new tools in evaluation of market access issues.
Using research design and methods described in Chapter III to address the
research questions mentioned in Chapter I, this study should be able to fill the above
gaps. This kind of study should contribute to introduce new research methods in
evaluating trade relations between two political entities that should be very useful to
formulate a more effective and solution-oriented trade policy and agreement in both
multilateral as well as bilateral format.

Chapter III Research Design and Methods
3.1 Main Concepts
Considering the proliferation of trade theories and nature of factors influencing the
dynamics of trade flows between trading partners as concluded in Chapter II, a context-
dependent type of research methodology has been applied. One of the very important
methodologies used to produce a context-dependent knowledge is the case study research
(Stake 2005; Flybjerg 2004). By doing case study in research, one can get close to the
real situation in order to find the clue of what is being studied and end up with a more
accurate conclusion and recommendation that could solve the existing social and
economic problems. Stake (2005) emphasizes that the case study is not a methodological
choice, rather a choice of what is to be studied. Therefore, whatever methods and
instruments are used here, this research has chosen to study the selected cases.
3.2 Research Design
This study has been carried out through two different levels of case studies, namely,
single descriptive at the first level and multiple explanatory case studies. It means that as
far as research design is concerned, both single descriptive and multiple explanatory case
study designs have been applied.40 Results from the descriptive case study, such as trade
volume, RCA index, and BCG matrix application will be used as the foundation for the
explanatory case study. Respectively, the explanatory case study explains what has been
described in the descriptive case study part. To avoid any confusion, it is important to
distinguish between the case being studied and the embedded units of the case. In this
40
According to Yin (2003a), Case study differs by the number of case being studied (single or multiple)
and the way it is executed (exploratory, descriptive and explanatory).
study, the case being studied is Indonesia-EU trade relations, which is one of the many
cases of trade relations between the South and the North. The six selected sectors are the
embedded units of the case.
3.2.1 Descriptive Case Study
In line with Yin’s definition (2003a) on the descriptive case study, the first level of this
study describes up-to-date trade relations between Indonesia and the EU. There are two
main goals of the descriptive part of this case study. The first goal is to describe the
development and changes of trade patterns between Indonesia and the EU. Describing
trade patterns is one of the main purposes of trade theory, especially what kinds of goods
one country produces, exports, and imports. For this purpose, secondary trade data
including trade volume and its development, the kinds of goods that Indonesia and EU
have traded with the world and to one another (trade structure), as well as country
composition of trade flows, including export destination and import origin, have been
investigated. This part can be found in Chapter IV.
The second goal is to identify six cases from different product sectors as the basis
for explanatory case study. This has been done by analyzing trade performances with the
help of instruments including the RCA index, trade volume, and the BCG matrix. The
indicators resulting from trade performance analysis have been used to select six cases.
The specified formula and criteria have been applied in the process of case selection (see
workflow 3, page 44). The results can be found in Chapter V of this dissertation.
Research Design and Methods | 47
3.2.1.1 Data Collection for Descriptive Case Studies
As far as the type of data collected in the descriptive part of this study is concerned,
secondary data has been used. In order to describe the trade pattern, trade statistics
including Indonesian and EU export and import volumes in either direction, as well as to
and from the rest of the world, are required. For this purpose, data has been compiled
based on product classification. Here, Standard International Trade Classification
Revision 3 (SITC Revision 3) is collected. The SITC Revision 3 data type is managed by
the UNSD COMTRADE and kept updated based on reports from each member country
classified by groups and divisions of commodities for the production of statistics. The
classification includes a total of 3,118 product items. EU and Indonesia adopted SITC
Revision 3 in the beginning of 1988 when the new customs tariff entered into force. The
adoption of SITC Revision 4 has not yet been fully implemented and disseminated by
member states.
The use of this classification coding has helped in systematic data collection.
Many countries have recorded their internal and external trades in one or both of these
classifications. It has been of great help to analyze products using SITC version 3 and
Harmonized System (HS) number according to the need and data availability. These two
types of product classifications are in fact able to be cross-placed when certain indicators
like total values of exports and imports are found. The total values of exports and imports
of one country calculated either based on SITC or HS number is not different. As far as
products codification is concerned, this study has used two digits SITC trade data version
3 in the calculation of RCA index and HS number for tariff barriers analysis. Unless
otherwise indicated, trade data used in this study is mostly consolidated accurate data, not
estimated data, reported by countries under review from 1999 to 2008. Therefore, trade
data has been mostly downloaded and compiled from UNSD COMTRADE online
database during 2010 and 2011.
Secondary data including trade regulations and standards, complaints-inventory
databases,41 distances,42 and the economic size of Indonesia and EU43 have also been
collected during the explanatory case studies. The data has been collected mostly from
UNSD COMTRADE. As will be explained in the next paragraph, data analysis activities
in this case study level consist of primary data analysis, supply-demand analysis, gap
analysis, complaints-inventory analysis, as well as gravity model analysis.
3.2.1.2 Data Analysis for Descriptive Case Study
The case selection has been carried out based on a setup formula and criteria (see section
workflow 3, page 44) with the purpose to pick up samples of three product sectors for
each political entity. Population of the sample is the list of products at the two-digit level
of SITC Revision 3 (see Annex 3.1). Selected cases will be studied further using some
mentioned methods in the explanatory study. The results should give explanation to the
described trade relation between Indonesia and EU, including trade incentives and
barriers. For this purpose, a method of case selection using indicators of trade
performance and criteria is applied. In order to identify the position of each sector in the
target market and to select six sector-based cases to be studied in depth, this study has
used the RCA index, trade volume, as well as the BCG matrix known as BCG growth
matrix as instruments. Figure 3.1 depicts the workflow of data analysis and case
selection.
41
These kinds of data are available in Directorate General of Trade section 2 (DG 2) in the EU case and in
National Agency for Export Development (NAFED) under Ministry of Trade in Indonesia.
42
Data on distances between main cities in the world are available on CEPII’s website.
43
Economic indicators data are available and kept in National Statistical Bureau as well as Indonesian
Central Bank and Eurostat in the EU.
Table 3.1: Workflow of Data Analysis and Case Selection 3
Workflow 1. RCA Index --------> 2. BCG Matrix --------> 3. Case Selection
Refer Formula Refer Formula 3.3 Refer Formula 3.1,

Data and Formula --------> -------->
3.2 and Formula 3.4 Tables 3.1 and 3.2
List of products List of products List of six selected

based on based on position products (cases)
Results --------> -------->
ranking of RCA in BCG matrix’s based on setup
index quadrants criteria
Source: Author’ illustration
The results of the RCA index calculation (workflow 1) and depiction of trade
performances in the BCG matrix (workflow 2) will be used to select three cases for each
political entity (total of six cases) with the help of setup criteria.
Workflow 1 (RCA Index Calculation)
Collected trade statistics have been used to calculate the RCA index of Indonesia and EU
using the Balassa Index (BI) of RCA CEPT II (see Equation 3.1). Working out the RCA
is a simple two-step process. First, divide the total exports of a product k from country i
to country j ( xijk ) by total exports of country i to j ( X ij ) resulting Y. Then divide total
exports of product k of country j ( x kj ) by its total exports ( X j ) resulting Z. Y divided by Z
is the RCA index ( Bijk ). In other words, the RCA is the ratio of the share of a given
product in a country’s exports to another country or region to the share of the same
product in that country or region’s total exports. Specifically, the BI for a country i in its
exports of good k to country j can be expressed as follows (Balassa 1977):

xijk X ij
Bijk = (3.1)
x kj X j
where
xijk = exports of product k from country i to country j
X ij = total exports from country i to country j
x kj = country j total exports of product k
Xj = country j total exports
Bijk = the Balassa Index of product k of exports from country i to j.
If the index of product k exported by country i is greater than one, country i is
said to have comparative advantage in exporting that product to country j. The higher the
index is, the better the ranking of one political entity against competitors in a market
under review, therefore the larger the contribution of that product to net exports (exports
minus imports) and balance of trade. The index indicates the difference between actual
net exports and adjusted net exports, taking into account the country’s trade
surplus/deficit.
In line with the previous chapter, Buckey (1986) has considered the performance
measures by looking at how well a country or a sector of a firm has done relative to its
rivals (partners), which is among the three methods of measuring a country’s
competitiveness.44 Typical measures are the above-mentioned Revealed Comparative
Advantage (RCA) index and Export Performance Portfolio. They are specific measures
of performance developed and used primarily by international trade researchers and that
have also been applied in this study. In this study, both the RCA index calculation and
trade performance measurement basically have two main goals. It will be used not only
to find out the Indonesian and the EU reciprocal competitiveness, but also as an
instrument in selecting cases. It is important to note that export data for Indonesia has
44
See Chapter III p. 13. The other method such as measure the management process or how competitive
potential is converted into competitive performance has been used for instance by World Economic Forum
(WEF) in a form of yearly countries competitiveness index.
been taken from UNSD COMTRADE, while EU export data has been taken from UNSD
COMTRADE and Eurostat as far as sources of export data is concerned.45
Measures of Revealed Comparative Advantage (RCA) will be used to help assess
Indonesian and EU export potentials. It can also provide useful information about the
missing opportunities because of one or other factors. In this case, the potential products
of one country have lost the opportunity to fulfill the existing potential demand of its
trade partner. A potential product with a high rank on the RCA index and low market
share in a growing market is a good example of an opportunity-loss case. However,
opportunity loss can be caused by regulatory (avoidable) and non-regulatory
(unavoidable) barriers. The loss of opportunity can be caused, for instance, by
unavoidable barriers such as distance as much as it can be caused by regulatory barriers.
Similarly, the loss of opportunity can be caused as well by trade incentives’ ignorance
such as import taxes and product standards and quality assurance, which are all worth
investigating.
Countries with similar RCA profiles are unlikely to have high bilateral trade
intensities unless intra-industry trade is involved. Conversely, two political entities with
different RCA profiles have more chances to have high trade intensities and
interdependencies. The RCA index of one country for a particular product is often
measured by the product’s share in the country’s exports in relation to its share in world
trade or reference market as described in Formula 3.2. A value of less than unity implies
that the country has a revealed comparative disadvantage in the product. Similarly, if the
index exceeds unity, the country is said to have a Revealed Comparative Advantage in
45
Missing datas for year 2008 that have not been submitted by some EU members to UNSD Comtrade has
been taken from Eurostat. Currencies differences have been taken into account using exchange rate
published recorded by European Central Bank (see online references).
the product. No international standard scaling system has been found in measuring the
strength of advantages and disadvantages, although it can be done. This RCA exercises
are mainly based on two trade flow directions. The first direction is the calculation of
RCA of Indonesia and the EU vis-à-vis the world. The second is the calculation of RCA
of Indonesia vis-à-vis the EU and vice versa. Both measurements are found in literature
proving that RCA can be measured at the global level (e.g., Soesastro & Basri 2005) or
restricted to the analysis of bilateral trade between just two countries or trading partners
(e.g., Kaitila 2001; Lee 2003; Utku & Seyman 2004). Since we are interested in the
dynamics of European countries’ trade vis-à-vis Indonesia as well, the calculation of the
indexes is not restricted to the world only, but also to bilateral trade of the EU and
Indonesia context. A comparative approach between two countries’ trade specialization
can be done in either level of trade flow.
The bilateral RCA index is a slightly modified RCA index, in which trade
partner’s exports replaces world’s exports (reference change)—in this case, EU Exports
replace world’s exports. It also provides information on RCA calculated as the ratio of
the share of a product in a country’s total exports to the share of this product in export to
reference markets or partners rather than its share in world exports. Five product
groupings based on the intensity of endowment factors are used in the analysis of export
specialization of Indonesia and the EU.46 This system of grouping has also been used in
the work of Utkulu and Seyman (2004).
46
Product group will be categorized as follows; 1. Raw material-intensive goods represent by SITC 0, 2 (-
26), 3 (-35), 4, 56, and 97; 2. Labor-intensive goods represent by SITC 26, 6 (-62), 67, 68, 8 (-87), 88; 3.
Capital-intensive goods represent by SITC 1, 35, 53, 55, 62, 67, 68 and 78; 4. Easy-to-imitate research-
oriented goods represent by SITC 51, 52, 54, 58, 59, 75, 76; and 5. Difficult-to-imitate research-oriented
goods represent by SITC 57, 7 (-75, -76, -78), 87 and 88. UNSD’s reference for products and (SITC
number) are respectively as follows: food and live animals (0), beverage and tobacco (1), crude
material/fuel (2), mineral fuel/lubricants (3), animal/vegetable oils/fats/wax (4), chemicals/products NES
(5), manufactured goods (6), machinery/transport equipment (7), miscellaneous manufactured articles (8),
Table 3.2: Illustration of Trade Performance Based Case Selection 4

Product RCA Index Trade Volume Final
Code Ri Rtv
name (2006) (2006) Rank
0 Product A 0.08 50 527.320 61 55.5
1 Product B 0.17 43 4.428.619 55 49
2 Product C 9.85 7 314.942.225 14 10.5
3 Product D 4.4 14 86.943.787 26 20
Notes:
- The italicized product (C) will be selected as one of top 10 candidates for having higher rank (less
value of final rank) than others.
- Ri = Rank of RCA index
- Rtv = Rank of trade volume
Source: Author’s case-selection method
The rank of RCA index (Ri) with the rank of trade volume (Rtv) has been
combined together, resulting in the final rank (fr). The idea behind this method is to find
product sector with the most potential and a high trade volume that can be used as
representative sample in trade flows between Indonesia and the EU. Table 3.2 shows the
illustration of how products have been ranked based on RCA index and trade volume.
Workflow 2 (BCG Matrix Application)
Considering the representation level of cases selected, we use Boston Consulting Growth
(BCG) matrix as one of tools. Each quadrant of the matrix represents two indicators: the
performance of the exported product and the condition of the foreign market under
review (see notes in Graph 3.1 explaining the different characteristic of each quadrant).
As seen on Graph 3.1, the top 10 products identified in workflow 1 have been positioned
in four different quadrants to find out in which quadrant they belong. The increase of a
national export market share (represented by a horizontal axis) has been compared with
textile fibers (26), electric current (35), organic chemicals (51), inorganic chemicals (52),
dyeing/tanning/color material (53), pharmaceutical products (54), perfume/cosmetic/cleanser (55),
manufactured fertilizers (56), plastics in primary form (57), plastics non-primary form (58), chemical
material/productions not else specified (59), rubber manufactures not else specified (62), non ferrous metals
(68), iron and steel (67), office/data processing machines (75), telecommunications etc equipment (76),
road vehicles (78), scientific/etc instruments (87), photographic equipments/clocks (88).
the growth of the market of products of the trade partner under review (represented by the
vertical axis). The BCG matrix ensures the possibility of analyzing the position of certain
products in the target market being reviewed.47 One top product group, identified based
on the size of the colored bubble, will be selected from three top quadrants’ champions,
underachiever, and achiever in adversity (see details procedures on workflow 3, page 44).
It is important to note that the results can also be used not only for the purpose of case
selection but also to identify the performances of all kinds of products exported by two
political entities, the dynamics of market demand and growth, as well as export structure.
Graph 3.1: BCG Matrix for National Export Performance Analysis 3

4
3
2
Market Growth
Champion
1
Achiever in Adversity
0
-4 -3 -2 -1 -1 0 1 2 3 4
-2
Underachiever
-3
Declining
-4
Increase of Market Share
Product 1 Product 2 Product 3 Product 4 Product 5 Product 6
Notes:
Underachiever: It indicates the losers in growth markets.
Champion: It shows the winners in growth markets.
Achiever in Adversity: It draws the winners in declining markets.
Declining Sector: The export prospects for these products tend to be gloomy.
Source: Author’s Illustration, inspired from International Trade Center (2006)
Graph 3.1 depicts the export performance of an exporting country against the
growth of demand in an importing country. This graph is to some extent different with
the original BCG matrix (growth-share model). The size of bubbles, for example, is
proportional to the country’s export turnover in terms of value. The other key difference
is in the horizontal axis. In this case, the increase of market share is measured instead of
47
Boston Consulting Group is world leader of consulting company established in 1963 (more information
available online at www.bcg.com). It is one of top of the best in Fortune 100 companies list.
market share. The variable used for vertical axis is not different with the original BCG
matrix. Both plot the annual growth of the trading partner’s imports value for the product
group under review.
Graph 3.1 is structural in nature because market shares usually do not change
much over time and imports of the target market expressed in terms of volume are unlike
those expressed nominally (i.e., value) and are not affected by fluctuations in prices and
exchange rates. As a result, the overall picture does not change much from one year to the
next. Bubbles to the right of the vertical axis strongly represent products in which one
country should specialize in—that is, those products in which one country has, according
to Balassa, a comparative advantage.
Formulas 3.2 and 3.3 below present the way of calculating market growth and the
increase of market share:
Market Growth = ( I 2kj - I 1kj ) / I 1kj x 100% (3.2)
Increase of Market Share = (( I 2kij / I 2kj ) - ( I1ijk / I1kj )) / ( I1ijk / I1kj ) x 100% (3.3)
where
I1kj = country j total import of product k in previous year
I 2kj = country j total import of product k in current year
k
I1 ij = denotes import of product k from country i to country j in previous year
k
I2 ij = denotes import of product k from country i to country j in current year
Workflow 3 (Case Selection)
As soon as the positions of the top 10 products acquired using the method illustrated in
Table 3.1 have been located in the BCG matrix, the products are ranked based on the
final rank (fr) and quadrant they belong to. This placement has been illustrated in Table
3.3. In the first step, only one top product in each quadrant has been selected. Products
positioned in quadrant 4 (if any) will be selected in the second step, only if none of
product sectors belongs to quadrants 1, 2, and 3. Quadrants 1, 2, and 3 have been put as
the first priority because they belong to products with the highest potential in achieving
gains from trade (such as increasing market share and positive growth). On the other
hand, despite the dynamic nature of the target market, products in quadrant 4 promise
less opportunity for growth. In other words, they are economically less attractive than
other quadrants.
The criteria of case selection need to be systematically set up to smooth the
process. Each criterion has its own argument behind it. The setup criterion and the
arguments can be elaborated as follows:
a. Cases represent the similarity in outcome, namely most potential sectors indicated
by the best rank of the RCA index (Ri) and the best rank of the trade volume
(rtv).48 This is to guarantee that the cases selected have played important roles in
the Indonesia-EU trade relation. For this purpose, final rank (fr) has been
calculated separately using the following formula:
fr = (Ri + rtv)/2 (3.4)
b. Three cases have been selected from different product sectors (represent the
difference in background) for each political entity based on SITC digits (sectors
1–9). This is to make sure that the selected cases come from different product
sectors with different product characters and dynamic factors influencing the
supply chain.
48
The higher index of RCA can not always guarantee the higher trade value in year under review since it is
a cumulative index resulted from series of data.
c. Cases are sectors from three different positions in the BCG matrix quadrants 1, 2,
and 3. Exception is allowed in which the sector in quadrant 4 will be selected only
if no single product is identified in one of those quadrants. This guarantees that
cases are selected from different market performances (represent the difference in
background).
Table 3.3: Illustration of Case Selection Process 5

Final Quadrant 1 Quadrant 2 Quadrant 3 Quadrant4
Rank (Underachiever) (Champions) (Achiever in Adversity) (Declining Sectors)
1 Product A (S1) Product E (S1) Product G (S2) Product K (S9)

2 Product B (S4) Product F (S6) Product H (S5)
3 Product C (S9) Product I (S4)
4 Product D (S1) Product J (S2)
Note:
S = Product Sector (1–9)
Source: Author’s illustration on case selection method based on criteria
3.2.2 Explanatory Case Study
After describing the trade relation between Indonesia and the EU in the descriptive part
and making use of it in selecting six cases (see case selection process from workflow 3,
page 44), the explanation of the relation has been made in the second level of this
research. The main goal of this explanatory case study is to investigate incentives and
barriers of trade flows between Indonesia and the EU. In order to achieve this goal, the
collection of primary and secondary data has been conducted. The collected data will be
analyzed using five selected methods that have been applied separately. Those methods
are primary data analysis, supply-demand analysis, complaints-inventory analysis, as
well as gap analysis and gravity model.
3.2.2.1 Case Selection
It is important to underline that six selected products (cases) have been used as objects of
data collection and analysis of the first three methods of identifying trade incentives and
barriers, namely, primary data analysis, supply-demand analysis, and gap analysis (the
process of case selection has been elaborated on workflow 3, page 44). For the other two
methods—namely, complaints inventory and gravity model—the object of data collection
and analysis has been all traded goods (without case sampling) because it is common and
possible to do so. The analysis has been carried out and presented in Chapters VI and
VII.
3.2.2.2 Data Collection for Explanatory Case Study
3.2.2.2.1 Primary Data Collection
In order to collect primary data, a set of questionnaires has been prepared and
disseminated. Selected exporters have been asked to act as respondents and fill out the
questionnaires. The questionnaires asked which trade incentives and barriers have been
mostly considered according to the respondents’ acquired experiences (see questionnaire
set in Annex 3.3). The type of questions used is basically a combination of closed and
open-ended questions. In open-ended questions, respondents are allowed to fill any
answer they consider as right according to their own experiences. The answers of open-
ended questions have been coded. In order for the coding results to be relevant and
unbiased, the combination coding approach has been implemented. In this case, new
categories of trade incentives/barriers have been developed by incorporating major
categories of observations (answers from respondents) guided by trade theory and logic.
The list of trade incentives and barriers has been selected based on several sources
including theoretical references (e.g., Head 2003; Krugman 2007), results from previous
research (Srivastava & Green 1986), and recommendations from experienced researchers
and experts. The questionnaires have been peer-reviewed by experienced researchers as

well as experts and furnished accordingly. To avoid misinterpretation and improve the
quality of revised questionnaires, a pilot dissemination of questionnaires has been carried
out using an online survey facility offered by makesurvey.net targeting export-oriented
members of SPECTARIS Berlin (www.spectaris.de) prior to large-scale data collection.49
The good responses indicate that the revised questionnaire is well accepted and
understood.
Due to the unknown number of the population (all experienced national exporters
from Indonesia to EU and from EU to Indonesia), the number of the sample (targeted
respondents) is determined conveniently based on quota. The targeted quota is 50
selected respondents for each selected case. Since the number of cases under review is
six, there have been a total of 300 respondents who filled the questionnaires during the
primary data collection.50 Four different strategies of dissemination and collection of this
questionnaire have been used, including trade fair visits, electronic mailing, online
surveys, and phone calls. The most effective strategy has been the trade fair visits while
the most efficient method is of course e-mail. The more effective method demands more
time and cost.
The strategy of data collection is set up to guarantee the quality of respondents’
answer since companies participating in an international trade fair are mostly active
exporters, who have been the target population of this research. Before one company is
finally selected as one of respondents, they will be asked whether they already have
firsthand experience doing trade with the EU or Indonesia, respectively. It is obvious that
e-mail dissemination sometimes need to be followed up via phone call reminders. During
49
Spectaris is German trade association of companies producing and marketing the scientific and optical
instruments. Permission and support in dissemination of online pilot questionnaire has been given by
Division of International Trade and Export Promotion as well as Market Research and Statistics Division.
50
A purposive sampling strategy is applied.
trade fair visits and phone calls, some respondents preferred to receive and answer the
questionnaire via e-mail, especially if a prospective respondent felt that he/she was not
the right person to answer the question or if she/he needed approval from higher-rank
management. The planning and preparation has been made at least one month before
conducting the trade fair visits. Because the trade fair must be carefully preselected, well-
determined criterion has been set up. The criteria in selecting trade fair visits are the
following:
a. It should be an international trade fair held in Indonesia and the EU
(Germany),51 where international suppliers (exporters) of selected cases meet
their international consumers (buyers).
b. It must represent at least one of the product lines within the selected sectors.52
The phone call, e-mail, as well as online survey have been used complementarily
with the trade fair visits. Sometimes trade fair visits need to be followed with phone calls,
e-mails, and online survey methods since quite often the personnel of the potential
companies responsible for handling such issues were not available during the trade fair
visits. These last three strategies have been mostly used in collecting primary data in
Indonesia since there were not many relevant trade fair events held during the three-
month survey in Indonesia. Nine trade fairs have been selected and visited for primary
data collection (see details in Annex 3.4).
3.2.2.2.2 Secondary Data Collection
Some methods of analysis used in the explanatory study require secondary data. In order
to investigate the trade incentives and barriers using secondary data analysis, information
51
Around 75% of world top 20 trade fairs are held in Germany during year 2001 through 2004(Sinn, 2005)
52
Full list of product line within the product sector can be found in Chapter V.
on trade data—namely, export and import development, production capacity, and
consumption rate—have been collected. The development of nontariff and tariff
instruments such as safeguards, dumping, standards and regulations, as well as export and
import taxes imposed by Indonesia and the EU have also been collected from official
sources, namely, the Directorate General for Trade of the European Commission (DG
Trade) and the Indonesian Ministry of Trade. Data on tax and tariffs imposed are
identifiable by their HS numbers.53 According to WTO’s news, access to tariff data
formerly had been cumbersome and limited to trade specialists. This has changed since
the publication of World Tariff Profiles by the WTO, UNCTAD, and ITC, providing
detailed data on bound and applied tariffs of the 150 WTO members (WTO 2007).
Standards and regulations have been used also in gap analysis while complaints inventory
is required to identify existing barriers. A gravity model analysis requires secondary data
on economic size and distance. An indicator of economic size is available in the
periodically published report, such as IMF Economic Outlook, European Central Bank,
Eurostat, and Indonesian Central Bank, while distance data have been taken from French
Research Center in International Economics (CEPII).
3.2.2.3 Methods of Data Analysis for Explanatory Case Study
3.2.2.3.1 Method of Primary Data Analysis
The frequency of primary data collected from a total of 300 respondents has been
tabulated and analyzed. The frequency of answers from respondents has been analyzed
53
The HS number is a six-digit nomenclature in which the first two digits form chapters numbered 01-97,
the goods being classified according to material. States that have signed the Harmonized System
Convention have committed themselves to employ this six-digit system while being free to use a more
detailed classification with a greater number of digits at the national level. The EU Customs Tariff is an
eight-digit classification that complies with the six digits of the HS with the addition of two digits that are
used in some instances for a more detailed breakdown according to EU requirements. The HS includes over
5,000 numbers.
using the chi-square test. Table 3.4 illustrates the chi-square analysis of each determinant
identifying whether one determinant significantly meets the hypothesis that trade
incentives and barriers are independent to export performance (cases are in agreement).
The chi-square analysis is used to test the null hypothesis (H0), stating that there is no
significant difference between expected and observed data. In other words, those
determinants are independent to export performances. Therefore, those determinants that
accept the null hypothesis and reject the alternative hypothesis (H1) will be selected as
significant trade incentives and barriers. On the other hand, trade incentives and barriers
that reject the H0 and accept/reject the H1 will be rejected as significant trade incentives
and barriers influencing Indonesian and EU export performance. Results of the chi-square
analysis have been presented in table format by referring to the work of M. Skorek and
M. Schreier (2009).
Table 3.4: Illustration of Chi-Square Analysis of Primary Data Frequency 6
Variable Case 1 Case 2 Case 3 H0 H1 Significance
1 √ √ √ Accepted Rejected Significant

2 √ √ √ Rejected Rejected Insignificant
3 √ √ √ Rejected Accepted Insignificant
4 X √ √ Will not be further analyzed
… … … … … … …
Note: √ = Frequency ≥ 5, X = Frequency < 5
Source: Author’s illustration
The logic of using this method is simply because a generalization can be made if
all cases in different performance characteristics that present all market situations are in
agreement with the H0 statement for tested incentives or barriers to trade. Statistically,
the significance of trade incentives and barriers is confirmed if the chi-square value (X2)
< 5.99 and asymptotic significant value > 0.15. The determinants have not been analyzed
further if one of the cases has a frequency < 5.

3.2.2.3.2 Methods of Secondary Data Analysis
Since concluding without comparing is not recommended, secondary data analysis deems
as necessary to complement the primary data analysis. There are four different methods
of analysis applied. The variation of the four tools can be used to investigate the
consistencies or contradictions between the different methods in this kind of case study.
However, the contradiction of results found in different methods has been seen as a
normal phenomenon in social research; therefore, the result in one method will not
eliminate the results of others, but rather supplement them. This should not create any
problems in drawing the conclusions and formulating recommendations. Those four
methods of analysis used include the supply-demand analysis on trade incentives and
barriers, gap analysis, complaints-inventory analysis, and gravity model.
Supply-Demand Analysis
The first method—namely, supply-demand analysis on trade incentives and barriers—
investigates potential incentives and barriers of trade in both supply and demand in six
selected cases. Potential trade incentives investigated in this analysis are market size and
production capacity, including production and consumption data. Both tariff and nontariff
barriers have been investigated, including the development of tariffs and trade regulations
that might hinder trade flows.
Gap Analysis
The second method of secondary data analysis used is gap analysis. This is a very useful
method of analysis focusing on trade policies for future improvement. This method has
been widely used in strategic marketing analysis. In doing gap analysis, there are
straightforward steps to follow. The first step is to determine market entry requirements,
including product quality requirement, supply chain regulations and product standards,
and labeling in the target market for each selected case (market demand). The second step
is to find out the ability of exporters of the partner country to comply with those entry
requirements. This involves a literature study on the credibility and capability of national
certifying bodies as well as the availability of technology and equipment. Answering the
questions “What does the target market want exporters to comply with?” and “How does
the ability of exporters to comply with the market access requirements?” should show the
existing gap, if any. The gap locates between what existing products supply condition and
what the consumer demands. The condition will be considered as the gap if the market
requirement cannot fully or partially be met at the time of study due to lack of
technology, knowledge, and information (the criteria of the existing gap). As the
implication to policy, stakeholders—including suppliers, buyers, and the government in
question—must fill that gap to smooth and grow trade flow.
Complaints-Inventory Analysis
The third method of analysis has been applied in analyzing the complaints inventory filed
by the market access authority of two political entities. The documented complaints can
show us the existing problems of trade flows faced by Indonesian and EU suppliers. The
study using the complaints-inventory analysis is rarely found in literature. This type of
study has been carried out by P. Walkenhorst and B. Fliess (2003) on the effect of EU
nontariff measures by analyzing evidence from the complaints inventory as secondary
data source. Complaints reported and kept by Indonesian and EU trade authorities, as
well as UNCTAD, have been collected, summarized, and thought over. Since not many
complaints were usually recorded, all the filed complaints relating to Indonesia-EU
bilateral trade from all product sectors will be included in the analysis.
Gravity Model
The gravity model is the fourth analysis method used in the secondary data analysis.
Analysis using the gravity model theory has been very useful to show the direct relation
of economic size including GDP, population, and GDP per capita to trade flows. It is also
useful to measure the inverse relation of the geographical distance to bilateral trade flows.
The objective of this analysis is twofold. The first objective is to find out the existence
and nature of those relations in a single variable equation. This has been inspired from
simply showing the existence of the gravity model in bilateral trade flows carried out by
Krugman and Obstfeld (2006). Here, the anomalies of the export volume as the results of
differences in the above-mentioned economic size and distance have been graphically
and empirically investigated. The second objective is to combine all variables in one
multivariable equation in order to find out the significance of each independent variable.
Tinbergen (1962) and Poyhonen (1963) were the first two authors who
implemented the gravity equation to analyze international trade flows. According to this
model, exports from the political entity i to country j might be explained by their
economic size, like GDP, population, and geographical distances. The first two factors
are usually identified as incentives and the last one as barriers to trade flows.
The general gravity law for social interaction like trade flows can be expressed as
follows:
Mi M j Dij
Fij = G ⇔ G = Fij (3.5)
Dij Mi M j
where
Fij = the “flow” from origin i to destination j, alternatively, let FTij represent total volume of
interactions between i and j (i.e., the sum of the flows in both directions: FTij = Fij +
Fji )
M i = economic size of country i

M j = economic size of country j
If F is a monetary flow (e.g., export values), M usually denotes the gross domestic
product (GDP), population, or gross national income (GNI, formerly GNP) of two
countries
Dij = the distance between two countries’ capital cities under review
G = a gravitational constant depending on units of measurement for M and F
Single Linear Equation Model and OLS Estimation
In order to achieve the first objective of this analysis, the basic single linear equation
model has been used. In this case, the correlation between the selected dependent variable
and independent variables has been measured separately. Like Krugman and Obstfeld
(2006), this study has also used a scattered diagram to show the relationships and
anomalies in the observations. The results of the first objective have been used as the
foundation in choosing a suitable model of the multivariable equation (linear, etc.).
Equation 3.6 shows the structure of the single linear equation used:
y = β 0 x + β1 (3.6)
where y here indicates the Indonesian export value, x is independent variable (population,
GDP, and distance), while β 0 and β1 are parameters (constant). Famous for its simplicity
and effectiveness in econometric estimation, this analysis has used the ordinary least
square (OLS) model.
In this gravity model, author has finally opted to use total trade value (export +
import value) instead of sector base trade value for particular reasons. First, the primary
data analysis has suggested that trade incentives and barriers are mostly case (product
sector) dependent. Second, not all EU member countries have a trade transaction with
Indonesia in three selected sectors; hence the percentage of missing data (zero trade
value) is therefore high. Initial probes reveal that taking sector base trade value as
observations (a total of 34,995 observations) have led to the weak robustness of the
model. Third, most of researchers use total trade value in their gravity models instead of
sector base trade value.
In order to achieve the objective, analysis has been carried out based on following
foundation and assumptions: One of the objectives is to find out whether distance plays a
significant role in restricting Indonesia-EU trade flows. The best way to do that fairly is
to include selected countries as references of the variation in distance to Indonesia and
EU. Therefore, data of reference countries including the neighboring East Asia and
Europe countries have been included in the model. Therefore, the estimation model has
used cross-sectional data during the period 1999–2006 from 27 member countries,
Indonesia, and 16 reference countries (n = 44 countries).54 Therefore, there are a total of
28 observed countries with 43 country pairs and 9,632 observations.55
In effort of achieving the objective, it is important to assess the coefficient betas
on explanatory variables along with their statistical significance as well. In this process,
the work carried out by Roberts (2004) on the proposed China-ASEAN Free Trade Area
(CAFTA) has been considered suitable and necessary in modeling Indonesia-EU trade
flows. The second equation model of this analysis has been achieved using the modified
gravity equation model. Here, the GDP per capita difference will be included as well. The
following equation has been used in our model:
54
The 16 reference countries have been selected based on their importance to EU and Indonesian trade as
well as their proximity to EU and to Indonesia. The selected countries for Indonesian case are Australia,
Brazil, Brunei Darussalam, China, India, Japan, South Korea, Malaysia, Nigeria, Russia, Singapore, Saudi
Arabia, Thailand, Turkey, USA and Vietnam (see Graph 4.11 and Graph 4.12). For EU case, Brazil,
Canada, China, India, Japan, Malaysia, Norway, Peru, Russia, Saudi Arabia, South Korea, Singapore,
Taiwan, Turkey, USA and Switzerland (see also Graph 4.13 and Graph 4.14)
55
It has been calculated using following formula: Total observations = (observed countries) x ((observed-1)
+ reference countries)) x (number of observed years) = 28 x 43 x 8 = 9632 observations.
TFij = fn (GDPi , GDP j , pcGDPDiff ij , GDij−1 ) (3.7)
where TF (trade flow) between two countries is the function of the GDP of country i,
GDP country j, the difference of GDP per capita between country i and j, and the
geographical distance among them. Based on that equation function, the multivariable
equation can be presented as follows:
log TFij = β 0 + β1 log(GDPi ) + β 2 log(GDPj ) + β 3 log(GDPDiff ij ) + β 4 log(GDij ) + ε ij (3.8)
In order to do this exercise, the secondary data of GDP, population, and GDP per
capita of all countries under observation have been taken from World Economic Outlook
(IMF 2009), while the distance from each country’s capital city (measured in nautical
miles)56 has been taken from the surface distance between two points of latitude and
longitude provided online by Byers (2009). The trade volume data (export + import) has
been taken from UNSD COMTRADE (2009).
3.2.2.3.3 Conclusion Making and Contribution of Different Methods
To give the answers to the last two research questions (Chapter I, page 4), different
methods have their own requirements in identifying the influencing trade incentives and
barriers. In the cases of primary data analysis (method 1), supply-demand analysis
(method 2), and gap analysis (method 3), the method of agreement has been applied.
Here, all three embedded unit of cases should agree that determinants (incentives and
barriers to trade) have convincing influence in the reciprocal export performance of
Indonesia and the EU. If this requirement is fulfilled, the hypothesis is accepted;
otherwise, it is rejected. In the complaints-inventory analysis (method 4), all factors (in
this case, barriers to trade) listed in the inventory have been accepted as influencing
56
To compare, 1 Nautical Mile equals respectively to 1.853 km.
factors. For the gravity model (method 5), statistic parameters including adjusted R-
square value, standard error, and heteroskedasticity test have been evaluated to know
whether the regression results are already in a good fit. Since Indonesia and EU have
difference levels of GDP per capita (see Table 2.1 and Annex 2.1), the Linder
hypothesis57 has been used to validate the model. In this case, the coefficient value of
GDP per capita difference ( log GDPpcDiff ij ) to trade volume should meet the expected
sign (negative). The significance influence of factors to export value has been determined
by the coefficient value of regression results (significant at 1%); otherwise, it is judged as
insignificant.
It is important to emphasize again that the contradiction of results found in
different methods has been seen as a normal phenomenon in social research; therefore,
the result in one method will not eliminate the results of others, but rather supplement
them. This should not create any problems in drawing the conclusions and the
recommendations. In fact, since each method has used unique data sources, each method
has delivered a genuine contribution in shaping a more robust conclusion that enables the
author to answer the last two research questions mentioned in Chapter I. However, it has
to be made clear that there are two different instruments of analysis in the five methods
used. In the primary data analysis (method 1) and gravity model analysis (method 5),
statistic instruments have been used. Therefore, only in those two methods can we
determine whether the results of factors analysis are statistically significant or not
without undermining the role of the other three methods in making conclusions (see
Table 6.14 and Table 7.8). In the case of selecting priority in policy recommendation and
57
According to Linder’s hypothesis, income level (in our case GDP) would influence the demand of one
country (in our case export demand). The difference in income level would influence trade volume in
negative way.
making, results presented in both Table 6.14 and Table 7.8 can help policy makers and
decision makers to give more priority to factors (incentives and barriers to trade) that
appear as influencing factors in all or mostly all of the five methods applied. We know
that setting up priorities is useful when cost and time constraints are present in policy
making, especially bilateral trade policy.
Since the title as well as the abstract of this study has indicated the use of South-
North framework in studying the international trade relations, one might ask about the
representativeness and applicability issues of this case study. The remaining questions
might be to what extent Indonesia can be considered as representative of the South and
EU of the North as well as the applicability of conclusion taken and policy recommended
beyond the two political entities. Literature study of development economics theories has
suggested that there are in fact similar characteristics within the South and the North
grouping as previously elaborated in section 2.6. From international trade point of view,
the similar characteristics might also be seen from share to international trade volume,
trade pattern and endowment factors. The more convergence is the characteristic of those
other cases with Indonesian and EU case, the stronger the applicability of this study to
those other cases of South-North trade relations. However, the conclusions drawn and the
policy recommendations applied beyond these two political entities are case dependent.
There is no 100% guarantee that conclusions and policy recommendation applied in this
case study is applicable for other South-North case studies. Even, one identical problem
might have different solutions depending on for instance the availability of resources,
cooperation level as well as cultural and political issues of those particular countries.
Chapter IV Indonesian and EU Trade Pattern
4.1 Volume of Trade
4.1.1 Indonesian Trade Volume with the World
Indonesian trade with the world has experienced an increasing trend in the last two
decades. Its outward-looking ways and export promotion policy are among keys for that
achievement. Short-lived turbulences to this positive growth did happen. As mentioned
by Nofri and Werner (2008:8), the Asian financial crisis had a short-lived but quite
dramatic impact on Indonesian exports and imports. Exports went down to -8.59% in
1998 from 7.29% the previous year, while import growth reached a record low of -34.4%
in 1998 after reaching -2.91% the previous year (see Annex 4.1).
Despite the gladdening increase of Indonesian trade volume, especially exports
and trade surplus, it contributes only 0.707% and 1.0018% to the total world exports and
imports aggregate, respectively, in 2007.58 This low contribution envisages the current
power of Indonesian economy and productivity. The current 6% consumption-triggered
average annual growth is just not enough to bring Indonesia at least to the same level as
Malaysia and Thailand in many per capita welfare-related economic indicators.
Indonesian exports and imports grow in average by 12.85% and 21.39%,
respectively, during 1999–2008. Export has grown by 13.19% in 2007 compared with the
previous year. Exports exceeded USD 100 billion for the first time in 2006, resulting in
trade surplus of USD 39.73 billion. The 20.08% increase of export in 2008 cannot stop
the decline of Indonesian trade surplus (see Graph 4.1 and Annex 4.1). The sharp fall of
58
As natural resource rich country combined with estimated population around 242 Million in year 2010,
Indonesia should be able to contribute more shares to the world exports and imports.
trade surplus in 2008 has been the impact of a very strong growth of import—namely, by
73.55%, which is the largest ever.
Graph 4.1: Indonesian Trade Volume with the World (1989–2008) 4

140
Value (in USD Billion)bbbb
Export Value
120 Import Value
100
80
60
40
20
Year
Source: Author’s compilation and depiction, data from UNSD COMTRADE (2010)
Indonesian imports reach USD 61.07 billion in 2006 with an annual growth rate
of 5.84% in 2006. The increase of Indonesian import volume is observed in the following
year. Import volume reached USD 74.47 billion with 21.94% growth in 2007. This
increase of import volume has also contributed to the slight decline of Indonesian trade
surplus in 2007. The volume of Indonesian trade did not decrease in 2008. Both exports
and imports did increase in 2008 indicating the strength of Indonesian foreign trade in
surviving financial and economic crisis.59
4.1.2 EU Trade Volume with the World
Graph 4.2 depicts an increasing trend of the EU trade volume, both in export and import.
EU import volume has surpassed that of export in the last decade, resulting trade deficit.
59
Crisis had been triggered by dramatic rise in mortgage delinquencies and foreclosure in the United
States. Because of negative impacts to world economy, IMF (2008, p. XV), has observed that many
advanced economies are moving into recession while growth in emerging economies is weakening.
Indonesian and EU Trade Pattern | 73
The annual average deficit reaches the amount of USD 159.71 billion in the last decade.
On average, EU external exports and imports grow by around 12.11% and 12.48%,
respectively, in the last decade. As the aggregate volumes of EU exports and imports
(including its internal trade) reach around USD 5.24 and USD 5.42 trillion, respectively,
in 2007, the EU has contributed around 39.52% and 38% to world export and import,
respectively (see Annex 4.3). If the EU intra-trade is excluded, the EU contribution to
world exports and imports aggregate would be around 17.4% and 19% in 2007. This
brings EU as the largest contributor in exports to the world, leading China and the US, in
second and third place, respectively. This statistic also brings EU as the second-largest
importer of the world after the US. The large EU contribution to world’s exports and
imports has made the EU as one of the most important trade partners for many countries
including Indonesia.60 To compare, Indonesia contributes 0.86% in export and 0.52% in
import to world trade, while ASEAN contributes 6.17% in export and 5.37% in import to
world trade in 2007.
Graph 4.2: EU Export–Import Development (2000–2008) 5

2.500
Value (in USD Billion) 00000
External Export
External Import
2.000
1.500
1.000
500
-
2000 2001 2002 2003 2004 2005 2006 2007 2008
Year
(500)
60
EU is Indonesian second largest trade partner after Japan in 2007.
It has been predicted that the ongoing world crisis would also affect EU trade
performance for 2008 onward in a negative way. The EU leaders very much expected
that the ongoing crisis would not encourage EU trading partners, especially the US, to
protect their markets.61 Observing new development, current leadership in the US has
explicitly announced its further concern on reducing dependency on foreign suppliers and
to concentrate on domestic industries’ competitiveness (Goolsbee 2008).62
4.1.3 Indonesia and EU Trade Volume
The value of trade volume of goods between Indonesia and EU has been growing in a
cyclical and bumpy form in the last two decades (see Graph 4.3). Indonesian export
volume develops steadier than the EU one. The Asian financial crisis in 1997 is an
important year in describing trade relations between Indonesia and the EU. The crisis has
caused EU export value to Indonesia drop by 53.81% in 1998 (see also Annex 4.2).
Graph 4.3: Indonesian and EU Exports and Trade Balance (1989–2007) 6

14
Value (in USD Billion) 00000
Indonesian Export
12 EU Export
Trade Balance
10
(2)
Year
61
USA has been EU first rank export destination for years (see Graph 4.11).
62
Auston Goolsbee is economic advisor during the campaign of President Obama.
The reasoning for such a tremendous drop is, up to this point, still not clear,
which makes this kind of work more challenging. Further study on the impact of the
Asian financial crisis to EU export volume to other ASEAN countries also reveals a
similar drop.63 Overall, EU exports to ASEAN countries dropped by 35.19% in 1998. On
the contrary, referring back to Graph 4.2, there was no such dramatic drop in EU exports
to the world during the Asian financial crisis. It indicates that an economic crisis has
given a worse impact to EU exports volume to the crisis area rather than the rest of the
world. The Indonesian export value also faced the drop during that crisis, but only in a
reasonable scale of 4% in 1998 and another 8% drop in 1999.
The year 2000 is one of growth for both trade partners. Indonesian and EU
exports to each other grew by 22.33% and 22.96% successively in that particular year.
This very impressive growth of Indonesia-EU bilateral export in 2000 has been one of the
indicators of the normalization of Indonesian and EU trade flows after the crisis, although
it has not fully back to normal. In 2001, Indonesian exports dropped again by 10.64%,
while EU exports dropped by 1.05%. During the period 2002–2007, both Indonesian and
EU exports have positively grown. The latest statistics have indicated that Indonesian and
EU exports to each other have grown by 10.64% and 17.29% in the amounts of USD 12.8
billion and USD 7.2 billion, respectively.
In terms of trade balance between Indonesia and EU, two eras have been
identified. The first era is the precrisis era (1990–1997). During this seven-year era, the
EU has mostly experienced an annual trade surplus toward Indonesia, except in 1994. On
the contrary, Indonesia has been experiencing an average trade surplus of USD 4.13
billion a year within the new era (1998 onward). This amount of surplus contributes
63
Most possible answer is that the wait and see attitude of EU supplier as the consequence of instable
exchange rates at that time.
around 15% of the total of Indonesian annual trade surplus. The benefit of this surplus
has been shared by both local as well as foreign exporters, including European companies
operating in Indonesia. However, there is no adequate data available about the sharing
percentage of the benefits sharing between local and foreign players. Since Indonesia is
not included as one of EU’s major trading partners, this continuous deficit might not
worry EU too much as long as supplies for rare raw commodity remain undisturbed due
to the different levels of economic size.64 It will be an adversity if trade deficit occurred
on the Indonesian side. This might draw the big picture of South–North trade relations in
a way that EU (the North) has a bigger bargaining power compared with Indonesia (the
South).
4.2 Trade Structure
4.2.1 Indonesian Trade Structure with the World
Prior to the Asian financial and economic crisis in 1997, Indonesia has experienced a
historic economic transformation characterized by drastic changes in economic structure,
industrial formation, and trade pattern.65 During this period of rapid growth, initiatives for
deregulation in 1983–1995 had contributed to a further expansion of the private sector.
Deregulation and conglomeration have resulted in an increase of foreign direct
investment flows since 1990 (Nofri and Werner, 2008).
64
Indonesia supplied only 0.68% to total import of the EU in year 2007 while EU export to Indonesia
contributed only 0.44% from its total export in the same year.
65
Thee Kian Wie (in Touwen, 2003) had divided the “new order” government led by Soeharto into three
different phases of economic policy that each deserves further detailed investigation. The three phases are
(1) economic stabilization, rehabilitation, partial liberalization and recovery (1966-1973); (2) oil booms,
rapid economic growth, and increasing government intervention (1974-1982) and (3) deregulation-
conglomeration (1983-1998).
Regarding this deregulation and conglomeration, Soesastro and Basri (2005)
mention that no less than 20 different reform packages had taken place aimed at
increasing economic efficiency, encouraging investment, and stimulating non-oil and
non-gas exports. Specifically in trade policy, import substitution policy has been replaced
by export promotion policy in early 1980s. Since then, both export and import values
have substantially increased, while export structure, especially export of manufacturing,
has changed dramatically (Graph 4.2.).
The process of industrialization has also been rapid, and various indicators show
that the process of industrial upgrading—from low to higher value-added manufacturing
and from the dominance of natural resource based on labor and, even further, to capital-
intensive industries—has been taking place (Aswicahyono 2004a). Graph 4.4 depicts the
changes in structure of Indonesian exports to the world from 1967 to 2001. Until the late
1970s, manufacturing exports constituted no more than 4% of total exports. By 1987, the
share of manufacturing exports had surpassed the share of agricultural exports and in
1992 overtook the share of fuels, ores, and metals exports.
Graph 4.4: The Structure of Indonesian Exports to the World (1967–2001) 7

90
Agricultural raw materials
80 Fuel, ores and metal
Manufactures
70
Percetage of Exports
60
50
40
30
20
10
-
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Year
Source: Author’s compilation and depiction, data from World Bank (2014)
Since 2001, the Indonesian export structure has not changed much until now. In
order to see next development, further study has been carried out using raw data from
UNSD COMTRADE (Graph 4.5). There are some differences between this study and the
previous study by Aswicahyono, chiefly in the method of classifying agriculture
products. First, in the previous study carried out by Aswicahyono, all goods stemming
from agriculture industry including manufactured goods have been included as
agriculture products. That is why the figures have been larger. In this study, only raw
agriculture goods have been included. Second, this study separates fuels from other
primary commodities like ores and metal. This separation is important due to the
dominance of Indonesian fuels export for decades. This is also useful to monitor the
Indonesian dependency rate to energy. In other words, this descriptive study
differentiates between agriculture raw material, fuels, and manufactured goods.
Graph 4.5 confirms the previous depiction of Graph 4.4, wherein exports of
manufactured goods have surpassed fuels export in 1991. At that time, cork and wood
manufactures (SITC 63), clothing (SITC 84), textiles (SITC 65), footwear (SITC 85), and
miscellaneous manufactured goods (SITC 89) are the top 5 most exported manufactured
goods of Indonesia contributing, respectively, 26.96%, 18.56%, 14.39%, 8.15%, and
3.26% to product group. It means more than 71.33% of export comes from that five
mentioned products alone. Currently, wood manufactures, footwear, and miscellaneous
manufactures goods are no longer found in the top 5 of Indonesian exports to the world.
Their positions have been replaced by electronic (SITC 77), nonferrous metals (SITC
68), and paper, paperboard, etc. (SITC 64). Clothing, accessories, and textile remain in
the top 5 group of Indonesian exports to the world in 2007; contributing 12.17% and
7.94% to total exports of manufactured goods (see details in Annex 4.4). Those top 5
manufactured products have a share of 45.21% to total exports of manufactured goods in
2007. The reduction of share of the top 5 Indonesian most exported manufactured goods
from 71.33% in 1991 to 45.21% in 2007 indicates the success of the Indonesian strategy
in diversifying its export aiming at reducing Indonesian dependency to fuels export
during the years under review.
Graph 4.5 also depicts that both manufactured goods and fuels faced a short-lived
negative impact from the 1998 financial crisis. However, the percentage of Indonesian
exports of manufactured goods has been constantly decreasing from 57% in 2000 to 42%
in 2007 as the share of nonfuel primary commodities is rising. Therefore, if the share of
fuel and nonfuel commodities is combined, the total share of all primary commodities
amount to 50%, which is 8% higher than the export share of all manufactured goods in
2007. This phenomenon could have been caused by the rise of commodity price during
2003–2007.66
Graph 4.5: Indonesian Export Structure to the World (1989–2007) 8

80
Primary commodities, excluding fuels
70 Fuels
Exports (Percentage)
Manufactured goods
60 Agricultural raw materials
50
40
30
20
10
0
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Year
66
Further information on the rise of commodity price index and its peak can be found in Matthies (2007a
and 2007b). The updated development of world commodity price index is available online at http://hwwi-
rawindex.org/ including the downward trend of commodity price index following its peak in 2008.
Despite the increase of fuel price, fuel export increased only 1% during 2000–
2007. Interestingly, a two-digit SITC-based statistics analysis reveals that Indonesia has
been becoming a net importer of petroleum (SITC 33) since 2003, with an annual deficit
of USD 9.35 billion in 2007. This is of course a great astonishment as the 2007
estimation of Indonesian proved natural oil reserve is 4.43 billion barrels (CIA, 2008).
This deficit is observed to be increasing year by year. The deficit has been balanced by
other fuel products, namely, significant exports of natural gas (SITC 34) and coal (SITC
32) with an annual trade surplus of USD 9.89 billion and USD 6.67 billion, respectively,
in 2007 (Annex 4.4).
As has been mentioned previously, the Indonesian export of nonfuel primary
commodities has been constantly increasing.67 However, at the time of writing, the price
of world commodities has tumbled to a record low due to the world economic slowdown
starting after surpassing its peak in the middle of 2008. Therefore, the new development
of Indonesian exports of primary commodities including fuels is expected in 2008 and
beyond. Fixed vegetable fats and oils (SITC 42) is not only Indonesia’s most exported
commodities with a share of 34.58% to its group but also the most exported Indonesian
products in 2007 (see Annex 4.10). Other commodities including metal ores and scrap
(SITC 28), crude rubber (SITC 23), fish, crustacean and mollusk (SITC 03), as well as
coffee, tea, cocoa, and spices (SITC 07) have been identified as the other top 5 nonfuel
commodities with a share of 28.28%, 18.07%, 7.68%, and 7.73%, respectively.68
Graph 4.6 depicts the structure of Indonesian imports from the world. Despite its
continuous decline, manufactured goods still play an important role in the Indonesian
67
It is believed that the increase of commodities price like palm oil, ores and rubber during under reviewed
years has been some of the possible causes of this development.
68
Trade volume and share details of non fuels primary commodities exported by Indonesia to the world in
2007 can be found in Annex 4.4.
import structure. This product group is dominated by iron and steel (SITC 67) and
organic chemical products (SITC 51), contributing 11.21% and 9.54%, respectively, to
the group in 2007 (see Annex 4.6). The next most imported manufactured of Indonesia in
2007 are general industrial machines (SITC 74), special industry machinery (SITC 72),
and road vehicles (SITC 78). Each contributes, respectively, 8.89%, 7.99%, and 7% to
the total import of manufactured goods in 2007.
The increasing share of fuels import since 1995 is obvious. The most imported
fuel is petroleum (SITC 33). It contributes 99.50% to the total value of fuels imported in
2007 (see Annex 4.4). As has been mentioned previously, Indonesia has been becoming a
net importer of petroleum since 2003.69 The continuous and intensive exploration and
exporting of petroleum, the increase of domestic consumption, and the difficulties in
finding low-cost recovery resources are reputed as the main cause.70
In the group of nonfuel commodities, cereal (SITC04), animal feedstuff (SITC
08), textile fibers (SITC 26), sugar, honey (SITC 06), and pulp and waste paper (SITC
25) have been identified as the five most imported products in 2007. They contribute
19.93%, 11.19%, 11.02%, 10.91%, and 9.97%, respectively, to the total import within the
group. Prior to 2000, Indonesian import structure is still similar to its export. It is obvious
that the share of fuels has surpassed the shares of nonfuel primary commodities imported
from the world to Indonesia since 2001 (see Graph 4.6). If the shares of fuel and nonfuel
commodities are combined, their share to the Indonesian total import reaches 43%, which
is 9% lower than the import share of all manufactured goods in 2007. The share of all
commodities import in 1997 is still 23% of the Indonesian total import. The share has
69
A country will be called as net importer of one kind of product if it has deficit of trade in that particular
product.
70
A presentation from Rakhmanto (2008) has highlighted these tendencies.
almost doubled in the last decade. It means Indonesia imported more and more of
commodities.
Graph 4.6: Indonesian Import Structure from the World (1989–2007) 9

90 Primary commodities, excluding fuels
Fuels
80 Manufactured goods
Export (Percentage)
60
50
40
30
20
10
0
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Year
4.2.2 Indonesian Exports Structure to EU
Does the Indonesian export structure to the EU present a similar pattern with its export
structure to the world? To answer this question, similar methods of compilation and
calculation have been used. It is obvious that manufactured goods remain as Indonesia’s
major export to the EU after a structural change occurred in 1989 when the volume of
Indonesian manufactured goods export to the EU surpassed the share of nonfuel primary
commodities. The share of manufactured goods reached 57.17% of the total exports in
2007. The trends of share of this product group are constantly decreasing since 2000 (see
Graph 4.7). This follows the similar trend as that of Indonesian exports to the world.
The booming of the commodities market, as indicated with the increasing
international commodities price, is believed to be one of the potential causes of the
increasing portion of nonfuel primary commodities exported from Indonesia to the EU

since 2000. This increasing trend has led to the increasing share of this product group
reaching 38.33% of the total exports in 2007. If the world economic crisis did not happen
earlier, the Indonesian export structure to the EU could change into its traditional pattern
when primary commodities dominated Indonesian export to EU (prior to 1989).
It is important and interesting to note that fuels (3)—which is one of the
Indonesian major exports to the world, representing 26% of the total exports in 2007—
played only a minor but slightly increasing role in the Indonesian export structure to the
EU (see Graph 4.7). Fuels contributed only 2.74% of the Indonesian total export to the
EU in 1999. The contribution had doubled to 7.08% in 2006, which then dropped again
to 4.24% in 2007. The geographic distance is possibly one of the determining factors in
explaining this fact.71 It is for instance much cheaper for the world’s largest energy
importer like the EU to import fuels from EU members or from countries that are
geopolitically relatively closer, such as the Russian Federation,72 Norway,73 Africa, and
the Middle East.74 The most exported fuel from Indonesia to the EU is coal. The booming
of the coal market in the EU put Indonesia as its seventh-largest supplier in 2007 (see
Annex 4.9).75
The impact of the Asian financial and economic crisis is also obvious on the
Indonesian export of manufactured goods to EU. Its share decreases around 15% in 1997
compared with the previous year. It takes only two years to surpass the pre-crisis level in
71
Distance means transportation cost. The transportation cost will increase the unit price of the product.
Cost, insurance and freight (CIF) of Coal exported from Indonesia to EU is around 128% of the Free on
Board (FOB) price. It can be calculated by comparing export value reported by Indonesia (FOB based) with
import value for the same product reported by the EU (CIF based).
72
Russian Federation is EU coal and oil largest supplier.
73
Norway is world’s third larger exporter of petroleum and natural gas. It is EU 2nd largest supplier for
petroleum and natural gas.
74
Around 45% of EU oil is imported from the Middle East countries.
75
The booming can be seen from the Indonesian export performance analysis in year 2006 (Chapter V, p.
93).
1996. This is in line with the short-lived impact of the crisis in the case of Indonesian
manufactured goods exported to the world. It is interesting to note that most of
Indonesian manufactured goods exported to EU are labor-intensive industries. Clothing
(SITC 84),76 footwear (SITC 85), furniture, bedding (SITC 82), textile yarn, fabric and
others (SITC 65), and telecommunication sound equipment (SITC 76): these products
have been identified as the top 5 most exported Indonesian manufactured goods to the
EU in 2007, with shares to the product group of around 18.21%, 10.65%, 10.64%, 7.56%,
and 7.46%, respectively.
Graph 4.7: Indonesian Export Structure to EU (1989–2007) 10

Fuels
80 Manufactured goods
70
Export (Percentage)
60
50
40
30
20
10
0
Year
Considering that Indonesia is abundant in natural resources, the major exports of
the country to EU members seem not to fully fit the endowment theories mentioning that
endowment factors play an important role in one country’s export pattern. The
domination of the Indonesian primary commodities products like fixed vegetable fat and
oils (SITC 42), metal ores (SITC 28), coal (SITC 32), and crude rubber (SITC 23) can be
found only in 10 EU members’ major imports from Indonesia (see Annex 4.7). The rest
76
Clothing’s position as Indonesian most exported products in 2007 has been replaced by coal and metal
ores that both are from commodities group (see Annex 4.10)
have been dominated by manufactured goods. However, further investigation of the type
of manufactured products exported to the EU carried out in the next chapter has
supported the endowment theories (see conclusion in Chapter V).
As has been highlighted in the previous chapter on theoretical framework, factors
like foreign direct investment (FDI) should have played a more important role in shaping
the export pattern of developing countries, including Indonesia. Indonesian FDI
development has been explained well by Nofri and Werner (2008:11, 12), analyzing the
expansion of foreign investment in Indonesia, including the type of industries since 1990.
It is also mentioned that a closer look at the long-term trends shows that foreign direct
investment in three sectors—industry (chemical and pharmaceutical), electrical (trading
and other services), as well as transportation—represent about two-thirds of the total FDI
inflows in recent years. Another possible reason for this phenomenon is the rise of intra-
firm trade flows.
4.2.3 EU Trade Structure with the World
Statistically, there has been no change in the EU export and import structure in the last
two decades (1989–2007). However, the share of primary commodities export, which
was 15.41% in 1989, has steadily decreased year by year to 12.18% in 2007—a decrease
of only 3.23% within two decades. To compare, while the share of fuels to total export
has gradually increased from 2.27% in 1999 to 4.94% in 2007 (an increase of 2.67% in
eight years), manufactured goods have reached its record low in terms of share for the
last two decades in 2007. New development will be expected in 2008 and beyond due to
the ongoing crisis of the world economy starting in the EU’s largest exports destination,
namely, the US.

The EU major export to the world is manufactured goods bolstering up 77.61% of
the EU total export in 2007. Road vehicles (SITC 78) is the EU’s first rank export within
this product group, followed by general industrial machinery (SITC 74) with shares to
manufactured goods of 13.77% and 6.75%, respectively, for the same year. The next top
5 in 2007 are electronic machinery apparatus (SITC 77), medicinal/pharmaceutical
products (SITC 54), and iron and steel (SITC 67) with shares 6.73%, 6.33%, and 4.79%,
respectively (see detail in Annex 4.5). All of these top 5 industries are capital-intensive,77
involving a higher degree of gain as well as risk. To compare, the Indonesian top 5
manufactured goods are mostly labor-intensive, like clothing and textile, footwear, and
furniture. This distinguishes between the pattern of manufactured goods exported by
Indonesia and the EU that might respectively represent the common pattern of
manufactured goods exported by Southern and Northern countries.
Nonfuel primary commodities contribute 12.18%, while fuels contribute 4.94% to
EU exports to the world. The EU export of agriculture raw materials plays a minor role.
The share of this product group is 1.34% in 2007 (see Graph 4.8). All together, primary
commodities including fuels contribute 17.12% to the EU total export in the same year.
Nonferrous metals (SITC 68) and vegetables and fruits (SITC 05) are ranked the first and
the second in the top 5 of nonfuel primary commodities contributing 17.20% and 10.85%
to this product group. The next three top 5 are beverages (SITC 11), metal ore and scrap
(SITC 28), and meat (SITC 01) with shares of 9.06%, 7.71%, and 7.47%, respectively, to
this group in 2007 (see details in Annex 4.5). As the largest fuels importer, EU exports
77
Capital intensive industry is industry that requires a huge amount of capital resources to produce goods
such as automobile and chemical products. This kind of industries involves high investment in fixed asset
such as property and machinery. For this reason these industries are vulnerable towards crisis. If sales
volume decrease due to decrease of demand during the crisis, loses will increase dramatically since fixed
cost can not be removed or reduced. However capital intensive industries promise a high level of
productivity with helps of high technology generating more income and finally living standards of a
country.
only half of its imported fuels. This gap has contributed to more than the USD 325 billion
deficit in this sector in 2007. The most not only exported but also imported fuels are
petroleum (SITC 33) and natural gas (SITC 34).
Graph 4.8: EU Export Structure to the World (1989–2007) 11

90
80
70
Export (Percentage)

50 Fuels
Manufactured goods
30
20
10
0
Year
There have been no changes in the EU import structure observed in the last two
decades. As depicted in Graph 4.9, the share of EU imports of manufactured goods in
2007 has touched the lowest record in the last two decades, namely, 69.31%. On the
contrary, the share of EU imports of fuels has been increasing since 2002, exceeding the
10% share level for the first time since 2004. EU fuel imports almost surpassed the
position of nonfuel primary commodities in 2006 before slightly declining to 11.66% in
2007. More than 78% of the EU import of fuels is petroleum in the amount of more than
USD 435 billion in 2007 (see Annex 4.5). EU imports of natural gas in 2007 was USD
85.8 billion, securing its position as the EU’s second most imported fuel sharing 15.41%
of the total fuel imports. Coal and electric current shared the rest of the pie, contributing
4.24% and 2.10%, respectively, to the EU total fuel imports. All these figures strongly
indicate the EU’s dependency on energy. As understood, energy dependency is closely
related with the volatility of competitiveness, homeland security, and the bargaining
power of one country. It demands fast and even more difficult alternatives to current
solutions.
Graph 4.9: EU Import Structure from the World (1989–2007) 12

90
80
Export (Percentage)
70
60 Fuels
Manufactured goods
50
40
30
20
10
0
Year
The dependency of the EU toward energy supply is growing in the last five years.
Besides endowment factors such as the decreasing domestic production, the increasing
consumption of energy is also a problem. Energy expert Liuhto (2008) has warned that
the growing EU energy-import dependency is a major risk, and Russia plays an important
role in the EU energy supply (see Annex 4.5). Occurrences like the Ukraine energy
supply conflict involving Russia’s Gazprom in early 2009 and the Japan earthquake
triggered by a tsunami could change the world’s nuclear energy policy. This should be
considered as a clear message not only for the EU but also to all other nations on the
urgent need of a sustainable energy policy. The key players of the EU in the energy
supply business are oil companies from the United Kingdom, Netherlands, Belgium, and
Germany.78
4.2.4 EU Exports Structure to Indonesia
Compared with Indonesia, EU exports to Indonesia have a more consistent structure in
the last two decades. The supremacy of its manufactured goods can be found in its export
structure to Indonesia. The share of this product group in the EU total exports to
Indonesia reached 89.23% in 2007. The structure development is rather bumpy and
fluctuating. The dramatic drop of the share is obvious in the years following the start of
the Asian financial and economy crisis in 1997 (see trends during 1997–2000 from Graph
4.10).
Further study on the composition of EU manufactured goods exported to
Indonesia reveals that the share of the top 5 most exported manufactured goods is well
distributed (see Annex 4.6). Telecommunication and sound equipment (SITC 76) and
other transport equipment (SITC 79) are ranked the first and second, gaining 12% and
11.73% of the EU total export of manufactured goods in 2007. Special industry
machinery (SITC 72), electronic machinery apparatus and parts (SITC 77), and general
industrial machinery (SITC 74) secure the next ranks in the top 5 list of this product
group. They successively contribute 11.41%, 9.30%, and 8.46% to the group.
In general, Graph 4.10 depicts that EU exports to Indonesia have been dominated
by capital-intensive manufactured products, while the export of primary commodities
(SITC 1, 2, 3, 4, and 68), most notably fuels and lubricants (SITC 3), plays only a minor
role. Fuels and lubricants contributed only 0.30% to the whole structure of EU exports to
78
United Kingdom and Netherlands are identified as top ten largest petroleum exporters in the world.
Indonesia in 2007. Here, endowment factors like natural resources and distance might
play an important role. The domination of primary commodities like pulp and waste
paper (SITC 25), dairy products (SITC 02), and tobacco (SITC 12) have been found in
the export of only four EU members to Indonesia in 2007 (14.81%). The rest have been
dominated by manufactured goods. Careful observation of Annex 4.8 reveals that there is
a remarkable likeness of the structure of export of each EU member state to Indonesia.
Machinery, and transport equipment (SITC 7) have been the most exported products by
17 EU members (63%), while chemical products (SITC 5) have played an important role
in only three EU member states (11%). This is well matched with the structure of the EU
export aggregate, in which the share of manufactured goods has been remarkably
dominant.
Graph 4.10: EU Export Structure to Indonesia (1989–2007) 13

90
80
Export (Percentage)
70
60 Fuels
Manufactured goods
40
30
20
10
0
Year
4.3 Trade Partners’ Composition
4.3.1 Indonesian Trade Partners’ Composition
Indonesian trade is predominantly North–South with a low but increasing proportion of
South–South trade. Most of Indonesian exports go to Japan, the EU, and the US, which
together account for 42.11% of the total of Indonesian exports in 2007 (see Graph 4.11).
Indonesian exports to ASEAN countries in 2006 and 2007 only count for 17.93% and
19.54%, respectively. It is however on the rise with a growth of 23.33% in 2007,
maintaining the ASEAN share in second place at 19.54% during the same year. It is
relatively small compared with Germany’s export share to EU, reaching 54% of its total
export in 2007. The goal of ASEAN Economic Community is to establish a free trade
zone with a coordinated security policy, which has been rescheduled for 2015. It is
interesting to know in the future how Indonesian exports to ASEAN would further
develop under a more integrated ASEAN market.
Graph 4.11: Indonesian Main Export Destinations (2003–2007) 14

25
20 2003
2004
Share (%)
15 2005
10 2006
2007
5
an N EU US
A ina re a ia
In d ustral
ia
th e
rs
Jap EA Ch Ko
AS A O
Trade Partners
As depicted in Graph 4.11, China and India belong to a growing market share for
Indonesian exports, while Japan, EU, and the US belong to the decreasing one.79 The
annual average growth of Indonesian exports to China and India is 26.74% and 30.20%,
respectively. On average, Indonesian exports have grown, respectively, by 14.89%,
12.55%, and 12.19% to Japan, EU, and the US in the last five years. To compare, the
annual average growth of Indonesian total export for the same period is 16.94%.
Graph 4.12 depicts Indonesian import origins from 2003 to 2007. It is obvious
that most of Indonesian imports in 2007 originated from ASEAN, China, EU, Japan, and
the US with shares to total import of 31.95%, 11.49%, 10.32%, 8.76%, and 6.44%,
respectively (see Graph 4.13). Those five main import origins contribute 68.96% of the
total of Indonesian import in 2007. The share of Indonesian import from ASEAN
countries and China is increasing in the last five years with an average annual growth of
32.10% and 30.92%, respectively, while the Indonesian import share originating from
EU, Japan, and the US is decreasing. The influence of closer distance and regional trade
agreements (RTAs) are again apparent. The existence of a Middle East country like Saudi
Arabia replacing India is the only difference between the Indonesian main import and
export country composition.80
79
The surge of Indonesian flow of exports to China and India has been the result of their strong demand for
raw materials, coupled with rises in the prices of some of these commodities.
80
More than 88% of Indonesian import from Saudi Arabia in 2007 is petroleum.
Graph 4.12: Indonesian Main Import Origins (2003–2007) 15

35
2003
30
2004
25 2005
Share (%)
20 2006
15 2007
10
5
0
lia
.
a
n
EU
s
N
ea
SA
A
in
er
pa
tr a
A
or
i
Ch
th
U
ud
Ja
SE
us
O
Sa
A
A
Partners
As a member of ASEAN + 3, China has signed a free trade agreement (FTA)
starting with the ongoing tariff reduction with ASEAN. The increasing share of
Indonesian export to China is not the only impact of the FTA. The share of Indonesian
import originating from China has been increasing as well as boosting the trade volume
between two political entities. China has replaced the EU’s position as Indonesia’s
second main import origin since 2006. The Indonesian main imports from China in 2007
are iron and steel (SITC 67) and telecommunication sound equipment (SITC 76),
contributing 20.82% of the total import. It means China is clearly the EU’s key
competitor for those two products in Indonesia since they are the EU’s top 5 exports in
2007 (see Annex 4.11). As explained by Nofri and Werner (2008), Indonesia signed its
first Economic Partnership Agreement (EPA) with Japan and the ASEAN Charter in
2007. The ASEAN Charter, in particular, has shaped ASEAN as a legal entity. Indonesia
has also signed the world’s largest FTA with China—namely, the ASEAN–China Free
Trade Area (ACFTA)—through ASEAN in 2010. As multilateral trade liberalization has
been suspended, it is reasonable to predict that Indonesian trade flows will intensify more
with Asia. On the contrary, it is difficult to predict the future shifts of Indonesian trade
flows within the Asian market since trade liberalization is deepening with all Asian
partners. However, unconsolidated trade statistics of 2008, 2009, and 2010 show that
Indonesian imports from Singapore and China have doubled in value.
4.3.2 Indonesian Exports Destination to EU Members
Annex 4.7 has depicted the Indonesian export share to each of EU member state and
major products exported. It is obvious that most of the Indonesian exports to EU in 2007
went to Western Europe (EU-15), representing about 97.02% of the total exports. A
minor export share with 10 new EU member states has been observed, sharing only
2.98% in 2007. A closer look at the Indonesian export destination to EU members has
revealed that the Netherlands is the most important market for Indonesian products in the
EU, followed by Germany, Spain, United Kingdom, and Italy, covering all together
73.35% of the Indonesian total exports to EU in 2007. This is an absolute majority.
Table 4.1: Economic Size of Indonesian Major Trade Partners in EU in 2007 7

Population in GDP/PPP/Capita in Import Share81 Export Share82 in
EU Members
Mio (Rank) USD (Rank) in % (Rank) % (Rank)
Germany 82.2 (1) 28,600 (10) 18.13 (2) 29.31 (1)

Netherlands 16.4 (8) 32,600 (3) 21.52 (1) 13.04 (2)
Spain 45.3 (5) 26,200 (12) 14.92 (3) 3.68 (8)
United Kingdom 61.2 (3) 29,700 (7) 11.38 (4) 7.77 (6)
Italy 59.6 (4) 25,200 (13) 10.86 (5) 10.20 (3)
Source: Author’s compilation and calculation, data from Eurostat (2008), UNSD COMTRADE
(2008), and European Central Bank (2008)
There are some factors that could possibly explain this composition. First, the
influence of the colonial history factor could possibly explain closer trade relations
between Indonesia and the Netherlands, although the strategic location of the Port of
Rotterdam as the leading entry point of products to the EU single market could also be
considered as one of the factors. Second, export share seems to have correlations with the
81
Import share from Indonesia as reported by Indonesian Authority to UNSD COMTRADE
82
Export share to Indonesia as reported by each National Authorities and Eurostat to UNSD COMTRADE
economic size of EU member states as well. Based on demographic data prepared by
Eurostat, four of five members under review are the five most populous states (see Table
4.1). Besides, the purchasing power of the Indonesian main export destinations to EU is
quite higher than the minor ones. However, further study on those correlations is needed.
4.3.3 EU Trade Partners’ Composition
As observed in Graph 4.13, it is obvious that most of EU exports went to the US,
Switzerland, and the Russian Federation, with shares of 6.89%, 2.46%, and 2.31%,
respectively, in 2007. The sum of the EU export share to EU-15, the US, Switzerland,
and Russia is 70.52% of the total exports in 2007. The EU export to developing countries
including the least developing countries (LDCs) contributes only 15.52% of its total
exports with increasing trends, in which China and ASEAN countries are the only EU
export destinations achieving shares of more than 1% in 2007.83 The EU exports share to
LDCs alone accounts only 0.53% in 2007, in which increasing trends have been observed
clearly in the last four years.84 Three major characteristics of the EU export composition
can be concluded from above observations. First, EU exports have been predominantly
North–North. Second, distance does matter in shaping EU exports’ destination. Third, the
EU export share to developing countries including LDCs has been relatively low in
slowly increasing trends.
83
Share of EU exports to developing countries including LDCs shows an increasing trend. It contributes
respectively 14.32%, 14.47%, 15.27% and 15.22% respectively from 2003 to 2004.
84
Share of EU exports to LDCs from 2004 to 2006 is 0.44%, 0.47% and 0.50% respectively.
Graph 4.13: EU Export Destination (2003-2007) 16

50
45
40 2003
35
Share (%)
2004
30
25 2005
20 2006
15 2007
10
5
0
Trade Partners
A careful observation of the EU export destination also reveals that a constant
decrease in the EU export share occurs not only to the US but also to Japan. It is very
likely that the preliminary economic turbulences in the US and Japan prior to the 2008
financial crisis might have decreased the demand from both countries. The other possible
causes are the increase of the EU intra-trade share85 and the stronger competition coming
from China.86 The continuous increase of export share is attributed to the Russian
Federation, China, and India, in which rapid economic growth is obvious in the years
under review. The changes of export share of other destinations under review including
ASEAN are rather stable. It is remarkable that the EU export share with non-EU
members counts for only one-third of its export activity. The other two-thirds of the EU
export share, which are excluded from the Graph 4.13, belong to the intra-trade activities
indicating the effectiveness of the EU single market.
85
Intra trade indicates trade volume among EU members in the framework of European Single Market. It
has been constantly increasing (Eurostat, 2007, p. 36). Intra trade export indicates a high percentage of
share reaching respectively 67.25% and 67.51% in 2006 and 2007.
86
The average growth of China’s export of manufactured goods to USA and Japan are 26% and 16%
successively in the last five years. Manufactured goods are EU major export.
The position of Switzerland as the second-largest export destination of the EU is
quite interesting. Although Switzerland is not a member of the EU, the EU has been, as a
matter of fact, the supplier of more than 76% of Switzerland’s import in 2007. This really
translates how a close proximity and free trade agreement have a tremendous positive
influence. As seen previously in Annex.2, the EU has concluded a free trade agreement in
1972 and the European Economic Area in 1992 with Switzerland. The uniqueness of
Switzerland in the West is comparable to Singapore in the Eastern part of the globe in the
sense of their lack of endowment factors of production where free trade is a must. They
both share the common function of being the center of international activities. Graph 4.14
depicts the EU import origin from nonmembers. The export shares of China, Russia, and
Korea have shown a remarkable increase. China has replaced the US’s position as the
EU’s largest supplier since 2006 following the constant decrease of the US export share
to the EU. A decrease of export share is also obvious in the case of Japan, ASEAN, and
other non-EU member states. Turkey’s export share to the EU has increased slightly in
the last five years, while the share of Korean exports to the EU has gone slightly down in
2007.
Graph 4.14: EU Main Import Origins (2003-2007) 17

20
15 2003
Shares (%)
2004
10 2005
2006
5 2007
Trade Partners
Most EU imports originated from developed countries sharing 72.6% in 2007.87
Compared with export composition, the EU import share from developing countries
including LDCs is slightly higher. It accounts for 21.75% of the EU total import in 2007,
in which only 0.55% comes from LDCs showing one of the examples of an existing gap
in the international trade arena between the South and the North. All three characteristics
previously found in the EU export composition are found again in its import composition.
4.3.4 EU Members’ Exports to Indonesia
Annex 4.8 shows that most of the EU exports to Indonesia also originate from Western
European countries (EU-15). This is similar to the composition of Indonesian exports’
composition to the EU. Exports of EU-15 cover around 95.79% of the EU export to
Indonesia. This is the absolute majority compared with only 4.21% export originating
from Eastern European countries. Again, factors that have been mentioned before like the
size of the economy of the EU members matter to their export shares to Indonesia. Table
4.1 makes it clear that the size of the economy like GDP per capita and population is very
likely to have an impact on the differences in the level of the EU export volume to
Indonesia.
4.4 Conclusions
Indonesia contributes 0.83% and 0.53% to the total world export and import,
respectively, in 2007. Indonesian exports and imports grow with an annual growth rate of
respectively 13.19% and 21.94% during 2007 with a volume of USD 114.1 billion
generating a trade surplus of USD 39.63 billion (see Annex 4.1). The processes of
87
The share of EU export to developed countries in 2003, 2004, 2005, 2006 was respectively 77.14%,
76.42%, 75.19% and 73.94%, indicating the decreasing trends.
industrialization has gradually shifted the Indonesian trade structure from low to higher
value-added manufacturing and from the dominance of raw material–based industries to
labor- and capital-intensive industries (see Graph 4.7).
Indonesian trade is predominantly South–North with a low but increasing
proportion of South–South trade (see Graph 4.11). Most of the Indonesian exports go to
Japan, the EU, and the US, which together account for 42.11% of the total Indonesian
exports in 2007. China and India belong to the growing market share for Indonesian
exports in the last five years, while Japan, EU, and the US belong to the decreasing one.
In the case of the EU, the imports volume has surpassed that of exports again
since 2004, resulting in a trade deficit in the amount of USD 178.08 billion in 2007 alone
(see Annex 4.3 and Graph 4.2). On average, the EU exports and imports have increased
around 8.68% and 8.90%, respectively, in the last two decades. The EU has contributed
around 39.52% and 38% to world export and import, respectively. This indicates the high
productivity of the EU economy. This largest contribution to world trade has made the
EU the most important trade partner for many countries including Indonesia.
It has been obvious that there have been no changes in the EU export and import
structure in the last two decades (1989–2007). The main EU exports to the world are
manufactured goods bolstering up 77.61% of the EU total export in 2007 (see Graph 4.8).
The top five most exported products are from capital-intensive industries involving a
higher degree of gain as well as risk that differentiate the pattern of manufactured goods
exported by Indonesia representing the Southern countries and the EU representing the
Northern countries. The dependency of the EU toward energy supply is growing in the
last five years. Statistical reviews reveal three characteristics of the EU export
composition to the world. First, the EU exports have been predominantly North–North.
Second, distance does matter in shaping the EU export destination. Third, the share of the
EU export to developing countries including LDCs has been relatively low in slowly
increasing trends.
Chapter V RCA Index and Export Performance Analysis
5.1 Indonesian and EU RCA Index
5.1.1 Indonesian RCA Index with the World as Reference
Literature studies show that Indonesian trade specialization (RCA index) in the world has
been calculated by Soesastro (2005) using four-digit-level SITC. In this study, Soesastro
uses UNSD COMTRADE data of Indonesian export from 1985 to 1995, compared with
index from 1995 to 2001. However, he only concentrates in manufacturing products that
distinguish it with this study. The Indonesian RCA index to the world has also been
carried out by Tambunan (2007) using data from the ministry of trade. Tambunan’s study
focuses only in palm oil, with comparison to Malaysia as Indonesia’s main competitor.88
He uses his study for the purpose of illustration only. Calculation of the Indonesian RCA
index toward the world has been done as well by the International Trade Center (ITC) in
Geneva for 2004. The trade database used also originated from the same source of this
study—namely, from the UNSD COMTRADE. The main difference with this study is in
the product codification used. ITC used Harmonized System number (HS number), while
this study used SITC number. Additionally, ITC analysis is based on a one-year RCA
index.
This study calculates the average index of RCA accumulation of the last nine
years, from 1999 to 2006, 2007, and 2008. Therefore, this study can definitely be used as
a future reference about any changes of the RCA of Indonesian trade, considering that the
RCA index can also be used to monitor the changes of country competitiveness. The
88
Indonesia has replaced Malaysian position as world market leader in supplying fixed vegetable oil
especially palm oil in the last two years. Malaysian limitation in plantation area is supposed to be the main
cause.
exercises using the RCA index formula to Indonesian export have resulted in the list of
products that Indonesia has advantage compared to the world, as seen in Table 5.1 (see
the comprehensive results in Annex 5.1).
Table 5.1: Indonesian RCA Index with the World as Reference (1999–2008) 8
1999– 1999– 1999–
SITC Products* Group ∆ Rank Rank Rank
2006 2007 2008
42 FIXED VEG OILS/FATS 1 ↑ 14.33 1 15.21 1 15.60 1
23 CRUDE/SYNTHET/REC RUBBER 1 ↑ 12.75 2 13.38 2 13.92 2
32 COAL/COKE/BRIQUETTES 1 ≈ 8.57 3 9.01 3 8.87 3
63 CORK/WOOD MANUFACTURES 2 ↓ 8.33 4 7.92 4 7.49 4
34 GAS NATURAL/MANUFACTURED 1 ↓ 7.28 5 7.07 5 6.73 5
43 ANIMAL/VEG OILS PROCES'D 1 ↑ 4.84 6 5.71 6 5.92 6
28 METAL ORES/METAL SCRAP 1 ↓ 4.16 7 4.15 7 3.94 8
07 COFFEE/TEA/COCOA/SPICES 1 ↓ 4.12 8 4.12 8 4.08 7
25 PULP AND WASTEPAPER 1 ↓ 3.61 9 3.58 9 3.49 9
03 FISH/SHELLFISH/ETC. 1 ≈ 3.21 10 3.17 10 3.24 10
85 FOOTWEAR 2 ≈ 2.99 11 2.92 11 2.93 11
82 FURNITURE/FURNISHINGS 2 ↓ 2.38 12 2.31 12 2.25 12
84 APPAREL/CLOTHING/ACCESS 2 ≈ 2.21 13 2.18 14 2.20 13
64 PAPER/PAPERBOARD/ARTICLE 2 ≈ 2.18 14 2.20 13 2.17 14
65 TEXTILE YARN/FABRIC/ART. 2 ↓ 2.09 15 2.06 15 2.06 15
33 PETROLEUM AND PRODUCTS 1 ↓ 1.47 16 1.43 16 1.40 16
97 GOLD NONMONETARY EX ORE 1 ↓ 1.35 17 1.33 17 1.27 18
12 TOBACCO/MANUFACTURES 3 ↑ 1.28 18 1.33 18 1.36 17
24 CORK AND WOOD 1 ↓ 1.20 19 1.19 19 1.15 20
68 NONFERROUS METALS 2 ↑ 1.14 20 1.17 20 1.19 19
Notes:
* Products belong to the Indonesian top 20 RCA Index.
(∆ = ↑) denote products with increasing competitiveness.
(∆ = ↓) denote products with decreasing competitiveness.
(∆ = ≈) denote products with fluctuating competitiveness.
Source: Author’s Compilation and Calculation, Raw Data from UNSD COMTRADE (2009)
These results show a strong indication that Indonesia has major comparative
advantage in raw material and labor-intensive products (group 1 and 2), dominating the
top 20 list by 60% and 30%, respectively. There are only two products that Indonesia
specializes in that are from capital-intensive goods. None of the products within groups 4
and 5 appear in the short top list. As noted, the trends of changes can be identified
through colors. The competitiveness of half of the Indonesian top 20 products to the
world has been decreasing, while one-quarter is increasing in the last three years. The
RCA Index and Trade Performance Analysis | 103
other five products develop in a bumpy trend of competitiveness for the same period
under review.
5.1.2 Indonesian RCA Index with the EU as Reference
As literature studies revealed, Indonesian RCA to the EU has never been calculated
before. This guarantees the uniqueness and the importance of this study in the bucket list
of international trade relation literatures, Indonesia-EU trade relations in particular as
well as South and North in general. Therefore, calculation of the Indonesian RCA index
toward the EU has been carried out using the RCA index formula (see Chapter III, p. 48).
This calculation uses value of Indonesian export to the EU from 1999 to 2006, 2007, and
2008. This has resulted in the top 20 list of Indonesian products with comparative
advantage toward the EU as presented in Table 5.2 (see also Annex 5.2 for
comprehensive results).
Careful observation of Table 5.2 indicates that raw material–intensive products
(group 1) and labor-intensive products (group 2) are Indonesian specialized products in
the EU market. Not less than 80% of the top 20 list comes from groups 1 and 2. As a
matter of fact, the groups have dominated the top 15 ranks. There are only two capital-
intensive products (group 3) and two easy-to-imitate research-oriented products (group 4)
found in the top 20 list. They belong to the lower ranks of the RCA index. Observing the
last three years of development, we can conclude that 45% and 35% of the top 20 list are
in a state of decreasing trends and increasing trends of competitiveness, respectively. The
rest, four other products, are in a state of fluctuating trends of RCA index in the last three
years.
Table 5.2: Indonesian RCA Index with the EU as Reference (1999–2008) 9

1999– 1999– 1999–
2006 2007 2008
32 COAL/COKE/BRIQUETTES 1 ↓ 134.95 1 132.84 1 132.10 1
42 FIXED VEG OILS/FATS 1 ↑ 39.87 2 44.32 2 50.02 2
23 CRUDE/SYNTHET/REC RUBBER 1 ↑ 36.66 3 38.51 3 39.73 3
43 ANIMAL/VEG OILS PROCESSED 1 ↑ 16.82 4 19.22 4 22.38 4
28 METAL ORES/METAL SCRAP 1 ↓ 15.71 5 15.32 5 14.27 5
63 CORK/WOOD MANUFACTURES 2 ↓ 12.55 6 12.12 6 11.63 6
85 FOOTWEAR 2 ↑ 10.85 7 11.11 7 11.37 7
07 COFFEE/TEA/COCOA/SPICES 1 ≈ 10.10 8 9.99 8 10.25 8
03 FISH/SHELLFISH/ETC. 1 ≈ 9.23 9 9.25 9 9.18 9
84 APPAREL/CLOTHING/ACCESS 2 8.88 10 8.65 10 8.47 10
25 PULP AND WASTEPAPER 1 ↓ 7.59 11 7.25 11 6.77 11
82 FURNITURE/FURNISHINGS 2 ↓ 6.71 12 6.66 12 6.51 12
65 TEXTILE YARN/FABRIC/ART 2 ↓ 3.31 13 3.30 14 3.23 14
08 ANIMAL FEED EX UNML CER 1 ↑ 3.28 14 3.53 13 3.74 13
24 CORK AND WOOD 2 ↑ 2.32 15 2.49 15 2.68 15
12 TOBACCO/MANUFACTURES 3 ≈ 2.04 16 2.06 16 2.03 16
76 TELECOMS/ETC. EQUIPMENT 4 ↓ 1.93 17 1.88 18 1.85 18
62 RUBBER MANUFACTURES NES 3 ↑ 1.86 18 1.92 17 1.96 17
75 OFFICE/DATA PROC. MACHINES 4 ↓ 1.33 19 1.24 19 1.17 19
05 VEGETABLES AND FRUIT 1 ≈ 1.19 20 1.13 20 1.16 20
Notes:
Source: Author’s compilation and calculation, raw data from UNSD COMTRADE (2009) and
Eurostat (2009)
Based on the Indonesian RCA index to the world and to the EU, conclusions can
be made as follows:
a. Indonesia has specialization in its export to the world and to the EU mostly in raw
material–intensive products (group 1) with strong endowment factors and low
technology involved. Indonesia’s being rich in natural resources for mining enables
the specialization in coal and metal ores. Indonesia’s geographical position stretching
through the equator line across the region of immense seismic and volcanic activities
makes it feasible to extract commercial advantages from tropical plantations—such as
palm oil, rubber, coffee, tea, cocoa, and spices—that most suitably grow in the land
area located < 10° south and north of the equator line (see Figure 5.1).89 As one of the
world’s largest tropical rainforest and tropical wood producer and exporter, Indonesia
has the potential of producing cork, wood, and pulp. In a political-economic
perspective, such traditional specialization indicates that Indonesia has not yet been
able to transform its economy to reach the industrialization phase, although structural
changes of its export in the early 1990s, described in Chapter IV, have indicated
Indonesian progress into the manufacturing world. The continuously decreasing share
of the manufacturing sector in Indonesian export structure can be seen as the initial
signal of the stagnation, if not failure, of industrialization and technology transfer
promised during the last 40 years.
Figure 5.1: Indonesian Map 1
Note: EQ = Equator Line

Source: Generated using WinITDB (Version 2007) and edited with GIMP (Version 2.4.5)
b. The low competitiveness in the field of capital-intensive goods and research-oriented
goods has been identified as the main characteristic of Indonesian export, which
might also be one of the main characteristics of Southern countries’ trade in general.
There are many possible reasons for this. Besides lack of capital, the low quality of
human resources and incorrect development policy could be the other reasons.
89
Indonesia has some 400 volcanoes in which 90 of them are still active within its territory. Ashes come
out from the crater of active volcanoes has been a natural fertilizer for Indonesian soil.
However, policy changes toward improvements are happening. A very positive policy
has been taken lately by the Government of Indonesia (GOI) in the field of human
capital, where the government finally decides to allocate 20% of national budget for
education.90 This policy is endorsed by the Indonesian Parliament. Notwithstanding
the idea of boosting education budget to 20% has been recommended since 2007, this
can only be materialized shortly before the general election scheduled in 2009.
c. In its export to the EU, Indonesia also specializes in labor-intensive sectors, including
footwear and textile. Lower cost of production, especially labor cost compared to the
EU and other developed countries, has made this possible. However, other
countries—like Thailand, China, and Vietnam—also have a similar advantage in
terms of production cost. This makes them the main competitors of Indonesian labor-
intensive products in the EU market.
d. It is true that there is a positive correlation between domestic production resources
with Indonesian export activities. It is also true that relying on lower labor cost only
in promoting Indonesian export can no longer guarantee the success of the promised
transformation of Indonesia into one of the newly industrialized countries. 91 The
genuine collaboration of stakeholders—including research institutions, capital
owners, entrepreneurs, and the government—is seriously required in achieving the
said promise. Current situation shows that foreign capital and technology ownership
combined with Indonesian lower labor cost has resulted in world-class
90
If one country want to develop the industry where sophisticated technology involved, what one should do
first is educating the human resources. Industry will be invested in a country not only because of low wage
and good infrastructure only but also because of its well trained and educated human resources in line with
the development of new technology..
91
Indonesia was well known as one of Asian Tigers during Soeharto leadership, which is leap service. The
real Asian tigers are South Korea (now one of G-20 and OECD members), Singapore, Taiwan and Hong
Kong that should be a role model for Indonesia future development policy.
competitiveness in the export of Indonesian labor-intensive products. The presence of
international brands of shoes and apparels that Indonesia is currently exporting is
clear evidence.
e. In comparison to the Indonesian RCA index to the world, Indonesian export
specialization to the EU is rather similar in terms of product group. The minor
difference is believed to be caused by non-regulatory factors, such as distance.92 For
fresh products such as vegetables and fruits, Indonesia has lower advantages to the
EU because of distance. This is reasonable since distance influences the quality of
fresh products after their arrival in destined countries. However, this is not the case
for other Indonesian potential fresh products—in particular fish products, for which
cold chain technology has been made available in Indonesia by international
technology providers.93 Here, we can learn how technology can break trade barriers
that are impossible to do without.
f. Concerning the degree of comparative advantage, Indonesia has stronger comparative
advantage in its export specialization with the EU than with the world aggregate
(compare Table 5.1 with Table 5.2). This tendency indicates the existence of strong
interdependency between these two political entities in international trade. Indonesia
definitely needs high-technology production equipment that it cannot yet produce.
Vice versa, the EU definitely needs raw materials that it also cannot produce or it will
no longer want to produce. It is important to underline that dependency on import of
one commodity has not always necessarily indicated the scarcity of that commodity
in one country. One country might have decided to import one commodity that it can
actually produce, with various arguments. One country could possibly have chosen to
92
The results of analysis in Chapter VI should give us information about the influence of these factors.
93
Information on Indonesian cold chain association is available at http://www.arpionline.org/news.php.
stop producing and start importing domestically available commodities in order to
protect the environment or to save them for future generation. As the largest single
market, EU trade destination is mostly an intra-trade rather than an external one.
Since this study focuses only in the external trade of the EU as political entities, it is
too early to conclude that the EU always cannot produce products that Indonesia is
specializing in, unless production factors for producing those products is badly scarce
in the EU.
5.1.3 EU RCA Index with the World as Reference
The calculation of the EU RCA index with the world as reference in its current size of
membership is not found in the literatures. This study calculates the EU RCA index with
the world as reference using EU external export values. Results of the calculation can be
observed partly in Table 5.3 and comprehensively in Annex 5.3. Calculation results show
that the EU has the better comparative advantage in difficult-to-imitate research-oriented
goods (group 5), capital-intensive goods (group 3), and easy-to-imitate research-oriented
goods (group 4). With appearance of 30%, 15%, and 15% on the top 20 list, respectively.
The three groups also belong to the higher ranks. In contrary, raw material–intensive
goods (group 1) and labor-intensive goods (group 2) belong to the lower ranks. The
results have distinguished between EU and Indonesian export specialization. 94 Among
the list of products with a decreasing rank, nonmetal manufacture (SITC 66) is identified
as the only labor-intensive goods. In the last three years, the top 5 in rank (SITC 96, 11,
54, 72, and 79) and SITC 83 and 61 have shown a rather stagnant development of
comparative advantage, while others have shown minor changes. The RCA index of 40%
of EU top 20 products in the world market has been having decreasing trends.
94
To compare, see also Indonesian RCA Index with world as reference.
Table 5.3: EU RCA Index with the World as Reference (1999–2008) 10

1999– 1999– 1999–
2006 2007 2008
96 COIN NONGOLD NONCURRENT - ≈ 3.58 1 3.63 1 3.52 1
11 BEVERAGES 3 ≈ 2.33 2 2.34 2 2.29 2
54 PHARMACEUTICAL PRODUCTS 4 ≈ 2.06 3 2.06 3 2.00 3
72 INDUSTRY SPECIAL MACHINE 5 ≈ 1.96 4 1.97 4 1.96 4
79 RAILWAY/TRAMWAY EQUIPMNT 5 ↓ 1.83 5 1.80 5 1.76 5
93 SPECL TRANSACT NOT CLASS - ↓ 1.70 6 1.65 7 1.61 8
55 PERFUME/COSMETIC/CLEANSR 3 ≈ 1.70 7 1.71 6 1.68 6
66 NONMETAL MINERAL MANUF. 2 ↓ 1.64 8 1.62 9 1.59 10
73 METALWORKING MACHINERY 5 ↑ 1.60 9 1.64 8 1.65 7
71 POWER-GENERATING EQUIPMENT 5 ↑ 1.58 10 1.59 11 1.59 11
74 INDUSTRIAL EQUIPMENT NES 5 ↑ 1.58 11 1.60 10 1.60 9
51 ORGANIC CHEMICALS 4 ↓ 1.48 12 1.45 12 1.42 13
87 SCIENTIFIC/ETC. INSTRUMNT 5 ↓ 1.45 13 1.45 13 1.44 12
59 CHEM MATERIAL/PRODS NES 4 ↓ 1.39 14 1.39 15 1.36 16
09 MISC FOOD PRODUCTS 1 ↓ 1.39 15 1.39 14 1.37 14
53 DYEING/TANNING/COLOR MAT. 3 ≈ 1.37 16 1.38 16 1.37 15
83 TRAVEL GOODS/HANDBAG/ETC. 2 ↑ 1.22 17 1.23 17 1.25 17
61 LEATHER MANUFACTURES 2 ≈ 1.20 18 1.21 18 1.20 18
02 DAIRY PRODUCTS & EGGS 1 ↓ 1.17 19 1.15 20 1.12 21
21 HIDE/SKIN/FUR, RAW 1 ≈ 1.16 20 1.18 19 1.17 19
Notes:
(∆ = ↓) denote products the decreasing competitiveness.
(∆ = ≈ ) denote products with fluctuating competitiveness.
Eurostat (2009)
5.1.4 EU RCA Index with Indonesia as Reference
The calculation of the RCA index related to the EU in the form of a bilateral trade
relation has been carried out by Utku and Seymen (2004), investigating Turkey’s export
and competitiveness using EU-15 as reference. Their investigation has been done in one
direction, namely Turkey’s export flows to the EU. In addition, new EU member states
have not been included. A similar work has been done by Kaitila (1999, 2001) and
Caporale et al. (2009), analyzing the shifts of the comparative advantage of two Eastern
European countries toward EU-15 as a possible consequence of the 2004 EU
enlargement.
Table 5.4: EU RCA Index with Indonesia as Reference (1999–2008) 11

1999– 1999– 1999–
2006 2007 2008
72 INDUSTRY SPECIAL MACHINE 5 ↓ 30.16 1 28.55 1 27.33 3
73 METALWORKING MACHINERY 5 ↓ 28.57 2 28.25 2 27.67 2
02 DAIRY PRODUCTS & EGGS 1 ≈ 18.11 3 20.63 3 19.64 4
87 SCIENTIFIC/ETC. INSTRUMNT 5 ↓ 17.62 4 16.96 4 16.49 5
54 PHARMACEUTICAL PRODUCTS 4 ↓ 15.59 5 15.43 5 15.17 6
79 RAILWAY/TRAMWAY EQUIPMNT 5 ↓ 15.04 6 14.81 6 14.22 7
74 INDUSTRIAL EQUIPMENT NES 5 ↓ 11.47 7 10.72 8 10.17 9
53 DYEING/TANNING/COLOR MAT. 3 ↓ 11.08 8 10.54 10 10.19 8
41 ANIMAL OIL/FAT 1 ≈ 10.26 9 10.60 9 9.98 10
59 CHEM MATERIAL/PRODS NES 4 ↓ 9.88 10 9.44 11 8.88 11
21 HIDE/SKIN/FUR, RAW 1 ↑ 9.63 11 14.32 7 59.91 1
06 SUGAR/SUGAR PREP/HONEY 1 ≈ 7.20 12 6.70 12 6.19 12
61 LEATHER MANUFACTURES 2 ↓ 5.76 13 5.68 13 5.66 13
27 CRUDE FERTILIZER/MINERAL 1 ≈ 4.89 14 4.97 15 4.88 15
71 POWER-GENERATING EQUIPMT 5 ↑ 4.88 15 4.99 14 5.01 14
04 CEREALS/CEREAL PREPARATN 1 ↓ 4.29 16 3.97 16 3.89 16
01 MEAT & PREPARATIONS 1 ↓ 4.13 17 3.79 17 3.49 18
55 PERFUME/COSMETIC/CLEANSR 3 ↓ 3.71 18 3.68 18 3.61 17
67 IRON AND STEEL 3 ↓ 3.41 19 3.34 19 3.22 19
09 MISC FOOD PRODUCTS 1 ↓ 3.33 20 3.16 20 2.97 20
Notes:
Eurostat (2009)
Results compiled in Table 5.4 and Annex 5.4 show the EU (the North) is
compared to Indonesia (the South) in almost all ranges of product groups.95 With higher
ranks and 30% appearances in the top 20 list, difficult-to-imitate research-oriented goods
(group 5) again show supremacy compared to other groups. The product group that has
the greatest appearances (40%) but rather lower ranks is the raw material (product group
1). This group is represented by agricultural products that have been the cause of
complaint of developing countries during the failed Doha Round. It is highly problematic
whether subsidies have actually increased EU competitiveness in raw material–intensive

95
Annex 5.4 indicates that EU poses 37 product sector revealed as comparatively more competitive than
Indonesia products. Indonesian has 25 product sectors revealed as comparatively more competitive than the
EU products.
goods (group 1), especially from agricultural sectors. This is due to EU supremacy in
technology and know-how in almost all ranges of industries, including mass production
of agricultural products. Leather manufactures (SITC 61) has been revealed as the only
comparatively competitive labor-intensive group (group 2) in the top 20 list. This fact has
confirmed that differences in levels of wages have an important role in distinguishing
countries’ competitiveness with each other, especially in labor-intensive industries.
Further analysis of Table 5.4 indicates that 70% of the RCA indexes of EU top
list products have experienced decreasing competitiveness in the last three years. Only
10% of the product list belongs to those having increasing trends of RCA index, while
the other 20% remain fluctuating. Such downward trends might have been caused by the
ongoing 2009 crisis, triggering the fall of world demand on high technology, including
Indonesia. In a nutshell, analysis of the EU RCA index has led to the following
conclusions:
a. The EU has specialization in its export to the world and to Indonesia mostly in
difficult-to-imitate research-oriented goods (group 5), with strong human-capital
factors and high technology involved. The EU being rich in human resources of
highly educated engineers and entrepreneurs has shaped the competitiveness of EU
exports as a whole. Developed Western EU members—such as Germany, France,
Italy, and the UK—are the epicenter of what Barney (1991) calls a “sustained
competitive advantage,” as explained in the theoretical framework of this work. In
this case, the EU possesses a higher competitiveness in producing products that others
cannot or find difficult to imitate (group 5). The cooperation and linkages between
research institutes and the business world are believed to be one of the success
factors. Another factor that should be considered as playing an important role here is
the internal competition within the EU. Severe competition in the EU single market
has encouraged entrepreneurs to continuously develop their products with continuous
innovation. The last but not least is the availability of research funding from national
government, corporations, and the EU itself.
b. The EU also specializes its export in other product groups. Therefore, if we look at
the top 20 list, all product groups are represented. This indicates that although the EU
has strong competitiveness in high technology–related products, it does not leave
other product groups, including agriculture, behind.
c. In comparison to the EU RCA index to the world, the EU RCA index to Indonesia is
slightly different. The appearance of raw material–intensive products in the top 20 list
was more dominant in the case of the EU RCA index to Indonesia than to the world.
However, they have lower ranks compared to difficult-to-imitate research-oriented
goods (group 5).
d. In terms of degree of comparative advantage, the EU has a much higher comparative
advantage in its export specialization with Indonesia than with the world aggregate
(Table 5.3 and Table 5.4). It can be seen from the index value of its top products. This
tendency indicates an even stronger evidence of interdependency in trade between
two political entities.
5.2 Indonesian and EU Export Performance Analysis
This part describes Indonesian and EU export performance in the last two decades, with
special reference to the export of each product at two-digit level in 2006, 2007, and 2008.
For the purpose of case selection, 2006 has been used as the reference. There are at least
two reasons why 2006 has been chosen as the year of reference. The first reason is that
the cases should have been selected before the field survey was started in 2007. The
second reason is to see the trade portfolio in an economically relatively stable year, a year
that is not in crisis phase. All has learned that the crisis started spreading at the end of
2008.96 Market share and market growth are two indicators used in this trade
performance analysis. Bilateral trade flows between Indonesia and the EU as well as the
world have been reviewed. In order to identify position of each product in the target
market, results have been depicted in BCG matrix quadrants to select cases.
5.2.1 Indonesian Export Performance to the World
At aggregate level, performance of Indonesian export to the world in the last five years
has shown a good development. In terms of value, export has doubled in volume from
USD 64.48 billion in 2004 to USD 136.99 billion in 2008. Import has not developed as
fast as export until 2007, generating satisfactory trade surplus. However, 73.55% growth
of import in 2008 has tripled its volume from USD 42.95 billion in 2004 to USD 129.24
billion in 2008. No wonder that the rapid growth of import in 2008 has almost equalized
the export volume, bringing down the trade surplus significantly. Trade surplus has
therefore dropped from USD 39.63 billion in 2007 to USD 7.75 billion in 2008, which is
the lowest surplus after 11 years of two-digit-billion surplus.97
As the result of the accumulation of 20.07% growth of Indonesian export and
18.80% drop in world export aggregate compared to the previous year, Indonesian share
in total world exports has achieved a record high with a share of export 1.30% to total
world export in 2008.98 Similarly, Indonesian import share to the total world imports also
96
Year 2007 and 2008 could have been pre-crisis years affected by the incoming global economic crisis.
97
The explanation on Indonesian export and import controversy development in 2008 remains unknown
and deserves further investigation.
98
Indonesian share to world export in 2007 is 0.88%.
reached a record high, achieving 1.21% in 2008 as the consequence of 73.55% growth of
Indonesian imports and 17.84% drop in world import aggregate.
Table 5.5: Export Share of Indonesian Major Products in the World (2006–2008) 12
2006 2007 2008
SITC Products* ∆
RCA Share Rank Share Rank Share Rank
42 FIXED VEG., FATS, AND OILS ↑ 14.33 16.35 2 19.57 1 25.00 1
23 CRUDE RUBBER ↑ 12.75 15.68 2 16.20 2 21.08 2
32 COAL, COKE, BRIQUETTES ≈ 8.57 10.47 2 11.03 2 10.57 3
63 CORK, WOOD MANUFACTURES ≈ 8.33 4.95 4 4.05 7 4.61 8
34
GAS, NATURAL, ↑ 7.28 4.54 7 4.70 6 5.79 5
MANUFACTURED
43 ANIMAL, VEG. FATS, OILS, NES ≈ 4.84 7.92 4 11.12 2 10.94 2
28 METALLIFERROUS ORE, SCRAP ↓ 4.16 3.78 7 3.60 8 2.91 11
07 COFFEE, TEA, COCOA, SPICES ≈ 4.12 3.77 7 3.58 9 5.36 5
25 PULP AND WASTEPAPER ≈ 3.61 3.80 7 2.92 9 4.22 6
03 FISH, CRUSTACEANS, MOLLUSK ↑ 3.21 2.54 11 2.54 11 3.87 7
Note:
* = Products belong to Indonesian top 10 RCA index.
(∆ = ↑) denotes products with increasing share.
(∆ = ↓) denotes products with decreasing share.
(∆ = ≈) denotes products with fluctuating share.
Source: Author’s compilation and calculation, raw data from UNSD COMTRADE (2009)
At two-digit level, export share of most of Indonesian major products to the world
has shown an increasing trend in the last three years. The world share of products with
SITC number 42, 23, 43, 32, 03, 07, 34, and 25 in 2008 has increased compared to their
share in 2006, while products with SITC number 63 and 28 has decreased. A better world
rank in share can be identified in products with SITC number 42, 43, 03, 07, 34, and 25,
while the worst ranks have been seen for products with SITC number 32, 63, and 28.
Despite significant increase of share of products with SITC number 23, there is no
change in its rank (see Table 5.5).

Export growth of Indonesian main products to the world at two-digit SITC is
rather bumpy. Growth in 2006 for all Indonesian main products is positive, which is in
line with the positive world growth. This is the proof of the stability of world trade in
2006. As observed from Table 5.6, export growth of Indonesian main products with SITC
number 42, 23, 32, 43, 28, 07, and 25 is higher than the world growth, whereas growth of
products with SITC number 63, 34, and 03 is lower. The highest growth is observed for
export of products with SITC number 43 (85%).
Table 5.6: Export Growth of Indonesian Major Products in the World (2006–2008)
13
2006 2007 2008
SITC Products*
RCA Ina World Ina World Ina World
42 FIXED VEG OILS/FATS 14.33 19.94 17.59 65.33 38.09 54.34 1.11
23 CRUDE/SYNTHET/REC RUBBER 12.75 67.38 33.70 12.77 9.10 23.80 -31.59
32 COAL/COKE/BRIQUETTES 8.57 39.77 9.71 9.97 4.35 56.77 44.90
63 CORK/WOOD MANUFACTURES 8.33 5.32 10.65 -10.46 9.47 -8.74 -36.17
GAS, NATURAL,
34 MANUFACTURES 7.28 11.40 24.45 -2.09 -5.45 31.82 5.52
43 ANIMAL/VEG OILS PROCES'D 4.84 85.00 9.33 85.26 30.78 17.23 7.21
28 METAL ORES/METAL SCRAP 4.16 42.14 39.80 19.90 25.70 -23.65 -12.27
07 COFFEE/TEA/COCOA/SPICES 4.12 22.09 11.29 11.45 17.16 39.67 -15.43
25 PULP AND WASTEPAPER 3.61 19.80 14.65 -4.11 23.45 33.44 -9.19
03 FISH/SHELLFISH/ETC. 3.21 8.85 11.16 7.48 7.06 17.25 -50.36
Notes:
The blue-colored text denotes that Indonesian export growth outperforms world market growth.
The red-colored italicized text denotes that Indonesian export growth is below world market
growth.
Source: Author’s compilation and calculation, raw data from UNSD COMTRADE (2009)
A different situation can be observed for 2007. Growth of export products with
SITC number 63 and 25 is negative despite the positive growth of world demand for
these products. Indonesian products with SITC number 34 also have negative growth in
2007. This is in accordance with the trend of world export growth for the same product,
which was also negative in 2007. For the same year, export growth of Indonesian
products with SITC number 42, 23, 32, 34, 43, and 03 overshadowed growth of world
export for these products, while export growth of Indonesian products with SITC number
63, 28, 07, and 25 is lower than the growth of world export aggregate. The highest
growth is still observed for export of products with SITC number 32 (56.77%).
Export growth in 2008 has been better than 2007. Despite the revealed impact of
the ongoing crisis in that year to growth of world demand for products under review,
Indonesian main export products grew better than the world except for metal ores (SITC
28), as seen in Table 5.5. Export growth of Indonesian products with SITC number 28
and 63 has been decreasing in the last three years under review. In contrary, the export
growth of Indonesian major products with SITC number 42, 23, 32, and 43 has been
higher than world growth, while growth of other products has remained fluctuating. The
highest growth is now observed for export of products with SITC number 43 (85.26%).
5.2.2 Indonesian Exports Performance to the EU
The performance of Indonesian aggregate exports to the EU has shown an increasing
trend in the last five years. Indonesia has experienced an increasing trade surplus from
2004 to 2006. Surplus has slowed down in 2007 to 2008 (see Graph 4.3, Chapter IV).
Indonesian export growth to the EU has also increased during the period from 2003 to
2006. It has also slowed down in 2007. Despite the starting of a global financial crisis in
the last quarter of 2008, growth of Indonesian export to the EU still increased by 15.47%.
This is one of the indications that the EU demand for Indonesian primary commodities
has not been affected by the crisis although EU aggregate demand has been observed as
negative (Table 5.6). By comparing export growth of the EU and Indonesia in 2007 and
2008, the opposite can be observed for EU capital-intensive products.

If we look at the Indonesian share in total EU import, there have been decreasing
trends from 0.93 in 2002 to 0.68 in 2007 and 2008.99 However, it is not the case if the
calculation is carried out at two-digit level of SITC. Table 5.7 below shows the rank of
Indonesian main products in the EU market. Products with SITC number 42, 43, 23, 85,
and 32 have a stable and better rank of share in the EU market in the last three years.
Products with SITC number 07 and 84 get a better position in 2007 and 2008, while
products with SITC number 63, 03, and 28 slightly get the lower rank positions in recent
years under review.
Table 5.7: Export Share of Indonesian Major Products in the EU (2006–2008)14

2006 2007 2008
SITC Products* ∆
32 COAL/COKE/BRIQUETTES ↓ 134.95 7.42 6 6.26 6 5.67 6
42 FIXED VEG OILS/FATS ↑ 39.87 20.63 1 22.92 1 24.94 1
23 CRUDE/SYNTHET/RUBBER ≈ 36.66 15.54 2 14.80 2 15.00 2
43 ANIMAL/VEG OILS PROCES'D ≈ 16.82 20.17 2 17.87 2 18.03 2
28 METAL ORES/METAL SCRAP ≈ 15.71 3.12 10 3.20 9 1.44 13
63 CORK/WOOD MANUFACTR ↓ 12.55 9.11 3 6.83 4 6.57 4
85 FOOTWEAR ↑ 10.85 4.97 4 4.98 4 5.39 4
07 COFFEE/TEA/COCOA/SPICES ≈ 10.1 3.60 8 3.25 8 4.06 7
03 FISH/SHELLFISH/ETC. ≈ 9.23 1.47 16 1.31 18 1.44 17
84 APPAREL/CLOTHING/ACCESS ↓ 8.88 2.47 9 2.01 8 1.86 8
Notes:
* Products belong to Indonesian top 10 RCA index.
(∆ = ↓) denotes products with decreasing share.
(∆ = ≈ ) denotes products with fluctuating share.
Eurostat (2009)
Table 5.8 below presents the export growth of Indonesian major products to the
EU from 2006 to 2008. Growth looks bumpy in the last three years under review. Growth
of products with SITC number 42 has increased in the last three years under review,
while growth of products with SITC number 23 has decreased. Export growth of other
99
As the comparison, China’s share has increased from 9.37% in 2002 to 16.24% and 15.97% respectively
in year 2007 and 2008.
products under review has remained bumpy. The comparison between the developments
of export growth of Indonesian major products with EU market growth for corresponding
products has indicated the dynamic trends. It is important to note that despite negative
growth in the EU market, exports growth of Indonesian main products to the EU in 2008
tends to develop faster than in the previous year except for products with SITC number
28 and 63. The highest growth is observed for products with SITC number 23, 42, and 43
in 2006, 2007, and 2008 respectively.
Table 5.8: Export Growth of Indonesian Major Products in the EU (2006–2008) 15

2006 2007 2008
SITC Products*
RCA Ina EU Ina EU Ina EU
32 COAL/COKE/BRIQUETTES 134.95 65.51 4.95 -32.16 16.34 78.28 -4.51
42 FIXED VEG OILS/FATS 39.87 0.97 27.42 56.86 31.01 65.96 7.37
23 CRUDE/SYNTHET/RUBBER 36.66 82.02 33.27 9.14 11.25 15.17 -8.27
43 ANIMAL/VEG OILS PROCES'D 16.82 32.60 -4.22 16.17 28.12 72.23 -4.89
28 METAL ORES/METAL SCRAP 15.71 25.20 34.92 34.46 31.87 -53.37 -11.60
63 CORK/WOOD MANUFACTR 12.55 -4.07 -15.32 2.30 10.65 -9.61 -30.61
85 FOOTWEAR 10.85 22.41 10.97 9.90 10.96 16.53 -16.14
07 COFFEE/TEA/COCOA/SPICES 10.1 11.34 9.12 6.46 19.84 61.54 -10.81
03 FISH/SHELLFISH/ETC. 9.23 1.29 14.93 -1.62 7.75 10.46 -29.08
84 APPAREL/CLOTHING/ACCESS 8.88 7.50 11.83 -2.28 9.64 15.00 -20.35
Notes:
* Products belong to Indonesian top 10 RCA index.
Blue-colored text denotes that Indonesian export growth outperforms EU market growth.
Red-colored italicized text denotes that Indonesian export growth is below EU market growth.
Eurostat (2009)
In the framework of selecting a case for data collection and analysis, data on
export value, increase of market share, and EU market growth of top 10 products with
higher ranks of RCA index have been sorted in a BCG matrix, drawing a portfolio of
Indonesian export performance in the EU market in 2006. Graph 5.1 below indicates that
products with SITC number 28, 42, 03, and 07 have been identified as underachiever
products. It means their share is less than the previous year despite the positively growing
market in 2006. Four other products—namely, products with SITC number 23, 32, 84,
and 85—have been categorized as champions. In this case, market share has increased in
the growing market. Two other selected products have been identified as belonging in the
achiever-in-adversity quadrant, in which products’ share has been higher than the
previous year despite the negative growth of the EU market. None of the top 10 products
was identified to belong in the declining-sectors quadrant in 2006.100 It should be noted
that export performance presented in Graph 5.1 represents only Indonesian main products
identified in 2006.
Graph 5.1: Export Performance of Indonesian Products in the EU Market in

2006101 18
40
28 35
23
30
42
25
Market Growth (2006)
20
03 15 84
Achiever in Adversity 10
85 Champion
7
5 32
0
-4 -3 -2 -1 0 1 2 3 4
43
-5
-10
Declining -15 63 Underachiever

-20
Increase of Market Share (2006)

32 42 23 84 85 63 07 03 43 28
Eurostat (2009)
100
The export performance position of those main products will vary according to each year export volume
and growth of EU market for particular products.
101
For practical reason, Graph 5.1 presents products belonging to the highest RCA index at two digits level
of SITC Rev. 3. At least one product belongs to each of three observed quadrants.
5.2.3 EU Export Performance to the World
Performance of EU external export to the world at aggregate level indicates a good trend
in the last five years. Export grows positively in the last five years, with average growth
of 14.47%. Despite visible negative growth of world export in 2008 by approximately -
18.75%, EU exports have increased by 13.25% in the same year. EU external exports
have contributed around 13.11% and 18.27% in 2007 and 2008, respectively, to total
world exports. These figures have made the EU as the largest contributor to world export
aggregate, leading China and the US as the second- and third-largest contributors.
Germany, France, and Italy have been identified as top EU export contributors in 2008.102
If we look at two-digit level of SITC as presented in Table 5.9, EU exports have
developed much better compared to world growth in 2008. Export of products with SITC
number 54, 72, and 73 has grown consistently higher than the world growth. Contraction
of export growth has occurred for products with SITC number 11, while growth for other
products remains fluctuating. Growth of export products with SITC number 79 is
negative despite the positive growth of world demand for these products in 2006. For the
same year, export growth of EU products with SITC number 11, 54, 72, and 73
overshadowed growth of world export for these products, while export growth of rest of
EU products under review is lower than the growth of world export aggregate. In 2007,
growth of export products with SITC number 54, 72, 79, 55, 73, and 71 is obviously
higher than world export growth, while others is lower. Despite of negative growth of
world export for all products under review, EU export growth is positive. The highest
growth is observed for products with SITC number 73, 72, and 71 in 2006, 2007, and
2008 respectively.
102
Germany, France and Italy is the world’s first, fifth and sixth top exporter to the world in year 2007
competing with China, USA and Japan in top six.
Table 5.9: Export Growth of EU Major Products in the World (2006–2008) 16

2006 2007 2008
SITC Products*
RCA EU World EU World EU World
96 COIN NONGOLD NONCURRENT 3.58 6.47 19.28 20.69 41.41 -8.25 -14.01
11 BEVERAGES 2.33 18.54 12.03 15.39 19.32 5.08 -19.98
54 PHARMACEUTICAL PRODUCTS 2.06 15.38 13.92 18.44 18.11 13.28 -3.97
72 INDUSTRY SPECIAL MACHINE 1.96 14.67 13.85 26.14 25.42 12.67 -26.47
79 RAIL/TRAMWAY EQUIPMNT 1.83 -7.96 25.68 17.16 15.53 16.59 -24.20
93 SPECL TRANSACT NOT CLASS 1.7 9.91 12.29 21.15 52.93 13.93 -34.07
55 PERFUME/COSMETIC/CLEANSR 1.7 9.28 10.38 16.77 16.24 6.86 -16.91
66 NONMETAL MINERAL MANUF. 1.64 3.09 6.04 13.30 15.31 -1.47 -39.29
73 METALWORKING MACHINERY 1.6 19.27 16.84 10.84 6.16 18.79 -26.52
POWER-GENERATING
71 EQUIPMT
1.58 9.39 13.04 24.47 15.09 18.84 -24.08
Notes:
* Products belong to EU top 10 RCA index.
Blue-colored text denotes that EU export growth outperforms world market growth.
Red-colored italicized text denotes that EU export growth is below world market growth.
Eurostat (2009)
Market share of EU 10 most competitive products in the world market is quite
impressive. Calculation results presented in Table 5.10 is the genuine proof of how the
group of 27 countries has been the market leader in all product lines in which it has
comparative advantage. This leadership in the world market share remains as it is in the
last three years under review despite some temporal contractions of share observed in
some of the products for the particular years. Increasing trends of export market share has
been identified in EU major products with SITC number 54, 72, 79, 55, 73, and 71, while
trends of export market share of other products under review remain fluctuating.
Table 5.10: Export Share of EU Major Products in the World (2006–2008) 17

2006 2007 2008
SITC Products* ∆
96 COIN NONGOLD NONCURRENT ≈ 3.58 62.32 1 53.19 1 56.75 1
11 BEVERAGES ≈ 2.33 32.36 1 31.29 1 41.09 1
54 PHARMACEUTICAL PRODUCTS ↑ 2.06 26.89 1 26.97 1 31.81 1
72 INDUSTRY SPECIAL MACHINE ↑ 1.96 26.49 1 26.65 1 40.83 1
79 RAILWAY/TRAMWAY EQUIPMNT ↑ 1.83 20.28 1 20.56 1 31.63 1
93 SPECL TRANSACT NOT CLASS ≈ 1.7 20.55 1 16.28 1 28.14 1
55 PERFUME/COSMETIC/CLEANSR ↑ 1.7 23.76 1 23.87 1 30.70 1
66 NONMETAL MINERAL MANUF. ≈ 1.64 19.37 1 19.03 1 30.88 1
73 METALWORKING MACHINERY ↑ 1.6 23.66 1 24.71 1 39.94 1
71 POWER-GENERATING EQUIPMT ↑ 1.58 20.51 1 22.19 1 34.73 1
Note:
* Products belong to EU top 10 RCA index.
(∆ = ≈) denotes products with fluctuating share.
Eurostat (2009)
5.2.4 EU Export Performance to Indonesia
Total EU exports to Indonesia have an increasing trend, with an annual average growth of
11.17% since 2000 (see Graph 4.3 and Annex 4.2). EU exports to Indonesia reached
USD 7.25 billion in 2007. This level of export volume has placed EU as the fourth-
largest exporter to Indonesia after Singapore, China, and Japan in that year. EU market
share counts for 7.76% of the world aggregate export to Indonesia in the same year.103
Based on analysis at two-digit level of SITC product classification shown in Table 5.11
below, export growth has varied among EU top 10 products destined to Indonesia. It also
has fluctuating trends in years under review. Overall, EU export growth in 2008 has
better performed compared to previous years. Most of the export growth of EU top 10
products in that year has been higher than the growth of Indonesian market except for
products with SITC number 02 and 79. Growth trend is constantly increasing in the case
103
The calculations are based on export value reported by all 27 members to UNSD Comtrade (FOB
based). Different figures should come up if market share is calculated based on import data (CIF based).
of products with SITC number 72, 41, and 59 in the three years under review. The
decreasing trends of export growth can be observed for products with SITC number 54,
while export growth of other products remains to fluctuate.
Table 5.11: Export Growth of EU Major Products in Indonesia (2006–2008) 18

2006 2007 2008
SITC Products*
RCA EU Ina EU Ina EU Ina
72 INDUSTRY SPECIAL MACHINE 30.16 1.71 -6.56 7.17 25.58 16.21 2.61
73 METALWORKING MACHINE 28.57 13.48 -19.73 48.98 10.39 5.13 -28.49
02 DAIRY PRODUCTS & EGGS 18.11 -20.83 4.97 167.20 60.85 -31.22 5.77
87 SCIENTIFIC/ETC. INSTRUMNT 17.62 18.12 24.97 20.47 7.78 9.64 -6.40
54 PHARMACEUTICAL PRODUCTS 15.59 25.78 24.23 20.78 21.35 6.18 4.49
79 RAIL/TRAMWAY EQUIPMNT 15.04 43.20 0.78 344.62 206.26 -26.02 -18.03
74 INDUSTRIAL EQUIPMENT NES 11.47 13.21 6.44 -10.63 18.05 32.19 2.42
53 DYEING/TANNING/COLOR MAT. 11.08 -12.67 3.70 19.30 19.76 14.18 -11.32
41 ANIMAL OIL/FAT 10.26 18.67 80.09 23.35 -27.42 49.61 -27.61
59 CHEM MATERIAL/PRODS NES 9.88 3.12 6.94 6.72 13.60 17.48 3.10
Notes:
* Denotes that products belong to EU top 10 RCA index.
Blue-colored text denotes that EU export growth outperform Indonesian market growth.
Red-colored italicized text denotes that EU export growth is below Indonesian market growth.
Eurostat (2009)
Table 5.12 below presents the development of market share of EU major export to
Indonesia in the last three years. Table 5.12 has indicated that export share of EU major
products have developed better in Indonesian market compared with its development in
the world market (compare with Table 5.10). A similar conclusion can also be made from
the ranks of market shares. However, market share of some products has shown
increasing trends and improving ranks in the Indonesian market—namely, products with
SITC number 73, 87, and 41. The only products with slightly decreasing trends of market
share are pharmaceutical products (SITC 54). However, this does not change EU
leadership in Indonesian pharmaceutical for three possible reasons. The first reason is
that the percentage of the decrease is not excessive. Secondly, Indonesian pharmaceutical
market grows in the same direction in 2007 and 2008 respectively (declining). Thirdly,
the EU major competitors in Indonesian pharmaceutical market also experience the
declining trends.
Table 5.12: Share of EU Major Products in Indonesia (2006–2008) 19

2006 2007 2008
SITC Products* ∆
72 INDUSTRY SPECIAL MACHINE ≈ 30.16 18.19 2 15.52 3 17.58 2
73 METALWORKING MACHINERY ↑ 28.57 7.41 4 9.99 4 14.69 3
02 DAIRY PRODUCTS & EGGS ≈ 18.11 14.74 4 24.48 2 15.92 4
87 SCIENTIFIC/ETC. INSTRUMNT ↑ 17.62 9.53 4 10.65 4 12.48 3
54 PHARMACEUTICAL PRODUCTS ↓ 15.59 32.88 1 32.72 1 33.25 1
79 RAIL/TRAMWAY EQUIPMNT ≈ 15.04 24.87 1 36.11 1 32.59 2
74 INDUSTRIAL EQUIPMENT NES ≈ 11.47 13.89 3 10.52 4 13.57 3
53 DYEING/TANNING/COLOR MAT. ≈ 11.08 14.65 3 14.60 3 18.79 3
41 ANIMAL OIL/FAT ↑ 10.26 7.59 6 12.90 2 26.66 1
59 CHEM MATERIAL/PRODS NES ≈ 9.88 13.96 2 13.11 3 14.94 4
Notes:
* Denotes that products belong to EU top 10 RCA index.
Blue-colored text (∆ = ↑) denotes products with increasing share.
Black-colored text (∆ = ≈ ) denotes products with fluctuating share.
Eurostat (2009)
To analyze the EU export performance to Indonesia, export value and increase of
market share of EU top 10 export products in 2006 have been calculated. Indonesian
market growth for the same products and year also has been measured. All three
indicators have been plotted in a BCG matrix (see Graph 5.2). Graph 5.2 indicates that
products with SITC number 02, 53, 59, and 87 have been identified as underachiever
products. It means their share is less than the previous year despite the positive growth of
the market in 2006. The performance of products with SITC number 54, 74, and 79 has
been categorized as champions. It means that their market shares have increased in a
positively growing Indonesian market. Two other products (SITC number 72 and 73)
have been identified as achievers in adversity, in which products’ share has been higher
than the previous year despite the negative growth of the Indonesian market in 2006.
None of the EU top 10 products has been positioned in the declining-sectors quadrant.104
Graph 5.2: Export Performance of EU Products in Indonesian Market in 2006105 19

30
87 25
54
20
15
Market Growth (2006)
Achiever in Adversity 10 Champion

59 74
02 5
53
79
0
-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8
-5
72
-10
-15
Declining Underachiever
-20 73
-25
Increase of Market Share (2006)
72 73 02 87 54 79 74 53 41 59
Eurostat (2009)
5.3 Cases Selection
The last part of the exercises of this chapter is the selection of cases for Indonesian export
to the EU and vice versa. Export performance indicators presented in Annex 5.5 and
Graph 5.1 have been used in the selection of Indonesian cases, whereas export
performance presented in Annex 5.6 and Graph 5.2 has been used for the selection of EU
104
It should be noted that portfolios presented in Graph 5.2 represents only Indonesian main products
position in year 2006. The export performance position of those main products will vary according to each
year export volume and market growth in EU.
105
For practical reason, Graph 5.2 presents products belonging to the highest RCA index at two digits level
of SITC Rev. 3. At least one product belongs to each of three observed quadrants. Products listed under
SITC number 41 are unseen in the figure due to overlapping position with other product with bigger export
volume.
cases. For this purpose, the methodology and criteria mentioned in Chapter III have been
taken into account.
5.3.1 The Selection of Indonesian Cases
By combining results of the Indonesian export performance matrix seen in Graph 5.1
with trade indicators used for the selection of cases in Annex 5.5, the red-line-circled
products have been selected based on predetermined criteria. Firstly, it should be from
different product sectors; secondly, it should be from the most potential product sectors,
identified by top final rank (fr) value; and thirdly, it should be from different quadrants
of the BCG matrix (see details in Chapter III, p. 52). As seen in Graph 5.1 and Table
5.13, three product sectors selected as case studies for Indonesia are products with SITC
code 42 (fixed vegetable oil/fats), 32 (coal/coke/briquette), and 63 (cork/wood
manufactures). These three products represented 20.59% of Indonesia’s total export to
the EU in 2006.
Table 5.13: Selected Cases (Product Sectors) for Indonesia 20

Final Quadrant 1 Quadrant 2 Quadrant 3 Quadrant 4
Rank (Underachiever) (Champions) (Achiever in Adversity) (Declining)
1 42 (fixed vegetable oil) 32 (coal/coke/briquette) 63 (cork and wood) None
2 28 (metal ores/scrap) 84 (apparel/clothes) 43 (animal/veg. oil)
3 07 (coffee/tea/coco/spices) 23 (crude/synth rubber)
4 03 (fish, crustaceans, etc.) 85 (footwear)
Source: Author’s compilation, supporting data from Annex 5.5 and Graph 5.1
As required by the criteria in the selection of cases, these three products come
from three different sectors—namely, sector 4 (animal/vegetable oil/fat/wax), 3 (mineral
fuel/lubricants), and 6 (manufactured goods). The detail list of eligible sub products
under the selected products sectors can be seen in Annex 5.7. All three selected products
are among EU products with relatively top ranks of RCA index to the world and
Indonesia (see Annex 5.3 and 5.4). It is expected that by carefully selecting three cases
based on a strict criteria, it can not only increase the representation of the population but
also help in the analysis of the first three methods for the explanatory part in the case of
Indonesian export to the EU (Chapter VI).
5.3.2 The Selection of EU Cases
A similar method and criteria has been applied in the selection of cases for the EU.
Firstly, it should be from different product sectors; secondly, it should be from the most
potential product sectors, identified by top final rank (fr) value; and thirdly, it should be
from different quadrants of the BCG matrix (see details in Chapter III, p. 52). After
identifying 10 products with the highest RCA index, the EU export portfolio of the
selected products has been plotted in a BCG matrix (see Graph 5.2). By combining the
three similar trade indicators in Annex 5.6 and the above-mentioned criteria, the
selection of cases for the EU has been successfully accomplished, as presented in Table
5.14.
As identified in Graph 5.2 and Table 5.14, three product sectors selected as case
studies for Indonesia are products with SITC number and product name, respectively, 54
(pharmaceutical products), 87 (scientific instrument), and 72 (industry special machine).
These three selected sectors represented 14.89% of total EU export to Indonesia in 2006.
The detail list of eligible products under the selected sectors is available in Annex 5.8.
All three selected products are among Indonesian products with relatively top ranks of
RCA index to the world and the EU (see Annex 5.1 and 5.2). It is also expected that by
carefully selecting three cases based on a strict criteria, it can not only increase the
representation of the population but also help in the analysis of the first three methods for
the explanatory part in the case of EU export to Indonesia (Chapter VII).
Table 5.14: Selected Cases (Product Sectors) for the EU 21

Final Quadrant 1 Quadrant 2 Quadrant 3 Quadrant 4
Rank (Underachiever) (Champions) (Achiever in Adversity) (Declining)
1 59 (chemical material) 79 (other transport equipment) 72 (industry special machine) None
2 87 (scientific instrument) 74 (industry machine equip.) 73 (metalworking machinery)
3 02 (dairy products & eggs) 54 (pharmaceutical products)
4 53 (dyeing/tanning/color
mat.)
5 41 (animal oils and fats)

Notes:
Products with SITC number 59, 79, and 74 have been eliminated due to overlapping sectors with
quadrants 2 and 3 (notice the first number, indicating the product sector).
Source: Author’s compilation, supporting data from Annex 5.6 and Graph 5.2
5.4 Conclusions
Indonesia has specialization in its export to the world and to the EU mostly in raw
material–intensive products (group 1), with strong endowment factors and low
technology involved. The low competitiveness in the field of capital-intensive goods and
research-oriented goods has been identified as the main characteristic of Indonesian
export, which might also be one of the main characteristics of Southern countries’ trade
in general. Indonesia also specializes its export in labor-intensive sectors, such as
footwear and textile. Lower cost of production, especially labor cost compared to the EU
and other developed countries, makes it possible to happen.
It is true that there is a positive correlation between domestic production
resources with Indonesian export activity. It is also true that relying on lower labor cost
only in promoting Indonesian export can no longer guarantee the success of promised
transformation of Indonesia into one of the newly industrialized countries. The genuine
collaboration of stakeholders—including research institutions, capital owners,
entrepreneurs, and government—is seriously required in achieving the said promise.
In comparison to the Indonesian RCA index to the world, Indonesian export
specialization to the EU is not so much different in terms of product group. A minor
difference is believed to be caused by some factors, such as distance. In terms of degree
of comparative advantage that can be seen from the index value of its top products,
Indonesia has a much higher comparative advantage in its export specialization with the
EU than the world aggregate. This tendency indicates the logic of interdependency in
trade between these two political entities.
The EU has specialization in its export to the world and to Indonesia mostly in
difficult-to-imitate research-oriented goods (group 5), with strong human-capital factors
and high technology involved. The EU being rich in human resources of highly educated
engineers and entrepreneurs has shaped the competitiveness of EU export as a whole. The
EU also specializes its export in other product groups. Therefore, if we look at the top 20
list, all product groups are represented. This indicates that although the EU has strong
competitiveness in high technology–related products, it does not leave other product
groups, including agriculture, behind.
In comparison to the EU RCA index to the world, the EU RCA to Indonesia is
slightly different in terms of product group. The appearance of raw material–intensive
products in the top 20 list is more dominant in the case of the EU RCA to Indonesia than
to the world. However, they have lower ranks compared to difficult-to-imitate research-
oriented goods (group 5). In terms of degree of comparative advantage, the EU has a
much higher comparative advantage in its export specialization with Indonesia than with
the world aggregate (Table 5.3 and Table 5.4). It can be seen from the index value of its
top products. This tendency indicates an even stronger evidence of interdependency in
trade between the two political entities.
By combining the three trade indicators in Annex 5.6 and the above-mentioned
criteria of case selection, three cases for the case of Indonesian export to the EU (namely,
fixed vegetable oils [SITC 42], coal/coke/briquette [SITC 32], and cork and wood [SITC
63]) and three cases for the case of EU export to Indonesia (namely, scientific instrument
[SITC 87], pharmaceutical products [SITC 54], and industry special machine [SITC 72])
have been successfully selected. All products under this SITC product grouping will be
intensively analyzed in the first three methods of analysis discussed in the next
explanatory parts of Chapters VI and VII.

Chapter VI Incentives and Barriers of Indonesian Trade Flows to the EU
The main goal of this chapter is to give the explanation to what have been described
previously about Indonesian trade flows to the EU by identifying incentives and barriers
to trade. Precisely, the aim of this chapter is to answer research questions 3 (RQ3) and 4
(RQ4). The two research questions mentioned in Chapter I, p. 4, are as follows:
RQ3: What are incentives of bilateral trade flows between Indonesia and the EU?
RQ4: What barriers do Indonesian and EU suppliers face in accessing and entering each
In this chapter, incentives and barriers to trade flow from Indonesia to the EU have been
investigated. In order to achieve this goal, primary as well as secondary data of incentives
and barriers to trade have been collected and analyzed. The primary data has been
collected through dissemination of 150 questionnaires to export-oriented companies from
Indonesia according to strategies of data collection mentioned in Chapter III.106
Secondary data have also been collected from relevant sources as mentioned as well in
Chapter III.
6.1 Primary Data Analysis
6.1.1 Overview of Collected Data
Identification of incentives and barriers of Indonesian trade flows to the EU has been
carried out through dissemination of questionnaires to potential respondents until 150
targeted questionnaires were filled. The 150 respondents are Indonesian-registered,
export-oriented companies equally chosen from three selected cases representing
106
Questionnaires’ format can be seen in Annex 3.3.
different product sectors under investigation, featuring different export performances in
the EU market. They are companies doing business as producers and suppliers of coal,
fixed vegetable oils and fats, and cork/wood. The observed frequencies of the selected
trade incentives and barriers have been tabulated and analyzed using chi-square analysis.
6.1.2 Incentives of Indonesian Trade Flows to the EU
The null hypothesis (H0) test has shown interesting results. H0 has been accepted and H1
has been rejected in the frequency analysis of simple entry procedure, low technical
barriers, good logistics, higher product quality, and larger market size. It means that no
significant difference between expected and observed data exists. In other words, those
trade incentives are independent to export performance, and all cases are in agreement.
Based on the methodology in Chapter III, those determinants have been selected as trade
incentives that might increase Indonesian export performance to the EU.
Vice versa, H0 has been rejected and H1 has been accepted in the frequency
analysis of technology superiority and production capacity. This trade determinant is
therefore dependent on export performance and not eligible to be selected as trade
incentives (case dependent). Other trade incentives—including political stability, low
tariff, government supports, local representative, direct access to buyer, and faster export
licenses application process—have not met sufficient statistic prerequisite to be tested or
analyzed further (frequency < 5).

Incentives and Barriers of Indonesian Trade Flows to the EU | 133
Table 6.1: Observed Frequencies of Indonesian Export Incentives to the EU 22
Cases, Product Sector (%)

No Trade Incentives N
Champion, Achiever in Adversity, Underachiever,
Coal Fixed Vegetable Oil Cork/wood
I Regulatory:
1 Political Stability 0 0 0 0
2 Technology Superiority 33 50 17 66
Χ2 = 242, 11; df = 2; p = 0.004
3 Simple Entry Procedure(+) 31 43 27 49
Χ2 = 34.67, 2.12; df = 2; p = 0.346
4 Low Tariff 48 52 0 27
5 Low Technical Barriers(+) 36 31 33 45
Χ2 = 2, 0.13; df = 2; p = 0.936
6 Good Logistic(+) 32 33 34 90
Χ2 = 2, 0.07; df = 2; p = 0.967
7 Government Supports 0 47 53 30
8 Local Representative 0 52 48 23
9 Higher Product Quality(+) 32 36 33 101
Χ2 = 8.67, 0.26; df = 2; p = 0.879
10 Production Capacity 46 24 31 72
Χ2 = 134, 5.58; df = 2; p = 0.061
11 Direct Access to Buyer 0 100 0 12
Faster Export Licenses
12 0 100 0 12
Application Process
II Non-regulatory:
1 Larger Market Size(+) 27 36 37 105
Χ2 = 74, 2.11; df = 2; p = 0.347
N 188 253 191 632

2
Notes: Symbol (+) indicates significant trade incentives; X < 5.99 and p value > 0.15
Determinants that are italicized are those identified by respondents themselves out of the given
options (results of open-ended questions).
Source: Author’s compilation and calculation (using SPSS 15), data from firm-level survey
It is important to note that there are some new trade incentives that have been
considered and added by respondents as influencing factors. This has been made possible
since respondents have been given the chance to fill in any influencing factors based on
their experiences that are not listed in the questionnaire set (see Annex 3.3). Those new
trade incentives have been included and analyzed equally with already listed incentives to
trade. Those new identified trade incentives in this case are government supports, local
representative, production capacity, product quality, direct access to buyer, and faster
export licenses application process (italicized). It is recommended that those trade

incentives should be taken into account in future researches on identifying trade
determinants.
6.1.3 Barriers of Indonesian Trade Flows to the EU
The null hypothesis (H0) test has shown impressive results. H0 has been accepted and H1
has been rejected in the frequency analysis of technical barriers, bad logistics
performance, and high competition. It means that there is no significant difference
between expected and observed data. In other words, those barriers are independent to
export performance, and all cases are in agreement. Based on the methodology in Chapter
III, those barriers have been selected as impediments to trade, which might have
decreased Indonesian export performance to the EU. H0 has been rejected and H1 has
been accepted (case dependent factors) in frequency analysis of higher tariff, distance,
and production capacity. Other barriers—namely, political instability, language and
culture differences, complicated entry procedures, corruption, payment system, lack of
capital, lower demand, and force majeure—have not met sufficient statistic requirement
to be analyzed (frequency < 5).
All variables that are italicized are new trade barriers, considered and added by
respondents as influencing factors. They are payment system, lack of capital, lower
demand, production capacity, high competition, and force majeure. One of them—
namely, high competition—has been selected as one of the impediments to trade. None of
them has been tested as statistically significant. However, those barriers should be taken
into account (included in questionnaires) in future researches related to identification of
barriers to trade flow.

Table 6.2: Chi-Square Test of Indonesian Export Flow Barriers to the EU 23

No Trade Barriers N
Champion, Achiever in adversity, Underachiever,
Coal Fixed Vegetable Oil Cork/Wood
I Regulatory:
1 Higher Tariff 24 47 29 59
Χ2 = 108, 5.53; df = 2; p = 0.063
2 Technical Barriers(+) 28 35 37 75
Χ2 = 26, 1.04; df = 2; p = 0.595
3 Political Instability 0 0 0 0
4 Language and Culture
43 57 0 30
Differences
5 Complicated Entry
0 44 56 39
Procedures
6 Bad Logistic(+) 39 38 24 80
Χ2 = 89, 3.33; df = 2; p = 0.190
7 Corruption 0 54 46 26
8 Payment System 0 0 100 12
9 Lack of Capital 100 0 0 13
II Non-regulatory:
1 Distance 27 45 27 66
Χ2 = 96, 4.36; df = 2; p = 0.113
2 Lower Demand 50 0 50 24
3 Production Capacity 34 24 43 80
Χ2 = 113, 4.23; df = 2; p = 0.121
4 High Competition(+) 33 44 22 27
Χ2 = 18, 2; df = 2; p = 0.368
5 Force Majeure 52 48 0 25
N 171 205 180 556

2
Notes: Symbol (+) indicates significant barriers; X < 5.99 and Asymptotic Significant Value (p) > 0.15
Determinants that are italicized are those identified by respondents themselves out of the given
options (results of open-ended question)
6.1.4 Conclusions of Primary Data Analysis
Primary Data Analysis has resulted in satisfactory conclusions. As presented in Table 6.1,
the chi-square test reveals that five out of thirteen examined variables have accepted H0
and rejected H1. They are simple entry procedure, low technical barriers, good logistic,
higher product quality and larger market size. Those trade incentives might increase
Indonesian exports to the EU. The two tests showing a statistically significant difference
between the three cases are the test results of the technology superiority and production
capacity variable. In this case, H0 is rejected and H1 is accepted, at a 5% level of
significance. The chi-square test results of other factors were statistically invalid
(frequency < 5); hence have not been further analyzed. As seen from Table 6.2, H0 is
accepted and H1 is rejected in the frequency test of variables technical barrier, bad
logistic and high competition. They are therefore selected as impediments to Indonesian
exports to the EU. Vice versa, H1 has been accepted and H0 has been rejected in
frequency analysis of higher tariff, distance and production capacity. The chi-square test
results of other factors were statistically invalid (frequency < 5); hence have not been
further analyzed.
6.2 Supply-Demand Analysis
Supply-demand analysis is the first of four secondary data analysis methods used to
identify, respectively, potential incentives and barriers to trade in both supply and
demand side of the supply chain of the selected cases. Potential trade incentives—
including market size, production capacity, and consumption—have been investigated.
Potential barriers to trade—including tariffs and nontariff barriers—have also been
studied. This section will be divided into four parts—namely, supply-side trade
incentives, demand-side trade incentives, supply-side barriers, and demand-side barriers.
Each part presents, respectively, an analysis of the three selected cases for Indonesian
exports to the EU.

6.2.1 Supply-Side Incentives of Indonesian Exports to the EU
6.2.1.1 Supply-Side Incentives in the Case of Coal
As one of fossil fuels, coal is not only the largest source of energy for generating cheap
electricity worldwide but is also the largest source of carbon dioxide emissions compared
to petroleum and gas. Indonesian coal is extracted from the ground mostly with the open-
pit method since coal is found less than 10 meters below the ground’s surface. This
condition is commercially positive but environmentally negative. That is why Indonesian
coal trade has been closely related to problems of environmental degradation and
complaints and critiques from civil society. As we know, Indonesia has been a party to
dozens of international environmental agreements, including Biodiversity, Climate
Change, Climate Change—Kyoto Protocol, Desertification, Endangered Species,
Hazardous Wastes, Ozone Layer Protection, Ship Pollution, Tropical Timber 83, Tropical
Timber 94, and Wetlands.
The Ministry of Energy and Mineral Resources of Indonesia (MEMRI) has
predicted that Indonesia might have 93.4 billion tons of potential coal resources in 2007
(IEA 2008). According to this report, Sumatra Island has a reserve of around 52.5 billion
tons, while Kalimantan Island has 40.5 billion tons.107 Those resources will last 400 years
using the same production level as that employed in 2008.. It consists of 25% low rank,
59% medium rank, and 15% high quality of coal. Data Consult (2008) has predicted that
Indonesia has 6.98 billion tons proven reserves of coal, while MEMRI predicts a lower
estimation of 5.3 billion tons of proven reserves (IEA 2008). Continuous survey of
Indonesian coal reserves is carried out by the data center of MEMRI. According to Data
Consult (2008), most of the Indonesian coal resources are young-age coal (83.4%),
107
Other coal potential Island namely Irian Jaya has not been evaluated and explored yet.
comprising lignite (56.8%) and sub bituminous (26.6%). The rest (16.6%) are in the old-
age stage, comprising bituminous and anthracite contents. Bituminous and anthracite are
products that are usually exported (above grade ICI-2, with Calorific Value (CV) > 5300
kcal/kg; see Table 6.4). Kalimantan Island is a major source of this type of coal (IEA
2008). This reference indicates that from its total production, East Kalimantan, South
Kalimantan, and Central Kalimantan Provinces produce, respectively, 60%, 45%, and
75% of this coal type. Major Indonesian coal producers are Coal Contract of Work
(CCoW) holders, consisting of a few companies that cover more than 83.1% of the
Indonesian coal production in 2007. State-owned coal-mining companies hold a 12.8%
share, while mining authority holders share 4.1% of the Indonesian coal production in the
same year.
Table 6.3: The World’s Top 5 Exporters of Coal 24

Export Value (in USD)
Countries
Year 2006 % Year 2007 %
World 57,894,884,801 100 60,652,752,557 100
Australia 17,624,850,027 30.44 17,304,056,603 28.53
Indonesia 6,086,073,874 10.51 6,692,814,343 11.03
China 5,696,873,956 9.84 6,357,376,541 10.48
Russian Federation 4,589,752,513 7.93 5,869,319,552 9.68
USA 3,672,810,385 6.34 4,314,186,759 7.11
Total Top 5 37,670,360,755 65.07 40,537,753,798 66.84
Source: Author’s compilation and calculation, data from UNSD COMTRADE (2009)
As one of the important natural resources, the Government of Indonesia (GOI)
has included coal as one of its strategic products. In terms of export value, Indonesia is
the second-largest supplier of coal in the world market after Australia in 2006 and 2007,
although it does not belong to the world’s top largest producer and reserve owner. China
and USA do belong to the world’s largest coal producers and reserve owners, but their
energy policies have been focused on securing long-term domestic consumption, not for
export purposes. Therefore, China and the US only place third and fifth in the world
export share of coal. The top 5 coal exporters, listed in Table 6.3, supply 65.07% and
66.84% of world demand in 2006 and 2007, respectively.
As far as international coal price indexes are concerned, some indexes have been
used as references. Among others are the DES ARA Index, RB Index, and Newcastle
(Australian) Index.108 As the second-largest coal exporter, Indonesia has been developing
a so-called Indonesian Coal Price Index (ICI), managed by PT Coalindo Energy. The
ICI’s coal price index is prepared and published weekly every Friday at 3:00 PM Jakarta
time. The price of the evaluated coal will be sent directly by e-mail to Argus Media Ltd.
(London). The future price of Indonesian coal will be determined based on ICI’s four
types of coal grades, which can be seen in Table 6.4.109 Compared to international
indexes in Table 6.5, ICI’s index is more detailed and higher priced. This index is
expected to be more accurate, independent, and transparent than other existing indexes.
Table 6.4: ICI’s Coal Grade Specification and Price Index (July 2009) 25
Grade of Calorific Value Total Moisture FOB Price
Ash (GAR) % Sulfur %
Coal (GAR) Kcal/kg (GAR) % (USD/ton)
ICI – 1 6,500 Up to 12 Up to 12 Up to 1.0 150.47
ICI – 4 4,200 Up to 40 Up to 6 Up to 0.4 -
Source: Author’s compilation, data from PT Coalindo Energy (2009)
Current international economic turmoil brings down coal price to almost half of
its value prior to the crisis. In October 2008 alone, the price fell from USD 121.17 per ton
for the week ending on October 3, 2008, to USD 100.83 per ton for the week ending on
108
Those three indexes use different methodologies that are publicly accessible.
109
Indonesian State Owned Electricity Enterprise (PLN) is currently using ICI’s coal price index in
decision making and report. PT. Coalindo Energy has a vision to be the world leading coal price index in
the future.
October 31 in the same year. The decreasing trend of coal price continued until the end of
2008 to USD 80.33 per ton. At the time of writing, the average value of the three
different coal price indexes was USD 70.04 per ton (see Table 6.5). This downturn was in
line with the decline of crude oil price and world energy demand. This downturn has also
caused the mounting of coal stockpiles in China as industrial production activity has
slowed down. Countries seem to keep their coal stockpiles at a safe level, waiting for the
end of the ongoing financial and economic crisis. The uncertainty of world coal supply,
price, and demand in post crisis time is the key reason for securing coal stock today.
Table 6.5: International Coal Indexes from July–October 2009 (in USD) 26
NEWC Index RB Index DES ARA Index ICI 3 Index

Oct. ’09 71.74 64.96 73.42 -
Sept. ’09 68.16 60.04 67.87 -
Aug. ’09 73.14 63.93 71.06 -
Jul. ’09 75.12 61.45 67.37 84.32
Source: Author’s compilation, data from Global Coal Limited (2009)
Long-term trends of world coal price and other selected energy price can be seen
in Graph 6.1. The trend of coal price follows more or less a similar pattern as that of
other energy prices. Prior to the beginning of the financial crisis, coal price increased
faster than oil price. After reaching the peak between June–July 2008, coal and oil prices
continued to fall down until February–March 2009. Afterward, oil price increased more
convincingly than the increase of coal price. In the case of natural gas, an interesting
price development between two different gas origins and export destinations is observed.
Graph 6.1: Monthly Trends of World Energy Price (1999–2009) 20

600
Coal thermal for export, Australia (metric ton)
Russian Natural Gas, in Germany (thousands cubic meters)
500
Natural Gas, Indonesian LNG, CIF Japan (thousands cubic meters)
Price (in USD) Price
Oil; West Texas Intermediate, 40 API, Midland Texas (barrel)
400
300
200
100
Year and Month

Source: Author’s compilation and calculation, data from IMF (2010a)
It is worth investigating that the price of Russian-exported natural gas to Germany
has increased more than five times stronger than the price increase of Indonesian-
exported natural gas to Japan. The price of Indonesian-exported gas to Japan has been
affected negatively by the crisis since July 2008, then picked up earlier, just like the price
trends of coal and oil since February 2009. Seven months of slower price sensitivity has
been observed in the case of Russian-exported gas to Germany.
6.2.1.2 Supply-Side Incentives in the Case of FVOs
Indonesia has been becoming the world largest exporter of FVOs since 2007. Indonesia
has replaced the Malaysian position as the world market leader in FVOs.
Notwithstanding Malaysia is located within 10° north of the equator line, the limitation of
land and cheap-labor availability in Malaysia makes further expansion less feasible.110 A
different condition is observed in Indonesia’s case. Besides the availability of land to be
110
Malaysia has a stringent land use policy backed by regulation imposing that 60% of the land must be left
as permanent forest and less than 20% for agriculture use.
cultivated for expansion of palm oil plantations, Indonesia also has a more strategic
location, lying exactly within 10° north and south of the equator line. In addition,
Indonesia still has abundant cheap labor to be employed. These should be a solid
indicator to predict Indonesia’s long-term leadership in fixed vegetable oil supply,
especially palm oil.111
Based on data from Sucofindo (Chandran 2006), the average annual expansion of
Indonesian palm oil plantations from 1990 to 2005 is approximately 36%. From a total of
9.7 million hectares of permitted area, Indonesia currently has 7.9 million hectares of
palm-planted area, with annual production reaching 19 million tons of crude palm oil
(CPO). The Indonesian agriculture minister has reported during an Indonesian Palm Oil
Conference in Bali that another 18 million hectares of palm-oil-suitable and environment-
friendly land area has been reserved for future expansion of palm oil plantations (The
Jakarta Post 2009). Considering only 6 to 8 million tons of annual domestic consumption
of CPO, exporting CPO has been mostly used in dealing with existing excess of supply.
However, the rise of awareness of Indonesian stakeholders on the potential of a bio-
energy business might slightly decrease export growth of Indonesian CPO in the near
future. A top industry official has reported that the Indonesian supply of CPO started
rising from October 2009 onward, boosted by a strong output and more maturing palm
trees (Palm Oil HQ 2009). The early pickup of palm oil price in the ongoing crisis has
given new hope for Indonesian CPO producers (see price trends in Graph 6.9).
Graph 6.10 depicts the composition of Indonesian FVOs export in the last 10
years. From 14 sub-products under FVOs (SITC 42), palm oil, palm kernel, and coconut
111
This condition is also ideal for growing other tropical crops such as rubber, cocoa, tea, coffee, spices and
bananas (see Figure 5.1). Although GOI has reserved 8 million hectares area to be cultivated for palm oil,
deforestation has been happening on the daily basis. It is predicted that Indonesian deforestation reaches
300 football fields each year reducing Indonesian function as earth lung.
oil play important roles in the composition of Indonesia’s total export of FVOs in the last
10 years (1999–2008). Palm oil and palm kernel have contributed, respectively, 82.17%
and 11.2% (total 93.37%), while coconut oil has a 6.48% share. Because of a very
dominant share of palm oil in Indonesian FVOs export, most of respondents during the
field study in Indonesia are exporters of those products. In addition to that, the most
imported FVO by EU is palm oil (see Graph 6.7). Therefore, the focus of discussions in
this section is more on analysis of trade incentives in the supply and demand of palm oil
and palm kernel.
Graph 6.2: Indonesian Export of Fixed Vegetable Oil (1999–2008) 21

16.000
Indonesian Exports (in USD Million)
FVO
14.000 Palm Oil
Palm kernel
12.000 Coconut oil
Others
10.000
8.000
6.000
4.000
2.000
0
Year
In terms of competitiveness, RCA calculation in Chapter V reveals that Indonesia
has increased more than double of its competitiveness in the FVOs sector, from 9.92 in
1999 to a 19.04 index point in 2008. This increase has been the result of expanding palm
oil contribution in the sector. However, a five-digit SITC export quantity and volume
observation from 1999 to 2008 shows that this competitiveness has not been supported by
an increase in value added. Indonesian export of crude palm oil/CPO (SITC 42221) to the
world remains rather equal compared to refined palm oil/RPO (SITC 42229) in the last
10 years. A different pattern has been observed in the Malaysian export of palm oil to the
world (see Annex 6.1). Indonesia has exported 44.69% of RPO from the total quantity of
its palm oil export in 2008. This generates 46.98% of Indonesia’s total export of palm oil
in terms of value. As a comparison, Malaysia has exported 57% of RPO to the world,
generating 85.25% of Malaysia’s total export value of palm oil in 2008. Indonesia
exports more CPO and imports more RPO to and from Malaysia. These figures can be
translated into two assumptions. Firstly, Malaysia has more production capacity in RPO
compared to Indonesia. Secondly, Malaysia produces higher quality of RPO, which can
generate higher value added. If the second assumption is true, the lack of quality and
capacity of Indonesian refinery technology has presumably caused this pattern.
6.2.1.3 Supply-Side Incentives in the Case of Cork and Wood
In the economic side, Indonesian forestry has a promising potential to contribute to the
GDP as it used to in 1999, generating almost USD 3.5 billion. This sector generates
around 200 thousand jobs. If deforestation has been avoided and wood has been produced
in a sustainable way, this potential could have at least been maintained if not increased.
Export value of Indonesian cork and wood has been reduced to USD 2.3 billion in 2008.
This value brings down Indonesia’s rank to being the ninth-largest exporter of cork and
wood in the world. Indonesia used to be world’s second-largest exporter of cork and
wood in 1999. As far as export destination is concerned, the EU is Indonesia’s second-
largest export market, with an export value of USD 461.8 million in 2008. More than
24% of Indonesian cork and wood goes to Germany. Another 56.44% goes, respectively,
to the UK (19.01%), the Netherlands (17.34%), Belgium (11.96%), and Italy (8.13%).
Other 22 members share the rest (19.49%). Graph 6.3 depicts Indonesian export of cork
and wood to the EU and the world.
If we look at the trends depicted in Graph 6.3, Indonesian export of cork and
wood to the EU looks stable at USD 500 million. A different trend has been observed in
the case of Indonesian export of the same products to the world. It is obvious that less
and less cork and wood have been exported from Indonesia to the world in the last
decade. The contribution of cork and wood to Indonesia’s total export to the world is also
declining. In 1999, the contribution of cork and wood was still at rank 4, but now it’s
down to rank 16. This trend is economically bad but environmentally good for Indonesia
as far as illegal logging is concerned.112 The conversion of forests into plantations and
other profit-making purposes has reduced Indonesian rainforest substantially, which
consequently contributes to natural degradation. Similar to the case of coal, wood is also
closely related to the environment.
Graph 6.3: Indonesian Export of Cork and Wood to the EU and the World 22
Indonesian Exports (in USD Million)
4.000
World
3.500 EU
3.000
2.500
2.000
1.500
1.000
500
0
Year
Source: Author’s compilation, data from UNSD COMTRADE (2009)
112
Illegal loggings have caused flood in Indonesian major cities increasing government expenses.
6.2.2 Demand-Side Incentives of Indonesian Exports to the EU
6.2.2.1 Demand-Side Incentives in the Case of Coal
Statistics from the Ministry of Energy and Mineral Resources of Indonesia (MEMRI)
indicate that Indonesian domestic consumption of coal reached 49.4 million tons in 2007,
while exports counted 157 million tons in the same year. The Energy Information
Administration (EIA 2011) has estimated that Indonesian domestic consumption and
exports of coal reached, respectively, 31.9 and 222.8 million tons in 2007. It means that
Indonesian coal producers exported between 76% and 87% of its total coal production,
assuming zero stockpiles.
Graph 6.4: Indonesian Coal Productions and Distributions (1980–2007) 23

300
Production
Net Exports
250
Consumption
200
150
100
50
-50
Year
Source: Author compilation, data from EIA (2011)
In terms of quantity, Indonesian export of coal has grown an average of 10.7%
per annum in the last decade (from 1998 to 2007), while domestic consumption has
increased an average of 10.9%. In 2007, both export and consumption grew, respectively,
by 8.3% and 6.3% compared to the previous year. Graph 6.4 estimates the development
of Indonesian coal production and distribution in the last three decades. It is obvious that
both domestic consumption and export have tripled in the last decade, widening the gap
between export and domestic consumption.
In order to find the potential trade incentives in the demand side of Indonesian
coal export, statistical reviews have also been carried out to identify the top 5 world’s
largest importers of coal. Table 6.6 reveals that in terms of import value, the EU is in fact
the world’s biggest importer of coal in the world. The EU imports almost one-third of the
total world import of coal. The demand grows almost 100% in the last two years,
indicating the increase of energy consumption of EU economy.113
Table 6.6: The World’s Top 5 Importers of Coal 27

Import Value (in USD)
Countries
Year 2008 % Year 2007 % Year 2006 %
World 111,806,783,590 100 75,409,452,470 100 64,811,586,596 100
EU 32,701,298,258 29.25 19,877,684,636 26.36 17,638,780,812 27.22
Japan 30,493,050,330 27.27 15,429,842,485 20.46 14,227,535,920 21.95
India 10,344,206,761 9.25 5,898,419,569 7.82 4,568,212,423 7.05
Republic of Korea 5,317,655,634 4.76 6,445,093,916 8.55 - -
USA 2,957,731,935 2.65 2,816,593,553 3.74 4,418,830,722 6.82
Total 81,813,942,918 73.17 50,467,634,159 66.92 40,853,359,877 63.03
As depicted in Graph 6.5, the EU consumed 867.7 million tons of coal in 2006.
The final amount of EU coal consumption is unfortunately not yet available for 2007 and
2008. It is interesting to observe that both the EU’s and Japan’s coal supplies rely
strongly on import at almost similar levels. However, Japan has consumed less coal
compared to the EU. China’s increasing position as the world leader of coal consumption
113
The demand of coal of EU industries and power plants has been predicted to slow down as IMF and
World Bank predicted world growth rate at 1-2 % only in year 2009. Looking at the latest development of
demand for coal, especially Indonesian coal, the predicted negative effect from the ongoing financial and
economic crisis to coal demand did happen but slowly recovered. It is reported that Indonesian largest coal
producer by market value Adaro has posted the increase of its Q3 2009 net profit as much as 131% year on
year due to the increasing both foreign and domestic demand of coal.
exhibits the importance of energy for a country’s function as the world’s production base
with double-dip economic growth and largest population. Likewise, India’s coal
consumption also shows increasing trends approaching EU consumption level. Graph 6.5
and Graph 6.6 depict a clear picture on Indonesia’s position as a production base of coal
with relatively little domestic consumption.
Graph 6.5: Coal Consumption of Selected Countries (1999–2010) 24

4000
China
Coal Consumption (in Million Tons)
United States
3500
EU
India
3000 Japan
Indonesia
2500
2000
1500
1000
500
Year
Source: Author’s compilation and calculation, data from EIA (2011)
As seen in Graph 6.5, EU consumption of coal is below China and USA. The
recent trend of EU coal consumption is decreasing. India and China have been observed
as more aggressive and crisis resistant in increasing their coal supply from Indonesia in
the past two years, mainly from the Island of Kalimantan (Borneo). China has committed
to help the GOI in building railways in the South Sumatra Province to facilitate coal
transports from interior areas to seaports in that region. The offer is to guarantee supply
of 20 million tons from that region every year over a period of 15 years. It is more
efficient for China to import coal from abroad, such as Indonesia and Australia, rather
than transporting it from Northern China. China has doubled its energy demand in the last
decades to support its function as the world’s production base of various products, from
around 34 quadrillion British thermal unit (Btu) in 1997 to 76 quadrillion Btu in 2007
(Badiali 2009). As the second-cheapest energy source after water, coal has contributed
75% of China’s energy needs, while natural gas has contributed only 2%. In contrary, as
coal has been largely replaced by more environment-friendly and expensive energy—
such as mineral oil, natural gas, and nuclear and renewable energy—EU demand of coal
has experienced a steady decline (DW World 2007). That is why the EU has demanded a
high-calorie and environment-friendly type of coal.
Graph 6.6: Indonesian Coal Export Destinations (1999–2010) 25

4500
Coal Exports (in USD Million)0000t
4000 China Japan

ASEAN India
3500 Rep. of Korea EU-27
3000
2500
2000
1500
1000
500
0
Years
Graph 6.6 also reveals that EU coal demand has developed in a steady decline in
the last three years under review. The EU Commission has reported that more than half
of the coal used by coal-fired power stations in the EU has been imported (BBC 2010).
The import proportion might increase as loss-making coal mines across the EU will have
to be closed over the next four years. In 2008, total subsidy to the EU hard-coal sector
has fallen from EUR 6.4 billion to EUR 2.9 billion in 2003. In the same period, the
proportion of EU subsidy spent for production of coal has fallen by 62%, as more
spending has been channeled to cover the social and environmental costs of coal mines
closures (BBC 2010).
6.2.2.2 Demand-Side Incentives in the Case of FVOs
Before going into details, it is deemed as necessary to describe product characteristic of
fixed vegetable oils/fats (FVOs). FVOs are all oils extracted from plants. Oil is liquid at
room temperature, while fat is solid. FVOs can be categorized based on their use and
extraction source. Based on their use, FVOs may be edible or inedible. The examples of
inedible FVOs are processed linseed and castor oils, used in lubricants, paints, cosmetics,
and pharmaceuticals. Edible FVOs can be found in the food sector as cooking oils
(sunflower, safflower, rapeseed, coconut, corn, olive, palm, and sesame oil) and salad
dressing (ground nut oils) and are also used in baking (coconut and palm oils) and in the
commercial food industry (palm oil). FVOs are named based on their source of
extraction, such as palm oil. The complete product list of FVOs can be seen in Annex
5.7. Demand for FVOs in the food sector is growing more and more as awareness of
health rises, simply because animal fats do increase cholesterol and harm body fitness.
Palm oil has some product advantages. Besides its cheaper price, palm oil contains a high
percentage of Vitamin A (beta-carotene content of 1,000mg/kg) and lower cholesterol
(3mg/kg). Compared to soybean, the maintenance cost of a palm plantation is lower since
a productive palm tree can be cultivated up to 25 years. As exploration of fossil fuel is
becoming more risky and costly than ever before, the use of FVOs as bio-energy (all
types of FVOs except palm oil) and biodiesel (from palm oil) will tend to increase in the
future. This shifting trend has created a pro and contra in relation to the environment and
the food crisis.
The significance of a larger market size, shown in Table 6.1, is in line with the
EU position as the world’s largest importer of FVOs in 2006. China did surpass EU
position once in 2007, but then the EU led the world again in 2008. The value of EU
imports of FVOs was, respectively, USD 5.5, 6.6, and 9.5 billion in 2006, 2007, and
2008.114 This is a growth of almost 72.73% in the last two years. Indonesia has exported
its FVOs mostly to India (25.47%), the EU (21.19%), China (13.97%), Malaysia
(6.83%), and Pakistan (4.25%) in the last 10 years. This is the new composition of
Indonesian export destination of FVOs as India continues expanding its share from the
year 2000. India has replaced EU position as Indonesia’s major export destination of
FVOs since 2007. Indonesian export to the EU and India grows, respectively, 160.32%
and 307.73% from 2006 to 2008, signaling the existence of an increasing export
diversion from the EU to India. This might also indicate that exporting palm oil to India
is easier (lower entry barriers, lower product quality demand) and more profitable (closer
distance, lower transportation cost). Without the EU GSP scheme, import tariff of palm
oil originating from Indonesia is much higher in the EU than the rest of the world, on
average (Annex 6.6).
In a global scale, the EU is currently the net importer of FVOs due to the rising
demand of bio-energy. EU policy on minimum rate of excise duty at, respectively, €302,
€21, €21 per 1,000 liters gas oil for propellant, heating for business use, heating for non-
business use as well as government incentive by reducing duty for renewable energy mix
114
This statistics indicate EU external import based on FOB price in trade partners.
might have caused the increasing use of bio-energy (European Commission, 2009a).115
Since soybean oil, rapeseed oil, and palm oil have been used more intensively in the EU
bio-energy mix, the increase of bio-energy demand in the EU has increased EU import of
both soybean and palm oil, which Indonesia is the largest supplier of—but not in the case
of rapeseed oil (see Graph 6.7).
Graph 6.7: World Exports of Fixed Vegetable Oils to the EU (FOB Price) 26
4.000
World Exports to EU (in USD Million))))
Palm oil, fractions

Sunflower seed oil, etc.
3.500 Soya bean oil, fractions
Coconut oil, fractions
3.000 Palm kernel oil, fractns
Olive oil etc.
Rape,colza,mustard oil
2.500
2.000
1.500
1.000
500
Year
Palm oil, palm kernel, and coconut oil have been mostly (60%–75%) consumed in
the EU as food products (cooking, frying, margarine, shortenings, confectionery, baking,
filled milk, coatings, imitation dairy products, ice cream, and salad oil). It replaces other
vegetable oils and animal fats in the food industry not only because of its cheaper price in
comparison to other FVOs but also because it does not have to be hydrogenated, thus
avoiding the production of trans-fatty acids and reducing blood cholesterol (see price
115
This minimum rate has been proposed to be increased by EU in 2012 and 2014 (Euractiv, 2007). The
disparity of energy tax at level of member state has made it difficult for the EU to harmonize the rate. UK
and Germany have been imposing the highest excise duty for fossil energy.
comparison in Graph 6.9). It is therefore worth investigating that notwithstanding the
increase of total EU market for FVOs, the growth of the market share of Indonesian
FVOs in the EU has been identified as negative in 2006 (see Graph 5.1). Indonesia was
the second-largest supplier of palm oil to the EU after Malaysia in 2006, with market
share equal to 45.42%. Almost half of EU import of palm oil has been originated from
Malaysia.
Statistic report made by the EU Vegetable Oil and Proteinmeal Industry
(Fediol)116 suggests that EU consumption of FVOs (excluding olive oil) reached 19.8
million tons, with an annual growth of almost 19.80%, in 2006 (see Annex 6.1). In terms
of type of oils, palm oil—which Indonesia is the world leader of at the moment—is the
second-most-consumed FVO in the EU, with a 20.48% share, a more than 4% decline
compared to the 2004 consumption. In contrary, the EU has been consuming more
percentage of rapeseed oil since 2004 in a more self-sustained way. Germany consumed
32% of the total EU market share of FVOs, followed by France, Italy, the UK, Spain, and
the Netherlands, with 10.08%, 8.98%, 8.07%, 6.62%, and 6.21% market shares,
respectively.
Comparing EU consumption with its external import of FVOs, two conclusions
can be made. Firstly, the EU depends more on the import of palm oil but is not so
dependent on rapeseed oil import. Therefore, consuming less palm oil would be good for
the balance of payment. Secondly, it is obvious that the Netherlands has taken the
position as the land of transit of FVOs but not the end consumer. A similar hub function
has been played by Singapore in the case of Asia. Graph 6.8 reveals that the gap between
116
Fediol represents the interests of the European seed and bean crushers, meals producers, vegetable oils
and fats producers/processors. Fediol, headquartered in Brussels, has been involving in lobbying process of
EU policy in related topic such as food safety, international trade, environment and bio energy.
EU consumption and production of FVOs has been widening in the last five years,
resulting in continuous increase of imports and decrease of exports.
Annex 6.2 shows the pattern of export from Indonesia and Malaysia to the world
and the EU. The dramatic change of pattern of palm oil imported by the EU from 1999–
2008 is obvious. The EU prefers importing palm oil in the crude form rather than the
refined form. This is because importing CPO is cheaper than RPO. Besides, refining CPO
based on a high-quality standard of technology at home can guarantee the European
safety and healthy food standard.
Graph 6.8: EU FVOs Market Development (in 1,000 tons) 27
Notes: The number of EU members included in the graph has been evolved in line with EU
enlargements (EC-6 for up to 1972, EC-9 for 1973– 1985, EC/EU-12 for 1986–1994,
EU-15 for 1995–2003, EU-25 for 2004– 2005, and EU-27 for 2006 onward)
Source: Fediol (2009)
The monthly trends of FVOs’ world price can be observed from Graph 6.9. The
trends of palm oil, soybean oil, and coconut oil follow a rather similar pattern as that of
olive oil. While olive oil reached its peak price in February 2006, palm oil, coconut oil,
and soybean oil reached their peak prices, respectively, in March, July, and June 2008
before being brought down by the incoming crisis. The price pickup of palm oil is
observed since December 2008, while the pickup occurred simultaneously in April 2009
in the case of other selected FVOs. Graph 6.9 also reveals that palm oil is comparatively
cheaper than others.
Graph 6.9: World Price Developments of Selected FVOs 28

7.000 Olive Oil, less than 1.5% FFA
Coconut Oil, Philippine/Indonesia, cif Rotterdam
Price (USD per Metric Ton))))
Soybean Oil; Dutch, fob ex-mill

6.000 Palm Oil; Malaysia and Indonesia, cif NW Europe
5.000
4.000
3.000
2.000
1.000
Year and Month

Source: Author’s compilation and calculation, data from IMF (2010a)
According to the export guide to the EU (CBI, 2007a), it is important to monitor
the prices, stock, trade, and harvest of FVOs in the global market. These developments
will all have an influence on pricing and export strategy. Indonesian producers should
adapt their product to the demands of the market and the EU buyer. In this case, higher
product quality revealed as significant incentive to trade in the primary data analysis
plays an important role. Sustainable palm oil is more and more in demand, while
genetically modified organism (GMO) FVOs are avoided in EU consumption trends.
Consumers’ tastes differ vastly among EU member states. According to CBI (2007b),
Mediterranean countries like Spain and Italy consume huge amounts of olive oils, while
in countries like Germany and the Netherlands, the market for palm oil is very
substantial. Concerning low trans-fatty acid content, palm oil is more in demand by food
industries not only because of its cheaper price but also because of its healthier contents
(CBI, 2007b).
As far as product distribution is concerned, the possible distribution channels of
FVOs in the EU are direct sourcing, traders (brokers, agents, importers), refining
industry, and final processing industry (CBI, 2007a). CBI also stated that in general, large
volumes go straight from producer to the processor, while suppliers of smaller volumes
may opt to use agents, brokers, or importers. For some downstream companies,
information about the origin of the materials is not as important as ensuring that the
goods meet the agreed specifications, price parameters, and, most importantly, are
delivered on time (CBI, 2007a). On-time delivery depends very much on good logistics
performance in supplying countries. This is exactly in line with results of the field survey
presented in Table 6.1. Therefore, good logistics performance has to be taken into
account by the GOI, especially in increasing export performance to the EU.
6.2.2.3 Demand-Side Incentives in the Case of Cork and Wood
It is important to clarify here that cork and wood are included into manufactured goods.
However, wooden furniture is excluded. Manufactured products made out of wood under
SITC 63 include plywood, particleboard, and wood (see Annex 5.7). As world population
grows rapidly every year, the world’s demand of cork and wood for housing is also
increasing (see Annex 6.3). The trend of Indonesian export to the EU looks bumpy.
Export to the EU from 1999 to 2003 tends to be decreasing, with the exception of exports
in 2003–2007. Indonesian export to the EU in 2008 starts declining again (Graph 6.2).
Exporting cork and wood in Indonesia is becoming more problematic compared to coal
and FVOs. It is understandable since cutting down more forest would harm the
environment besides its commercial benefit.
6.2.3 Supply-Side Barriers of Indonesian Exports to the EU
6.2.3.1 Supply-Side Barriers in the Case of Coal
Tariff Barriers
Besides imposing a 5% coal export tax since 2005, according to Indonesian Coal
Contract of Work (CCoW) in 1980s, the CCoW’s owners also have to pay to the GOI
some amount of royalty. The GOI imposed a 5% export tax on coal based on Decree of
the Ministry of Finance No. 95/9005, to secure domestic demand. The Indonesian Coal
Producer Association (APBI) basically criticized this policy as it can deteriorate
investment climate in coal mining. The association has emphasized that the policy goal to
secure domestic demand for coal is illogical since total production surpassed domestic
demand (access of supply).117 As their commitment to contribute to Indonesian national
income, the association, representing Indonesian coal producers, finally accepted the
decree. This export tax decree has been cancelled by the GOI in 2008 but this action was
prevented by the body of judicial review. Independent analysts from academies and civil
society have collectively sued the cancellation to the judiciary. At the time of writing,
Indonesian coal exported from Indonesian ports are still subject to a 5% export tax.
The amount of royalty has been set to 13.5% of the total value of coal exploited.
In return, the GOI must restitute any new value-added tax (VAT) policies. Therefore, any
117
Indonesian production capacity of coal in 2005 was 150 million tones while domestic consumption was
only 40 million tones.
royalty imposed on coal might have not been considered by some exporters as barriers
since it will be restituted back as long as they pay royalty to the GOI. Companies keep
paying royalties while demanding VAT refunds. A problem started as the GOI failed to
do its obligation from 1983 to reimburse paid VAT. Some big coal companies stopped
paying royalties since 2001, claiming that the amount of tax refund that they should have
received is equal to the royalty they normally pay. The Indonesian Ministry of Finance
has ordered the State Receivables Committee (PUPN) in 2007 to collect the coal-mining
companies’ royalty debts. In the same year, coal-mining companies collectively sued the
GOI at the National Court of Commerce (PTUN), striving for PUPN to stop collecting
royalty debts. As companies won the court, the PTUN ordered the PUPN to stop
collecting debts. This decision has been made based on the content of the CCoW clause
mentioning that only international arbitrage can solve any future quarrels and order legal
action between both parties.
As some companies stop paying royalty, the GOI has issued a letter to the
immigration office to ban 14 board of directors and commissionaires of six mining
companies from leaving the country. As the global economic crisis arrived at the end of
2008, the Indonesian president released an instruction to end all ongoing conflicts
between the GOI and the private sectors, including the banning of coal-mining
companies’ managements. The Indonesian Ministry of Finance has scheduled the unpaid
reimbursement of VAT to coal-mining companies according to the CCoW clause.118 The
amount of VAT reimbursement remained unclear, but the royalty debts of banned
companies—including PT Kaltim Prima Coal (KPC), PT Arutmin Indonesia, PT Kideco
Jaya Agung, PT Kendilo Coal Indonesia, PT Berau Coal, and PT Adaro Indonesia—from
118
The reimbursement process of unpaid VAT restitution from years 2000 to 2008 will be the first priority
of GOI. The later schedule will be for unpaid VAT restitution from year 1983 to 1999.
2001 to 2007 reached USD 700 million. This public finance indiscipline of both the GOI
and the companies turns out creating a continuous polemic in Indonesian political
economy. Political economic lessons learned from mismanagement in the
implementation of Indonesian CCoW deserve further research in the future.
Nontariff Barriers
Coal deposits in Indonesia are mostly located in remote areas. The lack of sophisticated
heavy equipment owned by small- and middle-sized mining companies has delayed
distribution time. Sometimes permanent roads prior to exploration activity do not yet
exist. In the case of miners using public roads, complaints from surrounding villagers
have been heard. Trucks loading tons of coal on a daily basis have damaged public roads
very badly. The nonexistence of railways adds to the logistics problem. In the case of
coal mining in Kalimantan Island, miners use a river to transport coal to the destined port
or stockpile. In the case of coal mining in West Sumatra, some Dutch built railways,
which are still in use but need urgent revitalization. Sophisticated European railways
infrastructure as such does not yet exist in Kalimantan and Sumatra Island. China’s and
UAE’s investment offers in the development of railways in Sumatra and Kalimantan are
one of the indicators supporting this thesis. Along the supply chain of Indonesian coal,
problems have also been noted in the shipment process. According to notes given by
respondents during the primary data collection, EU buyers prefer to use their own
selected ships. Lack of ships makes the delay of targeted schedules unavoidable.
Therefore, activities in the coal-mining sector have contributed to the demand of more
and more sophisticated heavy equipment, new railways, larger and on-time ships, and
faster barges to facilitate coal exports distribution.

The secondary data shows that as Indonesia shifts from net exporter to net
importer of fuels, the domestic demand for coal especially for electricity is expected to
increase in the near future, as has been indicated by coal consumption in 2007. Moreover,
the GOI’s intention to implement export quota in 2010 is predicted to limit Indonesian
coal export flows, although implementing policy in the field is much harder than
formulating it. This decision could impact new foreign investments in the coal-mining
sector in a negative way.
The growing demand for coal in 2005 and 2006 came as a result of the soaring
prices of crude oil and gas. Coal becomes more important as an alternative source of
energy. The strong international demand for coal—including from the EU, Japan, India,
and China—makes the production capacity issue become more and more crucial in
Indonesian coal supply in the future. Many Indonesian coal producers have signed a
long-term contract with their consumers abroad. It is obvious that foreign buyers fasten
their seat belt, avoiding unexpected risks, such as future policy changes and excess of
demand. Therefore, to get a new coal sale contract in Indonesia today is getting more and
more difficult. The increase of both domestic and foreign demands are not the only
reasons supporting the fact that production capacity is one of the barriers to Indonesian
coal export to the EU. Production capacity can actually be considered as an incentive if it
can be increased and as a barrier if it cannot be extended.
As the price of energy generated from coal is much cheaper than other energy
corridors, the GOI has chosen coal to fire power plants. New energy-mix policy
substituting diesel with coal would definitely give the negative impact on Indonesian
export of coal in the future. Government plan to adopt a nuclear power plant has been
delayed and might be shifted to other corridors for a while, including coal. The recent
Fukushima Nuclear Reactor tragedy in Japan makes the future adoption of a nuclear
power plant in Indonesia more difficult, especially in winning public trust on safety of
nuclear technology being developed. Indonesian State-Owned Electricity Enterprises
(PLN) currently covers 65% of national demand for electricity. PLN is doing two phases
of a 10,000-megawatt project, while the private sector has been given license to build a
26,000-megawatt coal-fired power plant. All in all, these 36,000-megawatts of power is
expected to help achieve government target of 100% electricity cover-up nationwide in
2020 (Noersiwan 2009). Full functionality of coal-fired power plants of that size would
demand around 300 million tons of coal, leapfrogging Indonesian domestic coal
consumption by almost eight times. The use of low-calorie coal with low CO2 emission is
recommended so that export demand of high-calorie coal can be fulfilled.
Additionally, the GOI has demanded the Domestic Market Obligation (DMO) to
coal producers to prioritize the domestic coal demand on top of export (regulated in
Indonesia’s new coal law). The quota for coal export in 2010 has been set to 150 million
tons of coal. It is USD 13.5 billion worth, assuming world coal price average at USD 90
per ton. The GOI has discussed the quota system with producers, and it has been part of
conditions to be complied by contractors holding old CCoW (COW/PKP2B). The
Indonesian House of Representatives (DPR) has finally finished drafting the new Law on
Mineral and Coal No. 4/2009 in December 2008, replacing Law No. 11/1967 on general
mining. It took three years and seven months to draft this law. The main content of this
law is the need for a mining business license (IUP), which will replace the old CCoW
system.119 There are some important contents of this law, which is effective January 12,
119
The CCoW system has been well-developed and transparent system of granting concessions and mining
rights and obligations to foreign companies.
2009. The first is the need of a nontransferable exploration and production licensing
application instead of the old CCoW system, through a bidding process, with no
restriction on foreign investment. Each license is limited to 50,000 ha for 7 years’
exploration and 15,000 ha for 20 years’ production (with 2 x 10 years of renewal chance).
The second is the establishment of mining business zones. This could be aimed at
reducing illegal mining and securing protected areas such as rainforests. Thirdly, the
production level will be controlled by imposing the Domestic Market Obligation (DMO)
and priority use of local mining service providers. Other important things regulated by
the new law are the aspect of value-added processing and refinery of coal required to be
held in Indonesia, encouraging the use of low-rank coal and the use of local workers,
goods, and services as well as partnership. There are issues that are considered as
important. The first issue is the potential of discrimination in the implementation of a
mining business license (IUP). As stated in article 169 of the said law, only new investors
(including foreigners) should comply with IUP requirement. The old players can enjoy
their long-term CCoW but are requested to voluntarily commit to certain contents of the
new law. However, the implementation of the new law is dependent on a series of
changing government regulations (WTO, 2013).
More difficulty in getting new large-scale contracts in Indonesia might be
experienced by EU coal buyers in the future, not only because of the Indonesian export
quota in 2010 as the result from the policy change of Indonesian domestic energy mix,
but also because of the EU’s higher environmental standard (environment-friendly coal)
as well as the impediment of distance to trade flow. This might be the answer why major
coal-consuming countries are seeking not only to secure long-term supply contract but
also to acquire coal-mining companies’ ownership in Indonesia in order to guarantee

more sustainable supply in the future. The EU’s and Japan’s sharp increase of coal
stockpile imported from the world and Indonesia in 2008 is suspected to be in line with
this strategy. Regarding environmental protection, coal mining has been blamed by civil
society as the main cause of deforestation in Kalimantan and Sumatra Island. This is due
to irresponsible mining companies backed up by government officials issuing licenses
with less control. Most of these companies have not implemented the rehabilitation
procedures for the environment. This should be useful for the EU to adapt their future
energy-mix policy to avoid higher cost, lack of supply, and higher CO2 emission.
Combining the existing and future barriers faced by Indonesian coal exporters, it
is fair to predict that we could no longer expect to see Indonesian coal as a champion
product in the EU market in the future as identified in 2006. The 2007 declining
Indonesian coal export to the EU depicted in Graph 6.5 already shows the evidence. It
will be very interesting to observe the future decisions of Indonesian trade policy makers
in balancing the different interests of domestic as well as international stakeholders as it
is also interesting to know the changes of the EU energy-mix policy.
6.2.3.2 Supply-Side Barriers in the Case of FVOs
Tariff Barriers
Export tariff on FVOs has been levied by the GOI since August 1994. Almost similar
with the case of coal, this tariff instrument has been imposed by the GOI in order to
secure high domestic demand of cooking oil and reduce export in the form of palm kernel
(raw material). This export tax has been valid and promulgated under Regulation of the
Ministry of Finance No. 92/PMK.02/2005. This regulation has been amended many
times. The latest amendment in export tariff for palm kernel and palm oil is Regulation of
the Ministry of Finance No. 159/PMK.011/2008. The current export tax is based on
progressive ad valorem (percentage) tax on a given range of price references.120
Reference price will be continuously updated by a technical staff in the Ministry of
Trade, depending on the Rotterdam CIF price (reference price monitoring), one month
before the tax is to be applied. According to the last amendment of regulation, export tax
will only be taken if mentioned reference price reaches USD 700 per ton and beyond;
otherwise, no export tax will be imposed to exports of FVOs. The rate will go up as price
increases (progressive), except for palm kernel. There are 13 progressive tariff levels in
the new regulation (see Annex 6.4). Palm kernel has been subject to 40% export tax for
all tariff levels (non-progressive). Export tax for crude palm oil has been higher than
refined bleached deodorized (RBD) palm oil and biodiesel from palm oil. Since January
1, 2011, export tax for CPO has reached the 11th level (20%). This kind of tax export
structure is a clear indication that the GOI has urged producers to add value to its product
at home before exporting them. The more value has been added to raw material, the less
tariff level will be imposed. It is important to note that this regulation has been explicitly
criticized by Indonesian exporters, but some big producers can accept the regulation.
Nontariff Barriers
Similar explanation to bad logistics conditions in Sumatra and Kalimantan Island has
been found in the case of FVOs. The degree of problem in the case of FVOs is, however,
lower than in the case of coal due to different natures and conditions between plantation
areas and mountainous mining sites. The development of railways as effective and time-
efficient transportation is also deemed as the solution to smoothen the supply chain in
this sector.
120
The progressive export tax scheme on palm products was first introduced in September 2007.
6.2.3.3 Supply-Side Barriers in the Case of Cork and Wood
Tariff Barriers
Similar to palm oil, Indonesian wood has been subject to ad valorem export tax.
Manufactured wood export tax was first introduced in 2005 under Finance Ministry
Regulation No. 92/PMK.02/2005. In the case of export tax under the old tax regime, for
veneer/plywood, wooden sheets for packaging box, and wood in chips and particles and
manufactured wood, all are imposed with a 15% rate. The new export tax structure has
been regulated under Finance Ministry Regulation No. 72/PMK.011/2008. Export tax
under this new tax regime has imposed export tax for veneer/plywood at 15%, wooden
sheets for packaging box at 2%, and wood in chips and particles as well as manufactured
wood at 5% rate. Veneer/plywood producers suffer more from export tax than producers
of other manufactured wood, which is against the value-added strategy implemented in
the case of FVOs.
Nontariff Barriers
The difficulty in supplying raw material is believed to be caused by tight regulation
imposed by government in the form of limited cutting permits in order to protect the
forests, including the fight against illegal logging. Indonesian timber companies and
exporters must obtain a timber legality certificate (WTO 2013). This reasoning is
environmentally acceptable as wood is an environmentally sensitive product. Trade
success in wood products is closely related to certification schemes. Wooden products
have to pass a fumigation process before they are shipped. This process will guarantee
the elimination of small insects in the wood. Obligatory certification by Indonesian
authority, however, has been considered as one of the technical barriers by Indonesian
cork and wood producers. Voluntary labeling of wood has been provided as well by civil
society, such as Ecolabel Indonesia. Both local and international NGOs have more and
more important roles in environmental protection, including promotion of legal logging,
biodiversity, and wildlife sanctuary in Indonesia. In the field of fighting illegal logging,
Indonesia has been part of the EU bilateral PFLEGT license program under the Voluntary
Partnership Agreement (VPA). It means that legal, sustainable timber and timber
products from Indonesia can already get PFLEGT license in Indonesia. There is no valid
data on how many companies have applied for the PFLEGT license program. Candidates
for applicants are of course companies that already have forest-cutting licenses from the
Indonesian Forestry Ministry. Data from the Indonesian Ministry of Forestry indicates
that from 63 active forest-cutting licenses issued to companies until 2006, 13 licenses
will be outdated in 2010. More than half of those licenses will be outdated in 2020. Those
are the arguments that have caused the shortage of raw material supply. This has resulted
in the increase of wood price from November 2001.
Graph 6.10: Trends of Particular Wood Price in Metric Ton 29

1000
Sawnwood; dark red meranti, select quality
900
800
700
600
500
400
300
Year and Month

Source: Author’s compilation, raw data from IMF (2010a)
Graph 6.10 indicates that since the end of 2001, the price of particular wood has
been steadily increasing. The price peak level in June 2008 almost doubles the price
bottom level in January 1999. This increasing price tendency might continue as concern
toward environmental protection regains momentum at all levels of institutions. The UN
Climate Change Conference held in Copenhagen is a good example of how
environmental protection in a global scale has regained momentum.121 The conference
has been intended to strengthen countries’ commitment and to set up action plans in
reducing greenhouse gas emissions to battle climate change. The EU is well known as the
most committed members of this conference. Critiques and disappointments have been
directed to the US, which is not fully committed to reduce aimed level of CO2 emission.
The forestry sector used to be one of Indonesia’s favorite export sectors. It has
contributed significantly to Indonesian economic development, especially during the later
years prior to the 1997 Asian financial crisis. Because of the important position of the
Indonesian tropical forest in the world climate change program, there have been intense
pressures directed to the GOI to improve the management of the forestry sector since
2004 (Christanty et al. 2004a).
Christanty et al. (2004b) have also criticized earlier that coordination between
different levels of government is still lacking, lacking a clear division of tasks between
central, provincial, and district governments. When compared to other forest-rich
countries, the decentralization process in Indonesia has not sufficiently empowered
regional and local governments in the forestry sector, as the central government retains
most of the power to manage the forests. Later in 2007, the sharing and coordination of
121
The United Nations Climate Change Conference in Copenhagen COP 15 conference is the largest
international political conference ever held in Denmark with participants from 192 countries representing
governments, the business community, and civil society.
authority between the central and regional government in forest management has been
ruled and promulgated under Government Regulation No. 38/2007 in the forestry sector
(SI No. 38/2007). However, the content of this regulation still indicates the very strong
centralized decision-making system. Only less than 1% of the total authority desk in
forestry has been passed down to provincial and district levels. Indonesian provinces and
districts have been assigned only to recommend, consider, supervise, and implement in
most of the authority desk.
As the result of supply barriers, RCA calculation in Chapter V reveals that
Indonesia is losing its world competitiveness in cork and wood (SITC 63) products. In
1999, the RCA index for Indonesian export in this sector reached 11.43 point. This index
remained only 3.69 point in 2008. Aswicahyono (2004b) reveals that Indonesia has been
losing competitiveness in slow-growing industries like wood products, especially
plywood. Therefore, further restructuring of the forest-product industry in favor of legal
logging practices with proper environmental management is the right policy direction.
The exploitation of wood by the industry exceeding sustainable harvest levels is not
recommended and should therefore be avoided. As the pioneer of green economy, the EU
as one of target markets should not have any problem with such high politic.
6.2.4 Demand-Side Barriers of Indonesian Exports to EU
6.2.4.1 Demand-Side Barriers in the Case of Coal
Tariff Barriers
The EU does not lift any import duty to coal imported from third countries, including
from Indonesia (see Annex 6.5). Mineral fuel products (Chapter 27 Harmonized System
Number), including coal, are still included in the EU GSP scheme (European
Commission 2008). It is understandable that imposing duty to coal import would only
deteriorate energy price in the EU, which is already high. Value-added tax (VAT) must
be paid by importers (taxable person) at the time of goods entering the EU border to put
imported products in equal treatment as other products produced inside the EU border.
This tax will be passed to end consumers. The new EU general VAT rates published by
EU Commission for taxation and custom union in 2009 have not been harmonized
(European Commission, 2009c). It ranges from 15% in Cyprus at the lowest and 25% in
Hungary and Denmark at the highest. The history of VAT rates in the EU indicates
increasing trends in almost all member states. Reduced and super reduced rates can be
found for particular products in certain EU member states. It is allowed under VAT
Directive No. 2006/112/EC (European Commission 2006). VAT rates in the EU
electricity sectors range from 5%–25%. This is the sector in which coal has been used.
Nontariff Barriers
According to the notes given by respondents during the field research, European buyers
usually demand coal with high calorific value but with lower percentage of sulfur and
nitrogen.122 This specification cannot always be fulfilled by coal producers with lower
quality of coal-deposit specification. Although, laboratory tests have revealed that
Indonesian coal sample has, in fact, a higher calorie and lower sulfur compared to
Australian brown coal and American Wyoming. However, the nitrogen content of
Indonesian coal is the highest among the three (Sakanishi et al. 1995).
This technical requirement of coal specification is rather an adaptation to EU
directive on CO2 emission reduction, showing EU commitment to solve the global

122
Consuming coal with lower Sulfur and Nitrogen can reduce CO2 Emission.
climate change problem. This type of coal is unfortunately not always available with
cheap price. Most high-quality coal deposits with high calorie and lower sulfur and water
content are located in Sumatra Island, namely, Tanjung Enim. This has been mostly
exploited by state-owned companies, such as PT Tambang Batubara Ombilin. PT Adaro,
a foreign-owned company, is one of Indonesia’s major coal producers supplying this type
of environment-friendly coal (Envirocoal) for the European market. Technical barriers is
therefore one of the barriers in exporting coal to the EU.
6.2.4.2 Demand-Side Barriers in the Case of FVOs
Tariff Barriers
Indonesian FVOs, including palm oil, is still included in the EU GSP scheme (European
Commission 2008). Therefore importing FVOs from Indonesia to the EU is still duty-
free. Without the GSP scheme, average rate of import tariffs for Indonesian export of
FVOs would be 8.66% (tariff without the GSP scheme can be seen in Annex 6.6). Hence,
tariff barriers in exporting Indonesian FVOs to the EU does not exist in the demand side
of the supply chain. VAT rates for food products in the EU range from 3%–25%
(European Commission, 2009b). Some member countries that apply super reduced tariffs
are Spain, Ireland, Italy, Luxembourg, and Poland, with VAT rates of 4%, 4.8%, 4%, 3%,
and 3%, respectively.
Nontariffs Barriers
Technical Barriers to Trade (TBT) have been often regarded as EU typical market
barriers. Requirements are demanded through EU legislation (obligatory) and private
sector initiative of labels, codes, and management systems (voluntary). It covers almost
all phases of the supply chain—from shipment to end consumer. Especially in edible
products like FVOs, requirements are aimed at environmental protection and consumer
health and safety. Scientific and technical questions concerning consumer health and
food safety associated with the consumption of food products and, in particular, questions
relating to toxicology and hygiene in the entire food production chain, nutrition, and
applications of food technologies, as well as those relating to materials coming into
contact with foodstuffs, such as packaging in EU, had been mandated to the EU
Scientific Committee on Food (SCF) until May 2003. Since then, the European Food
Safety Authority (EFSA) has been responsible for providing the EU Commission with
scientific advices on food safety.
For shipment, EU Directive No. 96/3 has regulated the sea transport of liquid oils
and fats in bulk concerning food hygiene standards. The amendment has been made
based on scientific opinion of EFSA, assessing the risk to human health arising from the
potential contamination of oils and fats shipped in tanks that may have been used to
transport these substances (EFSA 2009). The list will be continuously updated based on
EFSA’s scientific opinion, published in its journal. The Maritime Safety Division of IMO
has advised that animal fats and vegetable oils are, to some extent, a flammable product.
For that reason, oils and fats transported by ships are classified under class 4.2 of the
International Maritime Dangerous Goods Code (IMDG). It is recommended by CBI
(2007a) that exporters in developing countries comply with “IMO Guidelines for the
Packing of Cargo in Freight Containers and Vehicles.”
The overall trend in Europe is toward facilitating reuse and recycling of
packaging through incentives. In order to harmonize the different forms of legislation, the
EU has issued a directive for packaging and packaging materials (Directive 94/62/EC) in
which minimum standards are required. Directive 79/831/EEC details laws, regulations,
and administrative provisions related to classification, packaging, and labeling of
dangerous substances. Vegetable oils are generally transported in iron drums. EU
Directive 93/43/EC applies to bulk packaging of animal fats and vegetable oils.
Requirements in this directive are primarily related to the quality of the inner coatings
and the seams of the oil drums. Both must be safe and must rank on the “Positive List of
Plastics,” which forms an integral part of the directive concerned.
During the 26 regular sessions of the TBT Committee between 1995 and 2001, a
total of 63 specific trade concerns were raised concerning the implementation and
administration of the TBT Agreement (OECD 2003). Twenty of the concerns were
specifically related to agro-food products, mainly involving genetically modified
organisms, livestock products, and beverages. Two-thirds of all agro-food concerns were
related to questions of labeling. Labeling of food as GMOs and non-GMOs has been
mentioned in the EU white paper on food safety (European Commission, 2000b). Hazard
Analysis Critical Control Point (HACCP) is an EU scientific-based production and
inspection system of ensuring food safety. The HACCP system applies to the entire food-
processing industry in the EU, from producer to consumer. UNCTAD (2000, p. 12) has
cited that the Directive on Hygiene for Foodstuffs (93/43/EC) stipulates that:
Foodstuff companies shall identify each aspect of their activities which has a
bearing on the safety of foodstuffs and ensure that suitable safety procedures are
established, applied, maintained and revised on the basis of the HACCP system.
General food law has been governed through EC’s Regulation No. 178/2002. The
aim of this regulation is to give assurance of a high level of protection of human health
and consumers’ interest in relation to food. Some important parts of this regulation are
Chapter II, Section 4, Articles 14–21, on the General Requirements of Food Law;
Chapter II, Section 1, Article 8, on Consumer Protection Law; Chapter II, Section 3,
Articles 11 and 12, on General Obligation on Food and Feed Imported into Community;
Chapter II, Section 4, Articles 14 and 15, on Food and Feed Safety Requirements;
Chapter IV, Section 1, Articles 50–52, on Rapid Alert System; and Chapter IV, Section 1,
Article 53, on Emergency Measures for Food and Feed of Community Origin Imported
from Third Countries. The comprehensive standards and regulations on products closely
related to human health and safety in the EU has been promulgated a decade ago.
Traceability and labeling are important issues in EU food safety systems.
Traceability guarantees the ability to trace and follow the origin of food and its
substances through all stages of production, processing, and distribution. It is the
responsibility of food business operators to give their food products and substances the
adequate labeling. Food and feed imported into the community shall comply with the
related requirements of food law or conditions recognized by the community to be at
least equivalent thereto or where a specific agreement exists between the community and
the exporting country with requirements contained therein (Chapter II, Section 3, Article
11). In order to make it easier to understand, EC’s Regulation No. 178/2002 on food
safety systems has been summarized in Figure 6.1.

Figure 6.1: EU Food Safety Systems for Imported Food Products 2

Rapid Alert System (RAS)
-Monitoring Food Risks

Commission under RAS -Received Reports from
International -Send Alert Notification
Organization -Technical Information Consumers
Established Network -Withdraw
Export Re-export
Exporters EU Importers Food

(third countries) Operators
-Distribute
- Send Remedies (withdraw or agreement)

- Technical Information
EU Custom EU Members States
Source: Author’s interpretation of EC’s Regulation No. 178/2002
Besides a complex health and food safety system, awareness of environmental
protection in the EU is also high. Environmental NGOs in the EU have put advertising in
member states’ television broadcasts, blaming palm oil plantations as the cause of
deforestation and endangering the habitat of protected animals, such as the Sumatran
orangutan (great apes species living in the Sumatran rainforest). Discussion about
Indonesian palm oil in Europe is not complete without relating it with orangutans.
Orangutan Conservancy (OC) expanded its “orangutan-friendly” consumer program by
partnering with Chandler Farm Inc. to promote body care products that do not contain
palm oil, despite the fact that not all palm oil products have been associated with illegal
logging.123
123
The Orangutan Conservancy (OC) was established in 1999 to support projects that focus on wild
orangutan protection, reintroduction, education, and research. The OC is a partner of the Great Apes
Survival Project (GRASP)
Indonesian palm oil producers have to adjust with the new market access issue
developed by the EU market as currently done by Malaysia (MPOC 2007). First it was
the health issue, then the environment, and now palm oil has to endure further
sustainability criteria for imports to Europe. The last criteria appear to be future barriers
since the EU Renewable Energy Directive (SI Directive 2009/28/EC) has provided a
number of sustainability criteria. Among other criteria is that bio-fuels production must
have minimum greenhouse gas (GHG) savings of 35% by 2010 compared to fossil fuel
(Article 17, Point 2). The directive also regulates that areas with high carbon stock, such
as peat lands, or areas with high biodiversity, such as primary forests, should not be used
for bio-fuels production (Article 17, Point 3). Based on EU calculations, palm oil has
carbon emission savings of 19% and soybean 31%, both below the 35% threshold. This
has been considered as a political manipulation by the Malaysian Palm Oil Association as
EU authority does not want to disclose their data (Bernama 2009). This threshold
problem is actually solvable by introducing and promoting new technology enabling the
capture of methane at oil mills. This will increase palm oil GHG emission saving to 56%.
If Indonesia and Malaysia plan to supply EU demand for bio-fuels in the future, both
countries should invest in their oil-milling technology to meet above-mentioned criteria.
6.2.4.3 Demand-Side Barriers in the Case of Cork and Wood
Tariff Barriers
The EU has adopted a new regulation on its Generalized System of Preferences (GSP)
scheme124 on July 22, 2008, covering the period from 2009–2011. The new decision
124
GSP is an autonomous trade arrangement through which the EU provides non-reciprocal preferential
access to 176 (-2) developing countries and territories. In 2007, developing countries exported € 57 billion
worth of goods under the GSP (an increase of 12% over 2006), with a nominal duty loss for the EU around
EUR 2.5 billion.
allows continued preferential access for 176 developing countries to the EU market,
including Indonesia (Belarus and Myanmar are being withdrawn concerning Council
Regulation [EC] No.1933/2006 and No.552/1997). In the new scheme, Indonesia has
been granted an extended preferential access to wood and articles of wood. In 2007 alone,
almost 40% of Indonesian export to the EU (€4.9 billion) was eligible for preferential
market access under the GSP scheme. With this scheme, some €3 million has been
granted indirectly by the EU to Indonesian exporters in 2007, as reported by Antara
(2008).125 The extended preferential access for Indonesian wood products has granted an
additional €156 million worth of EU imports of Indonesian wood products. Table 6.7 has
indicated that duties on particle- and fiberboard will be completely removed, while ad
valorem duties on plywood and wood boards will be reduced by 3.5 percentage points
from 5.25% (tariffs list without the GSP scheme can be seen in Annex 6.7). EC has
estimated that these amendments would bring losses in EU import duties about €1.2
million (EC 2008). EU VAT rates of timber for industrial use range from 15%–25% (EC,
2009b).
Table 6.7: EU Import Tariffs for Selected Wood and Cork 28

SITC/ HS Tariff for Indonesian Origin Wood
General Tariffs
Code126 Prior to July 2008 After July 2008
/4410 7.0 3.5 0
/4411 7.0 3.5 0
/4412 6.0–10.0 2.5–6.5 3.5
Source: Author’s compilation, data from European Commission (2008) and SIPPO (2006)
125
Indonesia gain most benefits in exports of telecommunication products, TV and sound equipments as
well as garments and footwear sectors.
126
4410: Particle board and similar board of wood or other ligneous materials, whether or not agglomerated
with resins or other organic bonding agents (excl. fiberboard, veneered particle board, hollow-core
composite panels and board of ligneous materials agglomerated with cement, plaster or other mineral
bonding agents); 4411: Fiberboard of wood or other ligneous materials, whether or not agglomerated with
resins or other organic bonding agents (excl. particle board, whether or not bonded with one or more sheets
of fiberboard; laminated wood with a layer of plywood; composite panels with outer layers of fiberboard;
paperboard; furniture components identifiable as such); 4412: Plywood, veneered wood and similar
laminated wood (excl. sheets of compressed wood, hollow-core composite panels, parquet panels or sheets,
inlaid wood and sheets identifiable as furniture components).
Nontariff Barriers
According to CBI export guideline (2007a), EU customers are indeed looking for reliable
suppliers who can supply them on a regular basis at a good price, with a consistent
quality. Developing country exporters must therefore be able to supply at a constant level
of quality and according to agreed specifications. There are different methods of
measuring unprocessed and value-added timber, depending on timber species and the
final use of the product. Also, the rules specifying restrictions, allowances, and tolerances
are very often a matter of mutual consent between buyer and seller. Complicated entry
procedures are very much associated with buyers’ preferences in a voluntary basis. Some
EU member states—including Germany, the UK, France, Belgium, and Denmark—have
adopted green public procurement.127 This requires timber and timber products to be from
legal and sustainable sources. Some EU buyers are environment-aware groups imposing
on their suppliers to comply with certain certifications. Producers who cannot deliver
certified cork and wood would consider this as complicated. Both exporters and
importers should therefore help each other to meet their customers’ preferences.
According to SIPPO (2006), regulations in Germany and the Netherlands have
prohibited the excessive use of formaldehyde in fiberboard, which is used in the building
industry. The fiberboard would be banned from entering the market if the formaldehyde
emission of the board exceeds a certain value in a testing room. In addition, Germany and
the Netherlands have imposed stricter regulations on the use of pentachlorophenol (PCP)
compared to the EU.128
127
EU only prepares the general framework of green public procurement. It is up to member states to
decide whether they are willing to adopt it or not (voluntary basis).
128
PCP has been used to reduce and combat bacteria in many different industries, for instance timber
products.
EU buyers demand a higher quality of wood products compared to demand from
other countries. Taking timber as an example, timber without or less pinholes and with
low water content is in demand. Labeling (CE Marking, IFC, and Indonesian Ecolabel)
and fumigation are mostly considered as technical barriers. Future trends in EU timber
market show an indication that sooner or later the EU will have the obligatory regulation
banning trading of illegal wood and wood products.
The results of the EU poll commissioned by the World Wide Fund for Nature
(WWF) and Friends of the Earth (FoE) show that the general public (> 90%) in the EU is
aware of the problem and highly favors the EU wide legislation to ensure that wood and
wood products are legally produced. This sends a strong message to European lawmakers
that it is time to act. WWF and FoE Europe therefore urge the Agriculture Council and
the European Parliament to adopt stricter regulations without further delay (WWF and
FoE 2009).
6.2.5 Conclusions of Supply-Demand Analysis
The supply-demand analysis reveals that endowment factor and product quality as trade
incentives increase export from Indonesia to the EU. Endowment factor is identified as a
supply-side incentive to trade, while product quality is rather a demand-driven trade
incentive. Both incentive factors have been identified in all selected cases. Other
identified trade incentives—namely, increasing demand and world energy price—are
rather case dependent (see Table 6.8).

Table 6.8: Incentives of Indonesian Export to the EU 29

Identified Trade Incentives
Sectors
Supply Side (Indonesia) Demand Side (EU)
Coal Endowment Factor* (Enormous Product Quality*, Increasing
Reserve) Demand, World Energy Price
Fixed Vegetable Oil Endowment Factor* (Enormous Product Quality*

Reserve)
Cork and Wood Endowment Factor* (Enormous Product Quality*

Reserve)
Note:
*: Determinants have been identified in all cases.
Source: Author’s conclusion
As presented in Table 6.9, this method also reveals that both tariff and nontariff
barriers are found both in the supply- and the demand-sides chains, with a different
degree for each sector under review. The supply-demand analysis identifies export tax
and value-added tax as respective supply- and demand-side tariff barriers to trade. Both
tariff barriers are found in all cases, while another type of tariff barrier—namely,
royalty—is rather case dependent.
As far as nontariff barriers are concerned, bad logistics is identified as a supply-
side barrier, while technical barrier is found in the demand side. Technical barriers found
in the EU market consist of three arguments—namely, environmental protection,
consumer health, and safety issues. Other nontariff barriers—namely, export quota and
production capacity—remain as case-dependent nontariff barriers as far as supply-
demand analysis is concerned.

Table 6.9: Barriers of Indonesian Export to the EU 30

Identified Trade Barriers
Sectors
Supply Side (Indonesia) Demand Side (EU)
Coal
Tariffs Export tax* (5%), royalty (13.5%) VAT* (5%–25%)
Non Tariffs Bad logistic* (lack of Technical barrier* (high calorific
sophisticated heavy equipment, value and low content of
lack of infrastructure—like sulfur and nitrogen/
railways, lack of shipment), export environmental protection)
quota (due to increasing domestic
demand)
Fixed Vegetable Oil
Tariffs Export Tax* (1.5%– 40%) VAT* (3%–25%)
Non Tariffs Bad logistic* (lack of Technical barrier* (consumer
sophisticated heavy equipment, health and safety, environmental
lack of infrastructure—like protection)
railways, lack of shipment)
Cork and Wood
Tariffs Export tax* (5%– 15%) VAT* (15%– 25%)
Non Tariffs Bad logistic*, production capacity Technical barrier*
(due to tight environment (environmental protection,
regulation, forest cutting licenses consumer health and safety
reduction, centralized forest backed by certification and a
management), technical barriers* labeling scheme)
(fumigation, obligatory
certification)
Note:
*: Barriers have been identified in all cases.
6.3 Gap Analysis of Indonesian Exports to the EU
Gap analysis has been carried out by comparing EU market demand in terms of quality,
standards, and regulations and the ability of Indonesian suppliers to adopt and meet the
quality, standards, and regulations in order to access the market. A condition will be
considered as the gap if the market requirement cannot fully or partially be met at the
time of study due to lack of technology, knowledge, and information (the criteria for
existing gap).
6.3.1 Gap Analysis on Indonesian Export of Coal to the EU
European buyers usually demand coal with high calorific value but with lower
percentages of sulfur and nitrogen. These specifications cannot always be fulfilled by
coal producers with lower quality of coal-deposit specification. This technical
requirement of coal specification is rather an adaptation of the EU directive on CO2
emission reduction, showing the EU’s commitment to solve the global climate change
problem. However, this quality requirement is actually not a problem as long as
production of this type of coal is unlimited.
6.3.2 Gap Analysis of Indonesian Exports of FVOs to the EU
Gap analysis has found major problems in trade flows of FVOs from Indonesia to the
EU. Gap exists as the ability of Indonesian producers to meet EU food standards and
regulations has always been questioned. The recognition of Indonesian certifying bodies
by the EU is therefore necessary. Institutional as well as capacity building in Indonesian
certifying bodies is still considered as important. As seen from the shift in the EU import
pattern of palm oil from Malaysia and Indonesia, the EU prefers importing crude oil to be
refined locally rather than importing refined oil. In the case of the prospect of exporting
biodiesel from palm oil, the EU’s new directive has demanded milling technology that
can absorb methane during the milling process in order to meet the required greenhouse
gas emission. Investment of this kind of technology in Indonesia does not yet exist so far.
The opportunity of meeting EU demand for low emission biodiesel is wide open as soon
as the investment in required technology is made.

6.3.3 Gap Analysis of Indonesian Exports of Cork and Wood to the EU
The gap has been found in the case of certified wood and wood products.129 From seven
well-known forest management certifications in the world, only two certifications are
well known and active in Indonesia. They are Forest Stewardship Council (FSC) and
Indonesia Ecolabel (LEI). The gap is found between compliance of producers and
incentives given by buyers. As Indonesian producers and exporters have followed the
costly certification process before exporting their products to the EU, half of buyers in
Europe do not want to pay a reasonable price. According to a survey carried out by Swiss
Import Promotion Programme (SIPPO 2006), prices of sustainable certified timber are
likely to be higher than conventional timber. Since certification requires relatively high
investments, the price of certified timber is in general 10%–30% higher than
conventional timber. Only half of the consumers are willing to pay this higher price for
sustainable timber.
Another survey by Centrum Hout reveals that only 13% is prepared to pay a
premium of more than 10% above the conventional timber price for certified timber.
There is also evidence that compared to the private sector, the public sector is more
sensitive regarding certified timber products and is therefore willing to pay the higher
price (SIPPO 2006). As possible consequences of the existing gap, Indonesian producers
and exporters do not bother anymore to follow the costly certification process and start
exporting to much-easier-to-access markets, such as India and China (trade diversion).
The Indonesian Tropical Forest Trust (TFT), an NGO giving training on how to achieve
the 10 principles and 56 criteria of the Forest Stewardess Council (FSC), has explained
during the survey that FSC will not guarantee three things—namely, product quality,
129
Certification is a document to approve that one product has passed certain principles and criterion of
quality or environment friendly. It can be used to access foreign market and convince buyers.
quantity, and price. This statement has been admitted by the FSC headquarter in Bonn
through a phone conversation. It is the job of certified producer and exporters to seek for
the best buyers that are ready to pay premium price for certified wood products.
However, it is easier for certified wood to access foreign market, such as the EU. For
accessing the EU market, FSC is more suitable and recognized than LEI. Another EU
well-known wood certification is the Program for the Endorsement of Forest Certification
(PEFC) schemes.130
The quantity gap can also be identified in certified timber. As summarized by
SIPPO (2006, p. 6):
Although there is a growing demand for certified timber products (especially in

the United Kingdom, Germany, the Netherlands and the Nordic states), the
impact of certification on world markets has been constrained by the difficulties
in obtaining commercial quantities of certified wood at the right time and at the
right price.
This summary made by SIPPO reveals that most wood producers have undermined wood
certification. The lower acceptance of producers to apply for existing certification could
be caused by the price gap, as explained in a previous paragraph.
6.3.4 Conclusion of Gap Analysis
Gap analysis has resulted in finding case-dependent gaps caused by trade barriers (see
Table 6.10). For Indonesian coal export to the EU, the identified gap is limited quantity
of demanded quality of coal. In the case of Indonesian FVOs export to the EU, a gap
exists as producers cannot meet EU food standards and regulations. Finally, in the case of
130
PEFC is the world largest certification system. The PEFC has provided an assurance mechanism to
buyers of wood and paper products promoting the sustainable management of forests. PEFC is however not
yet as well known and active as FSC in Indonesia. From its 35 institutional members, none of them is from
Indonesia.
Indonesian wood export, a gap has been found as less price incentives have been given to
producers that already invest in wood certification, required by EU premium buyers.
Table 6.10: Gaps Found in Indonesian Exports to the EU 31
Case Gaps Found Type of Barriers
Coal Limited quantity of demanded quality Production Capacity

FVOs Higher food standards and regulations Technical Barriers
Wood and Cork Sanitary and phytosanitary measures Market Entry Procedures
6.4 Complaints-Inventory Analysis
6.4.1 Complaints Reported by Indonesia
The Indonesian Ministry of Trade has not publicly disseminated complaints of barriers to
trade faced by Indonesian exporters although this complaints inventory is actually kept
well. The Indonesian version of executive summary has been acquired from the bilateral
trade section of the Indonesian Ministry of Trade following an electronic mail request.
One of the references of the executive summary is from the Indonesian-EU consultative
forum held in March 2007 in Indonesia. The complaints toward EU trade policy
presented in Table 6.11 are important points of translation of the executive summary.
The analysis of complaints inventory notified by the Indonesian trade authority
shows that 80% of the complaints are nontariff barriers. They include two pillars. The
first majority pillar (90%) is technical barriers representing social accountability,
consumer health and safety, as well as environmental protection arguments. The second
pillar is market entry procedures. In this case, it involves the requirement of import
licenses for particular products. Import tariff imposed to agricultural products is the only
tariff barrier listed in the complaints inventory. We know that this particular tariff barrier
in agriculture, together with the EU subsidy to the sector, has been intensively addressed
by the developing countries group during the defunct Doha development round. Whether
and to what extent the EU agriculture subsidy has affected Indonesia’s exports in the
sector remains unknown.
Table 6.11: Complaints Inventory Compiled by the GOI 32

No. Title Barriers Product/Sector
1 Import tax (average tariff 16%) Tariff Barrier Agriculture

Textile, steel, and some
2 Import license Market Entry Procedures
other products
Certificate of sanitary and Fresh products like fruits,
3 Technical Barriers
phytosanitary aquacultures, and coffee
The labor protection and other
Labor-intensive
4 corporate social responsibility (Social Technical Barriers
manufacturing
Accountability)
The Registration, Evaluation,
Authorization, and Restriction of
Chemical substances (REACH)
5 Technical Barriers Chemical products
program is suspected as a protective
act rather than a health and
environmental concern
Hazard Analysis and Critical Control
6 Technical Barriers Foods
Points (HACCP)
Rapid Alert System for Food and Feed
7 Technical Barriers Foods
(RASF)
8 Good Agricultural Practices (GAP) Technical Barriers Agricultural products
Toys, machineries, building
9 CE marking Technical Barriers materials, medical
equipment
10 Eco-labeling Technical Barriers Wood, textile, etc.
Source: Indonesian Ministry of Trade, Department of International Trade Cooperation
6.4.2 Complaints Notified by WTO
Research on WTO’s online documents on world trade disputes settlement indicates that
Indonesia has been registered as a complainant in two cases of international trade
disputes in years under review. From these two cases, none of them involved the EU or
EC. The two cases are trade disputes with Argentina, South Africa, South Korea, and the
US. Based on this finding, we can make two assumptions. First, Indonesia has not used
world trade disputes settlement to solve the existing complaints presented in Table 6.11.
Second, the GOI realizes that all barriers can only be solved with a cooperative approach
such as dialogue, working group discussion forum, as well as technical cooperation.
Table 6.12: Indonesian Complaints in WTO’s Dispute Settlement (1999–2008) 33

No Defendant Disputes Date
1 Thailand Antidumping Measures on Uncoated Wood-free Paper 9 May 08

2 Canada Antidumping Duties on Imports of Certain Paper from Indonesia 4 Jun 04
3 United States Continued Dumping and Subsidy Offset Act of 2000 21 Dec 00
Source: WTO (2011b)
6.4.3 Conclusions of Complaints-Inventory Analysis
The Indonesian trade authority complaints-inventory analysis reveals that tariff and
nontariff barriers have been listed as barriers of Indonesian export to the EU (see Table
6.11). The technical barriers item, including Social Accountability, REACH, HACCP,
RASF, GAP, certificate of sanitary and phytosanitary, and CE marking and ecolabel,
dominates the complaint inventory list. The second major complaints are market entry
procedures, namely, the need for import license.
Despite the existing barriers to Indonesian export to the EU, the data from Table
6.12 shows that a cooperative approach has been taken by the GOI in reducing the impact
of the existing trade barriers faced by Indonesian exports. A closer bilateral dialogue and
consultation as well as technical cooperation should have been in practice. As a matter of
fact, the so-called Indonesia-EU bilateral consultative forum has been held regularly. The
discussion on trade matter including trade barriers has been held under the working group
on commercial and economic issues. There are many complaints from Indonesian
producers/exporters that have been solved through these diplomatic dialogues rather than
registering them to WTO trade disputes settlement which might be more time and cost
consuming. As we have observed in Table 6.12, it takes some time before the remedy
gets adopted. Most of EU technical barriers are aimed at protecting its citizens from
consuming products that harm their health, their safety, and the environment, which the
GOI should also seriously do to its citizens when it comes to consuming particular
products. Therefore, meeting the high standard of market requirements through technical
cooperation and continuous capacity building would promote sustainable and
consumption as well as living standard of Indonesian people in the long term.
6.5 Gravity Model Application on Indonesian Exports to EU
6.5.1 Results of Single Linear Equation Model and OLS Estimation
6.5.1.1 GDP and Indonesian Export Volume
The relationship between EU GDP and Indonesian export volume is presented in Graph
6.11. Graph 6.11 shows the estimate relationship between Indonesian export values with
the EU members’ GDP. The horizontal x-axis indicates the EU members’ GDP in 2006
while the vertical y-axis denotes the Indonesian export value (FOB) to each EU member
states. As can be seen, the scatter of red-colored cross symbol (actual observation) lies
consistently along the 45-degree blue-colored fitted line. It means that the increase of
GDP has a positive impact on the increase of Indonesian export value. The estimation
results reveal that an increase of USD 1 billion in the EU GDP might increase around
USD 627,930.115 in Indonesian export.
The anomaly can be seen clearly in the case of the Netherlands where the residual
to fitted line is the highest. Although the share of the Netherlands’ GDP in the EU has
been relatively lower compared to other Western European countries, the Indonesian
exports to the Netherlands have surpassed other EU member states including Germany in
2006. As has been highlighted in Chapter V, the colonial historic relations between
Indonesia and the Netherlands might have positive influences in this anomaly.
Graph 6.11: EU Members’ GDP and Indonesian Export Volume131 30
Note: R² = 0.534, Adjusted R² = 0.515

Source: Author’s compilation using gretl version 1.8.6
Among current EU members, Portugal, the Netherlands, and the United Kingdom
have a colonial presence in Indonesia in the 15th century. However, the Netherlands
conquered Indonesia in a much longer time and a relatively larger occupied area than the
other two. Since the reason behind this presence is trade monopoly of natural resources,
the 350 years of the Netherlands’ presence in Indonesia since its first arrival in 1596 in
Java Island might have a positive impact on the trade intensity between Indonesia and the
Netherlands until the present day. The 350 years is long enough for both countries’
traders to know better the trade potential, supply chain, business contacts, and culture
131
R-Square (R²) is statistical method that explains how much of the variability of a factor can be caused or
explained by its relationship to another factor. It has been used in trend analysis, it is computed in value
between 0 (0 percent) and 1 (100 percent); the higher the value, the better the fit. Both R-Square and
adjusted R-Square have been calculated.
rather than other EU members. In addition, as the owner of the largest seaport in Europe,
namely, Port of Rotterdam, the Netherlands’ traders have more strategic location than
others to concentrate on international trade (access to the sea).
6.5.1.2 Population and EU Export Volume
Graph 6.12 depicts the relationship between Indonesian export values with EU members’
population. The horizontal x-axis indicates the EU members’ population in 2006 while
the vertical y-axis denotes Indonesian export value in the same year. Simulation reveals
that the EU members’ population number has a significant influence on the export
volume of Indonesia to EU member states. Estimation results reveal that an increase of 1
million EU populations might increase Indonesian export to the EU as much as USD
20,985,563.694. The biggest anomaly is again identified in the case of the Netherlands
supporting the previous reasoning behind this anomaly.
Other interesting fact that can be observed from Graph 6.12 is the negative
anomaly in the case of Poland and Romania. Both member states are new EU members.
Despite their relatively large population, their import volume from Indonesia is relatively
low compared to the lower-populated Western European members such as Belgium and
Finland. This is because of their relatively lower GDP compared to Western European
members. The economic divergence among EU member states seems to have a negative
impact as well in Indonesia-EU trade flows. It means that more economic convergence in
the EU might also benefit the third trading partners like Indonesia in line with the
increase of purchasing power. The world population map can be seen in Annex 6.3.
Graph 6.12: EU Members’ Population and Indonesian Export Volume 31
Note: R² = 0.460, Adjusted R² = 0.438

Source: Author’s compilation using gretl version 1.8.6
6.5.1.3 Distances and Indonesian Export Volume
Graph 6.13 indicates the negative impact of distance to Indonesian trade flows with the
EU. Indonesia tends to export more to the closer neighboring countries rather than to EU
member countries. This cannot be identified if analysis is carried out using EU as the
group, since the trade volume accumulation will be much larger. Just like the case of the
Netherlands anomaly, Japan’s anomaly position in the graph has shed light on some
factors. Besides having a colonial past with Indonesia, Japan is relatively closer
compared to two other Indonesian major trade partners, the EU and the US. Japan also
has a relatively higher purchasing power compared to other Indonesian neighboring
countries. In addition, Japan’s direct investments and financial assistance in Indonesia
have always been the largest in the last decade.
Using the same method used by Krugman and Obsfeld (2006) has led to the
conclusion that the distance between Indonesia and the EU does have a negative impact
on the Indonesian export volume to the EU (study Graph 6.13). The estimation results
reveal that an increase of 1,000 nautical miles in distance might decrease Indonesian
export by around USD 982,176,395.
Graph 6.13: Distances and Indonesian Export Volume 32
Note: R² = 0.212932, Adjusted R² = 0.192219

Source: Author’s compilation and calculation (gretl 1.8.6), data from CEPII (2009)
6.5.2 Results of Multivariable Equation Model and OLS Estimation
As presented in Table 6.13, the regression has resulted in the conclusion that economic
size (GDP and GDP differences) and distance have different degrees of impact on trade
flows between Indonesia and the EU. It reveals that the higher the GDP, the bigger the
trade flows between Indonesia and the EU. In contrast, the GDP differences and distance
have been the hindrances to trade flows. The regression results show the expected signs;
the GDP difference variable supports the Linder hypothesis (negative). All coefficients
are significant at 1% with the exception of per capita GDP difference. All coefficients on
per capita GDP difference are insignificant. From 9,632 total observations, some 50
observations have been considered by the software used (gretl) as missing or incomplete
data. Those missing values under asymptotic conditions should not affect the point
estimates significantly (Robert 2004; Brülhart & Kelly 1999). That is why the OLS
method has become the norm in estimating gravity equations as cited by other economists
(Baldwin 1994). In other cases (Brülhart & Kelly 1999), the missing data have been less
than 3% of the total observations (15 out of 552 observations) while in the case of Robert
(2004, p. 344), the missing data accounted for 12%. In this study, the percentage of
missing values accounted for 0.52% of the total observation, which is much more robust
than the other two cases.
Table 6.13: Regression Results of Equation 3.8 34
Coefficient Std. error T-ratio P-value
Const 18.8139 0.115673 162.6 0.0000 ***

logGDPi 0.980924 0.00677882 144.7 0.0000 ***
log GDPj 0.910571 0.00655944 138.8 0.0000 ***
log pcGDPDiff ij -0.110490 0.00954177 -11.58 0.0000 ***
log GDij -1.02336 0.0110024 -93.01 0.0000 ***
Note:
*** = 1% level of significance
Model: OLS, using observations 1-9632 (n = 9582)
Missing or incomplete observations dropped: 50, dependent variable: logTFi
Mean of dependent variable 19.77453 SD of dependent variable 2.685071
Sum squared residual 12243.22 SE of regression 1.130663
R-squared 0.822755 Adjusted R-squared 0.822681
F (4, 9577) 11113.91 P-value (F) 0.000000
White’s test for heteroskedasticity: Null hypothesis: heteroskedasticity is not present
With p-value = P (chi-square [14] > 1375.44) = 3.15307e-285
Breusch-Pagan test for heteroskedasticity: Null hypothesis: heteroskedasticity is not present
With p-value = P (chi-square (4) > 3374.69) = 0
Source: Author’s compilation and calculation (gretl 1.8.6), trade data from UNSD COMTRADE
(2009), geographic distance from CEPII (2009), and economic indicator from IMF
(2009)
The statistic parameters of the estimation’s results presented in Table 6.13
manifest a good fit. It can be seen from the value of adjusted R-square, which is more
than 82%. Standard error of regression accounted for 1.13, which is equal to
approximately 42% of the standard deviation (< 50%). This is much better compared to
Robert’s case (2004). Robert (2004) has counted a lower adjusted R-square (68%) and
higher standard error of regression (1.456), which is equal to 60% of standard deviation
(> 50%). As far as heteroskedasticity is concerned, two different test methods reveal that
based on null hypothesis, heteroskedasticity is not present. Standard error to mean of
dependent variable is 5.7%. In Robert’s case, the standard error to mean of dependent
variable accounted for 12.5%. The good fitness of this study indicates the suitability of
this model to be used in estimating the impact of incentives and barriers to trade flows.
6.5.3 Conclusions of Gravity Model Application
Based on the gravity model application, the following conclusions can be made:
1. The geographical distance between Indonesia and the EU has been identified as a
significant barrier to trade. This conclusion is supported by more than 1% level of
significance of the coefficient value.
2. The distance is associated with cost, insurance, and freight as well as transport
technology innovation. Therefore, reducing cost and increasing the safety and speed
of transportation have been considered as the feasible way in reducing the negative
impact of distance on trade volume.
3. The GDP of countries under review has a significant role in increasing the trade
volume. It can be seen from the 1% level of significance of coefficient of GDP i and
j. The bigger the GDP of two countries, the more trade volume can be created
between them, and vice versa. Therefore, it is important to note that as indicated in
the results of this study, the increase of GDP in developing countries should also
increase their trade with the rest of the world, including the North.
4. The GDP per capita difference between Indonesia and the EU has been revealed as a
barrier to trade between Indonesia and the EU. This has been supported with 1% level
of significance. This is theoretically logical since the per capita GDP is associated
with the purchasing power of a country. The more divergence per capita GDP
between trade partners, the less trade volume can be developed between them, and
vice versa. In this case, 1% difference in GDP per capita would decrease trade
volume by around 0.11%.
5. Past colonial relation has to some extent a positive impact on Indonesia-EU trade
relation, as well as on reference countries. The thesis made in the previous chapter
about this possible relationship, for example, in the case of Indonesia-Netherlands
trade anomalies (Graph 6.12), has therefore been well explained. A similar indication
is observed in the case of trade relations between Indonesia and Japan (Graph 6.13).
6.6. Conclusions
The combination of methods in identifying trade incentives and barriers has been found
as effective. The analysis of incentives and barriers to trade flow from Indonesia to the
EU using different tools and sources of data has resulted in comprehensive, satisfactory,
and interesting results. Both empirical and nonempirical methods have their own
strengths and weaknesses. Therefore, combining them in other similar studies is highly
recommended. Empirical methods (1 and 5) can determine whether one variable is
statistically significant or not while others can only identify the variable regardless their
significance. Nonempirical methods (2, 3, and 4) are more explicit than the empirical
ones. What both methods have in common is that both are carried out based on theories.
With regard to the effectiveness of identifying significant incentives and barriers to trade,
empirical methods (1 and 5) are found as superior compared to nonempirical. However,
its cost (both time and financial) and degree of difficulty are found as superior as well.
Table 6.14 presents the identified trade incentives and barriers as the results of the
application of five different methods of analysis.
Table 6.14: Incentives and Barriers of Indonesian Export to EU 35
No Incentives Methods Barriers Methods
PDA, CI, SDA

1. Simple Entry Procedure PDA Technical Barriers
(D), GA, CI
2. Low Technical Barriers PDA Bad Logistics PDA, SDA
3. Good Logistics PDA Distance GM*
4. Higher Product Quality PDA, SDA (D) High Competition PDA
5. Larger Market Size PDA, GM* Production Capacity SDA (S), GA

6. Endowment Factor SDA (S) Tariff Barriers SDA (S), CI
Market Entry
7. GDP GM* GA, CI
Procedures
8. Past Colonial Relation GM Difference in GDP GM*
Notes:
PDA: Primary Data Analysis
SDA: Supply-Demand Analysis, (S): supply driven, (D): demand driven
GA: Gap Analysis
CI: Complaint Inventory
GM: Gravity Model
*: Statistically Significant
Table 6.14 shows that primary data analysis (method 1) has identified simple
entry procedure, low technical barriers, good logistics, higher product quality, and larger
market size as Indonesian export incentives to the EU. This method also reveals that
technical barriers, bad logistics, distance, and high competition are barriers to Indonesian
export to the EU. The supply-demand analysis (method 2) reveals that higher product
quality and endowment factors are Indonesian export incentives to the EU. This method
also reveals that technical barriers, bad logistics, production capacity, and tariff barriers
are barriers to Indonesian export to the EU. The application of method 3 (gap analysis)
has led to the conclusion that some gaps identified have been caused by barriers faced by
Indonesian exporters to the EU including technical barriers, production capacity, and
market entry procedures. The application of method 4 (complaints inventory) has led us
to the conclusion that complaints on market access to the EU market exist due to the
highly set-up standards and regulations (technical barriers of trade), tariff barriers, and
market entry procedures. As presented, the implementation of method 5 (gravity model)
reveals that the increases of population and GDP in the EU have a significant impact on
the increase of trade flows from Indonesia to the EU. In contrast, distance has significant
negative impacts on Indonesian trade flows to the EU. It is important to underline that
technical barriers have been found as barriers to trade flows from Indonesia to the EU in
all five methods applied in this study, which is quite convincing. However, this cannot
undermine the validity of the trade incentives and barriers that have been identified on the
basis of one method only. In this study, the results of each method have been treated as
equal. In the case where priority is a must for particular constraints, one could prioritize
trade policy to trade incentives and barriers identified on the basis of more than one
method.
Chapter VII Incentives and Barriers of EU’s Exports to Indonesia
The main goal of this chapter is to give an explanation on the EU trade flows to Indonesia
by identifying trade incentives and barriers. This chapter will answer research questions 3
(RQ3) and 4 (RQ4). The two research questions mentioned in Chapter I (p. 4) are as
follows:
RQ3: What are the incentives of bilateral trade flows between Indonesia and the EU?
RQ4: What barriers do Indonesian and EU suppliers face in accessing and entering each
In this chapter, incentives and barriers to trade flow from the EU to Indonesia have been
investigated. In order to achieve this goal, primary as well as secondary data on
incentives and barriers to trade have been collected and analyzed. The primary data have
been collected through the dissemination of 150 questionnaires to export-oriented
companies from Indonesia according to strategies of data collection mentioned in Chapter
III.132 The secondary data have also been collected from relevant sources as mentioned as
well in Chapter III.
7.1 Primary Data Analysis
7.1.1 Overview of Collected Data
The identification of incentives and barriers of EU trade flows to Indonesia has been
carried out through the dissemination of questionnaires to potential respondents until 150
targeted questionnaires are filled out. The 150 respondents are EU-registered export-
oriented companies equally distributed from three selected cases representing different
132
Questionnaires’ format can be seen in Annex 3.3.
product sectors with different export performance in the Indonesian market. They are
companies doing business as producers and suppliers of pharmaceutical products,
industry special machines, and scientific instruments. The frequency of the selected trade
incentives and barriers has been tabulated and analyzed using the chi-square analysis.
7.1.2 Incentives of EU Exports to Indonesia
The null hypothesis (H0) test has shown results as presented in Table 7.1. H0 is accepted
and H1 is rejected in the chi-square analysis of technology superiority, low tariff,
innovation, larger market size, distributor (partner), and patent ownership. It means that
there is no significant difference between expected and observed data. In other words,
those trade incentives are independent on export performances. Based on the
methodology in Chapter III, these trade incentives have been selected as factors that will
encourage EU export performance to Indonesia.
Conversely, H0 is rejected and H1 is accepted for frequency analysis of simple
entry procedure, low technical barriers, good logistics, and competitive price. Those trade
incentives are therefore dependent on export performances and are not eligible to be
selected as trade incentives (case dependent). Other incentives to trade, namely, political
stability, command standard, infrastructure, direct investment, financing/bank, after-sales
service, market research, guarantee, brand image, and low competition, have not met a
sufficient statistic requirement to be analyzed further (one of the cases’ frequency < 5).
Incentives and Barriers of EU’s Exports to Indonesia | 199
Table 7.1: Chi-Square Test of EU Export Incentives to Indonesia 36

N
Trade incentives Champion, Achiever in adversity, Underachiever, N
o
Pharmaceutical Industry Special Scientific
Products Machines Instruments
I Regulatory:
1 Political Stability 0 61.54 38.46 13
2 Technology Superiority(+) 35.48 25.81 38.71 93
Χ2 = 78, 2.52; df = 2; p = 0.284
3 Simple Entry Procedure 52.63 31.58 15.79 38
Χ2 = 99, 7.79; df = 2; p = 0.020
4 Low Tariff(+) 39.39 42.42 18.18 33
Χ2 = 38, 3.45; df = 2; p = 0.178
5 Low Technical Barriers 48.48 22.73 28.79 66
Χ2 = 158, 7.18; df = 2; p = 0.028
6 Good Logistic 19.40 29.85 50.75 67
Χ2 = 229, 10.24; df = 2; p = 0.006
7 Common Standard 0 100 0 4
8 Infrastructure 21.43 35.71 42.86 14
9 Direct Investment 10.53 21.05 68.42 19
10 Innovation(+) 26.87 31.34 41.79 67
Χ2 = 53, 2.36; df = 2; p = 0.308
11 Financing/Bank 0 100 0 7
II Non-regulatory:
1 Larger Market Size(+) 37.63 32.26 30.11 93
Χ2 = 26, 0.84; df = 2; p = 0.657
2 Distributor (Partner)(+) 35.29 38.24 26.47 68
Χ2 = 35, 1.53; df = 2; p = 0.465
3 After-Sales Service 0 100 0 22
4 Market Research 75 0 25 12
5 Guarantee 0 0 100 2
6 Brand Image 0 0 100 1
7 Low Competition 0 0 100 3
8 Competitive Price 53.49 16.28 30.23 43
Χ2 = 131, 9.12; df = 2; p = 0.010
(+)
9 Patent Ownership 41.18 25.49 33.33 51
Χ2 = 32, 1.88; df = 2; p = 0.390
N 246 232 238 716

2
Notes: Symbol (+) indicates significant incentives to trade; X < 5.99 and p Value > 0.15
Determinants with italic font are those identified by respondents themselves out of the given
options (results of open-ended questions)
All variables with italic font are new determinants identified by respondents as
the important incentives to trade. They are common standard, infrastructure, direct
investment, innovation, financing/bank, distributor (partner), after-sales service, market
research, guarantee, brand image, low competition, competitive price and patent
ownership. Three of them, namely, innovation, distributor/partner and patent ownership
have been selected as EU export incentives to Indonesia while competitive price has been
tested as statistically significant at 1%. This has been the useful results of using both
close- and open-ended questions (mixed) since respondents have the opportunity to input
other incentives to trade that they deem as influential according to their own experiences
in the export-import transactions. Those incentives should therefore be taken into account
in future research related to identification of trade determinants.
7.1.3 Barriers of EU Exports to Indonesia
As seen from Table 7.2, the null hypothesis (H0) test has shown that H0 is accepted and
H1 is rejected in the analysis of higher tariff, corruption and distance. It means that there
is no significant difference between expected and observed data. In other words, those
barriers are independent on export performances, and all cases are on agreement. Based
on methodology in Chapter III, these barriers have been selected as barrier factors to
trade that probably could decrease EU exports performances to Indonesia.
In contrast, H0 is rejected and H1 is accepted in the frequency analysis of
differences in standard, lower demand, high competition and absence of local partner.
Those determinants are therefore dependent on export performances and not eligible to be
selected as significant trade barriers (case dependent). Other barriers, namely, technical
barriers, political instability, complicated entry procedures, bad logistic performances,
plagiarism, import ban for used machinery, language and culture differences and after-
sales service have not met sufficient statistic requirement to be tested and analyzed
further (one of the cases’ frequency < 5).
Table 7.2: Chi-Square Test of EU Exports Barriers to Indonesia 37

Frequency of Observed and (Expected Value)
No Trade Barriers Champion, Achiever in adversity, Underachiever, N
Pharmaceutical Industry Special Scientific
Products Machines Instruments
I Regulatory:
1 High Tariff(+) 27.27 31.82 40.91 66
Χ2 = 42, 1.91; df = 2; p = 0.385
2 Technical Barriers 23.53 41.18 35.29 17
3 Political Instability 21.43 7.14 71.43 14
4 Complicated Entry
Procedures
52.38 33.33 14.29 21
5 Bad Logistic
33.33 0 66.67 3
Performances
6 Corruption(+) 35 38.33 26.67 60
Χ2 = 26, 1.3; df = 2; p = 0.522
7 Plagiarism 57.89 10.53 31.58 19
8 Import ban for used
0 100 0 1
machinery
9 Differences in standard 30.95 21.43 47.62 42
Χ2 = 62, 4.4; df = 2; p = 0.109
II Non-regulatory:
1 Distance(+) 26.23 42.62 31.15 61
Χ2 = 53, 2.6; df = 2; p = 0.274
Language and Culture
2
Differences
45 20 35 20
3 Lower Demand 21.28 51.06 27.66 47
Χ2 = 109, 6.9; df = 2; p = 0.031
4 High Competition 28.57 23.21 48.21 56
Χ2 = 109, 5.8; df = 2; p = 0.054
5 After-Sales Service 0 62.86 37.14 35
6 Absence of local
partner
14.58 54.17 31.25 48
2
Χ = 182, 11.4; df = 2; p = 0.003
N 140 186 184 510

Notes: Symbol (+) indicates significant barriers to trade; X2 < 5.99 and p Value > 0.15
Barriers with italic font are those identified by respondents themselves out of the given options
(results of open-ended questions)
All variables with italic font are new barriers identified by respondents as the
important determinants. They are plagiarism, import ban for used machinery, differences
in standard, lower demand, high competition, after-sales service, and absence of local
partner. As seen in the analysis results, two of them, namely, lower demand and absence
of local partner, are statistically significant. Those barriers should therefore be included
in the questionnaire list in future research related to identification of barriers to trade.
However, one should be aware that import ban for used machinery and after-sales service
are very much sector-specific variables.
7.1.4 Conclusions of Primary Data Analysis
The primary data analysis has resulted in a satisfactory conclusion. The chi-square test
reveals that six out of twenty tested variables have been selected as incentives of EU
export to Indonesia. They are technology superiority, low tariff, innovation, larger market
size, distributor/partner, and patent ownership. These incentives to trade might therefore
increase export if the expected indicator is met. The chi-square test also reveals that three
out of fifteen tested barriers to trade have been selected. They are higher tariff,
corruption, and distance. These barriers are believed to have a negative impact on the
performance of Indonesian exports to the EU.
7.2 Supply-Demand Analysis of Exports Flow from the EU to Indonesia
Supply-demand analysis is the first of four secondary data analysis methods used to
identify the respective potential incentives and barriers to trade in both supply and
demand side of the supply chain of the selected cases. Potential incentives to trade
including market size, production capacity, and consumption have been investigated.
Potential barriers to trade including tariff and nontariff barriers have also been studied.
This section will be divided into four parts, namely, supply-side incentives, demand-side
incentives, supply-side barriers, and demand-side barriers. Each part presents the analysis
in three selected cases for EU exports to Indonesia.
7.2.1 Supply-Side Incentives of EU Exports to Indonesia
7.2.1.1 Supply-Side Incentives of Pharmaceutical Products
There is no doubt that the EU is the world leader in pharmaceutical industry. It can be
seen from the EU market share and RCA index to the world export (see Table 5.10 and
Annex 5.3 in Chapter V). Both technology-know-how and adequate funding for research
and development are believed as two key success factors to establish a research-based
pharmaceutical industry in Europe. According to report of members of European
Federation of Pharmaceutical Industry Association (EFPIA 2008), the EU pharmaceutical
industries have spent €24.76 billion in research and development investments in 2006
alone. 133 It is approximately more than 25% of Indonesian total export value for all
products in 2006. This number indicates that the expenditure of EU pharmaceutical
industries spent on research and development is quite high, namely, more than 29% of its
total exports to the world. As a comparison, the average expenditures of multinationals
companies on research and development are around 15%–16% while Indonesian
companies have spent 1%–2% only (Data Consult 2004). This might explain why
technology superiority and product quality should have been selected as incentives to
trade encouraging EU export to Indonesia.
Statistically, the EU has been supplying 26.89% of the world’s demand for
pharmaceutical products in 2006. This share has increased 26.97% and 31.81% in 2007
133
EFPIA was founded in 1978. Its members comprise of 32 national pharmaceutical industry associations
and 43 leading pharmaceutical companies involved in the research, development and manufacturing of
medicinal products in Europe for human use.
and 2008, respectively. As far as export destination is concerned, the EU member states
have more intense transactions with each other than with the rest of the world. It can be
identified by comparing the proportions of EU internal exports with its external exports
in pharmaceutical products. An increasing dominant proportion of EU internal export has
been observed. The proportion of EU internal and external exports accounted for 60.77%
to 39.23% and 62.31% to 37.69% in 2007 and 2008, respectively. EU total exports of
pharmaceutical products have increased by 11.64% in 2008 in comparison to previous
year.
Graph 7.1 depicts kinds of EU exports of pharmaceuticals to Indonesia from 1999
to 2008. Hormones (5,415) and medicaments (5,429) are the most exported
pharmaceuticals with increasing trends in the last four years. The comparison made
between Graph 7.1 and Graph 7.2 indicates that the EU has been a major importer of two
of Indonesia’s major pharmaceutical products, namely, medicaments and glycosides. For
these two products, the EU has supplied 50.1% out of more than USD 270 million of
Indonesian import value. In contrast, a good potential market of vitamins and antibiotics
has not been served by EU producers quite well. The total of Indonesian import value for
these two products in 2008 was more than USD 182 million; the EU served only 7.4% of
the total market potential.

Graph 7.1: EU Export of Pharmaceuticals to Indonesia (1999–2008) 33

140
Indonesian Import (in USD Million))))

Provitamins,vitamins (5411) Antibiotics (5413)
Veg.alkaloids (5414) Hormones (5415)
120 Glycosides; glands (5416) Pharm.goods (5419)
Medicaments,antibiotics (5421) Medicaments, hormones (5422)
Medicaments,alkaloid (5423) Medicaments, nes (5429)
100
80
60
40
20
Year
7.2.1.2 Supply-Side Incentives of Industry Special Machines
The RCA index of EU toward the world has shown the EU strong competitiveness in
supplying the world’s demand for industry special machines (see Table 5.3). The EU has
exported 50.61% of the world aggregate demand of this sector excluding the EU internal
trade in 2008. High competitiveness and productivity of the EU in industry special
machine products might have been generated from the combination of human capital and
research and development. The EU has a clear vision in maintaining its supremacy in
difficult-to-imitate research-oriented products. The availability of research funding as
well as world-class scientists is therefore crucial. In order to promote cooperation among
research institutions, the EU has provided funding to encourage the mobility and
exchange of researchers across member states. In the end, this will establish the network
of excellence as foundations in achieving technology superiority and product quality.

Graph 7.2: EU Export of Industry Special Machines (1999–2008) 34

Export Value (in USD Million)))))
250.000
EU Internal Trade
EU External Trade
200.000
150.000
100.000
50.000
Year
Among EU member states, Germany has been identified as the biggest exporter of
industry special machines to the world. According to a survey made by CBI (CBI 2007b),
Germany has also been identified as the largest machinery producer in the EU covering
more than one-third of EU total production. Other major producers are Italy, France, and
the UK. The healthy growth of all segments of EU machinery can be observed from 2000
to 2008 as presented in Graph 7.2. The EU internal export of industry special machines
accounted for one-third of its total export values. The statistical review reveals that the
proportion of EU internal and external export of industry special machines in 2008 shares
32.12% and 67.88%, respectively, of EU total export activities. It is obvious that exports
to third countries have played a more important role compared to the EU members.
As seen from Graph 7.3, the most exported industry special machine from the EU
to Indonesia in the last decade has been other special machines (SITC 728). If we look at
the value of the world’s exports for the same product group to Indonesia, the other
special machine is not the most exported product (see Graph 7.8). Annex 7.2 shows the
export value of industry special machines from the EU and other key competitors
including USA, Japan, and China to Indonesia. The EU, USA, and Japan are among the
old major competitors while China is a rather new strong competitor. China’s role as the
new key player in these difficult-to-imitate research-oriented goods has been one of the
results of its evolution from a closed centralized economy to a social market economy
following stronger China-US diplomatic and bilateral economic relations during Deng
Xiaoping’s and Jimmy Carter’s leadership. In this case, a foreign direct investment has
transformed China’s trade pattern, including industry special machines. China’s exports
of industry special machines to the world have grown in average by 37.7% while the EU,
the US’, Japan’s, and the world’s exports have grown in average only 11.2%, 9.7%,
12.5%, and 12%, respectively, since 1999.
Graph 7.3 EU Export of Industry Special Machines to Indonesia (1999–2008)35

350
Indonesian Imports (in USD Million))))
Agriculture Machinery (721)

Tractors (722)
300 Civil Engineering Equiment (723)
Textile, Leather Machines (724)
Paper, pulp mill Machines (725)
250 Printing, binding machines (726)
Food processing machines (727)
Other special machines (728)
200
150
100
50
Year
7.2.1.3 Supply-Side Incentives of Scientific Instruments
As seen from Graph 7.4, the EU has surpassed the US as the largest suppliers of the
world scientific instruments demand in 2008 with a steady growth in the last decade.
Most of the EU suppliers are SMEs, according to the EU standard of business scale. This
high degree of specialization on niche products has enabled them to successfully offer
tailor-made technological solutions made in the EU. Graph 7.4 also shows China’s and
South Korea’s position as other key players in this industry.
Graph 7.4: World Major Exporters of Scientific Instruments (1999–2008) 36

60.000
EU USA
China Rep. of Korea
Japan Mexico
50.000
Export (in USD Million))))
40.000
30.000
20.000
10.000
Year
The EU companies’ expenditures spent on research and development (R&D) is
relatively high, reaching 9.5% of their total revenue. Furthermore, companies invest from
10% to 15% of their turnover in R&D. More than 12% of the employees are working in
this R&D. More than 40% of the products are brand new with a life cycle of less than
five years in the market. This shows a clear vision toward innovation for the sake of
future international competitiveness of the EU industry in scientific instruments.

The EU exports of scientific instruments to Indonesia in 2004 have increased by
114%, reaching EUR 6.5 million in value. As seen from Graph 7.5, the EU has exported
mostly measurement and, control instruments (874) to Indonesia in the last decade
followed by medical instruments (872), meters and counters (873), and optical
instruments (871). This composition of Indonesian import structure from the EU is
similar to Indonesian import structure from the world (see also Graph 7.8). Exports have
started to get normal again in 2000 after the lowest drop of value due to the Asian
financial crisis.
Graph 7.5: EU Export of Scientific Instruments to Indonesia (1999–2008) 37

180
EU Export to Ina (in USD Millions)
Optical Instruments (871)

160 Medical instruments (872)
Meters, Counters (873)
140 Measure, Control Instrument (874)
Total
120
100
80
60
40
20
0
Years
Annex 7.3 shows Indonesian import origin of scientific instruments. Imports have
originated mostly from Singapore (29.27%), China (19.82%), Japan (16.5%), the EU
(9.19%), and Republic of Korea (8.46%). The EU used to be at the second rank from
1999 to 2002, owning 27.42% of market share average. Singapore impressively appeared
as one of Indonesia’s top 5 suppliers since 2003. Since 2005, Singapore and China have
replaced Japan’s and the EU’s position as the market leader, which is worth investigating.
The strategy of Japan’s, the EU’s, and the US’ companies in using liberalized Singapore
as their trading hub in Asia might be the main reason. Usually in the case of countries
functioning as export hub such as Hong Kong, United Arab Emirates, and Singapore, the
value of re-export products is relatively high. In this case, products imported into the hub
may have been re-exported to the final destination after getting minor processing such as
packaging and labeling.
7.2.2 Demand-Side Incentives of EU Exports to Indonesia
7.2.2.1 Demand-Side Incentives of Pharmaceutical Products
As far as market size for pharmaceutical products is concerned, Indonesia is quite
promising and has potential. Despite Indonesia’s position as the fourth most populated
country in the world, its modern health care expenditure to GDP remains relatively low.
Some possible reasons could lead to this situation. First, Indonesia still does not have a
universal health care system just like those established in the developed countries. The
percentage of people without health insurance is close to 60%. Second, the low
purchasing power of more than 90% of the population prevents them from buying
relatively high-quality imported pharmaceutical products. The 90% end up choosing
generic products or alternative medicine. Third, the belief in the traditional way of
healing diseases has supported the booming of cheap and chemical-free alternative
medicine and medical treatment. Fourth, the absence of aging population in terms of
Indonesia’s population age structure might have a negative influence on the demand for
pharmaceutical products in Indonesia.

The latest government effort in establishing the so-called new national social
security for all citizens and the steady increase of national budget for health care should
increase Indonesia’s future health care expenditure and, in turn, its pharmaceutical
market substantially. At the time of writing, the final draft of the new law on Indonesia’s
National Social Security System (Law No. 34/2011) has finally been ratified by the
Indonesian Parliament on December 28, 2011. This new law will take effect in two
phases. The health care insurance will take effect on 2014, while accident, live, and
pension insurances will take effect on 2015. This change is expected to boost demand,
which is good news for the pharmaceutical industry.
BMI has forecasted that the value of Indonesia’s pharmaceutical market in 2009
will reach USD 2.7 billion (ReportLinker 2009). BMI has also forecasted that the
Indonesian market value for pharmaceutical products might reach USD 4.7 billion by
2013, assuming 11% of Compound Annual Growth Rate (CAGR). In a nutshell, the
future market potential is promising. Indonesia’s import of pharmaceutical products has
grown in average by 17.89% every year from 1999 to 2008. Statistically, the market
share of ethical drugs (prescribed drugs) in Indonesia is 10%–15% larger than over-the-
counter (OTC) drugs. As the average of market share of ethical drugs in developed
countries reaches 80%, the Indonesian market share of ethical drugs is believed to still be
in a relatively lower percentage.
If we look at the development of domestic manufacturers, only few Indonesian
pharmaceutical companies are at the stage of producing major pharmaceutical products
and basic pharmaceutical material. However, most pharmaceutical companies still
function as assemblers of foreign patented drugs licensed to them. A research-based
pharmaceutical industry established in the EU for many years is still a dream of few of
Indonesian intellectuals. Some fundamental problems have caused this condition. The
Indonesian pharmaceutical industry still depends on imports of important raw materials
due to their inability to produce active pharmaceutical ingredients (APIs). Excellent
quality of water required in the high standards of the pharmaceutical industry is definitely
another constraint for the domestic pharmaceutical industry to develop. In addition, the
cost of acquiring high-quality packaging, such as aluminum foil, plastic, and bottle, has
increased the production cost of pharmaceutical products in Indonesia, although raw
materials for those items are domestically abundant. In order to fulfill this gap, buying
foreign patented license and importing ready-to-consume drugs as well as raw materials
are still imperative for the Indonesian pharmaceutical industry.
Graph 7.6: Indonesian Imports of Pharmaceutical Products from the World 38

200
Indonesian Imports (in USD Million))))
Provitamins,vitamins (5411)
180 Antibiotics (5413)
Veg.alkaloids (5414)
160 Hormones (5415)
Glycosides; glands (5416)
140 Pharm.goods (5419)
Medicaments,antibiotics (5421)
120 Medicaments, hormones (5422)
Medicaments,alkaloid (5423)
100
80
60
40
20
-
Year
There are four major pharmaceutical products that are imported intensively in the
Indonesian market in the last decade. These products are medicaments, vitamins,
antibiotics, and glycosides. These four products have altogether 81.70% market share to
Indonesia’s total imports of pharmaceutical products from the world in 2008 (see Graph
7.6). Indonesia supplies its demand for pharmaceutical products mostly from the EU,
with a decreasing trend in the last decade. The EU has contributed 47.44% of export
share to Indonesia’s total export of pharmaceutical products in 1999. The EU share has
shrunk to 30.72% in 2008, which is a 16.72% decrease of market share in a decade. Other
top Indonesian import suppliers for this product sector are China, USA, Switzerland,
Hong Kong, and Singapore (see Annex 7.1).134
7.2.2.2 Demand-Side Incentives of Industry Special Machine
Indonesia’s demand for industry special machines has grown above world average. It has
increased in average by 26.67% per year from 1999 to 2008. As reported by exporting
countries, the world export aggregate to Indonesia has reached USD 6.06 billion in 2008
alone. The EU used to be Indonesia’s leading importer in 2002. Now, the EU is ranked
fourth behind Singapore, Japan, and China. Singapore, Japan, China, and USA have been
EU major competitors in the Indonesian market of industry special machines since 2003.
The EU has exported USD 735.9 million values of industry special machines to
Indonesia in 2008. This still puts the EU as one of Indonesia’s top 5 importers for this
product although the trends of EU market share in Indonesia from 1999 to 2008 are
steadily decreasing (see Annex 7.2).
Graph 7.7 shows the structure of the world’s export of industry special machines
to Indonesia from 1999 to 2008. It is obvious that civil engineering equipment is the most
imported product into Indonesia. Indonesia’s ongoing infrastructure projects throughout
the country and the booming mining projects are among the factors that influence the
134
It is important to note that Singapore only publish its export data in UNSD Comtrade database up to
year 2003. Therefore the position of Singapore’s market share prior to 2003 remains unknown. Since
import data from Singapore to Indonesia recorded by Indonesia has always been problematic, it has not
been used as substitution of missing data.
rising demand for this product. The low import demand for agriculture machinery has left
two possibilities: either Indonesia is self-sustained in the industrialization process of its
agriculture industry or the industrialization process is not yet happening. Based on
Indonesia’s import dependency on important agricultural products such as rice and the
reality that most of its citizens have been working in the agriculture sector, the second
possibility seems to be correct (see also Graph 4.5). Comparisons made between the
contribution of agriculture to Indonesia’s economic growth (13% in 2006) and the
absorption of employment in this sector (44% in 2006) have indicated that the
industrialization process in the agriculture sector has not yet happened. Most of the
processes in the agricultural supply chain are still carried out manually, resulting in low
productivity. Productivity improvements are needed in order to make agricultural
products internationally more competitive. This will in turn raise household income in
rural areas. The support of the government as well as financial institutions in the
industrialization of Indonesia’s agriculture industry is the key factor in increasing the
demand for industry special machines in Indonesia.
Graph 7.7: World Exports of Industry Special Machines to Indonesia (1999-2008)39

World Exports (in USD Million))))
3.500
Agriculture Machinery (721)
Tractors (722)
3.000 Civil Engineering Equiment (723)
Textile, Leather Machines (724)
2.500 Paper, pulp mill Machines (725)
Printing, binding machines (726)
Food processing machines (727)
2.000 Other special machines (728)
1.500
1.000
500
0
Year
7.2.2.3 Demand-Side Incentives of Scientific Instrument
The Indonesian annual average demand for scientific instruments has grown by 32.8%
from 1999 to 2008 (see Annex 7.3). Indonesia’s imports of scientific instruments in 2008
reach the highest historical level in the amount of USD 1.65 billion. Measurement and
control instruments have been identified as Indonesia’s most imported scientific
instruments with an impressive growth since 2003. Growth of Indonesian imports for
other three sub-products has also been observed as positive in the last three years under
review (see Graph 7.8). Indonesia’s demand for scientific instruments comes mostly from
State Department and Ministries that use these products such as the Ministry of
Environment, the Ministry of Marine and Fishery, the Department of Agriculture, the
Department of Energy and Mineral Resources, the National Meteorology and Geophysics
Agency, as well as the State Ministry of Research and Technology. Demand also comes
from other state and private institutions including schools, universities, food and
beverage manufacturers, hospitals, certifying bodies as well as pharmaceutical industries.
Graph 7.8: Indonesian Imports of Scientific Instruments (1999–2008) 40

1000
Imports (in USD Millions))))
900 Optical Instruments (871)

Medical Instruments (872)
800 Meters, Counters (873)
Measure, control instruments (874)
700
Total
600
500
400
300
200
100
0
Year
Company database analysis shows that there are 218 domestic producers of this
product in Indonesia. They consist of private, state-owned, and foreign investment
enterprises. Most of them operate in Java Island, the most populated island in Indonesia.
Locally produced scientific instruments only meet 10% of the demand in Indonesia; the
rest is satisfied by imports from other countries. The lack of technopreneurs in Indonesia
and the weaknesses of Indonesian producers that lie on low quality of products are some
of the reasons of the ongoing dependency of Indonesia to imports. An increasing
awareness of the importance of more precise and accurate scientific instruments in
various areas of life is required in order for Indonesian users to buy from the best
suppliers.
7.2.3 Supply-Side Barriers of EU Exports to Indonesia
7.2.3.1 Supply-Side Barriers of Pharmaceutical Products
Tariff Barriers
As far as fiscal barrier is concerned, the EU does not impose any taxes to exported
pharmaceutical products from any EU port to any third countries. This has been the
implementation of the EU’s commitment to free flow of goods policy while maintaining
the competitiveness of EU pharmaceutical companies in the world market. The absence
of export taxes has helped companies in accessing foreign markets easier.
Nontariff Barriers
High standards and regulations and good manufacturing practice (GMP) demanded by
the EU have both positive as well as negative consequences to the export-oriented
companies in this sector. As positive consequences, the already-high standards and

regulations at home have made it easier for the EU pharmaceutical companies to comply
with foreign market standards. Hence, it has increased accessibility to foreign markets
especially developing countries’ markets like Indonesia, which has relatively lower
standards and regulations. The negative consequence is that achieving high-quality
standard of products needs high investment in technology and innovation as well as cost
of production itself. In the end, the consumers in developing countries like Indonesia
should be able and willing to pay for a higher price that could harm the market share of
EU pharmaceutical products in Indonesia. Otherwise, it could harm the market share of
EU-made pharmaceutical products in developing countries including Indonesia.
Other important issues are on rising energy prices and EU patent system for new
inventions. First, rising energy prices in the EU would contribute to increase of
production cost. This has a negative impact on the end price and the competitiveness of
EU products abroad. Continuous efforts of finding the cheapest possible new alternatives
for energy supplies are therefore a must. Second, the absence of a unified EU patent and
patent litigation system might create patent disputes across member countries, thus
discouraging innovation. Hence, policy formulation toward the unification of patent and
patent litigation system would avoid disputes and encourage innovation.
7.2.3.2 Supply-Side Barriers of Industry Special Machine
Tariff Barriers
In the case of industry special machines’ export to third countries, the EU also does not
impose any export taxes. As has been said before, this has been the consequence of the
EU’s commitment of free flow of goods policy while maintaining EU industry special
machine producers’ competitiveness in the world market. Imposing export taxes would
only reduce EU products’ competitiveness abroad.
Nontariff Barriers
Considering the EU lack of endowment factors, the volatility of energy prices in the EU
and the steady increase of raw material price such as metal ore and other supported raw
materials should be a major concern for EU producers and exporters of industry special
machines.135 This would increase the price, which is already high compared to Japan-,
USA-, and China-made machinery. This could only worsen the competitiveness of the
EU-made products especially in markets with lower purchasing power like Indonesia. As
direct investment in the target market is not good for economic growth at home,
innovative solutions in increasing the purchasing power of developing countries like
Indonesia might also come from the EU financial institution in the form of financing the
demand for high-profile technology in developing countries.
7.2.3.3 Supply-Side Barriers of Scientific Instruments
Tariff Barriers
Similar with the other two cases, the EU also does not impose any taxes to the EU-made
scientific instruments exported to any third countries. As has been said before, this has
been the consequence of the EU’s commitment toward free flow of goods policy while
maintaining the competitiveness of EU producers of scientific instruments in the world
market. Taxing exported machines in the EU would only increase the end price in the
135
Unstable energy price can be witnessed from Graph 6.1, whereas the increasing trends of raw material
can be found in IMF Reports of commodity price indexes (IMF, 2010a). The price of iron ore has
quadrupled in the last three decades.
target market, which is already relatively high compared to products made in Asia, due to
distance, high cost of production, as well as high domestic corporate and income tax.
Nontariff Barriers
The major problem in the supply side of EU exports of scientific instruments is the steady
rise of production cost. In this case, unstable energy prices as well as increasing trends of
raw material price, including iron and steel, nickel alloys, copper and copper alloys,
aluminum alloys, and other metal price, should be a major concern of EU producers and
exporters of scientific instruments.136 This would increase the end price, which is already
high compared to Japan-, USA-, and China-made scientific instruments. This could only
worsen the competitiveness of EU scientific instrument products especially in the market
with a relatively lower purchasing power like Indonesia. The same solutions might work
in this case as it has been previously recommended in the industry special machine case.
7.2.4 Demand-Side Barriers of EU Exports to Indonesia
7.2.4.1 Demand-Side Barriers of Pharmaceutical Products
Tariff Barriers
The GOI has imposed 10% VAT and import tax to pharmaceutical products imported
from the EU. Indonesia’s average applied tariff for pharmaceutical products (HS 29 and
30) originating from the EU in 2009 is 1.37% (see Annex 7.4). This is lower compared to
Indonesia’s average applied MFN tariff for this product sector, which is 3.2% rate.
The range of import tariff imposed to pharmaceuticals with EU origin is 0%–5%. The
136
Unstable energy price can be witnessed from Graph 6.1, whereas the increasing trends of raw material
can be found in IMF Reports of commodity price indexes (IMF, 2010a). As the price of aluminum has
tripled in the last three decades, the price of copper and iron ore has quadrupled.
highest tariffs are imposed to medicaments (HS 3003 and 3004) and bandages (HS 3005)
at 5% and 4.47%, respectively, which are all slightly above MFN tariff average.
Indonesia’s bound tariff allowed by WTO for chemical products is pretty much higher at
37.9% (WTO, 2010). Using International Trade Center (ITC) standard, Indonesia’s
applied tariff for this product is already at the lowest legend of tariff protection (0%–5%).
Nontariff Barriers
With regard to market entry procedures of imported pharmaceutical products, two
regulations have been imposed by the GOI. The first regulation is related to import
license. To be able to import pharmaceutical products into Indonesia, related companies
must post import license issued by the Ministry of Trade and Investment Coordinating
Board (BKPM). This has been regulated based on the Ministry of Trade Regulation No.
45/2009, which regulated Importer Identity Number (API). This has been amended later
with the Ministry of Trade Regulation No. 17/2010 that divides the Importer Identity
Number (API) into General Importer Identity Number (API-U) and Producer Importer
Identity Number (API-P). A related regulation, the Ministry of Trade Regulation No.
39/2010, provides detailed information regarding Importer Identity Number for
Producers (API-P) to complete the Ministry of Trade Regulation No. 45/2009 and No.
17/2010. The type of an automatic import licensing procedure is applied.
According to the GOI’s answers to questions raised by foreign representatives, as
documented by the Import Licensing Committee of WTO (WTO 2011a), Indonesia needs
to differentiate companies that import goods used in their own production process and
companies that import goods for sale and distribution in order to provide clarity regarding
the administrative purpose of the importers’ database registration. Under this new
regulation, the one company–one license rule has been applied. Companies must opt to
apply for import license for further distribution of finished products or to apply for
further production process of raw materials in Indonesia. As a consequence, two
company establishments are required if a company would like to import both finished and
raw materials. According to new WTO country review, around 20% of Indonesia’s tariff
lines are affected by import licensing requirements, which have been expanded (WTO,
2013).
Second, as the awareness of consumer protection issues has been gaining
momentum in Indonesia, tighter regulations have been imposed to the industry. In the
field of safety and quality of medicine, the Indonesian Ministry of Health has issued
Regulation No. 1010/2008 to emphasize Health Law No. 23/1992. The main focus of this
regulation is on medical wholesalers’ responsibility toward the safety and quality of their
sold pharmaceutical products.
Complaints, especially addressed on the first mentioned regulation, have come
from foreign players including EU companies. The president director of Bayer Indonesia,
Hans Josef-Schill (2009), has stated in an interview, as reported by online
pharmaceutical focus, that137
all global products are not currently in the Indonesian market. It can take time to
register products in the country and product registration can be more of a
challenge than it was previously. This process is especially difficult when a
company is not producing the drug in question locally.
Many have speculated that the main idea behind the tighter market entry procedures
could be that the GOI has been trying to encourage foreign players to set up their
137
Bayer is the first German pharmaceuticals company investing in Indonesia after the market liberalization
at the beginning of Soeharto’s era in the late 60’s. Since then Bayer keep its presence in Indonesia until the
presence day even though the Asian Financial crisis harmed the purchasing power of the nation in 1997.
manufacturing complex in Indonesia (attracting foreign direct investments). This strategy
has been considered by foreign producers as counterproductive that would, on the
contrary, discourage direct investments. The GOI was urged to understand that foreign
pharmaceutical companies cannot set up production in each country where they have a
market and that the government is putting up restrictions on companies on decisions that
they usually make on a commercial basis. The foreign companies’ representatives have
asked the GOI to avoid this situation. Indonesia’s Drug and Food Supervisory Body
(BPOM) has responded to this recommendation. BPOM has argued that they have just
implemented the existing regulations issued according to existing national Health Law
23/1992 as well as international framework on drug registration. Many possible reasons
might have encouraged the GOI to impose tighter regulations concerning consumer
protection. It could be mimicking Northern countries’ tight regulations. It could also be
the response to the increase of awareness toward consumer protection. Whatever the
reason is, this simply shows us that it is difficult to make regulations or policies that can
satisfy all stakeholders’ interest in the market.
Because of severe market competition, besides cost-intensive advertising, most of
well-known pharmaceutical companies have competed to offer Indonesian medical
doctors attractive incentives in the form of free family vacations, trips, trainings, and
seminars in order to increase sales. One doctor sometimes gets several offers from several
companies for a weekend vacation. This reality has been becoming public secret not only
in Indonesia but also in other foreign markets since there is no specific regulation written
to avoid such thing to happen. As a result, the cost of recruiting and entertaining doctors
in Indonesia has been the highest item of marketing campaign cost of pharmaceutical
companies. This will consequently increase the price of ethical drugs in Indonesia, which
has been unaffordable for the poor people that need them the most. It is much better for
patients if medical doctors prescribe the best and affordable medicines based on its curing
ingredients, not based on certain brands. However, Indonesian doctors usually would
prescribe generic drugs if so requested by their patients. In Indonesia, around 13 EU
pharmaceutical producers have been in tight competition with the US-, Australia-, and
Switzerland-made or licensed pharmaceutical products.
Under the Ministry of Finance Regulation No. 104, deduction of promotional cost
from gross income before tax is granted (SI No. 104/PMK.03/2009). It is mentioned in
article 4 of the regulation that the promotional cost of pharmaceutical products that can
be deducted from gross income will be limited up to 2% from companies’ total turnover.
Total promotional cost must not exceed USD 2.5 million for each company; otherwise, it
will be included as income, not as cost, which is subject to 10% tax. The promotional
cost can only be booked once by the producer, main distributor, or sole importer. In the
case of separated promotional cost spent by the producer and main distributor, the total
cost must be booked in the bookkeeping of the producer. Notwithstanding the main idea
of this regulation, which is to control unfair promotional campaigns of both ethical and
unethical drugs, the weaknesses of this new regulation are obvious. First, there is no clear
scientific reasoning why it is 2% and why there is a USD 2.5 million quota in the case of
pharmaceuticals. Second, the size and business scale of companies has not been taken
into account.
The absence of a universal social policy and low health care financing has
weakened Indonesia’s pharmacy market potential. Thabrany et al. (2003, p. 101) has
summarized that the level of health care financing affects the availability of human
resources, medical supplies, distribution of health care facilities, quality of health

services, and other important processes. In the end, the poor people choose OTC generic
drugs that are much cheaper, but sometimes with lower quality. Lower quality here
means that OTC generic drugs might not be used anymore in the developed countries due
to new research patent findings that have increased the quality of previous drugs.138 This
situation has benefited the local pharmaceutical companies with good sales performance
of their non-ethical drugs. Table 7.3 presents the results of a market share analysis on
major pharmaceutical companies in Indonesia. Despite higher-quality guarantee, only one
out of 28 foreign companies operating in Indonesia is listed as one of the top 10 market
shareholders in Indonesia in 2004, namely, Pfizer (a US-based company).
Table 7.3: Indonesia’s Top 10 Pharmaceutical Companies in 2004 38
Rank Companies’ Name Ownership Turnover (in Rp Billion) Market Share
1 Sanbe Local Private 1,537.04 7.37%

2 Kalbe Pharma Local Private 1,222.48 5.86%
3 Dexa Medica Local Private 1,153.49 5.53%
4 Tempo Local Private 947.16 4.54%
5 Bintang Toedjoe Local Private 875.54 4.20%
6 Pfizer Foreign Owned 762.10 3.65%
7 Kimia Farma State Owned 516.94 2.48%
8 Konimex Local Private 516.71 2.48%
9 Indopharma State Owned 480.61 2.30%
10 Pharos Local Private 468.17 2.24%
Source: Bisnis Farmasi (2007)
7.2.4.2 Demand-Side Barriers of Special Industry Machinery
Tariff Barriers
Besides the 10% VAT, industry special machines made in the EU are subject to import
tax. Indonesia’s applied average tariff for industrial machinery products (HS 8429 to
8701) originating from the EU member states in 2009 is 1.17% (see Annex 7.5). This is
138
One patent will be expired after 10 to 20 years of first patent issuing date. Afterwards, all
pharmaceutical companies can produce the similar product all over the world.
slightly higher than Indonesia’s average applied MFN tariff for this product sector, which
is 1.06%. However, import tariffs for three EU products have been higher than the MFN
average for the same products from other countries. Those products are tractors (HS
8701), bulldozers (HS 8429), and goods-vending machines (HS 8476). The three
products are subject to 11.16%, 9.75%, and 6.81% import tariff, respectively, which are
all higher than average. The range of import tariff imposed to industry special machines
with EU origin is 0%–11.16%. Indonesia’s bound tariff allowed by WTO for electrical
machinery product is pretty much higher at 30.6% (WTO 2010). Compared to
International Trade Center (ITC) standard, Indonesia’s applied tariff for this product is
already in the lowest legend of the world tariff protection (0%–5%). With respect to
electrical machinery and transport equipment, Indonesia’s average applied MFN tariff
has been reduced from 6.1% and 12.3% in 2006 to 5.8% and 10.6% in 2008, respectively.
Nontariff Barriers
Nontariff barriers that deserve further attention are the lack of cheap after-sales service of
the EU-made industry special machine in Indonesia, especially products sold by
companies that have no branches in Indonesia and Southeast Asia. A consumer might
doubt whether to buy or not, anticipating future dysfunction or failure of machinery that
needs immediate technical services to resume production. Hence, it is much more
influential in the case of machines used for daily production. Because of distance,
sending technicians from Europe to Indonesia will cost extra flight and accommodation
expenses. Three alternative solutions can be taken by European machinery suppliers.
The first solution offered is the establishment of a permanent small branch office
in Indonesia or in the Southeast Asian region supported with after-sales and technical
service personnel. The second solution is to provide free-of-charge training to
consumers’ technicians. This can be offered as one package to sold machinery and
equipment. The third solution is the EU foreign direct investment, which is deemed as an
effective solution for this problem, although the FDI in the high-technology sector has
not been fully accepted by developed countries’ policy makers at the moment. Fear of
technology piracy from local producers and domestic unemployment at the home country
are major concerns.
7.2.4.3 Demand-Side Barriers of Scientific Instruments
Tariff Barriers
In addition to the 10% VAT, Indonesia’s average applied tariff for scientific instruments
(HS 90) originating from the EU member states in 2009 is 4.67% (see Annex 7.6). This is
slightly higher than Indonesia’s average applied MFN tariff for this product sector, which
is 4.17%. The range of import tariff imposed to scientific instruments of EU origin is
0%–10%. The highest tariffs have been imposed to spectacles (HS 9004) and image
projectors (HS 9008) at 10% and 9.9%, respectively, which are all slightly above MFN
average. Indonesia’s bound tariff allowed by WTO for manufactured products is still at
35.4% (WTO 2010). Compared to International Trade Center (ITC) standard, Indonesia’s
applied tariff for this product is already in the two lowest legend of tariff protection (0%–
5% and 6%–10%). Compared to two other reviewed sectors, scientific instruments have
higher import tariff in Indonesia.

Nontariff Barriers
Despite Indonesia’s large market size (fourth largest in the world), the purchasing power
is relatively lower because of capital shortage. Considering the price and quality profile
of the EU-made scientific instruments, lower purchasing power might have affected sales
in Indonesia. The absence of after-sales service has also been considered as a barrier for
this product, especially products sold by companies that have no branches in Indonesia
and Southeast Asia. A consumer might doubt whether to buy or not, anticipating future
dysfunction or failure of scientific instruments that need immediate technical services.
This is much more crucial in the case of scientific instruments used in daily work.
Because of distance, sending technicians from Europe to Indonesia will cost extra flight
and accommodation expenses. There are two alternative solutions that can be taken by
European suppliers. First, the EU suppliers can offer free-of-charge training to buyers’
technicians. Second, the EU suppliers can establish a branch office as sales and after-
sales services in Indonesia.
7.2.5 Conclusions of Supply-Demand Analysis
The supply-demand analysis has revealed that technology superiority, product quality,
innovation, and larger market size have been identified as trade incentives increasing
export from the EU to Indonesia. Technology superiority, product quality, and innovation
have been included as supply-side incentives while larger market size has been identified
as a demand-driven incentive to trade. All four incentives to trade have been identified in
all three cases (see Table 7.4). Therefore, all of them have been included as incentives to
trade in the conclusive Table 7.8. All three supply-side incentives to trade have actually
been well recognized worldwide as characteristics of EU high-tech industries that should

be maintained. Therefore, this conclusion is already in agreement with public opinion and
perspective.
Table 7.4: Incentives of EU Exports to Indonesia 39

Identified Trade Incentives
Sectors
Supply Side (EU) Demand Side (Indonesia)
Pharmaceutical Technology superiority*, Larger market size*
Products product quality*, innovation*
Industry Special Technology superiority*, Larger market size*

Machines product quality*, innovation*
Scientific Instruments Technology superiority*, Larger market size*

product quality*, innovation*
Note:
*: Determinant identified in all cases
As presented in Table 7.5, this method has also revealed that tariff has been
identified in demand side only while nontariff barriers have been found in both supply-
and demand-side chain with different degrees for each sector under review. The supply-
demand analysis has identified that import tax and VAT are demand-side tariff barriers to
trade. All demand-side tariff barriers in the form of import tariffs (0%–11%) and VAT
(10%) have been found in all three cases. As far as nontariff barriers are concerned, the
absence of the EU unified patent system and the increasing cost of production as the
cause of increasing energy and raw material price have been identified as supply-side
nontariff barriers. On the demand side, severe competition and low purchasing power of
the Indonesian market have been identified as nontariff barriers faced by EU suppliers.
Other nontariff barriers including market entry procedures and absence of after-sales
services remain case-dependent nontariff barriers on the demand side of the supply chain
of EU exports to Indonesia.
Table 7.5: Barriers of EU Exports to Indonesia 40

Identified Trade Barriers
Sectors
Supply Side (EU) Demand Side (Indonesia)
Pharmaceutical
Products
Tariffs - Import Tariff (0%–5%), VAT
(10%)*
Nontariffs Absence of EU unified patent Market entry procedures, relatively
system*, increasing cost of lower purchasing power*, severe
production* competition
Industry Special
Machines
(10%)*
Nontariffs Absence of EU unified patent Absence of after-sales services,
system*, increasing cost of severe competition, lower purchasing
production* power*
Scientific Instruments
(10%)*
Nontariffs Absence of EU unified patent Absence of after-sales services,
system*, increasing cost of severe competition, lower purchasing
production* power*
Note:
*: Barriers have been identified in all cases
7.3 Gap Analysis of EU Exports to Indonesia
Gap analysis has been carried out by comparing Indonesian market access requirements
including product quality, standards, and regulations and the ability of EU suppliers to
adopt them in accessing the Indonesian market. Condition will be considered as the gap if
the market requirements cannot be met at the time of study (the criteria of existing gap).
7.3.1 Gap Analysis of Pharmaceutical Products
Recalling market entry requirements set up by the GOI to imported pharmaceutical
products, three regulations previously explained in section 7.2.4.1 are already in line with
EU industrial and market standards, namely, for the sake of consumer health and safety.
Hence, there is no gap found in this case. As EU has been well known as highly advanced
in consumer protection regulation, meeting the Indonesian industrial and market
standards is not a difficult task. Objections from the EU suppliers is that tighter drug-
selling control and registration in Indonesia will definitely be more time and cost
consuming compared to previous market access requirements. However, as long as there
is no double-standard treatment between locally produced and imported products, there is
no reason for complaining.
7.3.2 Gap Analysis of Industry Special Machine
As the Indonesian market of industrial machine has not been highly regulated, the EU
exporters should not find gap in entering the market. Indonesia has developed and
imposed National Standard (SNI) to imported products. The impact of the newly
implemented SNI has not been evaluated. It is therefore too early to identify whether gap
has existed or not. However, based on the ability of EU suppliers to meet the world’s
highest standards at the home market, meeting the Indonesian market quality standards
including SNI should not be a big deal for them. The EU machines have been long
associated with high standards and endurance, putting consumer protection as first
priority.
7.3.3 Gap Analysis of Scientific Instruments
Similar to other cases, as the Indonesian market of scientific instruments has not been
highly regulated, the EU exporters should not also find gap in entering the market.
However, the impact of newly implemented Indonesian National Standard (SNI) has not
been evaluated. It is too early to find the gap. However, based on the ability of EU
suppliers to meet the world’s highest standards at the home market, meeting the
Indonesian market quality standards should not be a problem for EU suppliers.
7.3.4 Conclusion of Gap Analysis
Gap analysis has resulted in no gap identified in all three cases under review. Gap does
not exist as EU producers have long gotten used to highly regulated and standardized
environment at the home market. Therefore, when it comes to entering a lower-regulated
and less-standardized market, the EU producers should definitely not find any problems.
It can be concluded that setting up high industry and market standard at home would
automatically enable domestic producers to enter foreign markets more easily.
Understanding that a market with no gap is much better than a market with deep gap, any
efforts for harmonization of standards and regulations must be supported. The efforts
should be backed up with a capacity-building program directed for developing countries’
suppliers, especially for small to medium scale enterprises.
7.4 Complaints-Inventory Analysis
7.4.1 Complaints Reported by EU
The EU has been facilitating and following up complaints from its business society
entering a foreign market. The Trade Barriers Regulation (TBR) ruled under EC
Regulation No. 3286/94 (SI 1994) has given European businesses a platform for tackling
discriminatory treatments in foreign markets. Business societies can use the TBR to ask
the European Commission to investigate any restrictions, discriminatory treatments,
difficulties in obtaining licenses, or any other form of unfair barriers to their export of
goods or services in foreign markets. The European Commission (2009b) has reported in
its website that dozens of companies and industries have used TBR to tackle problems in
export markets as well as unfair foreign trade practices that cause injury within the EU
internal market in the last decade. This report has also stated that TBR cases have helped
to improve export conditions for carmakers in Colombia, pharmaceutical products in
Turkey, textiles in Brazil, and many other success stories.
Table 7.6: Complaints Inventory Reported by the EU 41

No Title Measures Sector (SITC3) Last update
1 Luxury tax on motor vehicles Internal taxation Road vehicles (78) 22/09/2009
Restrictions on poultry meat
Sanitary and phytosanitary Live animals/except
2 due to highly pathogenic avian 08/04/2010
measures fish (00)
influenza
Live ruminants, their products Sanitary and phytosanitary Live animals/except
3 15/02/2011
and derivatives (BSE139 case) measures fish (00)
Foodstuffs registration and Sanitary and phytosanitary Agriculture and
4 15/02/2011
technical requirements measures fisheries
Burdensome registration, Registration,
Textile
5 documentation, and custom documentation, custom 03/08/2011
yarn/fabric/art. (65)
procedures procedures
Nontransparent import Quantitative restrictions and
6 Beverages (11) 09/08/2011
procedures, restriction related measures
Registration,
Import controls on certain Metal ores/metal
7 documentation, custom 05/09/2011
products scrap (28)
procedures
Registration,
8 Labeling requirements documentation, custom Horizontal 20/09/2011
procedures
Registration,
Pharmaceutical
9 Drug registration and IPR documentation, custom 08/11/2011
products (54)
procedures, IPR
140
Source: EU online market access database
139
Bovine Spongiform Encephalopathy (BSE) disease
140
European Commission (2011)
An online complaint formula is also available in the official website of the EU
(European Commission 2011). This new service provided by the EU market access
division is called EU online market access database. In this online database, barriers
faced by EU companies all around the world have been submitted and publicly made
available in the EU official website. This facility is useful not only for EU policy makers
but also for other companies planning to export products to certain countries. This is one
of the EU good practices in facilitating trade that the GOI should consider to offer as well
to its business community in the future. Table 7.6 shows the list of ongoing complaints
posted by EU companies according to their experiences in accessing the Indonesian
market.
A closer look at the complaints inventory reported by the EU reveals that
complicated market entry procedures including registration, documentation, and custom
procedures as well as sanitary and phytosanitary (SPS) inspection have been major
complaints of EU exporters in food and textile-related products. The main reason behind
these border procedures is to protect domestic consumers. Consumer protection, except
religious reasoning such as halal labeling, is still a new topic in Indonesia. Therefore,
studies on consumer protection in Indonesia are still hard to find. In contrast, consumer
protection has been a well-regulated matter in the EU market. Therefore, if we consider
this background wisely, the EU and Indonesia should no longer consider this as trade
barriers but rather as compulsory best practice in achieving sustainable trade.141 The EU
and Indonesian authorities should cooperate in the acceleration of the sophistication of
quality improvement of related infrastructure and procedures of the system to avoid
bribery, longer waiting time, as well as product rejection. Indonesia’s ongoing effort to
141
The long distance of distance sensitive product shipment from EU to Indonesia or vice versa that
normally takes 3 to 4 weeks could impact the quality of products that could endanger the end consumers in
the destined country.
install and improve the National Single Window (NSW)—an online processing platform
for customs documentation, licensing applications, and duty payments, which allows
controlling and recording trade flows—is one of the promising solutions. Since the first
launch in 2007, Indonesia’s NSW has been operational at 10 main customs entry points,
covering an estimated 90% of trade flows (WTO 2013).
The road and vehicle sector has complained about luxury tax. This is a decade-old
complaint, since it was first listed in 2001. The luxury tax rates ranging from 10% to 75%
are still applicable in the Indonesian market. This luxury tax is charged in addition to
import duties of 25%–50% for CKD (completely knocked down) vehicles and of 45%–
80% for CBU (completely built units) vehicles plus a 10% flat rate VAT. This internal
tax certainly has a negative impact on the end price of imported road vehicles from the
EU, which are mostly expensive compared to Indonesian-made vehicles. This tariff
barrier has encouraged EU carmakers to consider producing cars in Indonesia.
7.4.2 Complaints Reported by WTO
The EU has not registered any complaints causing disputes against Indonesia since 1986.
As seen from Annex 7.7, the EU complaints listed in the WTO dispute-settlement
mechanism from 1999 to 2008 have been directed mostly to the US (19 disputes). Other
disputes have been directed to Argentina (3 disputes), India (3 disputes), Brazil (2
disputes), Canada (2 disputes), China (2 disputes), Mexico (2 disputes), Australia (1
dispute), Chile (1 dispute), Korean Republic (1 dispute), and Thailand (1 dispute). The
frequencies of disputes show us that the EU is very much concerned on market access of
their products in the US market. It also shows us that trade disputes have been directed by
the EU to its major export destination, namely, the US. As no disputes have been directed
to Indonesia since the 1986 automobile subsidy case, two possibilities may have
occurred. First, Indonesia’s trade barriers do exist, but they are still in line with the rules
of the WTO. Second, even if the GOI breached the rules of the WTO, the EU has opted
to choose a diplomatic channel mentioned in the previous chapter.
7.4.3 Conclusions of Complaints-Inventory Analysis
Analysis carried out on the EU trade authority complaints inventory reveals that tariff and
nontariff barriers have been listed as barriers of EU exports to Indonesia in the last
decade (see Table 7.6). Market entry procedures have dominated the complaints
inventory posted including registration, documentation, custom procedures, import
license, and certificate of sanitary and phytosanitary. Those two barriers have also been
found in the case of Indonesian exports to the EU in the previous chapter. Despite
existing barriers to EU exports to Indonesia, a cooperative approach has been taken by
the EU and the GOI in reducing the impact of the existing trade barriers faced by EU
suppliers. A closer bilateral dialogue and consultation as well as technical cooperation
should have been established.
As a matter of fact, the so-called Indonesia-EU bilateral consultative forum has
been held regularly. The EU Chamber of Commerce and delegation of EU Commission
in Jakarta have been in the forefront in presenting the interests of the EU business
community in Indonesia. The discussion on trade matter including trade barriers has been
held under the working group on commercial and economic issues. Many complaints
from the EU producers/exporters have been solved through these diplomatic dialogues
rather than registering them to WTO trade disputes settlement, which might be more time
and cost consuming. Moreover, the EU is concerned with the difficulties that developing
countries faced in order to actively participate in the dispute-settlement system. Within
the framework of the negotiations on disputes settlement, the EU prefers initiatives aimed
at granting developing countries a better access to the system and providing them with
the necessary training and technical assistance rather than putting them into other
difficulties.
7.5 Gravity Model Application on EU Export Incentives and Barriers
The analysis using gravity model theory has also been applied to show the direct relation
of economic size including GDP, population, distance, and GDP per capita to EU
external trade flows. The objectives and methodology taken are almost similar to the
Indonesia’s case in Chapter VI. The differences lie in trade flow direction and countries
selected as reference. In this case, the EU as a group has a function as an exporting entity
and reference countries including Indonesia as importing trade partners.
7.5.1 Results of Single Linear Equation Model and OLS Estimation
7.5.1.1 GDP and EU Export Volume
The relationship between the EU partners’ GDP with the EU export volume has been
presented in Graph 7.9. This graph shows the estimate relationship between the EU
export values and the GDP of its trade partners. The horizontal x-axis indicates the EU
trade partners’ GDP in 2006 while the vertical y-axis denotes the EU export value (FOB)
to each trade partner. The scatter of red-colored cross symbol (actual observation) lies
consistently along the 45-degree blue-colored fitted line. It means that the increase of
GDP of the EU trade partners has a positive impact in increasing the EU export value to
those countries. The value of R2 and adjusted R2 has signed the good fit of the
estimation.142
As estimated by the linear equation, an increase of USD 1 billion in the EU trade
partners’ GDP might increase around USD 22,537,522.26 in the EU export value. The
relatively larger anomaly can be seen clearly in the case of Switzerland, Russia, and
Japan, where the residual to fitted line is the highest (see Graph 7.9). Other factors such
as distance, number of population, as well as trade pattern might have played an
important role in explaining these anomalies.
Graph 7.9: Trade Partners’ GDP and EU Export Volume 41
Note: R² = 0.829, Adjusted R² = 0.817

Source: Compiled using gretl version 1.8.6
7.5.1.2 Population and EU Export Volume
Graph 7.10 depicts the relationship between the EU export values with its selected trade
partners’ population including Indonesia. The horizontal x-axis indicates the EU trade
142
Definition by businessdictionary.com mention that R-Square (R²) is statistical method that explains how
much of the variability of a factor can be caused or explained by its relationship to another factor. Used in
trend analysis, it is computed as a value between 0 (0 percent) and 1 (100 percent); the higher the value, the
better the fit. Both R-Square and adjusted R-Square have been calculated.
partners’ population in 2006 while the vertical y-axis denotes the EU export value in the
same year. The value of R2 and adjusted R2 has signed lesser fit compared to GDP
estimation. Compared with GDP, population size of trade partners including Indonesia
has lower influence on EU export’s volume to related country. The biggest anomaly has
been identified in the case of the EU export to USA. Another interesting fact that can be
seen from Graph 7.10 is the anomaly in the case of Switzerland and Russia. Both are
closer to the EU. Despite their relative lower population, their import volume from the
EU is relatively high compared to more populous countries like China, India, and
Indonesia. Besides their relatively closer distance to the EU member countries, their
economic convergence with the EU as well as closer bilateral relations seem to have a
positive impact in trade relations between the EU and the US, Switzerland, and Russia
(see also previous Graph 7.9).
Graph 7.10: Trade Partners’ Population and EU Export Volume 42
Notes: R² = 0.460, Adjusted R² = 0.438

7.5.1.3 Distance and EU Export Volume
Using Krugman and Obsfeld’s (2006) method has led to the conclusion that distance
between the EU and Indonesia does have a negative impact on the EU export value to
Indonesia at a lower level of significance compared to Indonesia’s case, as seen from R-
square and adjusted R-square’s value (compare Graph 7.11 and Graph 6.13). The
anomaly can be seen again in the USA case. Considering the US’ significant position as a
major destination of EU exports, any changes of US policy would definitely bring a
large-scale impact on the EU economic growth. Graph 7.11 has also convinced us that
the purchasing power of the destination market is one of the incentives to the exports of
EU products, which is higher in both quality and price. This will put distance as a minor
trade barrier in the EU case.
Graph 7.11: Distances and EU Export Volume 43
Notes: R² = 0.091402, Adjusted R² = 0.030829

7.5.2 Results of Multivariable Equation Model and OLS Estimation
As presented in Table 7.7, the regression has resulted in the conclusion that economic
size (GDP and GDP differences) and distance have different impacts on trade flows
between Indonesia and the EU. It reveals that the higher the GDP, the bigger the trade
flows between Indonesia and the EU while GDP differences and distance have been
hindrances to trade flows. It is obvious that distance has a less significant impact on EU
exports compared to the case of Indonesian exports as observed from the results of the
multivariable equation model (compare Table 7.7 and Table 6.13). Distance has also been
identified as a significant barrier by exporters in the primary data analysis (Table 7.2).
The statistic parameters of the regression’s results presented in Table 7.7 manifest
a good fit. It can be seen from the value of adjusted R-square, which is more than 84.5%.
Standard error of regression accounted for 0.9468. This is equal to approximately 39% of
the standard deviation (< 50%). This is much better than Robert’s case (2004). As a
comparison, Robert’s case has a lower adjusted R-square of 68% and higher standard
error of regression, namely, 1.456, which is equal to 60% (> 50%). As far as
heteroskedasticity is concerned, two different test methods reveal that based on null
hypothesis, heteroskedasticity is not present. Standard error to mean of dependent
variable is 4.7%. In Robert’s case, the standard error to mean of dependent variable is
more than double at 12.5%. The good fitness of this study indicates the suitability of this
model to be used in determining trade incentives and barriers.

Table 7.7: Regression Results for Equation 3.8 42
Coefficient Std. error T-ratio P-value
Const 18.5816 0.0982900 189.0 0.0000 ***

logGDPi 0.961222 0.00564872 170.2 0.0000 ***
log GDPj 0.831950 0.00585692 142.0 0.0000 ***
log pcGDPDiff ij -0.108577 0.00793235 -13.69 0.0000 ***
log GDij -0.916751 0.00970474 -94.46 0.0000 ***
Notes:
*** = 1% level of significance
Model: OLS, using observations 1-9632 (n = 9612)
Missing or incomplete observations dropped: 20, dependent variable: logTFi
Mean of dependent variable 20.04035 SD of dependent variable 2.405528
Sum squared residual 8611.905 SE of regression 0.946795
R-squared 0.845150 Adjusted R-squared 0.845086
F (4, 9607) 13108.47 P-value (F) 0.000000
White’s test for heteroskedasticity: -, Null hypothesis: heteroskedasticity is not present
Breusch-Pagan test for heteroskedasticity: - , Null hypothesis: heteroskedasticity is not present
As presented in Table 7.7, the results of the regression show the expected signs;
the negative value of GDP difference coefficient supports the Linder hypothesis. All
coefficients are statistically significant at 1%. From 9,632 total observations, some 20
observations have been included as missing or incomplete data. Those missing values
under asymptotic conditions should not have significant effects to the results of the
estimation (Robert 2004; Brülhart & Kelly 1999). That is why the OLS method has
become the norm in estimating gravity equations as cited by other economists (Baldwin
1994). In other cases (Brülhart & Kelly 1999), the missing data have been less than 3%
of the total observations (15 out of 552 observations) while in the case of Robert (2004,
p. 344), the missing data accounted for 12%. In this study, the percentage of missing
values accounted for 0.21% of the total observation, which is much more robust
compared to the other two cases.

7.5.3 Conclusions of Gravity Model Application
The following conclusions can be made based on the results of the gravity model
analysis:
1. The geographical distance between the EU and Indonesia has been identified as a
significant barrier to trade. This conclusion is supported by 1% level of
significance of the coefficient on trade distance.
2. The distance is associated with cost, insurance, and freight as well as transport
technology innovation. Therefore, reducing cost and increasing the safety and
speed of transportation have been considered as the feasible way in reducing the
negative impact of distance on trade volume.
3. The GDP of reference countries under review has a significant role in increasing
the EU trade volume. It can be seen from the 1% level of significance of
coefficient of GDP i and j. The bigger the GDP of two countries, the more trade
volume can be created between them, and vice versa. Therefore, it is important to
note that as indicated in the results of this study, the increase of GDP in
developing countries should also increase their trade with the rest of the world,
including with the North.
4. The GDP per capita difference between the EU and Indonesia has been identified
as a barrier to trade between EU and Indonesia. This is theoretically acceptable
since per capita GDP is associated with the purchasing power of one country. The
more divergence per capita GDP between trade partners, the less trade volume
can be developed between them. This can also be translated that the more
convergence per capita GDP, the more the trade flows increase between the South
and the North. However, its impact on trade volume in this case has been
identified as smaller than other explanatory variables (1% difference in GDP per
capita would decrease trade volume by around 0.109%). This is possibly due to
the convergence of per capita GDP of reference countries.
7.6 Conclusions
The combination of methods in identifying trade incentives and barriers in the case of the
EU export to Indonesia has also been found as effective. The analysis of incentives and
barriers of trade flow from Indonesia to the EU using different tools and sources of data
has resulted in comprehensive, satisfactory, and interesting results as well. Both
empirical and non-empirical methods have their own strengths and weaknesses.
Therefore, combining them in a study is highly recommended. Empirical methods (1 and
5) can determine whether one variable is statistically significant or not while non-
empirical methods (2, 3 and 4) cannot. Non-empirical methods (2, 3, and 4) are more
explicit (easy to understand by readers from any background) than the empirical ones.
What both methods have in common is that both are carried out based on theories. With
regard to the effectiveness of identifying significant incentives and barriers of trade flow,
empirical methods have been found as more superior than non-empirical one, but the cost
(both time and financial) and degree of difficulty is also more superior compared to the
non-empirical methods. Table 7.8 shows the identified incentives and barriers of the EU
exports to Indonesia as the results of the application of five different methods of analysis.
Table 7.8: Incentives and Barriers of EU Exports to Indonesia 43
No Incentives Methods Barriers Methods
1 Technology Superiority PDA, SDA (S) Tariff Barriers PDA, SDA (D), CI
2 Low Tariff PDA Corruption PDA
3 Innovation PDA, SDA (S) Distance PDA, GM*
Absence of Unified
4 Larger Market Size PDA, SDA (D) SDA (S)
Patent System
Increasing Cost of
5 Distributor (Partner) PDA SDA (S)
Production
Market Entry
6 Patent Ownership PDA SDA (D), CI
Procedures
7 GDP GM*
8 Product Quality SDA (S)

Notes:
PDA: Primary Data Analysis
SDA: Supply-Demand Analysis, (S): supply driven, (D): demand driven
GA: Gap Analysis
CI: Complaint Inventory
GM: Gravity Model
*: Statistically Significant
Table 7.8 shows that primary data analysis (method 1) has identified technology
superiority, low tariff, innovation, larger market size, distributor, and patent ownership as
the EU export incentives to Indonesia. This method also reveals that tariff barriers,
corruption, and distance have been the hindrances to the EU exports to Indonesia. The
supply-demand analysis (method 2) has identified technology superiority, innovation, and
larger market size as the EU export incentives to Indonesia. This method also reveals that
the absence of the EU unified patent system and the increasing cost of production and
tariff barriers are barriers of Indonesian export to the EU. The application of method 3
(gap analysis) has led to the conclusion that no gaps were identified between Indonesian
standards and regulations with the ability of the EU exporters to meet the standards and
regulations. Method 4 (complaints inventory) has led to the conclusion that complaints on
the Indonesian market procedures from the EU exporters and business communities have
been increasing because of more complicated Indonesian market entry procedures. In
contrast, based on WTO complaints inventory (disputes settlement list), the EU has not
registered any complaints directed to the GOI since 1986. Finally, the application of
method 5 (gravity model) has indicated that the increase of GDP and the population of
the EU trade partners including Indonesia have a significant positive impact on the
increase of the EU trade volume with the countries under review. In contrast, distance has
significant negative impacts on the EU trade volume with those countries. Distance has a
lower significant impact in the case of the EU compared to Indonesia’s case. This is
possibly due to the difference in trade pattern and logistic sophistication.

Chapter VIII Summary and Recommendations
Referring to the research questions in page 4, one of the objectives of this study is to
recommend trade policies to Indonesia and the EU using identified incentives and
barriers to trade that have encouraged and restricted trade flows in order to benefit more
from bilateral trade relations. This chapter is exactly aimed at achieving this objective by
summarizing research findings and recommending trade policy implications. This final
chapter consists of four main contents: the summary of research findings with
comparison to the existing theories, implications to trade policy, future bilateral
negotiation and cooperation, and recommendations for future research agenda.
8.1 Summary of Research Findings
8.1.1 Indonesian Trade Pattern and Specialization
Despite being the fourth largest population in the world, Indonesia contributes only
0.86% and 0.52% to total world exports and imports, respectively, in 2007. As a
comparison, with less than half of the Indonesian population, Germany has contributed
10.02% and 7.43% to the world total value of exports and imports, respectively, for the
same year. This fact-finding of the minor share of Southern countries compared to
Northern countries to the world trade volume has been widely agreed among
international trade researchers. However, the gap of share has been narrowing by 18% in
the last two decades (Wang, J. et al. 2011) in which China, Brazil, and India have played
a major role. Unfortunately, Indonesia is not listed as a major contributor in narrowing
the gap, although Indonesian exports and imports have grown by 13.19% and 21.94%,
respectively, in 2007 with a total volume of trade around USD 188.57 billion, generating
trade surplus around USD 39.63 billion.

The portion of Indonesian trade has been predominantly South–North with low
but increasing portion of South–South trade. This figure shows the strong dependency of
Indonesian export on Northern countries’ import demand. Most of the Indonesian export
products have been shipped to Japan, the EU, and the US, which altogether account for
42.66% of Indonesian total exports in 2007. This figure supports the theory of the
dependency of Southern countries to Northern countries that became popular in the 1960s
to the 1970s. Analysis on trends of the Indonesian export destination reveals that China
and India belong to the growing market share for Indonesian exports in the last five years
while Japan, the EU, and the USA belong to the decreasing one. The growing proportion
of South–South trade volume has also been recognized by WTO (2012) that the share of
developing countries’ exports going to developing countries increased from 29% in 1990
to 47% in 2008 in which Asia has played a major role.
The process of industrialization has gradually shifted the Indonesian trade
structure from low to higher value-added manufacturing, from the dominance of natural
resource–based and labor-intensive industries to capital-intensive industries. However,
Indonesia still specializes its export to the world and to the EU mostly in raw material–
intensive products (group 1) with strong endowment factors and low technology involved
(Chapter V, p. 100 and 102). The low competitiveness in the field of capital-intensive
goods and research-oriented goods has been identified as the main characteristic of
Indonesian export that might also be one of the main characteristics of Southern country
trade in general. Indonesia also specializes its exports in labor-intensive sectors such as
footwear and textile. Lower cost of production especially labor cost compared to the EU
and other developed countries make it possible to happen. It is true that there is a positive
correlation between domestic natural and production resources with the Indonesian
Summary and Recommendations | 249
export activity. It is also true that relying on lower labor cost only in promoting the
Indonesian export can no longer guarantee the success of the promised transformation of
Indonesia into one of the newly industrialized countries.143 The genuine collaboration of
stakeholders including research institutions, capital owners, entrepreneurs, and
government is seriously required in achieving the said promise.
When comparing the Indonesian RCA index to the world, the Indonesian export
specialization to the EU is not so much different in terms of product group. The minor
difference is believed to be caused by some factors such as distance. In terms of degree of
comparative advantage that can be seen from the index value of its top products,
Indonesia has much higher comparative advantage in its export specialization with the
EU rather than the world aggregate (compare Table 5.1 and Table 5.2). This tendency
indicates the logic of long-lasting interdependency in trade between these two political
entities, especially natural resource–based commodities.
8.1.2 EU Trade Pattern and Specialization
The EU external imports volume has surpassed export in the last decade (see Annex 4.3),
resulting in average trade deficit in the amount of USD 159.72 billion in the last decade
(see development in Graph 4.2). In annual average, the EU external exports and imports
have grown by 10.92% and 10.65%, respectively, in the last decade. The EU has
contributed 39.52% and 38% to total world exports and imports, respectively. This
largest contribution to world trade has made the EU the most important trade partner for
many countries including Indonesia.144 There have been no changes in the EU exports
143
Indonesia was well known as one of Asian Tigers during Soeharto’s leadership. The real Asian Tigers
are South Korea (now one of G-20 and OECD members), Singapore, Taiwan and Hong Kong that should
be a role model for Indonesia future development policy. China is catching up as new Asian Tigers.
144
EU is currently Indonesian second largest trade partner after Japan in 2007.
and imports structure in the last two decades (1989–2007). The main EU exports to the
world are manufactured goods bolstering up 77.61% of the EU total exports in 2007 (see
Graph 4.8). The top 5 most exported products of the EU are capital-intensive industries
involving a higher degree of gain as well as a risk that differentiate the pattern of
manufactured goods exported by Indonesia and the EU. Statistical reviews reveal three
characteristics of the EU export pattern to the world. First, EU exports have been
predominantly North–North. Second, distance does matter in shaping the EU export
destination. Third, the EU export share to developing countries including LDCs is rather
low but slowly increasing (see Graph 4.13). These conclusions of the EU trade pattern
characteristic confirm widely known high volume of North–North trade that rejects the
endowment factor theories.
The EU has specialization in its exports to the world and to Indonesia mostly in
products with strong human capital and high-technology involvement (group 5). The EU,
rich in highly educated, trained, and experienced engineers and entrepreneurs, has
established strong competitiveness in line of products included in group 5. Interestingly,
the EU has not just specialized in group 5 products but also in other product groups. If we
look at the top 20 list, all product groups are represented. This indicates that although the
EU has strong competitiveness in high technology–related products, it does not leave
other groups of products including agriculture behind (diversification of production and
exports). In fact, high-technology mastery can be adopted in the production process and
supply chain of almost all product lines.
In comparison to the EU RCA index to the world, the EU RCA to Indonesia is
slightly different in terms of product group. The appearance of raw material–intensive
products in the top 20 list is more dominant in the case of EU RCA to Indonesia rather
than to the world. However, they have lower rank compared to group 5. In terms of
degree of comparative advantage, the EU has much higher comparative advantage in its
exports specialization with Indonesia rather than with the world aggregate (compare
Table 5.3 and Table 5.4). It can be seen from the index value of its top products. This
conclusion again indicates a strong evidence of interdependency in trade between two
political entities.
8.1.3 Differences in Trade Patterns of Indonesia and the EU
Based on the comparison presented in Table 8.1, the trade patterns of the EU and
Indonesia are obviously different. In terms of trade volume, the EU has contributed much
greater role in international trade share compared to Indonesia. One may argue that
Indonesia’s population is only half of the EU’s total population, but that argument cannot
deny the productivity superiority of the EU. This is not something to do with the number
of population but productivity and purchasing power of the economy. This thesis has
been supported with the results of the RCA analysis that the EU is indeed the world
champion in almost all lines of manufactured products based on the results of link and
match between research and development and innovation with domestic and international
industrial demand. The similar explanation can also be used for the difference in export
and import share to the world.
In terms of aggregate trade balance with the world, the EU has recorded
substantial trade deficit while Indonesian trade balance has shown the opposite. As seen
from Annex 4.5, imports of fuel and nonfuel primary commodities are counted as
responsible for the EU deficit while surplus in manufactured goods trade cannot balance
the deficit. The steady increase of commodity prices and the world financial crisis would
deteriorate the EU trade deficit in the future (see Annex 4.3). Therefore, the EU
innovative trade policy is urgently needed to stop the counter growth trend. In contrast,
Indonesia has been enjoying trade surplus in all three group of commodities (see Annex
4.4). However, Indonesia should be careful as well with the increasing trends of import in
fuels to keep the economy grow. Hence, the acceleration of sustainable energy mix
should be considered, and green technology from Europe should be transferred to
accelerate the process.
Table 8.1: Differences in Trade Patterns of Indonesia and the EU 44
No. Trade Indicators (2007) Indonesia EU
1 Trade Volume USD 188.57 billion USD 10,660.04 billion
2 Trade Surplus (Deficit) USD 39.63 billion (USD 178.08 billion)
3 Share in World Exports 0.86% 39.52%

Aggregate
4 Share in World Imports 0.52% 38%

Aggregate
5 Trade Relations Predominantly South–North Predominantly North–

with an increasing portion of North with slow
South–South increasing portion of
North–South
6 Trade Structure Gradually shifting from Capital-intensive

lower to higher value-added manufactured products.
products and from dominance Trade structure has been
of raw material–based to matured and no changes
labor- and capital-intensive observed in the last two
industries. decades.
7 Export Specialization Raw material–intensive Strong human capital

products (group 1) factors and high
technology involved
(group 5)
8.1.4 Indonesia-EU Bilateral Trade
Referring to comparative advantage theory described in Chapter II and research findings,
the difference of trade patterns and specialization between Indonesia and the EU should
ideally open up greater opportunity for both political entities to establish closer trade
relations. The EU dependency on labor-intensive and commodity-based products fits very
much with Indonesia’s richness of those items. Similarly, Indonesia’s dependency on
high-tech products including industrial and agricultural machinery, green technology,
scientific and laboratory equipment, as well as high-quality pharmaceutical products
matches very much with the EU ability to supply those items.
Despite opportunities, efforts of increasing the trade volume between the two
political entities have met many barriers. Therefore, the value of trade volume of goods
between Indonesia and the EU has been growing in the cyclical and bumpy trends in the
last two decades. In terms of trade balance between Indonesia and the EU, two eras have
been identified. The first era is pre-Asian financial crisis era (1990–1997). During this
seven-year era, the EU has experienced a mostly constant trade surplus in yearly basis
toward Indonesia except in 1994. In contrast, during the second era (post–crisis era),
Indonesia has been experiencing an average trade surplus of USD 4.13 billion a year
within the new era (1998–now), contributing 15% to Indonesia’s yearly trade surplus.
The correct reasoning of the changes in Indonesia-EU trade balance in the post–crisis era
is worth investigating.
Labor-intensive and raw material–based manufactured products145 have
dominated the Indonesian exports to the EU. The share of manufactured goods reached
145
(Clothing (SITC 84)145, footwear (SITC 85), furniture, bedding (SITC 82), textile yarn, fabric etc (SITC
65) and telecommunication sound equipment (SITC 76) are among the top five with share to the product
group respectively 18.21%, 10.65%, 10.64%, 7.56% and 7.46% in 2007.
57.17% of the Indonesian total exports to the EU in 2007, with steady decreasing trends
since 2000. Fuel (SITC 3), which is one of Indonesia’s major exports to the world (26%),
plays only a minor but slightly increasing role in the Indonesian export structure to the
EU. The geographic distance is possibly one of the determining factors in explaining this
fact.146 Considering Indonesia’s abundance of natural resources, it is also obvious that
Indonesia’s major export to the EU members does not fully fit the endowment factor
theories, which mention that endowment factors play important roles in one country’s
export pattern. Other factors like foreign direct investment (FDI)147 and intrafirm trade
flows should have played a more important role in shaping the developing countries’
export pattern including Indonesia, although these factors’ existence and influence in the
Indonesia-EU trade relations have never been investigated so far.148 With regard to
Indonesia’s export destination, most of Indonesia’s export to the EU in 2007 goes to
Western Europe (EU-15), representing about 97.02% of the total exports. It reveals a
minor share of Indonesian exports with 10 new EU member states, which counted only
2.98% in 2007. This fits with Linder hypothesis, which states that the relatively low
income per capita of eastern European countries has played an important role in
determining the volume of their bilateral trade with Indonesia.
Compared to Indonesian exports, the EU export pattern to Indonesia in the last
two decades is relatively more solid (compare Annex 4.10 and Annex 4.11). The
supremacy of the EU manufactured goods exported to the world can be found again in its
export structure to Indonesia. The share of this product group in the EU total export to
146
(Clothing (SITC 84)146, footwear (SITC 85), furniture, bedding (SITC 82), textile yarn, fabric etc (SITC
65) and telecommunication sound equipment (SITC 76) are among the top five with share to the product
group respectively 18.21%, 10.65%, 10.64%, 7.56% and 7.46% in 2007.
147
FDI development in Indonesia has been well explained by Nofri and Werner (2008, p.11-12) mentioning
the expansion of foreign investment in Indonesia including the type of industries since 1990.
148
The intensity of intra firm trade flows is still a difficult topic due to the shortage of primary and
secondary data available for public.
Indonesia in 2007 is 89.23%.149 Careful investigation indicates that the EU export to
Indonesia has been dominated by capital-intensive manufactured products while the
export of primary commodities (SITC 1, 2, 3, 4, and 68), most notably fuels and
lubricants (SITC 3), plays only a minor role.
The domination of primary commodities like pulp and waste paper (SITC 25),
dairy products (SITC 02), and tobacco (SITC 12) has been found in exports of only four
EU members to Indonesia in 2007 (14.81%). The rest has been dominated by
manufactured goods. Careful observation reveals that there is a remarkable likelihood of
the structure of export of each member countries to Indonesia. Machinery and transport
equipment have been the most exported products by 17 EU member countries (63%)
while chemical products play an important role in only three EU member countries
(11%).150 This composition is well matched with the EU export structure as a whole in
which manufactured goods are remarkably dominant. Most of EU exports to Indonesia
have originated from Western European countries (EU-15). This is similar to the
composition of Indonesian export to the EU. The export of EU-15 covers around 95.79%
of the EU export to Indonesia. Factors like the size of the economy of EU members do
matter to the share of their export to Indonesia. The size of the economy like GDP per
capita and population is very likely to have an impact on the differences in the level of
the EU export volume to Indonesia. This thesis is in agreement with the conclusions of
this study presented in Table 8.2.
149
Telecommunication and sound equipment (SITC 76), other transport equipment (SITC 79), special
industry machinery (SITC 72), electronic machinery apparatus and parts (SITC 77) and general industrial
machinery (SITC 74) are among the top five contributing respectively 12%, 11.73%, 11.41%, 9.30% and
8.46% to EU total export of manufactured goods in 2007.
150
Products under machinery and transport equipment (SITC code 7) and chemical sectors (SITC code 5)
have been selected as cases in this study.
8.1.5 Indonesian Export Incentives and Barriers to EU
The application of selected methods in identifying Indonesia’s export incentives and
barriers to the EU has led to the impressive results that have been presented in a single
table (Table 6.14). Results from different methods of analysis have suggested that simple
entry procedures, low technical barriers, good logistics, higher product quality, larger
market size, endowment factor (such as enormous reserve), GDP, and postcolonial
relation have been identified as incentive factors that could increase Indonesia’s export to
the EU. The application of different methods also reveals that technical barriers, bad
logistics (supply side), distance, high competition, production capacity (supply side),
tariff barriers (supply side), and market entry procedures are barriers to trade from
Indonesia to the EU.
8.1.6 EU Trade Incentives and Barriers to Indonesia
As presented in Table 7.7, the analysis of incentives and barriers of trade flows from
Indonesia to the EU using different tools and sources of data reveal that technology
superiority, low tariff, innovation, larger market size, distributor/partner, patent
ownership, GDP, and product quality have been identified as incentive factors of EU
exports to Indonesia. Different methods of analysis have also identified higher tariff,
corruption, distance, absence of unified patent system (supply side), increasing cost of
production (supply side), and market entry procedures as barriers to trade from the EU to
Indonesia.
8.1.7 Differences in Trade Incentives and Barriers
Comparing the trade incentives and barriers from the two trade flows, we can see the
similarities as well as differences of results. As presented in Table 8.2, larger market size,
product quality, and GDP are trade incentives in which Indonesia and the EU have in
common, while other incentives are case dependent. Distance and market entry
procedures are barriers in which Indonesia and the EU have in common, while other
barriers are case dependent. Based on the author’s observation, the potential factors
causing these differences are different terms of trade (group of major products exported),
degree of sophistication of technology and regulation, different quality of infrastructure,
different endowment factors, difference in the countries’ international trade policy,
different quality of human resources, as well as different consumers’ living standard. The
study on the cause of differences in trade incentives and barriers between the South and
the North should therefore be the next research agenda in international trade.
Table 8.2: Comparisons of Trade Incentives and Barriers 45

No. Variable Indonesia Case EU Case
1 Incentives Differ to EU: Differ to Indonesia:
Simple entry procedures, low Technology superiority, low
technical barriers, good logistics, tariff, innovation,
endowment factor (such as enormous distributor/partner, and patent
reserve), and postcolonial relation ownership
Similar to EU: Similar to Indonesia:
Larger market size, product quality, Larger market size, product
GDP quality, GDP
2 Barriers Differ to EU: Differ to Indonesia:
Technical barriers, corruption, bad Absence of unified patent
logistics, high competition, production system, increasing cost of
capacity, market entry procedures, and production
higher tariff Similar to Indonesia:
Similar to EU: Distance and market entry
Distance and market entry procedures procedures

8.2 Bottlenecks
Market access to the Northern countries like the EU remains the main bottleneck for
developing countries like Indonesia. The main concern is that the EU domestic high-
politic policies, especially those related with environment and consumer protection, may
unintentionally restrict market access of products from developing countries including
Indonesia. Producers, especially SMEs in Indonesia, still lack technical and financial
abilities to comply with the environmental regulations in the EU. Lack of capital in
acquiring eco-friendly machinery is one of the obstacles. The availability of cheap capital
and adequate technology from the most efficient sources are therefore highly demanded
by Indonesian suppliers so they can get more access to the EU market.
The logistic problems in the supply side of Indonesia’s export activity to the EU
have been caused mainly by the lack of logistic infrastructure in the naturally rich region
in Indonesia. It consequently will worsen transportation cost and time. It is estimated that
shipping cost is 50% to 80% higher than elsewhere in the region (WTO, 2013). Here, the
commitment of the central government in Jakarta to accelerate the improvement of
infrastructure, in particular the possibility of building adequate railway systems
connecting the naturally rich regions of Kalimantan and Sumatra Island to the nearest
adequate seaport, is considered as necessary to bridge the existing logistic problem. The
GOI’s plan to connect all main islands by building long bridges crossing over the straits
is very much supported, since this will eliminate time- and cost-consuming use of shuttle
ferry. This will be able to solve logistic problems in multi potential sectors. Although it is
not easy, there is also a need to identify and solve the problems of longer waiting time of
shipment from Indonesia to the EU in order to meet the EU buyers’ request of safe,
secure, and on-time delivery of exported goods.

In a nutshell, besides the unavoidable non-regulatory barriers such as distance and
production capacity, the main challenges faced by the Indonesian and EU trade actors are
the difference in standards and regulations, know-how, and infrastructure that are all
directly or indirectly associated with the government’s high-standard policies, especially
in the EU side. Despite existing barriers to trade, Indonesia and the EU do not have
dispute-settlement records in the international trade arena, which is found as positive. It is
more cost and time efficient to use soft diplomacy such as dialogue, bilateral working
group, and technical cooperation to solve existing trade barriers rather than bring it to the
UN dispute-settlement system. Therefore, it should be and remain that way.
8.3 Dispute-Settlement Issues
The dispute-settlement mechanism was established in 1995 by the WTO. This
mechanism provides members with a legal framework for solving disputes which may
arise in the course of implementing WTO agreements. It offers the equal right for all
members to defend their interests before ratified agreements. The diplomatic negotiation
is of course the recommended way of solving the disputes. Members can ask for panels
and appeal procedures. The WTO panels investigate the disputes by interpreting the rules
to solve the disputes. WTO panels give final recommendations to disputed parties. The
compliance toward the final recommendation is obligatory. Any disobedience can cost
trade compensation or sanctions. This system is rigid and frightening. It can also provoke
retaliation and hinder international cooperation. Therefore, it is better to investigate the
supply- and demand-side causes of trade barriers and bring it to any bilateral dialogue,
working group, and diplomatic negotiation.

The WTO members from Northern countries, including the EU, are consistently
making use of this mechanism. In the case of EU, the EU has never initiated a dispute-
settlement case before negotiating it first (diplomatic approach). This approach has
worked well in solving trade disputes and avoiding trade wars. This approach has been
seen by the EU as a better way in terms of speed and efficiency (SI [EC] No 3286/94, OJ
L 349, 31.12.1994, p. 71).
The European Commission has prepared a good model of trade barriers complaint
system from companies. Before a complaint is lodged, the complainant is invited to make
an informal contact with the European Commission. The first contact point should be the
Market Access Unit of DG Trade. This unit will provide pieces of advice on the
relevance of the issue and on the best way to handle the case. If a complaint has to be
submitted, officials in the unit can provide assistance. The procedures are basically free
of charge for the complainants (EC 2009).
Before launching the trade barriers investigation, the complainant must
demonstrate preliminary evidence of unfair trading practice, the breach of international
rules in another country, commercial harm such as financial losses, reduced profit
margins, redundancies, or lack of investment, and a surge in imports or fall in exports. In
the case of acceptance, an investigation will be launched. The commission will use either
bilateral diplomacy, WTO dispute-settlement procedure, or other dispute-settlement
procedures to remove the trade barriers.
From the Southern countries’ point of view, like Indonesia, the mechanism of
multilateral disputes settlement should guard the Southern (weaker one) against any
unilateral action by the Northern (stronger one) if negotiation would no longer work.
Unfortunately, the lack of international trade law skills and the lack of bargaining power
often put the Southern countries like Indonesia in the wait-and-see position. The lack of
foreign-language mastery of international trade lawyers from Indonesia is one of the
causes. Hiring independent foreign lawyer would be costly.
In the case of Indonesia, the first focal point often used by Indonesian exporters
to raise their complaint is trade association and chamber of commerce with the absence
of a complaint inventory system. To give a better protection for Indonesian exporters, the
Ministry of Trade should prepare a national model of trade barriers complaints and
facilitate an urgent investigation if necessary. A trade complaints inventory received from
both national and trade partners’ enterprises should be maintained well because it is
believed as useful in bilateral trade talks and technical cooperation agenda, and it is a
source of information for international trade research of this kind.
8.4 Implication to Policy
8.4.1 Policy Recommendations for Indonesian Exports to EU
Indonesia has arrived at the next level on the global stage of diplomacy. This can be seen
from its role in G20 meetings, WTO rounds, and major international forums such as the
climate change conference in Bali Province. Unfortunately, the high profile of Indonesian
diplomacy in the international arena including in freeing trade has not been backed up by
the capability of its exporters, especially SMEs, to access the high-profile market of
Northern countries like EU. Considering that the EU is one of Indonesia’s major
traditional trade partners, cooperation with the EU and other partner countries in
empowering the identified trade incentives and eliminating the existing barriers is
inevitable. In doing so, the form of Indonesia-EU bilateral partnership and cooperation
negotiation is still deemed as the most effective and efficient way compared to the
ineffective ASEAN-EU interregional path. This form can be extended later on as soon as
ASEAN has stood up as one political entity like the EU.151
In order for Indonesia to expand trade flows with the EU as its traditional market
while differentiating exports to emerging markets, the GOI should deal with trade
barriers identified in this study. The summaries of identified barriers and policy
recommendations have been presented in Table 8.3. Trade-related corruption, which is
one of the causes of a high-cost economy, often occurs in the particular point of supply
chain, mostly border-related area, as the window of flow of goods between countries.
Therefore, the acceleration process of a single-window system should remain as one of
the GOI’s top priority. The single-window system would promote transparency, more
effective border control, and more reliable trade statistics.
Import tax cut for high technology needed for the production of export-quality
products is very much recommended. This would increase the competitiveness of
Indonesia’s potential products in the foreign market. The Indonesian trade authority
should also facilitate the exporters’ complaints in accessing the foreign market (online
and offline complaint inventory). The improvement of infrastructure related to
transportation of goods for export and import activities would reduce trade barriers and
create trade and investment. In this case, the development of well-connected and barrier-
free railway systems throughout the province is very much recommended. As far as
improvement of the capacity of Indonesian SMEs in accessing a high-profile market, the
151
Although EU and ASEAN have similar awareness that peace, security and economic growth can be
achieved through regional integration and cooperation, the difference in the type and phase of integration,
decision making process and supranational power have made it difficult to establish inter regional trade
agreement.
GOI should continuously be well informed about new standards and regulations in
foreign markets and building the capacity of SMEs to meet the new standards and
regulations.
Table 8.3: Regulatory Barriers and Solutions to Indonesian Exports to EU 46
Barriers to Trade Proposed Solution
Technical Barriers Harmonization and socialization of standards and regulations

accompanied with capacity building. All technical barriers that
are not in line with WTO’s rules of technical barriers to trade
(TBT Agreement) should be eliminated.
Bad Logistic Performance (S) Development of good infrastructure especially a well-
connected and sophisticated railway system in remote and
resource potential areas. The convergence of good
infrastructure availability nationwide should be the GOI’s next
agenda to boost trade flows, economic growth, and living
standards.
High Competition The GOI should support and facilitate any efforts in upgrading
the quality of Indonesian export products to meet the EU and
international standards and win the competition in the foreign
markets. Easier access to production machinery is one of the
examples of efforts.
Production Capacity (S) Increasing productivity through capacity building, well-planned

and effective investment in production equipment to help boost
production capacity.
Tariff Barriers (S) The GOI should make sure that the objective of imposing
export taxes is not to restrict access to raw material but other
purposes such as to make domestic demand obligation, to
promote domestic entrepreneurship (to added value of products
exported), and to attract investments. These purposes should be
well communicated to all trade partners including the EU.
Market Entry Procedures The EU should make sure that entry procedures should not be
more time and cost consuming to avoid trade diversion and
increase of end consumer price. This would only add burden to
companies that already face many constraints in the supply
side.
Note:
(S): Supply-side barriers
Source: Author’s recommendation
In general, doing business in a sustainable way is the key solution to deal with
market-access bottlenecks. As a matter of fact, Indonesia is already the party to dozens of

international environmental agreements including biodiversity, climate change, Kyoto
Protocol, desertification, endangered species, hazardous wastes, law of the sea, marine
life conservation, ozone layer protection, ship pollution, Tropical Timber 83, Tropical
Timber 94, and wetlands. Therefore, the Indonesia-EU future cooperation should focus
not only on the commercial side but also more on the social and environmental side to
ensure that the ratified agreements have been implemented in the Indonesian daily
business. The efforts to finance the Indonesian business society, both local and joint
ventures, to acquire eco-friendly machinery should be made. This effort can benefit both
sides, not only to increase the market access ability of Indonesian products to the
Northern countries especially the EU but also to give access to the EU eco-friendly
machinery to be used in Indonesian soil.
The development and dissemination of Indonesian National Standard (SNI) must
absolutely be supported. The harmonization and the exchange of know-how on national
standards and regulations with the EU and other Indonesian major trading partners like
Japan and the US are also the key recommended solutions in tackling trade barriers. The
mind-set of most stakeholders in Indonesia, considering standards and regulations as the
tool to protect the domestic market, must be changed. Standards and regulations are
imperative in the contemporary international trade highlighting responsible business
practice. The awareness of the Indonesian stakeholders that the main objective of
implementing standards and regulations is basically to guarantee the quality of the
products, which in turn will protect the consumers and increase the competitiveness in
entering the foreign markets, must be strengthened. It can be done through conference,
capacity building, and training. What we can see in Indonesia now is quite the opposite.
The Indonesian National Standard (SNI) has not yet been implemented well, the
competitiveness of export-oriented SMEs are still low, but ASEAN markets have been
set up free. This might change the Indonesian business landscape, from a production-
based to a consumption-based society in the future.
8.4.2 Policy Recommendations for EU Exports to Indonesia
The EU’s strong competitiveness in almost all sectors, especially in high technology,
should be seen by the EU trade authority as a potential factor to help Southern countries,
including Indonesia, in accelerating their economic growth. With that perspective, the EU
could increase purchasing power of Southern countries to buy high-tech products. This
includes technology that enables SMEs in Southern countries to upgrade their product
quality to meet the EU’s high standards and regulations. With this setting, one could
expect that trade volume between Southern and Northern countries would expand
accordingly.
The existing EU trade-related technical and financial assistance to Southern
countries should be optimized. This should be focused on barriers faced by Southern
countries in accessing the EU market and development of common standards and
regulations. The EU does support this type of programs of Indonesia through a number of
grant programs to ease market access barriers keeping Indonesian exporters from entering
the EU and other international markets. This helps the GOI in its goals of empowering
SMEs’ efforts in meeting EU market standards and regulations. As a matter of fact, trade
as well as investment has been the priority issue of Indonesia-EU bilateral cooperation
for several years. The EU should continue supporting Indonesia in trade-related aspects
addressed in this study, including enhancing Indonesian capacity in participating in
multilateral trade negotiations, dissemination of EU standards and quality control

procedures among SMEs, as well as promoting dialogue and interaction between the
Indonesian and European business communities, especially in the SME level, being the
backbone of most economies in the world.
Table 8.4: Regulatory Bottlenecks and Solutions to EU Exports to Indonesia 47
Barriers to Trade Proposed Solution
Higher Tariff Although Indonesian MFN tariffs have been quite low
compared to bound tariffs (see Annex 8.1), tariffs for in-
demand high-tech products that could help Indonesia in
improving its capacity in producing high-quality products,
increasing production capacity, and increasing economic
growth are still high; hence it should be reduced.
Corruption Corruption can be tackled with a good system. The National
Single Window (NSW) has been seen as an effective tool in
reducing cross-border corruption besides its function in
tackling smuggling practices.
Absence of Unified Patent A unified EU patent system would avoid patent overlapping
System(s) causing disputes.
Increasing Cost of Production(s) Increasing cost of production is a common problem of

developed countries’ industry, including the EU. This
condition has compelled companies to move production base
elsewhere. Policies directed toward resisting the cost increase
is a must.
Market Entry Procedures Indonesia should make sure that entry procedures should be
in line with WTO’s rules and should not be more time and
cost consuming to avoid trade diversion and increase of
consumer price. This would only add complaints and burden
to companies that already face many constraints in the supply
chain.
Note:
(S): Supply-side barriers
Source: Author’s recommendations
8.4.3 Indonesia-EU Bilateral Cooperation
In order to deal with above-mentioned challenges, the continuous, genuine bilateral
cooperation between Indonesia and the EU in the fields of harmonization and
socialization of standard regulations, capacity building, and commitment to continue
technology transfer is required. Regarding Indonesia-EU technical cooperation, the

current EU trade-and-investment-related assistance amounts to EUR 30 million annually.
EUR 15 million is aimed at improving Indonesian export quality infrastructure and the
compliance of Indonesian exports to international standards. This would, in other words,
mean helping Indonesia enter the EU and other developed countries' markets through
improving capacity in complying with sanitary, technical, and other standards. This
policy has been in the right direction, where institutional capacity building of Indonesia
(the South) might help its exporters coping with the emerging technical standards and
regulations in the EU (the North). The remaining EUR 15 million will be directed toward
an Indonesia-EU economic cooperation facility to support a sustainable economic
development in Indonesia. The purpose of this facility is to enhance the capacity of
Indonesian public and private institutions to support the economic reform process in
areas such as trade and investment climate, trade and environment, energy, intellectual
property rights, and science and technology. However, whether this financial assistance
has been able to improve trade incentives and eliminate barriers to trade remains a big
question. Therefore, continuous improvement of project implementation, monitoring, and
evaluation is needed.
In order to avoid possible trade diversions because of existing market access
barriers and the absence of trade agreements in the case of Indonesia-EU trade flows,
more aggressive negotiations for future trade agreements between Indonesia (ASEAN)
and the EU are highly recommended. For the time being, a bilateral trade partnership
between Indonesia and the EU is seen as relatively more feasible compared to an
ASEAN-EU trans-regional trade agreement. It is worth noting that Indonesia still lacks
experience in bilateral trade agreements, from Annex 2.3. In contrast, the EU has been a
party to many bilateral trade agreements and played an important role in helping
developing countries through zero tariffs (see Annex 2.2). Therefore, the EU should share
its experiences on bilateral trade agreements to Indonesia to avoid unexpected trade
imbalances. However, Indonesia’s active role in the WTO negotiations process, which
has defended its interests as a developing country during the Doha negotiations, is a good
asset in negotiating a bilateral agreement. The four-year-old Indonesia-Japan EPA is one
example of Indonesian capability in concluding a bilateral trade agreement. As the
Indonesia-China FTA has been widely criticized, the next Indonesian preferential trade
agreements, including with the EU, should be made by more balanced interests.
Indonesia and the EU should cement a partnership and cooperation in trade in a
reciprocal way, focusing on each party’s product potential in export and import in which
it has a competitive advantage over the other. Only by focusing on the priority
merchandising sectors could both parties benefit the most effectively and efficiently.
Actions and initiatives should be well defined toward promotion of trade incentives and
diminishing of regulatory trade barriers. Based on a summary of research findings,
especially on trade incentives and barriers, improvement of transportation and logistic
infrastructure (especially railway system) in Indonesia, elimination of existing trade
barriers for both partners’ main export products, information dissemination, and capacity
building on each market standards and regulations to exporters—especially export-
oriented SMEs—should be the next priority of the Indonesia-EU partnership and
cooperation. The Indonesia-EU partnership and cooperation can be materialized through
an economic partnership agreement (EPA). An EPA can be used as the tool in
counterbalancing the revealed negative impact of distance and other non-regulatory
barriers to trade in order to boost trade volume between the two political entities. Both
Indonesian and EU diplomatic efforts are clearly needed in such initiatives, which should
bring together all trade-related stakeholders on a table. The trade incentives and barriers
identified in this study should be taken into account.
The already well-established European as well as Indonesian Chamber of
Commerce in Jakarta should push Indonesia and the EU to begin talks on having an
economic partnership agreement. In the case of the European Chamber of Commerce in
Jakarta, the profile of the membership has not yet covered the interests of EU SMEs. The
chamber has delivered inputs and critiques to the GOI as far as economic policy
formulations are concerned. This should become a good example for Indonesian trade
stakeholders to have their own chamber of commerce as well, with similar functions in
the EU like other countries already have. For promoting exports in foreign markets,
including the EU, the GOI has established independent offices called Indonesian Trade
Promotion Center (ITPC) in selected countries, delivering services to groups of countries.
8.5 Continuation of Research
Describing and explaining Indonesia-EU trade relations is an interesting and challenging
one. However, the identification of incentives and barriers to trade flows between
Indonesia and the EU is not an easy task. Not only because there is no similar work found
in literatures hitherto, as far as references are concerned, but also because of the wide
variations of sensitivity of different goods to different incentives and barriers to trade.152
Therefore, it turns out to be almost impossible to generalize the results to all products
traded at all time. In other words, case-dependent incentives and barriers identification of
bilateral trade flows are very much recommended.
152
For instance, some goods are distances sensitive while others are not. For example, the work of Carillo
and Li (2002) using the gravity model has shown how a classification into differentiated and homogeneous
product categories had the different impact between and within Regional Trade Agreements’ members.
Incentives and barriers to trade are not new topics in the international trade arena.
However, the contribution of this work could make a difference for two reasons. First, the
reviewed trade partners and approach chosen for this work are relatively unique and new
compared to previous works of international trade research. Second, we use a unique
combination of data collection and analysis methods in answering research questions.
Such combination has been found as effective and comprehensive in investigating
bilateral trade relations. It is like riding several horses in one race, since it gives more
chance to achieve previously setup goals. Therefore, the application of such combination
to other case studies is promising and therefore highly recommended.
The study of trade relations between South and North is rather dynamic in nature.
This study has focused on the investigation of bilateral trade statistics in the last ten years
(1999–2008), while field research has been carried out at the end year of that time period.
Therefore, it should be admitted that weaknesses and missing facts could possibly
happen. Additionally, one should be aware of any changes of regulatory trade incentives
and barriers that occurred in line with time, regime, and policy changes. In order to
anticipate those changes of trade incentives and barriers between Indonesia and the EU,
representing South and North, continuous research on similar topics (every 5 to 10 years),
with improved methodology and research scale, is recommended. The larger the coverage
of sectors (cases), the better the results. The use of South-North framework has been
found as very useful by author to address the complexity of international trade relations.
It is worth noting that trade data discrepancy between data recorded by an
Indonesian statistics agency (BPS) with data recorded by Indonesian trade partners,
including the case of products with relatively high import tax, is still huge. Statistical
analysis presented in Annex 8.2 is just one showcase of the existing discrepancy, which
tends to increase notably from 2003 to 2007. This import data discrepancy has gotten
bigger and bigger in the last five years. It is worth investigating why such big
discrepancy exists during the identified years. This curiosity has brought to some
speculations of potential causes that deserve further investigation. First, export (FOB)
data might have been mistakenly or intentionally misreported by Indonesian or its trade
partner’s authority to the UNSD COMTRADE. Second, there might have been
smuggling practices in importation process of goods into Indonesian market to avoid high
import taxes. And third, there might have been misuse of certificate of origin of imported
goods to avoid import taxes.
In the case of intentional misreporting, statistic manipulation should have been
the most possible cause. As firm-level survey has identified corruption as one of
Indonesia’s trade barriers, the existence of possible collusion between importers and
custom officials in avoiding high import tariffs deserves further investigation. The second
speculation is that products have been imported illegally (smuggled) via closer foreign
international ports, such as Singapore’s, to avoid high import tax.153 In the case of misuse
of certificate of origin, foreign imports to Indonesia via Singapore have mistakenly or
intentionally not been recorded as Indonesian import from the country of origin but from
the country of transit (Singapore). Such misreporting would cause underestimation of
trade statistics and at the same time loss of import tax revenues. This is a good entering
strategy for foreign companies, especially those coming from countries that have signed
an FTA with Singapore, who would like to avoid Indonesian import tax.154 The big
153
Smuggling is the intentional evasion of tariffs or quantitative trade restriction (Van den Berg, 2004, p.
214)
154
Most of products imported from Singapore to Indonesia have been subject to duty free under AFTA
scheme.
question remaining is whether the implementation of the Indonesian National Single
Window (NSW) system could solve this statistic discrepancy.
Since trade statistics have often been used for high-level decision making,
national income tax base, policy formulation, as well as economic and business research,
its miscalculations and manipulations might have led to potential misleading and
financial loss, not only for one country, but also for all stakeholders using trade statistics
to make important decisions and policies. Therefore, an intensive, joint, empirical
research between Indonesia and the EU on possible factors causing Indonesian import
data discrepancy as well as cooperative remedies toward its improvement should be
included as one of future research priorities in supporting Indonesia (ASEAN)–EU trade-
related bilateral dialogues, working groups, and diplomatic negotiations.
The use of this study as reference for future researches in relevant topics is useful
for three reasons. It describes clearly the current merchandise trade relationship between
Indonesia and the EU, representing the South and the North. It explains empirically the
incentives that should be taken into account to increase trade flow. It also empirically
explains existing trade barriers that have to be eliminated to increase market access and
boost trade flows. The results of a primary study suggest that future studies on bilateral
trade incentives and barriers should really take into account the case-dependent nature of
international trade. Any generalization should be avoided. Despite its limitation, this
cross-product sectors based case study should be useful and effective in formulating
bilateral trade policy by focusing on the most potential products of each trade partner.
The future research on Indonesia and EU trade relations with broader coverage of cases,
including trade-in services and investment, is considered as an interesting but more
challenging one, due to the lack of consolidated trade data in services.

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Annexes
Annex 2.1: Profiles of Most Active Regional Blocs 1

Regional Area (km2) Population GDP (PPP in USD) Member
155
Blocs Millions Per capita States
Agadir 1,703,910 122,817,000 695,562 5,663 4
ASEAN 4,400,000 582,611,000 2,769,905 4,754 10
CACM 523,780 41,570,000 250,793 6,033 7
CARICOM 462,252** 15,597,000** 95,865** 6,146 15
CEMAC 3,020,142 39,812,000 118,571 2,978 6
COMESA 3,779,427 125,281,000 165,060 1,318** 5
CSN 17,337,095 380,704,000 4,035,143 10,599 10
EAC 1,763,777 107,050,000 150,496 1,406 3**
ECOWAS 5,112,903 283,912,000 493,300 1,738 15
EU 4,422,388 496,042,000 15,249,688 30,742 27*
EurAsEC 3,020,142 206,547,000 2,656,939 12,864 6
GCC 2,475,672 37,852,000 1,091,513 28,836 6
NAFTA 21,783,850* 444,677,000 17,291,706* 38,885* 3**
SAARC 5,143,121 1,581,680,000* 4,097,124 2,590 8
SACU 2,693,418 56,016,000 557,514 9,953 5
SPARTECA 8,483,219 34,140,000 968,018 28,359 15
* = the highest among the blocs ** = the lowest among the blocs
Agadir Egypt, Jordan, Morocco, Tunisia
ASEAN Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philipines, Singapore,
Thailand, Vietnam
CACM Guatemala, Honduras, El Salvador, Nicaragua, Costa Rica, Panama and Belize
CARICOM Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana,
Haiti, Jamaica, Montserrat, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the
Grenadines, Suriname, Trinidad and Tobago
CEMAC Cameroon, Central African Republic, Chad, Congo, Equatorial Guinea, Gabon
COMESA Comoros, Djibouti, Eritrea, Ethiopia, Sudan
CSN Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru, Uruguay,
Venezuela
EAC Kenya, Tanzania, Uganda
ECOWAS Benin, Burkina Faso, Cape Verde, Gambia, Ghana, Guinea-Bissau, Liberia, Mali,
Nigeria, Senegal, Sierra Leone, Togo, Cote d’Ivoire (suspended, election 2010), Níger
(suspended, coup 2009), Guinea (suspended, coup 2008).
EU Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland,
France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg,
Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden,
United Kingdom
EurAsEC Belarus, Kazakhstan, Kyrgystan, Russia, Tajikistan, Uzbekistan
GCC Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates
NAFTA Canada, Mexico, United States of America
SAARC Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka
SACU Botswana, Lesotho, Namibia, South Africa, Swaziland
SPARTECA Australia, New Zealand, Cook Islands, the Federated States of Micronesia, Fiji,
Kiribati, Marshall Islands, Nauru, Niue, Papua New Guinea, Solomon Islands, Tonga,
Tuvalu, Vanuatu and Western Samoa
Source: CIA (2008), IMF (2010)
155
The definition can be found in the list of acronyms (p. xv).
Annex 2.2: Bilateral and Intra-Regional Trade Agreements Involving EU 2

Partner Countries Form of Trade Agreement
1. Algeria Association Agreement (2002/2005)
2. Andorra Custom Union (1991)
3. Argentina Trade and Economic Cooperation (1990)
4. Australia Trade and Economic Cooperation (2003)
5. Canada Trade and Economic Cooperation (1976)
Partnership (2004), FTA negotiation (2009)
6. Chile Association Agreement (2003)
7. China GSP, Cooperation (2000)
8. Egypt Association Agreement (2001/2004)
9. Iceland Free Trade Area, Custom Union (1973)
10. India Trade and Economic Cooperation (1993), Bilateral Free Trade and
Investment Agreement (2007), FTA Negotiation (2007)
11. Indonesia Framework of Comprehensive Partnership and Cooperation (2009)
12. Iran Trade Cooperation (2002), Cooperation is in crisis
13. Iraq Partnership and Cooperation Agreement (2012)
14. Israel Association Agreement (2000)
15. Japan Mutual Recognition Agreement (2002)
Cooperation (2003), FTA Negotiation (2013)
16. Jordan Association Agreement (1997/2002)
17. Kazakhstan Partnership and Cooperation (1995/1999)
18. South Korea Trade Cooperation (2001), Free Trade Agreement (2010)
19. Lebanese Republic Interim Agreement (2003)
20. Madagascar, Mauritius, Seychelles Interim Partnership Agreement (2009)
and Zimbabwe
21. Malaysia Free Trade Agreement Negotiation (2010)
22. Mexico Free Trade Agreement (2000)
23. Moldova Partnership and Cooperation (1994/1998)
24. Morocco Association Agreement (1996/2000)
25. New Zealand Mutual Recognition Agreement (1997/1999)
26. Norway European Economic Area (1994)
27. Palestine Authority Association Agreement (1997)
28. Papua New Guinea and Fiji Interim Partnership Agreement (2011)
29. Paraguay Trade Cooperation Agreement (1992)
Association Agreement (2004)
Peru Free Trade Agreement (2013)
30. Russia Partnership and Cooperation (1994/1997)
Common Economic Space (2005)
31. San Marino Custom Union (1992)
32. Singapore Free Trade Agreement Final Negotiation (2010/2012)
33. South Africa Trade Cooperation Agreement (1999/2000)
34. Switzerland Free Trade Area (1972) and EEA (1992)
35. Syria Association Agreement (2009)
36. Thailand Free Trade Agreement Negotiation (2013)
37. Tunisia Association Agreement (1995/1998)
38. Turkey Association Agreement (1963), Custom Union (1995)
39. Ukraine Partnership and Cooperation (1998), Concluded FTA (2011)
40. Uruguay Cooperation Agreement (1992)
41. USA Partnership (1998), Initiation of Transatlantic FTA (2013)
42. Vietnam Free Trade Agreement Negotiation (2010)
43. Africa, Caribbean and Pacific Partnership Agreement (2000), EPA (13 countries have not signed the
EPA)
44. Andean Community Association Agreement (2010), in ratification process
45. ASEAN Trans-Regional Trade Initiative (2000)
46. CARIFORUM (15 countries) Economic Partnership Agreement (2008)
47. GCC (in negotiation) Free Trade Agreement (1990, 1999, 2004)
48. Mediterranean Partnership Agreement (1995)
49. Western Balkan Stabilization and Association Agreement (2000), Autonomous Trade
Preference (2000)
50. Mercosur (in negotiation) Free Trade Area (2000)
Annexes | 285
Source: Compiled from European Commission and World Trade Organization

Annex 2.3: Bilateral and Intra-Regional Agreements Involving Indonesia 3
Partner Countries Form of Trade Agreement
Indonesia
1. EFTA The results of feasibility study of FTA was
signed on June 2007 that the both side
could get significant benefits from an FTA.
2. Japan Japan-Indonesia Economic Partnership
Agreement (JIEPA) in 2007
3. USA Feasibility Study for FTA, Trade and
Investment Framework Agreement (TIFA,
1997)
4. EU GSP, Comprehensive Economic
Partnership Agreement (CEPA) in 2009,
Negotiating FTA
Indonesia as ASEAN’s member
1. Australian-New Zealand ASEAN-Australia-New Zealand Free
Trade Agreement (AANZFTA) in 2009
2. China The full FTA between China and Indonesia
(ASEAN six) is already in force in year
2010 while the FTA with other four
(MLCV) will be started in 2015.
3. India ASEAN-India Free Trade Framework
Agreement (AIFTA) in 2003
4. South Korea (except Thailand) Korea-ASEAN Free Trade Framework
Agreement (KAFTA) in 2005
Source: Compiled from ASEAN, WTO, MOFA and bilaterals.org
Annex 3.1: The List of Products at Two Digits Level of SITC Rev. 3 4
Code Product Name Code Product Name
00 Live animals 57 Plastics in primary forms
01 Meat and meat preparations 58 Plastic manufactures
02 Dairy products and eggs 59 Chem. materials & products n.e.s.
03 Fish, crustaceans, molluscs etc. 61 Leather and dressed furskins
04 Cereals and cereal preparations 62 Rubber manufactures, n.e.s.
05 Vegetables and fruit 63 Cork and wood manufactures
06 Sugars, sugar prep. and honey 64 Paper, paperboard, articles thereof
07 Coffee, tea, cocoa, spices 65 Textile yarn etc., n.e.s.
08 Animal feeds, excl. unmilled cereals 66 Non-metallic min. manufactures n.e.s.
09 Miscellaneous edible products 67 Iron and steel
11 Beverages 68 Non-ferrous metals
12 Tobacco and tobacco manufactures 69 Manufactures of metal n.e.s.
21 Hides, skins and furskins, raw 71 Power generating machinery
22 Oil seeds and oleaginous fruit 72 Machinery for part. industries
23 Crude rubber, synth. and recycled 73 Metalworking machinery
24 Cork and wood 74 Gen. industr. machinery & equipm.
25 Pulp and waste paper 75 Office machines and computers
26 Textile fibres and their wastes 76 Telecom equipment etc.
27 Crude fertilizers, crude minerals 77 Elec. machinery, app. and appliances
28 Metalliferous ores, metal scrap 78 Road vehicles
29 Crude animal and veget. Materials 79 Other transport equipment
32 Coal, coke and briquettes 81 Prefab. buildings; fixtures
33 Petroleum, petroleum products 82 Furnit., mattr., cushions etc.
34 Gas, natural and manufactured 83 Travel goods, handbags etc.
41 Animal oils and fats 84 Apparel and clothing accessories
42 Fixed vegetable fats and oils 85 Footwear
43 Animal/vegetable fats/oils, processed 87 Prof., scient. & contr. instruments
51 Organic chemicals 88 Photogr. equip., opt. goods; watches
52 Inorganic chemicals 89 Misc. manufactured articles n.e.s.
53 Dyeing, tanning and col. Materials 09 Other commodities
54 Medicinal and pharmaceutical prod. 93 Returned good and auction goods
55 Oils, toilet and cleansing prep. 96 Coin, not being legal tender
56 Fertilizers, other than of 27 97 Gold, non-monetary
Source: UNSD Comtrade Database
Annexes | 287
Annex 3.2: Cover Letter Used for Primary Data Collection 5
A PhD Research on Indonesia-EU Trade Relations
Dear Sir/Madam,
I am conducting a study on trade relations between Indonesia and the EU as part of my PhD
research at Jacobs University Bremen, Germany.
One of the key objectives of this research is to identify the trade incentives and barriers
influencing the trade flow between these two political entities in six selected sectors, including
your export product. The results of this study will hopefully contribute to the preparation of
future Indonesia (ASEAN)–EU trade agreements as well as closer trade relations.
If your company is an active exporter or importer to Indonesia/EU and is willing to share its
experience, please kindly answer two questions on the next page. Your answers will remain
completely anonymous (i.e., no one will be able to attribute the answers to you or your company).
I thank you in advance for your time and participation, and I wish your company great success in
your future trade relation with Indonesia/EU!
Sincerely yours,
Okta Nofri, SE, MES

PhD Candidate
Jacobs University Bremen

Campus Ring 1
Research IV, Room 158
28759 Bremen
Germany
Phone: +49 421 200-3432

Fax: +49 421 200-3303
E-Mail: o.nofri@jacobs-university.de
Website: http://www.jacobs-university.de/
Annex 3.3: Questionnaire Set Used in Primary Data Collection 6

Political entity: ( ) Indonesia ( ) EU Member Countries, namely:
Case (sector) number: ( ) I ( ) II ( ) III
Respondent No.: 1
No Questions
1 According to your experience, which one of the following factors would allow
your company to export more of your product to Indonesia/EU? (please tick
where applicable; more than one option may be selected)
( ) Larger market size in Indonesia/EU
( ) Political stability
( ) Technology superiority
( ) Simple entry procedures
( ) Low tariff
( ) Low technical barriers
( ) Good logistic performance
( ) Others, please specify……………………………………………………..................
……………………………………………………………………………………………
2 Is there anything that prevents you from doing as much trade as you would like to with
EU/Indonesia?
( ) No ( ) Yes
If yes, which one of the following trade barriers do you often find in doing trade with
EU/Indonesia (please tick where applicable; more than one option may be selected)
( ) Higher tariff
( ) Technical barriers to trade, (please specify)………………………………………....
……………………………………………………………………………………………
( ) Distance
( ) Political instability
( ) Language and cultural differences
( ) Complicated entry procedures
( ) Bad logistic performance
( ) Corruption, (please specify)……………………….………………………………...
……………………………………………………………………………………………
( ) Others, (please specify)……………………………………………………………...
………………………………………………………………………………………........
Source: Okta Nofri (2007)

Annexes | 289
Annex 3.4: The List of Visited Trade Fair in Indonesia and Germany 7
No Trade Fair Schedule Location
th th
1 Woodworking and 16 - 19 of April 2008 Jakarta International
Forestry Indonesia Expo (JIExpo), Indonesia
2 Pulp and paper 16th - 19th of April 2008 Jakarta International
Expo (JIExpo), Indonesia
3 Technopharm 30th of Sept.- 2nd of Oct. 2008 Nürnberg, Germany
4 Euroblech 21st - 25th of Oct. 2008 Hannover, Germany
5 OPTATEC 17th - 20th of June 2008 Frankfurt/Main, Germany
6 Dental Informa 18th - 21st September 2008 Hannover, Germany
7 Photokina 23 - 28th of September 2008 Köln, Germany
8 ExpoPharm 18th - 21st of September 2008 München, Germany
9 Medizin Expo 30th January – 1st of February Neue Messe Stuttgart,
2009 Germany
Source: http://www.auma.de (2007, 2008)
Annex 4.1: Indonesian Trade Flows with the World (1989-2008) 8

Period Export Growth (%) Import Growth (%) Trade Balance
1989 22.03 0.00 16.36 0.00 5.67

1990 25.68 16.57 21.84 33.50 3.84
1991 29.14 13.47 25.87 18.45 3.27
1992 33.97 16.58 27.28 5.45 6.69
1993 36.82 8.39 28.33 3.85 8.49
1994 40.05 8.77 31.98 12.88 8.07
1995 45.42 13.41 40.63 27.05 4.79
1996 49.81 9.67 42.93 5.66 6.88
1997 53.44 7.29 41.68 -2.91 11.76
1998 48.85 -8.59 27.34 -34.40 21.51
1999 48.67 -0.37 24.00 -12.22 24.67
2000 62.12 27.64 33.51 39.63 28.61
2001 56.32 -9.34 30.96 -7.61 25.36
2002 57.16 1.50 31.29 1.07 25.87
2003 61.06 6.82 32.55 4.03 28.51
2004 71.58 17.23 46.52 42.92 25.06
2005 85.66 19.67 57.70 24.03 27.96
2006 100.80 17.67 61.07 5.84 39.73
2007 114.10 13.19 74.47 21.94 39.63
2008 137.02 20.08 129.24 73.55 7.78
(*): in USD billion

Source: Compiled and Calculated from UNSD Comtrade Database (2008, 2009)
Annexes | 291
Annex 4.2: Indonesian and EU Bilateral Exports Development (1989-2008) 9

Year Indonesian Export* Growth (%) EU Export* Growth (%) Trade Balance*
1989 1.77 2.35 -0.58

1990 2.20 24.21 3.81 61.97 -1.61
1991 3.66 66.44 4.17 9.60 -0.51
1992 4.61 26.17 5.51 32.14 -0.90
1993 5.15 11.62 5.46 -0.94 -0.31
1994 5.73 11.25 5.41 -0.83 0.32
1995 6.43 12.23 7.52 38.90 -1.09
1996 7.27 13.08 8.16 8.51 -0.89
1997 7.52 3.37 9.11 11.68 -1.59
1998 7.20 -4.23 4.21 -53.81 2.99
1999 7.36 2.21 3.20 -24.10 4.16
2000 8.95 21.65 3.93 22.96 5.02
2001 8.04 -10.20 3.89 -1.05 4.15
2002 8.26 2.78 4.15 6.67 4.11
2003 8.37 1.34 4.58 10.51 3.79
2004 9.12 8.90 5.75 25.49 3.37
2005 10.36 13.65 5.75 0.01 4.61
2006 12.06 16.45 6.18 7.45 5.88
2007 13.40 11.07 7.25 17.29 6.15
2008 15.53 15.92 8.69 19.86 6.84
Note: (*): Export in USD billion, data has been reported by each political entity
Annex 4.3: Developments of EU Exports and Imports (1989-2008) 10

Export Export Growth (%) Import Import Growth (%) Trade Balance
Period
1 2 1 2 1 2 1 2 1 2
1988 1,157.00 - - 1,183.38 - - -26.38 -
1989 1,237.52 - 6.96 - 1,279.53 - 8.13 - -42.01 -
1990 1,476.82 - 19.34 - 1,543.23 - 20.61 - -66.41 -
1991 1,476.13 - (0.05) - 1,570.71 - 1.78 - -94.58 -
1992 1,579.26 - 6.99 - 1,652.20 - 5.19 - -72.94 -
1993 1,443.07 - (8.62) - 1,402.08 - (15.14) - 40.99 -
1994 1,648.84 - 14.26 - 1,591.14 - 13.48 - 57.7 -
1995 2,010.28 - 21.92 - 1,916.55 - 20.45 - 93.73 -
1996 2,072.40 - 3.09 - 1,970.53 - 2.82 - 101.87 -
1997 2,092.62 - 0.98 - 1,974.70 - 0.21 - 117.92 -
1998 2,148.09 - 2.65 - 2,068.20 - 4.73 - 79.89 -
1999 2,261.30 - 5.27 - 2,267.66 - 9.64 - (6.36) -
2000 2,380.63 781.05 5.28 1.36 2,431.24 913.28 7.21 (4.00) (50.60) (132.23)
2001 2,413.95 791.65 1.40 6.48 2,413.55 876.78 (0.73) 0.89 0.40 (85.14)
2002 2,585.12 842.92 7.09 16.73 2,534.21 884.56 5.00 19.57 50.91 (41.64)
2003 3,070.79 983.92 18.79 20.69 3,033.83 1,057.63 19.72 20.90 36.95 (73.71)
2004 3,677.23 1,187.48 19.75 10.33 3,682.14 1,278.65 21.37 14.61 (4.91) (91.17)
2005 3,968.08 1,310.10 7.91 11.40 4,046.80 1,465.52 9.90 15.84 (78.72) (155.42)
2006 4,507.43 1,459.46 13.59 16.76 4,681.35 1,697.72 15.68 15.89 (173.92) (238.26)
2007 5,240.98 1,704.08 16.27 13.17 5,419.06 1,967.53 15.76 16.13 (178.08) (263.45)
2008 5,806.53 1,928.55 10.79 1.36 6,082.29 2,284.92 12.24 (4.00) (275.77) (356.36)
Note:
1: External + Internal Trade in USD billion
2: External Trade in USD billion
Annexes | 293
Annex 4.4: Indonesian Trade Structure with the World (2007)156 11

Indonesian Export to the World Indonesian Import to the World
No Rank Goods and Commodities Export (in USD) % Goods and Commodities Import (in USD) %
I Non-Fuels Primary Commodities 27,299,401,240 100 Non-Fuels Primary Commodities 10,260,231,114 100
1 FIXED VEG. FATS AND OILS 9,439,867,548 34.58 CEREALS, CEREAL PREPRTNS. 2,045,245,843 19.93
[SITC Rev.3 code 42] [SITC Rev.3 code 04]
2 METALLIFEROUS ORE,SCRAP 7,719,363,529 28.28 ANIMAL FEED STUFF 1,148,403,317 11.19
3 CRUDE RUBBER 4,932,002,017 18.07 TEXTILE FIBRES 1,130,847,440 11.02
4 FISH,CRUSTACEANS,MOLLUSC 2,097,461,447 7.68 SUGAR,SUGR.PREPTNS,HONEY 1,119,282,659 10.91
5 COFFEE,TEA,COCOA,SPICES 2,013,061,536 7.37 PULP AND WASTE PAPER 1,022,505,818 9.97
II Fuels 29,210,401,753 100 Fuels 21,994,333,288 100
1 PETROLEUM,PETROL.PRODUCT 12,533,807,000 42.91 PETROLEUM,PETROL.PRODUCT 21,884,885,926 99.50

2 GAS,NATURAL,MANUFACTURED 9,983,780,410 34.18 GAS,NATURAL,MANUFACTURED 89,247,800 0.41
3 COAL, COKE, BRIQUETTES 6,692,814,343 22.91 COAL, COKE, BRIQUETTES 20,184,877 0.09
ELECTRIC CURRENT 14,685 0.0001
[SITC Rev.3 code 35]
III Manufactured Goods 48,236,207,425 100 Manufactured Goods 39,161,700,679 100
1 CLOTHING AND ACCESSORIES 5,869,799,968 12.17 IRON AND STEEL 4,388,171,676 11.21
2 ELEC MCH APPAR,PARTS,NES 4,462,502,924 9.25 ORGANIC CHEMICALS 3,734,836,517 9.54
3 NON-FERROUS METALS 4,329,632,360 8.98 GENERAL INDUSTL.MACH.NES 3,480,046,991 8.89
4 TEXTILE YARN,FABRIC,ETC. 3,829,093,539 7.94 SPECIAL.INDUST.MACHINERY 3,127,504,504 7.99
5 PAPER,PAPERBOARD,ETC. 3,317,105,779 6.88 ROAD VEHICLES 2,739,647,140 7.00
Source: Compiled and Calculated from UNSD Comtrade Database (2008)
156
This Annex 4.4 shows only five most exported and imported manufactured goods in 2007.
Annex 4.5: EU Trade Structure with the World (2007) 12

EU Export to the World EU Import to the World
No Rank Goods and Commodities Export (in USD) % Goods and Commodities Import (in USD) %
I Non-Fuels Primary Commodities 570,122,599,787 100 Non-Fuels Primary Commodities 670,040,214,771 100
1 NON-FERROUS METALS 98,042,178,634 17.20 NON-FERROUS METALS 127,014,531,753 18.96

2 VEGETABLES AND FRUIT 61,873,584,852 10.85 VEGETABLES AND FRUIT 76,743,705,474 11.45
3 BEVERAGES 51,634,370,003 9.06 METALLIFEROUS ORE,SCRAP 75,617,221,774 11.29
4 METALLIFEROUS ORE,SCRAP 43,969,410,868 7.71 MEAT, MEAT PREPARATIONS 41,651,712,574 6.22
5 MEAT, MEAT PREPARATIONS 42,588,959,811 7.47 FISH,CRUSTACEANS,MOLLUSC 37,320,913,856 5.57
II Fuels 231,320,356,838 100 Fuels 557,022,939,435 100
1 PETROLEUM,PETROL.PRODUCT 195,588,019,675 84.03 PETROLEUM,PETROL.PRODUCT 435,880,453,506 78.25

2 GAS,NATURAL,MANUFACTURED 21,913,190,762 9.41 GAS,NATURAL,MANUFACTURED 85,854,204,649 15.41
3 ELECTRIC CURRENT 11,686,232,743 5.02 COAL, COKE, BRIQUETTES 23,600,416,076 4.24
4 COAL, COKE, BRIQUETTES 3,576,691,807 1.54 ELECTRIC CURRENT 11,687,865,204 2.10
III Manufactured Goods 3,631,341,128,767 100 Manufactured Goods 3,310,821,919,104 100
1 ROAD VEHICLES 533,891,608,492 13.77 ROAD VEHICLES 478,703,855,810 13.5

2 GENERAL INDUSTL.MACH.NES 261,686,628,341 6.75 ELEC MCH APPAR,PARTS,NES 244,194,818,286 6.88
3 ELEC MCH APPAR,PARTS,NES 260,726,519,985 6.73 MEDICINAL,PHARM.PRODUCTS 196,315,381,796 5.53
4 MEDICINAL,PHARM.PRODUCTS 245,409,905,677 6.33 OFFICE MACHINES,ADP MACH 185,667,301,422 5.23
5 IRON AND STEEL 185,645,445,172 4.79 TELECOMM.SOUND EQUIP ETC 178,582,722,079 5.03
Source: Compiled and Calculated from UNSD Comtrade Database, 2008

Annexes | 295
Annex 4.6: Structure of Indonesian and EU Bilateral Exports (2007) 13

Indonesian Exports to EU EU Exports to Indonesia
No Rank Goods and Commodities Export (in USD) % Goods and Commodities Export (in USD) %
I Non-Fuels Primary Commodities 4,913,219,180 100 Non-Fuels Primary Commodities 874,628,933 100
1 FIXED VEG. FATS AND OILS 1,664,895,866 33.89 PULP AND WASTE PAPER 229,117,203 26.20
2 METALLIFEROUS ORE,SCRAP 1,333,350,101 27.14 DAIRY PRODUCTS,BIRD EGGS 196,602,257 22.48
3 CRUDE RUBBER 576,660,010 11.74 NON-FERROUS METALS 79,864,061 9.13
4 COFFEE,TEA,COCOA,SPICES 364,101,668 7.41 MISC.EDIBLE PRODUCTS ETC 70,914,309 8.11
5 FISH,CRUSTACEANS,MOLLUSC 248,318,715 5.05 CRUDE FERTILIZER,MINERAL 36,763,384 4.20
II Fuels 542,015,077 100 Fuels 19,979,898 100
1 COAL, COKE, BRIQUETTES 541,815,855 99.96 PETROLEUM,PETROL.PRODUCT 19,745,630 98.83

2 PETROLEUM,PETROL.PRODUCT 199,222 0.04 COAL, COKE, BRIQUETTES 190,610 0.95
GAS,NATURAL,MANUFACTURED 43,658 0.22
[SITC Rev.3 code 34]
III Manufactured Goods 7,303,881,111 100 Manufactured Goods 5,940,397,530 100
1 CLOTHING AND ACCESSORIES 1,329,894,439 18.21 TELECOMM.SOUND EQUIP ETC 712,974,555 12.00
2 FOOTWEAR 777,829,967 10.65 OTHR.TRANSPORT EQUIPMENT 697,061,880 11.73
3 FURNITURE,BEDDING,ETC. 777,675,098 10.64 SPECIAL.INDUST.MACHINERY 677,545,822 11.41
4 TEXTILE YARN,FABRIC,ETC. 552,404,517 7.56 ELEC MCH APPAR,PARTS,NES 552,672,121 9.30
5 TELECOMM.SOUND EQUIP ETC 545,138,215 7.46 GENERAL INDUSTL.MACH.NES 503,108,340 8.46

Annex 4.7: Indonesian Exports to EU Members in 2007 14

Value Share Value Share
Rank Destination Indonesian Most Exported Products
(in USD) (%) (USD) (%)
1 Netherlands 2,749,459,376 20.55 FIXED VEG. FATS AND OILS (42) 988,067,822 35.94
2 Germany 2,316,011,149 17.31 CLOTHING AND ACCESSORIES (84) 439,704,864 18.99
3 Spain 1,906,222,913 14.25 METALLIFEROUS ORE,SCRAP (28) 1,105,137,387 57.98
4 United Kingdom 1,454,160,357 10.87 CLOTHING AND ACCESSORIES (84) 316,509,273 21.77
5 Italy 1,387,249,251 10.37 COAL, COKE, BRIQUETTES (32) 281,410,325 20.29
6 Belgium 1,332,173,357 9.96 TELECOMM.SOUND EQUIP ETC (76) 201,085,536 15.09
7 France 827,594,571 6.19 ELEC MCH APPAR,PARTS,NES (77) 127,798,220 15.44
8 Greece 233,498,692 1.75 FIXED VEG. FATS AND OILS (42) 45,342,092 19.42
9 Poland 190,871,204 1.43 CRUDE RUBBER (23) 52,011,566 27.25
10 Denmark 140,781,047 1.05 FOOTWEAR (85) 30,803,626 21.88
11 Finland 121,342,284 0.91 TELECOMM.SOUND EQUIP ETC (76) 28,690,452 23.64
12 Sweden 109,828,702 0.82 FURNITURE,BEDDING,ETC. (82) 17,635,914 16.06
13 Portugal 95,126,761 0.71 TEXTILE YARN,FABRIC,ETC. (65) 18,155,803 19.09
14 Ireland 77,951,300 0.58 COAL, COKE, BRIQUETTES (32) 16,188,625 20.77
15 Slovenia 73,916,897 0.55 COAL, COKE, BRIQUETTES (32) 37,120,477 50.22
16 Czech Rep. 70,711,861 0.53 TELECOMM.SOUND EQUIP ETC (76) 40,469,986 57.23
17 Romania 59,032,019 0.44 CRUDE RUBBER (23) 34,110,810 57.78
18 Slovakia 45,633,700 0.34 FOOTWEAR (85) 25,641,450 56.19
19 Bulgaria 37,517,259 0.28 FIXED VEG. FATS AND OILS (42) 20,608,378 54.93
20 Hungary 36,547,908 0.27 CRUDE RUBBER (23) 7,721,505 21.13
21 Malta 24,337,656 0.18 OTHR.TRANSPORT EQUIPMENT (79) 16,637,500 68.36
22 Austria 24,116,608 0.18 CLOTHING AND ACCESSORIES (84) 6,216,723 25.78
23 Lithuania 19,889,399 0.15 CRUDE RUBBER (23) 7,979,522 40.12
24 Estonia 18,907,531 0.14 FOOTWEAR (85) 4,869,627 25.75
25 Cyprus 12,491,955 0.09 PAPER,PAPERBOARD,ETC. (64) 3,790,860 30.35
26 Latvia 10,736,547 0.08 FURNITURE,BEDDING,ETC. (82) 1,605,314 14.95
27 Luxembourg 360,082 0.00 CORK, WOOD MANUFACTURES (63) 111,615 31.00
Total 13,376,470,386 100

Annexes | 297
Annex 4.8: Exports of EU Members to Indonesia in 2007 15

Value Share Value Share
Rank Reporter Most Exported Products to Indonesia
(in USD) (%) (in USD) (%)
1 Germany 2,181,112,000 29.19 ELEC MCH APPAR,PARTS,NES (77) 278,467,000 13.27
2 Netherlands 970,250,954 12.98 OTHR.TRANSPORT EQUIPMENT (79) 390,373,780 40.82
3 Italy 758,979,928 10.16 SPECIAL.INDUST.MACHINERY (72) 181,499,168 23.91
4 France 751,672,774 10.06 OTHR.TRANSPORT EQUIPMENT (79) 135,599,333 18.04
5 Sweden 636,025,550 8.51 TELECOMM.SOUND EQUIP ETC (76) 342,893,152 53.91
6 United Kingdom 577,883,630 7.73 PULP AND WASTE PAPER (25) 48,098,569 8.32
7 Belgium 362,997,005 4.86 ORGANIC CHEMICALS (51) 37,943,450 10.45
8 Spain 273,864,575 3.67 OTHR.TRANSPORT EQUIPMENT (79) 44,419,587 16.22
9 Austria 260,911,699 3.49 ELEC MCH APPAR,PARTS,NES (77) 58,104,854 23.31
10 Finland 224,947,771 3.01 POWER GENERATNG.MACHINES (71) 87,105,045 39.16
11 Denmark 104,278,265 1.40 OTHR.TRANSPORT EQUIPMENT (79) 15,391,523 14.76
12 Ireland 100,055,607 1.34 ESSENTL.OILS,PERFUME,ETC (55) 24,290,466 24.28
13 Poland 90,318,852 1.21 MISC MANUFCTRD GOODS NES (89) 31,301,397 34.66
14 Czech Rep. 70,392,517 0.94 DAIRY PRODUCTS,BIRD EGGS (02) 13,546,834 19.24
15 Greece 38,242,872 0.51 TOBACCO,TOBACCO MANUFACT (12) 22,189,687 58.02
16 Hungary 21,359,000 0.29 ELEC MCH APPAR,PARTS,NES (77) 9,952,000 50.68
17 Bulgaria 13,709,501 0.18 COFFEE,TEA,COCOA,SPICES (07) 4,687,163 34.19
18 Romania 8,381,395 0.11 SPECIAL.INDUST.MACHINERY (72) 4,878,065 58.20
19 Slovenia 6,689,961 0.09 METALS MANUFACTURES,NES (69) 1,571,477 23.49
20 Slovakia 5,077,762 0.07 ROAD VEHICLES (78) 1,402,485 27.62
21 Estonia 5,030,183 0.07 TELECOMM.SOUND EQUIP ETC (76) 1,578,354 31.38
22 Portugal 4,853,118 0.06 PULP AND WASTE PAPER (25) 1,249,463 25.75
23 Luxembourg 3,156,699 0.04 GENERAL INDUSTL.MACH.NES (74) 1,729,534 54.79
24 Latvia 1,056,025 0.01 OFFICE MACHINES,ADP MACH (75) 336,682 31.88
25 Lithuania 408,586 0.01 RUBBER MANUFACTURES, NES (62) 238,967 58.49
26 Cyprus 278,881 0.00 MEDICINAL,PHARM.PRODUCTS (54) 164,750 59.08
27 Malta 219,937 0.00 GENERAL INDUSTL.MACH.NES (74) 160,502 72.98
Total 7,472,155,047 100

Annex 4.9: Top Ten Suppliers of Fuels to EU in 2007 16

Product Rank Trade Partner Trade Value (USD) Share (%)
Coal The World 23.600.416.076 100

1 Russian Federation 3.991.168.030 16,91
2 Australia 3.767.752.084 15,96
3 South Africa 3.687.101.379 15,62
4 Colombia 2.391.302.518 10,13
5 USA 2.037.478.746 8,63
6 Poland 1.532.496.496 6,49
7 Indonesia 1.285.907.346 5,45
8 Canada 883.011.771 3,74
9 China 833.777.836 3,53
10 Czech Rep. 413.261.763 1,75
Petroleum The World 435.880.453.506 100
1 Russian Federation 82.766.897.582 18,99
2 Norway 48.369.737.549 11,10
3 Netherlands 35.142.682.587 8,06
4 Libya 33.398.984.246 7,66
5 United Kingdom 32.153.735.853 7,38
6 Saudi Arabia 19.470.553.852 4,47
7 Belgium 14.469.321.334 3,32
8 Iran 14.131.076.947 3,24
9 Kazakhstan 13.205.342.851 3,03
10 Germany 13.084.705.107 3,00
Natural gas The World 85.854.204.649 100
1 Special Categories 31.910.035.443 37,17
2 Belgium 10.010.939.287 11,66
3 Norway 9.516.785.511 11,08
4 Algeria 8.629.941.874 10,05
5 Netherlands 6.477.292.639 7,54
6 United Kingdom 3.507.377.925 4,09
7 Germany 3.447.749.609 4,02
8 Nigeria 3.109.715.094 3,62
9 Egypt 2.029.506.529 2,36
10 Qatar 1.868.776.196 2,18

Annexes | 299
Annex 4.10: Trends of Indonesian Most Exported Products to EU (1999-2007) 17
OFFICE M ACHINES,ADP M ACH (75)
2007 COFFEE,TEA,COCOA,SPICES (7)
CORK, WOOD MANUFACTURES (63)
COAL, COKE, BRIQUETTES (32)
2006 TELECOMM .SOUND EQUIP ETC (76)
TEXTILE YARN,FABRIC,ETC. (65)
CRUDE RUBBER (23)

2005
FURNITURE,BEDDING,ETC. (82)
FOOTWEAR (85)
CLOTHING AND ACCESSORIES (84)

2004
M ETALLIFEROUS ORE,SCRAP (28)
FIXED VEG. FATS AND OILS (42)

Year
2003
2002
2001
2000
1999
0 500 1,000 1,500 2,000

Export Value in USD Million

Annex 4.11: Trends of EU Most Exported Products to Indonesia (1999-2007) 18
SCIENTIFIC EQUIPM ENT NES (SITC 87)
2007 ROAD VEHICLES (SITC 78)
ORGANIC CHEM ICALS (SITC 51)
M EDICINAL,PHARM .PRODUCTS (SITC 54)

2006
CHEM ICAL M ATERIALS NES (SITC 59)
PULP AND WASTE PAPER (SITC 25)
2005 IRON AND STEEL (SITC 67)
POWER GENERATNG.M ACHINES (SITC 71)
GENERAL INDUSTL.M ACH.NES (SITC 74)
2004 ELEC M CH APPAR,PARTS,NES (SITC 77)
SPECIAL.INDUST.M ACHINERY (SITC 72)
TELECOM M .SOUND EQUIP ETC (SITC 76)

Year
2003
2002
2001
2000
1999
0 100 200 300 400 500 600 700 800

Export Value in USD Million

Annexes | 301
Annex 5.1: RCA Index of Indonesian Exports to the World (1999-2008) 19

SITC Products 1999-2006 Rank 1999-2007 Rank 1999-2008 Rank
42* FIXED VEG OILS/FATS 14.33 1 15.21 1 15.60 1
23 CRUDE/SYNTHET/REC RUBBER 12.75 2 13.38 2 13.92 2
32* COAL/COKE/BRIQUETTES 8.57 3 9.01 3 8.87 3
63* CORK/WOOD MANUFACTURES 8.33 4 7.92 4 7.49 4
34 GAS NATURAL/MANUFACTURED 7.28 5 7.07 5 6.73 5
43 ANIMAL/VEG OILS PROCES'D 4.84 6 5.71 6 5.92 6
28 METAL ORES/METAL SCRAP 4.16 7 4.15 7 3.94 8
07 COFFEE/TEA/COCOA/SPICES 4.12 8 4.12 8 4.08 7
25 PULP AND WASTE PAPER 3.61 9 3.58 9 3.49 9
03 FISH/SHELLFISH/ETC. 3.21 10 3.17 10 3.24 10
85 FOOTWEAR 2.99 11 2.92 11 2.93 11
82 FURNITURE/FURNISHINGS 2.38 12 2.31 12 2.25 12
84 APPAREL/CLOTHING/ACCESS 2.21 13 2.18 14 2.20 13
64 PAPER/PAPERBOARD/ARTICLE 2.18 14 2.20 13 2.17 14
65 TEXTILE YARN/FABRIC/ART. 2.09 15 2.06 15 2.06 15
33 PETROLEUM AND PRODUCTS 1.47 16 1.43 16 1.40 16
97 GOLD NON-MONETARY EX ORE 1.35 17 1.33 17 1.27 18
12 TOBACCO/MANUFACTURES 1.28 18 1.33 18 1.36 17
24 CORK AND WOOD 1.20 19 1.19 19 1.15 20
68 NON-FERROUS METALS 1.14 20 1.17 20 1.19 19
62 RUBBER MANUFACTURES NES 1.08 21 1.11 21 1.14 21
76 TELECOMMS ETC EQUIPMENT 0.98 22 0.93 23 0.93 24
09 MISC FOOD PRODUCTS 0.93 23 0.98 22 1.03 22
56 MANUFACTURED FERTILIZERS 0.90 24 0.88 25 0.81 26
26 TEXTILE FIBRES 0.87 25 0.93 24 0.98 23
51 ORGANIC CHEMICALS 0.84 26 0.86 26 0.84 25
55 PERFUME/COSMETIC/CLEANSR 0.74 27 0.74 27 0.74 27
83 TRAVEL GOODS/HANDBAG/ETC 0.73 28 0.68 28 0.64 29
75 OFFICE/DAT PROC MACHINES 0.68 29 0.65 31 0.64 30
27 CRUDE FERTILIZER/MINERAL 0.68 30 0.66 29 0.64 31
52 INORGANIC CHEMICALS 0.66 31 0.65 30 0.66 28
58 PLASTICS NON-PRIMRY FORM 0.63 32 0.63 32 0.62 32
66 NON-METAL MINERAL MANUF. 0.62 33 0.60 33 0.59 35
57 PLASTICS IN PRIMARY FORM 0.59 34 0.57 34 0.56 36
89 MISC MANUFACTURES NES 0.55 35 0.54 37 0.53 37
29 CRUDE ANIM/VEG MATER NES 0.54 36 0.56 36 0.59 34
08 ANIMAL FEED EX UNML CER. 0.53 37 0.57 35 0.60 33
77 ELECTRICAL EQUIPMENT 0.48 38 0.48 39 0.49 39
05 VEGETABLES AND FRUIT 0.46 39 0.45 40 0.46 40
06 SUGAR/SUGAR PREP/HONEY 0.45 40 0.44 41 0.44 41
61 LEATHER MANUFACTURES 0.45 41 0.48 38 0.50 38
69 METAL MANUFACTURES NES 0.40 42 0.39 42 0.39 42
67 IRON AND STEEL 0.38 43 0.39 43 0.39 43
53 DYEING/TANNING/COLOR MAT 0.36 44 0.38 44 0.38 44
81 BUILDING FIXTURES ETC 0.35 45 0.33 46 0.32 47
00 LIVE ANIMALS EXCEPT FISH 0.34 46 0.34 45 0.33 46
59 CHEM MATERIAL/PRODS NES 0.32 47 0.33 47 0.35 45
71 POWER GENERATING EQUIPMT 0.30 48 0.30 48 0.29 48
88 PHOTOGRAPHIC EQU/CLOCKS 0.27 49 0.27 49 0.26 49
02 DAIRY PRODUCTS & EGGS 0.23 50 0.22 51 0.22 51
74 INDUSTRIAL EQUIPMENT NES 0.20 51 0.22 50 0.23 50

04 CEREALS/CEREAL PREPARATN 0.18 52 0.18 52 0.17 52
22 OIL SEEDS/OIL FRUITS 0.14 53 0.14 54 0.13 56
72# INDUSTRY SPECIAL MACHINE 0.14 54 0.15 53 0.15 53
93 SPECL TRANSACT NOT CLASS 0.13 55 0.11 57 0.10 57
78 ROAD VEHICLES 0.12 56 0.13 56 0.15 55
79 RAILWAY/TRAMWAY EQUIPMNT 0.11 57 0.14 55 0.15 54
41 ANIMAL OIL/FAT 0.08 58 0.08 58 0.08 58
54# PHARMACEUTICAL PRODUCTS 0.06 59 0.06 60 0.06 61
87# SCIENTIFIC/ETC INSTRUMNT 0.06 60 0.06 61 0.06 60
73 METALWORKING MACHINERY 0.05 61 0.05 62 0.05 62
01 MEAT & PREPARATIONS 0.04 62 0.04 63 0.04 64
96 COIN NONGOLD NON CURRENT 0.04 63 0.07 59 0.07 59
11 BEVERAGES 0.04 64 0.04 64 0.04 63
21 HIDE/SKIN/FUR, RAW 0.03 65 0.03 65 0.03 65
Note: Products with SITC number 34, 35, 39, 49, 60, 70, 80, 91, 93, 94, 96 and 99 are excluded due to
data shortage, UN special code and confidentiality. Products marked with (*) are cases selected for
Indonesian trade flow to EU. Products marked with (#) are cases selected for EU trade flow to
Indonesia.
Annexes | 303
Annex 5.2: RCA Index of Indonesian Exports to EU (1999-2008) 20

32# COAL/COKE/BRIQUETTES 134.95 1 132.84 1 132.10 1
42# FIXED VEG OILS/FATS 39.87 2 44.32 2 50.02 2
63# CORK/WOOD MANUFACTURES 12.55 6 12.12 6 11.63 6
85 FOOTWEAR 10.85 7 11.11 7 11.37 7
24 CORK AND WOOD 2.32 15 2.49 15 2.68 15
26 TEXTILE FIBRES 0.75 24 0.95 22 1.14 21
67 IRON AND STEEL 0.44 29 0.45 29 0.43 29
78 ROAD VEHICLES 0.12 48 0.12 48 0.12 49

41 ANIMAL OIL/FAT 0.07 52 0.06 55 0.06 55
21 HIDE/SKIN/FUR, RAW 0.05 57 0.04 57 0.04 58
72* INDUSTRY SPECIAL MACHINE 0.04 58 0.04 58 0.04 57
87* SCIENTIFIC/ETC INSTRUMNT 0.02 61 0.03 60 0.04 59
54* PHARMACEUTICAL PRODUCTS 0.02 62 0.02 62 0.02 62
Note: Products with SITC number 11, 34, 35, 39, 49, 60, 70, 80, 91, 93, 94, 96 and 99 are excluded due to
data shortage, UN special code and confidentiality. Products marked with (#) are cases selected for
EU export flows to EU. Products marked with (*) are cases selected for Indonesian trade flow to
Indonesia.
Annexes | 305
Annex 5.3: RCA Index of EU Exports to the World (1999-2008) 21


11 BEVERAGES 2.33 2 2.34 2 2.29 2
21 HIDE/SKIN/FUR, RAW 1.16 20 1.18 19 1.17 19
78 ROAD VEHICLES 0.99 27 1.00 26 1.02 27
67 IRON AND STEEL 0.90 31 0.90 31 0.89 31
41 ANIMAL OIL/FAT 0.85 35 0.86 34 0.86 33
85 FOOTWEAR 0.80 40 0.79 40 0.81 40
24 CORK AND WOOD 0.64 47 0.65 47 0.64 46
26 TEXTILE FIBRES 0.58 50 0.59 49 0.59 50

Note: SITC Number 34, 35, 39, 49, 60, 70, 80, 91, 93, 94, 96 and 99 are excluded due to data shortage,
UN special code and confidentiality; Products marked with (*) are selected products for EU case;
Products marked with (#) are selected products for Indonesian case.
Annexes | 307
Annex 5.4: RCA Index of EU Exports to Indonesia (1999-2008) 22


41 ANIMAL OIL/FAT 10.26 9 10.60 9 9.98 10
21 HIDE/SKIN/FUR, RAW 9.63 11 14.32 7 59.91 1
67 IRON AND STEEL 3.41 19 3.34 19 3.22 19
78 ROAD VEHICLES 2.88 21 2.69 23 2.61 23
11 BEVERAGES 2.02 30 2.08 30 2.10 29
26 TEXTILE FIBRES 0.59 41 0.60 41 0.59 41
24 CORK AND WOOD 0.49 45 0.51 43 0.53 43

85 FOOTWEAR 0.12 53 0.12 53 0.12 53
97 GOLD NON-MONETARY EX ORE 0 63 0 63 0 63
Note: SITC Number 34, 35, 39, 49, 60, 70, 80, 91, 93, 94, 96 and 99 are excluded due to data shortage, UN
special code and confidentiality; Products marked with (*) are selected products for EU case;
Products marked with (#) are selected products for Indonesian case.
Annexes | 309
Annex 5.5: Trade Indicators Used in Selection of Cases for Indonesia157 23

Final Final
RCA Rank TR Rank MG IMS
Points Rank
SITC Products
(R1+R2)/
99-06 (R1) 2006 (R2) (FR) 2006 2006
2
0 LIVE ANIMALS EXCEPT FISH 0.03 59 527320 63 61 61 -0.01 8.28
1 MEAT & PREPARATIONS 0.3 39 13131532 47 43 42 -0.03 6.57
2 DAIRY PRODUCTS & EGGS 0.07 51 12544 66 58.5 59 0 2.76
3# FISH/SHELLFISH/ETC. 9.23 9 232577426 17 13 12 -0.4 14.93
4 CEREALS/CEREAL 0.09 50 10668326 51 50.5 51 0.01 5.93
5 VEGETABLES AND FRUIT 1.19 20 85478928 27 23.5 25 -0.08 3.69
6 SUGAR/SUGAR PREP/HONEY 0.27 40 4428619 56 48 49 0.04 7.07
7# COFFEE/TEA/COCOA/SPICES 10.1 8 314942225 14 11 9 -0.53 9.12
8 ANIMAL FEED EX UNML CER. 3.28 14 86943787 26 20 19 0.24 1.03
9 MISC FOOD PRODUCTS 0.31 38 13813789 46 42 41 0.04 20.05
11 BEVERAGES 0 65 968089 61 63 63 0 8.29
12 TOBACCO/MANUFACTURES 2.04 16 72640481 29 22.5 22 -0.02 -0.17
21 HIDE/SKIN/FUR, RAW 0.05 57 6448039 54 55.5 56 -0.03 12.95
22 OIL SEEDS/OIL FRUITS 0.57 27 1420581 59 43 42 0.01 -2.51
23# CRUDE/SYNTHET/RUBBER 36.66 3 561651315 8 5.5 4 2.9 33.27
24 CORK AND WOOD 2.32 15 276541800 15 15 14 0.38 5.43
25 PULP AND WASTE PAPER 7.59 11 111201893 23 17 16 -0.45 7.71
26 TEXTILE FIBRES 0.75 24 12068139 49 36.5 35 0.24 1.54
27 CRUDE FERTILIZER/MINERAL 0.1 49 1275007 60 54.5 55 0 7.62
28# METAL ORES/METAL SCRAP 15.71 5 842049124 4 4.5 3 -0.41 34.92
29 CRUDE ANIM/VEG MATER NES 0.83 23 30886297 39 31 28 -0.23 3.57
32# COAL/COKE/BRIQUETTES 135 1 1047439244 2 1.5 1 1.86 4.95
33 PETROLEUM AND PRODUCTS 0.22 42 31259866 38 40 38 0.01 22.31
34 GAS NATURAL/MANUFATRED 0.33 35 9531 67 51 53 0 37.42
41 ANIMAL OIL/FAT 0.07 52 0 69 60.5 60 0 13.62
42# FIXED VEG OILS/FATS 39.87 2 966710807 3 2.5 2 -3.28 27.42
43 ANIMAL/VEG OILS PROCES'D 16.82 4 93507222 25 14.5 13 3.39 -4.22
51 ORGANIC CHEMICALS 0.51 28 176354727 18 23 24 0.03 9.65
52 INORGANIC CHEMICALS 0.05 56 2516475 57 56.5 57 0 23.36
53 DYEING/TANNING/COLOR 0.32 36 11698122 50 43 42 0.14 7.43
54 PHARMACEUTICAL PRODCTS 0.02 62 7930025 53 57.5 58 -0.01 13.51
55 PERFUME/COSMETIC/CLEANS 0.21 43 35420732 36 39.5 37 -0.05 11.17
56 MANUFACTURED FERTILIZER 0.02 60 202827 65 62.5 62 0 5.6
57 PLASTICS IN PRIMARY FORM 0.36 30 29588153 41 35.5 34 0.01 14.92
58 PLASTICS NON-PRIMRY FORM 0.34 32 29242158 42 37 36 0.01 14.76
59 CHEM MATERIAL/PRODS NES 0.13 47 46159013 33 40 38 0.12 14.37
61 LEATHER MANUFACTURES 0.75 25 22509937 43 34 31 -0.56 19.04
62 RUBBER MANUFACTURES NES 1.86 18 152826083 19 18.5 17 -2.56 154.2
63# CORK/WOOD MANUFACTRES 12.55 6 464437470 10 8 7 1.35 -15.3
64 PAPER/PAPERBOARD/ARTICLE 0.99 21 114213826 21 21 20 -0.75 43.84
65 TEXTILE YARN/FABRIC/ART. 3.31 13 421070214 11 12 11 0.02 9.9
66 NON-METAL MINERAL MANU 0.27 41 95504552 24 32.5 30 0.02 1.65
67 IRON AND STEEL 0.44 29 240418593 16 22.5 22 0.12 34.49
68 NON-FERROUS METALS 0.36 31 131052554 20 25.5 26 -0.19 66.48
69 METAL MANUFACTURES NES 0.34 34 57510099 30 32 29 -0.07 20.11
71 POWER GENERATE EQUIPMNT 0.06 54 44617078 34 44 46 -0.08 -0.81
157
The products with red colors are selected cases for Indonesian Export to EU.
72 INDUSTRY SPECIAL MACHINE 0.04 58 33122521 37 47.5 48 0.08 10.17

73 METALWORKINGMACHINERY 0.01 63 329881 64 63.5 64 0 11.49
74 INDUSTRIAL EQUIPMENT NES 0.07 53 73711651 28 40.5 40 0.03 12.8
75 OFFICE/DAT PROC MACHINES 1.33 19 370342509 13 16 15 -0.24 12.85
76# TELECOMMS ETC EQUIPMENT 1.93 17 816482732 5 11 9 -0.07 6.85
77 ELECTRICAL EQUIPMENT 0.34 33 485095008 9 21 20 0.16 8.56
78 ROAD VEHICLES 0.12 48 113355935 22 35 33 -0.02 15.34
79 RAIL/TRAMWAY EQUIPMNT 0.05 55 53900580 31 43 42 0.1 -24.4
81 BUILDING FIXTURES ETC 0.18 44 14339010 45 44.5 47 -0.01 12.95
82# FURNITURE/FURNISHINGS 6.71 12 804156634 6 9 8 -1.26 12.95
83 TRAVEL GOODS/HANDBAG/etc 0.95 22 35909984 35 28.5 27 -0.02 13.36
84# APPAREL/CLOTHING/ACCESS 8.88 10 1456574240 1 5.5 4 0.11 11.83
85# FOOTWEAR 10.85 7 597895754 7 7 6 0.22 10.97
87 SCIENTIFIC/ETC INSTRUMNT 0.02 61 30291685 40 50.5 51 -0.01 11.25
88 PHOTOGRAPHIC EQU/CLOCKS 0.31 37 46222493 32 34.5 32 -0.08 7.76
89 MISC MANUFACTURES NES 0.72 26 371265895 12 19 18 0.04 11.57
93 SPECL TRANSACT NOT CLASS 0.15 46 9655710 52 49 50 0.06 -17.4
96 COIN NONGOLD NON CURENT 0.01 64 3577 68 66 65 -0.01 -24.6
97 GOLD NON-MONETRY EX ORE 0.17 45 2188394 58 51.5 54 0.05 9.79
Note: SITC Number 35, 39, 49, 60, 70, 80 and 94 are excluded due to data shortage, UN special code and
confidentiality; TR= Trade Value, MG=Market Growth, IMS=Increase of Market Growth; Products
marked with (#) are top ten products under reviewed.
Annexes | 311
Annex 5.6: Trade Indicators Used in Selection of Cases for EU158 24

Final Final
RCA Rank TR Rank MG IMS
SITC Products Points Rank
99-06 (R1) 2006 (R2) (R1+R2)/2 (FR) 2006 2006
00 LIVE ANIMALS EXCEPT FISH 2.84 22 4986709 51 36.50 39 14.52 -1.12
01 MEAT & PREPARATIONS 4.13 17 2395933 54 35.50 38 9.33 0.54
02* DAIRY PRODUCTS & EGGS 18.11 3 78722339 25 14.00 9 4.97 -4.80
03 FISH/SHELLFISH/ETC. 0.02 59 1985571 55 57.00 59 20.58 1.00
04 CEREALS/CEREAL PREPARATN 4.29 16 22235022 36 26.00 24 60.53 -0.91
05 VEGETABLES AND FRUIT 0.3 48 11164748 47 47.50 52 27.16 0.11
06 SUGAR/SUGAR PREP/HONEY 7.2 12 95736315 22 17.00 15 -23.77 8.79
07 COFFEE/TEA/COCOA/SPICES 0.12 52 12861127 44 48.00 54 19.05 -1.43
08 ANIMAL FEED EX UNML CER. 2.33 25 18125287 41 33.00 30 7.56 -0.06
09 MISC FOOD PRODUCTS 3.33 20 56148941 27 23.50 22 19.35 -0.22
11 BEVERAGES 2.02 30 4097077 53 41.50 45 26.15 0.18
12 TOBACCO/MANUFACTURES 1.03 37 18675802 40 38.50 40 1.82 -1.25
21 HIDE/SKIN/FUR, RAW 9.63 11 726779 59 35.00 37 -22.30 7.16
22 OIL SEEDS/OIL FRUITS 0.02 58 224759 60 59.00 60 -3.17 0.04
23 CRUDE/SYNTHET/REC RUBBER 0.11 54 22433409 35 44.50 47 15.04 0.57
24 CORK AND WOOD 0.49 45 33772247 32 38.50 40 18.18 3.00
25 PULP AND WASTE PAPER 2.8 23 199072752 7 15.00 11 28.65 -1.91
26 TEXTILE FIBRES 0.59 41 5822015 50 45.50 49 8.05 0.31
27 CRUDE FERTILIZER/MINERAL 4.89 14 41222954 30 22.00 20 1.33 -3.95
28 METAL ORES/METAL SCRAP 0.41 47 105495734 19 33.00 30 9.49 13.38
29 CRUDE ANIM/VEG MATER NES 0.84 38 6768437 49 43.50 46 8.60 -5.11
32 COAL/COKE/BRIQUETTES 0 61 121612 61 61.00 61 -25.96 0.57
33 PETROLEUM AND PRODUCTS 0.05 56 18850646 39 47.50 52 31.74 -0.06
GAS
34 NATURAL/MANUFACTURED
0 62 201 62 62.00 62 750.00 0.00
41* ANIMAL OIL/FAT 10.26 9 1166203 58 33.50 32 80.09 -3.93
42 FIXED VEG OILS/FATS 0.01 60 4129029 52 56.00 58 -6.21 2.03
-
43 ANIMAL/VEG OILS PROCES'D 0.17 49 1400427 56 52.50 56 70.26
15.38
51 ORGANIC CHEMICALS 2.11 29 173731435 9 19.00 17 4.19 -1.74
52 INORGANIC CHEMICALS 2.16 27 33671362 33 30.00 29 3.35 -0.75
53* DYEING/TANNING/COLOR MAT 11.08 8 86092436 24 16.00 13 3.70 -2.75
54* PHARMACEUTICAL PRODUCTS 15.59 5 143797090 12 8.50 4 24.23 0.41
55 PERFUME/COSMETIC/CLEANSR 3.71 18 153556421 11 14.50 10 9.23 -1.25
56 MANUFACTURED FERTILIZERS 2.52 24 11756390 45 34.50 34 38.71 -1.65
57 PLASTICS IN PRIMARY FORM 2.19 26 106388194 18 22.00 20 4.84 -1.41
58 PLASTICS NON-PRIMRY FORM 1.19 36 39572076 31 33.50 32 10.94 1.10
59* CHEM MATERIAL/PRODS NES 9.88 10 175413296 8 9.00 5 6.94 -0.52
61 LEATHER MANUFACTURES 5.76 13 50288551 28 20.50 19 30.49 -0.72
62 RUBBER MANUFACTURES NES 0.54 42 20401205 38 40.00 43 28.08 -1.13
63 CORK/WOOD MANUFACTURES 0.05 55 25497559 34 44.50 47 69.39 2.62
64 PAPER/PAPERBOARD/ARTICLE 0.7 40 119675673 14 27.00 25 5.78 -3.56
65 TEXTILE YARN/FABRIC/ART. 0.49 44 128769979 13 28.50 28 18.75 -0.04
NON-METAL MINERAL
66 MANUF.
1.46 33 97747515 21 27.00 25 -1.87 -8.25
67 IRON AND STEEL 3.41 19 328519622 5 12.00 8 -4.39 1.56
68 NON-FERROUS METALS 0.51 43 71567145 26 34.50 34 44.37 -1.06
158
The products with red colors are selected cases for Indonesian Export to EU.
69 METAL MANUFACTURES NES 2.12 28 99300927 20 24.00 23 3.98 0.30

POWER GENERATING
71 EQUIPMT
4.88 15 267947685 6 10.50 7 -14.17 1.29
72* INDUSTRY SPECIAL MACHINE 30.16 1 648602848 2 1.50 1 -6.56 1.48
73* METALWORKING MACHINERY 28.57 2 44070113 29 15.50 12 -19.73 2.17
74* INDUSTRIAL EQUIPMENT NES 11.47 7 569738408 3 5.00 2 6.44 0.83
75 OFFICE/DAT PROC MACHINES 0.47 46 88164876 23 34.50 34 2.44 -0.62
76 TELECOMMS ETC EQUIPMENT 1.94 31 669271912 1 16.00 13 20.34 0.87
77 ELECTRICAL EQUIPMENT 1.61 32 399402373 4 18.00 16 -2.15 0.77
78 ROAD VEHICLES 2.88 21 114793053 17 19.00 17 -30.66 -1.94
RAILWAY/TRAMWAY
79* EQUIPMNT
15.04 6 157639671 10 8.00 3 0.78 7.37
81 BUILDING FIXTURES ETC 1.38 34 7370148 48 41.00 44 40.02 -1.37
82 FURNITURE/FURNISHINGS 0.13 51 13981891 42 46.50 50 -11.62 -0.51
TRAVEL
83 GOODS/HANDBAG/ETC
0.13 50 1205006 57 53.50 57 -29.83 1.13
84 APPAREL/CLOTHING/ACCESS 0.04 57 21568263 37 47.00 51 17.41 1.03
85 FOOTWEAR 0.12 53 11653633 46 49.50 55 24.16 -2.89
87* SCIENTIFIC/ETC INSTRUMNT 17.62 4 115944035 16 10.00 6 24.97 -0.55
88 PHOTOGRAPHIC EQU/CLOCKS 1.36 35 12897592 43 39.00 42 8.21 -0.82
89 MISC MANUFACTURES NES 0.74 39 119025493 15 27.00 25 13.19 1.47
Note: SITC Number 34, 35, 39, 49, 60, 70, 80, 91, 93, 94, 96 and 99 are excluded due to data shortage,
UN special code and confidentiality; TR= Trade Value, MG=Market Growth, IMS=Increase of
Market Growth; Products marked with red color are top ten products under reviewed.
Annexes | 313
Annex 5.7: List of Sub-Products under Selected Cases for Indonesia 25

Code Name of Product Code Name of Product
421 FIXED VEG OIL/FAT, SOFT 421 ... FIXED VEG OIL/FAT, SOFT
4211 SOYA BEAN OIL ... 42171 CRUDE RAPE/COLZA/MUS OIL
42111 CRUDE SOYA BEAN OIL 42179 REF RAPE/COLZA/MUST OIL
42119 REFINED SOYA BEAN OIL 4218 SESAME (SESASUM) OIL
4212 COTTON SEED OIL 422 FIXED VEG OILS NOT SOFT
42121 CRUDE COTTON SEED OIL 4221 LINSEED OIL
42129 REFINED COTTON SEED OIL 42211 CRUDE LINSEED OIL
4213 GROUNDNUT (PEANUT) OIL 42219 REFINED LINSEED OIL
42131 CRUDE PEANUT OIL 4222 PALM OIL
42139 REFINED PEANUT OIL 42221 CRUDE PALM OIL
4214 OLIVE OIL 42229 REFINED PALM OIL
42141 VIRGIN OLIVE OIL 4223 COCONUT (COPRA) OIL
42142 OTHER OLIVE OIL 42231 CRUDE COCONUT OIL
42149 OLIVE OIL BLENDS 42239 REFINED COCONUT OIL
4215 SAFFLOWER OIL 4224 PALM KERNEL(BABASSU) OIL
42151 CRUDE SAFFLOWER OIL 42241 CRUDE PALM KERNEL OIL
42159 REFINED SAFFLOWER OIL 42249 REFINED PALM KERNEL OIL
4216 MAIZE (CORN) OIL 4225 CASTOR OIL
42161 CRUDE MAIZE OIL 4229 FIX VEG FAT NES NOT SOFT
42169 REFINED MAIZE OIL 42291 TUNG OIL
4217 RAPE/COLZA/MUSTARD OIL 42299 FIXED VEGETABLE OILS NES

321 COAL NON-AGGLOMERATED 322 ... BRIQUETTES/LIGNITE/PEAT
3211 ANTHRACITE,NOT AGGLOMRTD 3222 LIGNITE
3212 OTHER COAL 32221 LIGNITE,NOT AGGLOMERATED
32121 BITUM.COAL NOT AGGLOMRTD 32222 LIGNITE,AGGLOMERATED
32122 OTH COAL,NOT AGGLOMERAT. 3223 PEAT
322 BRIQUETTES/LIGNITE/PEAT 325 COKE/SEMI-COKE/RETORT C
3221 BRIQUETTES ETC (COAL) 3250 COKE/SEMI-COKE/RETORT C

633 CORK MANUFACTURES 634 ... VENEER/PLYWOOD/ETC
6331 ARTICLES OF NATURAL CORK 6343 PLYWOOD(PLIES<6MM THICK)
63311 CORKS AND STOPPERS 63431 PLYWOOD-HARDWOOD FACED
63319 CORK MANUFACTURES NES 63439 PLYWOOD-STANDARD
6332 AGGLOMERATED CORK 6344 PLYWOOD/LAMINATES NES
63321 AGGLOMERATED CORK SHAPES 63441 PLYWOOD/LAM HARD FACED
63329 AGGLOMERATED CORK NES 63449 PLYWOOD/LAMINATES NES
634 VENEER/PLYWOOD/ETC 6345 FIBREBOARD
6341 VENEER SHETS ETC <6MM 63451 FIBREBOARD DENS>0.8G/CM3
63411 VENEER SHEETS CONIFEROUS 63452 FIBREBOARD DENS>0.5G/CM3
63412 VENEER SHEETS NON-CONIF. 63453 FIBREBOARD DENS>.35G/CM3
6342 DENSIFIED/RECONST WOOD 63459 FIBREBOARD NES
63421 DENSIF WOOD BLOCKS ETC. 6349 WOOD SIMPLY SHAPED NES
63422 PARTICLE BOARD (WOOD) 63491 HOOPWOOD,SPLIT POLES ETC
63423 PARTICLE BOARD(EXC WOOD) 63493 WOOD WOOL/WOOD FLOUR
Source: Compiled from UNSD Comtrade Database (2008)

Annex 5.8: List of Sub-Products under Selected Cases for EU 26

540 UN SPECIAL CODE 541 ... PHARMACEUT EXC MEDICAMNT
541 PHARMACEUT EXC MEDICAMNT 5416 GLYCOSIDES/GLANDS/VACCIN
5411 VITAMINS/PROVITAMINS 54161 GLYCOSIDES AND DERIVATIV
54110 UN SPECIAL CODE 54162 GLANDS ETC AND EXTRACTS
54111 PROVITAMINS, UNMIXED 54163 ANTISERA/BLD FRA/VACCINE
54112 VITAMIN A/DERIVATIVES 54164 BLOOD/TOXIN/CULTURES ETC
54113 VITAMIN B/DERIVATIVES 5419 PHARM GOODS,NON-MEDICAM.
54114 VITAMIN C/DERIVATIVES 54191 BANDAGES/PLASTERS/GAUZE
54115 VITAMIN E/DERIVATIVES 54192 BLOOD GROUPING REAGENTS
54116 VITAMINS UNMIXED NES 54193 X-RAY OPACIFIERS
54117 PROVITAMIN/VITAMIN MIXT. 54199 OTH PHARMACEUTICAL GOODS
5413 ANTIBIOTICS,NON-MEDICAL 542 MEDICAMENTS INCLUDE VET
54131 PENICILLINS AND DERIVS 5421 INSULIN MEDICAMENTS BULK
54132 STREPTOMYCINS AND DERIVS 54211 PENICILLIN NON-RETAIL
54133 TETRACYCLINES AND DERIVS 54212 ANTIBIOTIC NES NONRETAIL
54139 OTHER ANTIBIOTICS (BULK) 54213 PENICILLIN/STREPT RETAIL
5414 VEG ALKALOIDS/ESTER/SALT 54219 ANTIBIOTICS NES RETAIL
54140 UN SPECIAL CODE 5422 HORMONES
54141 OPIUM ALKAOIDS/DERIVS 54221 INSULIN FORMULATED, BULK
54142 CINCHONA ALKALOIDS/DERIV 54222 OTHER HORMONE NON-RETAIL
54143 CAFFEINE AND ITS SALTS 54223 INSULIN RETAIL PACKS
54144 EPHEDRINES/SALTS 54224 HORMONE-ACH, RETAIL PACK
54145 THEOPHYLLINE ETC/DERIVS 54229 HORMONES NES RETAIL PACK
54146 RYE ERGOT ALKALOIDS/DRIV 5423 ALKALOIDS/DERIVATIVES
54147 NICOTINE AND ITS SALTS 54231 ALKALOIDS, NON-RETAIL
54149 VEG ALKALOIDS NES/SALTS 54232 ALKALOIDS, RETAIL PACKS
5415 HORMONES/STEROIDS/DERIVS 5429 MEDICAMENTS N.E.S.
54151 INSULIN AND ITS SALTS 54291 MEDICAMENTS NES NON-RET.
54152 PITUITARY/ETC HORMONE/DE 54292 VITAMIN/PROVITAM. RETAIL
54153 CORTISONE/DERIVATIVES 54293 MEDICAM NES RETAIL PACKS
54159 OTHR HORMONES/DERIVS/ETC

871 OPTICAL INSTRUMENTS NES 8741 ... NAVIGATION/SURVEY/ET APP
8711 BINOCULARS/TELESCOPES 87412 NAVIGATION INST PART/ACC
87111 BINOCULARS 87413 SURVEY INSTRUMENTS
87115 OPTICAL TELESCOPES ETC 87414 SURVEY INSTR PARTS/ACC.
87119 BINOC/TELESCOPE PART/ACC 8742 DRAFTING/LEN MEAS INSTR
8713 ELECTRON/ETC DIFFRAC EQU 87422 DRAFTING/DRAWING EQUIPMT
87131 ELECTRON/ETC DIFFRAC EQU 87423 LENGTH MEASURING EQUIPMT
87139 ELECTRON/ETC DIFFR PARTS 87424 PTS NES OF INST OF 8742
8714 OPTICAL MICROSCOPES 87425 MEASURE/CHECK INSTR NES
87141 MICROSCOPES STEREOSCOPIC 87426 MEAS/CHECK INSTR PART/AC
87143 MICROSCOPE PHOTO/PROJ/ET 8743 FLUID GAUGES/INSTRUMENTS
87145 MICROSCOPES NES 87431 LIQUID FLOW/LEVEL GAUGES
87149 MICROSCOPES PARTS/ACCESS 87435 PRESSURE GAUGES ETC
8719 OPTICAL APPLIANCES NES 87437 FLUID INSTRUMENTS NES
87191 TELESCOPIC SIGHTS/ETC 87439 FLUID INSTRUM PARTS/ACC
87192 LASERS EXC LASER DIODES 8744 PHYSIC/CHEM ANALYSIS EQU
87193 OPTICAL INSTRUMENTS NES 87441 GAS/SMOKE ANALYSIS APPAR
87199 PARTS/ACCESS FOR 8719 87442 CHROMATOG/ELECTROPHE APP
872 MEDICAL/ETC INSTRUMENTS 87443 SPECTROMETERS ETC
8721 DENTAL INSTRUMENTS 87444 EXPOSURE METERS
Annexes | 315
87211 DENTAL DRILLS 87445 OPTICAL SCIENT INSTR NES

87219 DENTAL INSTRUMENTS NES 87446 PHYS/CHEM ANALYS APP NES
8722 MEDICAL.SURG/VET INSTRUM 87449 PHYS/CHEM ANAL PARTS/ACC
87221 SYRINGES/CATHETERS/ETC 8745 SCIENTIFIC INSTRUMNT NES
87225 OPHTHALMIC INSTRUMENTS 87451 BALANCES SENSETIVITY>5CG
87229 OTH MEDICAL INSTRUMENTS 87452 DEMONSTRATION APPARATUS
8723 MECHANO-THERAPY EQUIPMNT 87453 MECHANICAL TESTING EQUIP
87231 M-T/MASSAGE/APT TEST APP 87454 MECH TESTER PARTS/ACCS
87233 THERAP RESPIRATION APPAR 87455 THERMO-/HYDRO-METERS ETC
87235 BREATHING APPLIANCES NES 87456 THERMOMETER ETC PART/ACC
8724 MEDICAL FURNITURE,PARTS 8746 AUTOMATIC CONTROL INSTR.
873 METERS AND COUNTERS NES 87461 THERMOSTATS
8731 GAS/LIQUID/ELECTR METERS 87463 PRESSURE REGULATORS/ETC
87311 GAS METERS 87465 REGULATE/CONTRL INST NES
87313 LIQUID METERS 87469 REGUL/CNTRL INST PART/AC
87315 ELECTRICITY METERS 8747 ELECT/RADIATION METERS
87319 GAS/LIQ/ELEC METER PARTS 87471 RADIATION DETECTORS ETC
8732 METERS/COUNTERS NES 87473 OSCILLOSCOPES ETC
87321 COUNTING DEVICES 87475 NON-RECORD ELECT METERS
87325 SPEED ETC INDICATORS 87477 TELECOMMS TEST METERS
87329 METER/COUNTER PARTS/ACC. 87478 ELECTRICAL METERS NES
874 MEASURE/CONTROL APP NES 87479 ELEC/RAD METER PARTS/ACC
8741 NAVIGATION/SURVEY/ET APP 8749 INSTRUMENT PART/ACC NES
87411 NAVIGATION INSTRUMENTS

721 AGRIC MACHINE EX TRACTR 724 ... TEXTILE/LEATHER MACHINRY
7211 AGRICULTURAL MACHINERY 7247 TEXT WASH/DYE/ETC MACHNY
72111 PLOUGHS 72471 WASHING MACHINE CAP>10KG
72112 SEEDERS/PLANTERS/ETC 72472 DRY-CLEANING MACHINES
72113 CULTIVATORS/WEEDERS/ETC 72473 DRYING MACHINES CAP>10KG
72118 OTH AGRIC/HORTIC MACHNRY 72474 OTH TEXTILE MACHNERY NES
72119 AGRIC MACHINE(7211)PARTS 7248 LEATHER WORKING MACH NES
7212 HARVESTING MACHINERY 72481 HIDE PREPARATION EQUIPMT
72121 LAWN MOWERS 72483 FOOTWEAR MANUF/REPAIR EQ
72122 COMBINE HARVESTR-THRESHR 72485 LEATHER MAN/REPR EQU NES
72123 OTH HARV/THRESHER/MOWER 72488 PARTS FOR LEATHER MACHNS
72126 EGG/FRUIT CLEAN/SORT MAC 7249 WASHING/ETC MACHINE PART
72127 SEED CLEAN/SORT MACHINRY 72491 WASHING MACHINE PARTS
72129 PTS NES OF MACHY OF 7212 72492 TEXTILE MACHINRY PTS NES
7213 DAIRY MACHINERY 725 PAPER INDUSTRY MACHINERY
72131 MILKING MACHINES 7251 PULP/PAPER MAKING MACHIN
72138 OTH DAIRY MACHINERY NES 72511 CELLULOSE PULP MFG MACHN
72139 PTS NES DAIRY MACHINERY 72512 PAPER ETC MAKING ETC MCH
7219 AGRICULTURAL MACHINE NES 7252 AUX PAPER MAKING MACHINY
72191 WINE/CIDER/JUICE EQUIPMT 72521 PAPER/BOARD CUTTING MACH
72195 POULTRY KEEPING EQUIPMNT 72523 PAPER SACK/ENV MANF MACH
72196 AGRIC MACHINERY NES 72525 PAPER CARTON/ETC MACHNRY
72198 PARTS WINE/ETC MACHINES 72527 PAPER MOULDING MACHINERY
72199 PTS NES AGRIC MACHINES 72529 PAPER IND MACHINES NES
722 TRACTORS 7259 PAPER IND MACHINE PARTS
7223 TRACK-LAYING TRACTORS 72591 PAPER MANUF MACHINE PTS
7224 WHEELED TRACTORS 72599 PAPER PRODUCT MACH PARTS
72241 PEDESTRIAN CNTRL TRACTOR 726 PRINTING INDUSTRY MACHNY
72249 WHEELED TRACTORS NES 7263 PRINT BLOCK/TYPE MKNG EQ

723 CIVIL ENGINEERING PLANT 72631 TYPE SETTING EQUIPMENT
7231 BULLDOZERS/GRADERS/ETC 72635 PRINTING TYPE,PLATES,ETC
72311 BULLDOZERS/ANGLEDOZERS 7265 OFFSET PRINTING MACHINES
72312 GRADERS/LEVELLERS-CONSTR 72651 REEL FED OFFSET PRINTERS
7232 MECHAN SHOVEL/EXCAVATORS 72655 SHEET FED OFFSET MACH A4
72321 FRONT-END SHOVEL LOADERS 72659 OFFSET PRINT MACHINE NES
72322 SHOVEL/EXCAVATORS 360DEG 7266 NON-OFFSET PRINTING MACH
72329 SELF PROP SHOVEL/EXC NES 72661 LETTERPRESS PRINT MACHIN
7233 EARTH-MOVNG/BORNG EQ NES 72663 FLEXOGRAPHIC PRINT MACH.
72331 EARTH-MOVING SCRAPERS 72665 GRAVURE PRINT MACHINERY
72333 ROAD ROLLERS/TAMPERS 72667 PRINTING MACHINERY NES
72335 COAL/ROCK/TUNNEL CUTTERS 72668 MACH ANCILLARY TO PRINTG
72337 BORING/SINKING EQUIP NES 7268 BBOKBINDING MACHINERY
72339 EARTH HANDLING EQUIP NES 72681 BOOKBINDING MACHINERY
7234 CONSTR/MINING MACHIN NES 72689 PTS NES OF BOOKBIND MCHN
72341 PILE DRIVERS/EXTRACTORS 7269 PRINTING IND MACH PARTS
72342 SNOW PLOUGHS/BLOWERS 72691 TYPE-SETTING MACHN PARTS
72343 NON-SP COAL/ROCK CUTTERS 72699 PRINTING PRESS PARTS
72344 NON-SP BORING MACHIN NES 727 FOOD PROCESSING MACHINES
72345 NON-SP TAMPING MACHN NES 7271 FOOD MILLING/ETC MACHRY
72346 NON-SELF PROP SCRAPERS 72711 CEREAL/DRIED LEGUME MACH
72347 NON-SP E-M MACHINES NES 72719 CEREAL/DRY LEGM MACH PTS
72348 PUBLIC WORKS MACHNRY NES 7272 OTHER FOOD PROC MACHINES
7239 EARTH MOVING MACH PARTS 72721 OIL/FAT EXTRACT MACHINES
72391 E-M BUCKET/GRAB/SHOVELS 72722 INDUS FOOD PROC MACH NES
72392 BULLDOZER ETC BLADES 72729 INDUS FOOD PROC MACH PTS
72393 BORING/SINK MACHRY PARTS 728 SPECIAL INDUST MACHN NES
72399 PTS NES EARTH-MOVG MACH 7281 SPECIALIZED MACHINE TOOL
724 TEXTILE/LEATHER MACHINRY 72811 MACHINE TOOLS - MINERALS
7243 SEWING MACHINES ETC 72812 MACHINE TOOLS - WOOD/ETC
72433 SEWING MACHINES DOMESTIC 72819 PTS NES OF TOOLS OF 7281
72435 SEWING MACHINES INDUSTRL 7283 MACHINERY NES - MINERALS
72439 SEW MCH NEEDLES/FURN/PTS 72831 MINERAL SORTING ETC MACH
7244 TEXTILE YARN MACHINERY 72832 MINRL CRUSHING ETC MACHN
72441 TEXTILE YARN EXTRUDERS 72833 MNRL MIXING,KNEADING MCH
72442 TEXTILE FIBRE PROC EQUIP 72834 MINRL MOULDING ETC MACHN
72443 YARN SPINNING/ETC EQUIPM 72839 PTS NES OF MACHY OF 7283
72449 PTS NES TEXTILE MACHINES 7284 SPECIAL INDUST MACHY NES
7245 WEAVING/KNITTING/ETC EQU 72841 GLASS/LAMP WKNG MACH NES
72451 WEAVING MACHINES (LOOMS) 72842 RUBBER/PLASTICS WRKG MCH
72452 KNITTING/STITCH BOND MAC 72843 TOBACCO INDUSTRY MCH NES
72453 GIMPING/LACE/ETC MACHINE 72844 WOOD/CORK PRESSES ETC.
72454 YARN PRE-PROCESS MACHINE 72846 MTAL TREATING MACHNY NES
72455 FELT MFG,FINISHING MACHY 72847 ISOTOPIC SEPARATORS
7246 AUXILIARY TEXTILE MACHNY 72849 MACHNRY NES,INDIV FUNCTN
72461 AUXIL WEAVE/KNIT MACHINE 7285 PARTS SPEC INDUST MACHNY
72467 WEAVING LOOM PARTS/ACCES 72851 GLASS-WORKING MACHY PART
72468 LOOM/KNITTER ETC PTS/ACC 72852 PLASTIC/RUBBER MACH PART
72853 TOBACCO MACHINERY PARTS
72855 PARTS NES, MACHINES 7284

Annexes | 317
Annex 6.1: Indonesian and Malaysian Palm Oil Exports Pattern 27

Malaysia Indonesia
Value Share Quantity Share Value Share Quantity Share
World (USD 000) (%) (Ton) (%) (USD 000) (%) (Ton) (%)
1999 RPO 10861594 85.25 7370987 96.22 844255 75.77 2433560 73.77
CPO 1879335 14.75 289511 3.78 269987 24.23 865427 26.23
Total 12740929 7660497 1114242 3298986
2008 RPO 3344793 97.14 15155366 57.02 5814239 46.98 6386507 44.69
CPO 98422 2.86 11423991 42.98 6561330 53.02 7904179 55.31
Total 3443216 26579357 12375570 1429069
EU
1999 RPO 314551 83.86 658802 78.21 146994 45.55 480428 46.97
CPO 60536 16.14 183570 21.79 175707 54.45 542326 53.03
Total 375087 842372 322702 1022754
2008 RPO 441054 32.42 857176 15.51 679505 32.60 788084 30.91
CPO 919514 67.58 466789 84.49 1404691 67.40 1761904 69.09
Total 1360568 5525063 2084196 2549988

Annex 6.2: EU Consumption of Fixed Vegetable Oil and Fats (in 1000 tones) 28
Year 2007 Growth 2006 Growth 2005 Growth 2004
Products EU-27 (%) EU-27 (%) EU-25 (%) EU-25
Groundnut 114 0.57 130 0.66 105 0.64 95
Soya 3,170 15.97 3,092 15.61 2,278 13.78 1,989
Rape 7,144 35.98 6,864 34.66 5,476 33.12 4,491
Sunflower 3,306 16.65 3,227 16.29 2,471 14.95 2,389
Cotton 68 0.34 85 0.43 90 0.54 88
Other liquid oils 31 0.16 68 0.34 98 0.59 45
Total liquid oils 13,834 69.68 13,466 67.99 10,518 63.62 9,097
Copra 766 3.86 746 3.77 764 4.62 679
Palm kernel 639 3.22 639 3.23 663 4.01 693
Other lauric oils 40 0.20 20 0.10 55 0.33 -8
Total lauric oils 1,445 7.28 1,405 7.09 1,483 8.97 1,365
Linseed 165 0.83 171 0.86 131 0.79 114
Castor 123 0.62 109 0.55 130 0.79 110
Sub Total 15,566 78.40 15,151 76.50 12,262 74.17 10,686
Maize germ 209 1.05 242 1.22 182 1.10 187
Grape pips 13 0.07 14 0.07 14 0.08 13
Palm 4,067 20.48 4,399 22.21 4,074 24.64 3,419
TOTAL 19,855 100.00 19,806 100.00 16,532 100.00 14,306
Source: Compiled and Calculated from Fediol (2009)
Annexes | 319
Annex 6.3: World’s Population Map 29

25%
China
1,330,141,295
India
20%
1,173,108,018
15%
World Share (in %) xxx
ASEAN
605,262,150
10%
EU
491,676,747
USA
310,232,863
NAFTA Indonesia
5%
456,461,460 242,968,342
Pakistan
Russia Japan Nigeria Bangladesh
Brazil
Germany
UK France Vietnam Mexico
Italy Thailand Philippines
Myanmar
0%
-1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%
-5%
Population Growth
Note: This graph only shows countries with a population above 125 million (top 10), ASEAN members,
EU members and NAFTA members on January, 2010 (estimated).
Source: Compiled and Depicted from CIA (2010)
Annex 6.4: Indonesian Progressive Taxes on Exports of Palm Oil 30

Export Tariff Level (%)
No Products Definition
1 2 3 4 5 6 7 8 9 10 11 12 13
1. Palm Kernel 40 40 40 40 40 40 40 40 40 40 40 40 40
2. Crude Palm Oil (CPO) 0 1.5 3 4.5 6 7.5 10 12.5 15 17.5 20 22.5 25
3. Crude Olein 0 1.5 3 4.5 6 7.5 10 12.5 15 17.5 20 22.5 25
4. RBD Palm Olein 0 1.5 3 4.5 6 7.5 10 12.5 15 17.5 20 22.5 25
RBD Palm
5. 0 1.5 3 4.5 6 7.5 10 12.5 15 17.5 20 22.5 25
Kernel Olein
6. Crude Stearin 0 0 1.5 3 4.5 6 8.5 11 13.5 16 18.5 21 23
Crude Palm
7. 0 0 1.5 3 4.5 6 8.5 11 13.5 16 18.5 21 23
Kernel Olein
8. Crude Kernel Olein 0 0 1.5 3 4.5 6 8.5 11 13.5 16 18.5 21 23
9. Crude Kernel Stearin 0 0 1.5 3 4.5 6 8.5 11 13.5 16 18.5 21 23
RBD Palm
10. 0 0 1.5 3 4.5 6 8.5 11 13.5 16 18.5 21 23
Kernel Oil
RBD Palm
11. 0 0 1.5 3 4.5 6 8.5 11 13.5 16 18.5 21 23
Oil
RBD Palm
12. 0 0 0 1.5 3 4.5 6 7.5 11 13.5 16 18.5 21
Stearin
RBD Palm
13. 0 0 0 1.5 3 4.5 6 7.5 11 13.5 16 18.5 21
Kernel Stearin
14. Biodiesel (FAME) 0 0 0 0 0 2 2 2 2 5 5 7.5 10
RBD Palm
Olein (in labelled
15. 0 0 0 0 0 2.5 5 7.5 10 12.5 15 17.5 20
packaging
< 25 kg)
Notes:
RBD: Refined Bleached Deodorized
Tarrif level 1: valid if Rotterdam CIF price ≤ USD 700
Tarrif level 2: valid if Rotterdam CIF price USD 701 -USD 750
Tarrif level 3: valid if Rotterdam CIF price USD 751 - USD 800
Tarrif level 7: valid if Rotterdam CIF price USD 951 - USD 1,000
Tarrif level 8: valid if Rotterdam CIF price USD 1,001- USD 1,050
Tarrif level 12: valid if Rotterdam CIF price USD 1,201-USD 1,250
Tarrif level 13: valid if Rotterdam CIF price ≥ USD 1,251
Source: Attachment to Indonesian Finance Ministry’s Regulation No. 159/PMK.011/2008
Annexes | 321
Annex 6.5: Import Tariff Imposed by EU to Coal, Coke and Briquettes 31

Import Tariff in %
HS
HS based Product Definition
Number
From Ina Average
2701 Coal; briquettes, voids and similar solid fuels manufactured from coal 0 0
2702 Lignite, whether or not agglomerated, excluding jet 0 0
2703 Peat (including peat litter), whether or not agglomerated 0 0
2704 Coke and semi-coke of coal, of lignite or of peat, whether or not 0 0
agglomerated; retort carbon
Total 0 0
Average 0 0
Source: Compiled and Calculates from International Trade Center (2010)

Annex 6.6: Import Tariff Imposed by EU to Vegetable Oils 32

Import Tariff in %
HS
Number
From Ina Average
1507 Soya-bean oil and its fractions, whether or not refined, but not 5.33 1.11
chemically modified
1508 Ground-nut oil and its fractions, whether or not refined, but not 4.08 0.52
chemically modified
1509 Olive oil and its fractions, whether or not refined, but not chemically 36.77 15
modified
1510 Other oils and their fractions, obtained solely from olives, whether 0.00 5.73
or not refined, but not chemically modified, including blends of
these oils or fractions with oils or fractions of heading No 1509
1511 Palm oil and its fractions, whether or not refined, but not chemically 6.85 1.29
modified
1512 Sunflower-seed, safflower or cotton-seed oil and fractions thereof, 6.12 1.34
whether or not refined, but not chemically modified
1513 Coconut (copra), palm kernel or babassu oil and fractions thereof, 7.39 1.56
whether or not refined, but not chemically modified
1514 Rape, colza or mustard oil and fractions thereof, whether or not 6.04 1.47
refined, but not chemically modified
1515 Other fixed vegetable fats and oils (including jojoba oil) and their 5.37 1.25
fractions, whether or not refined, but not chemically modified
Total 77.950 29.270
Average 8.661 3.252

Annexes | 323
Annex 6.7: Import Tariff Imposed by EU to Wood Products 33

Import Tariff in %
HS
Number
From Ina Average
4401 Fuel wood, in logs, in billets, in twigs, in faggots or in similar forms; 0 0

wood in chips or particles; sawdust and wood waste and scrap, whether
or not agglomerated in logs, briquettes, pellets or similar forms
4402 Wood charcoal (including shell or nut charcoal), whether or not 0 0
agglomerated
4403 Wood in the rough, whether or not stripped of bark or sapwood, or 0 0
roughly squared
4404 Hoop wood; split poles; piles, pickets and stakes of wood, pointed but 0 0
not sawn lengthwise; wooden sticks, roughly trimmed but not turned,
bent or otherwise worked, suitable for the manufacture of walking-
sticks, umbrellas, tool handles or the like; chip wood
4405 Wood wool; wood flour 0 0
4406 Railway or tramway sleepers (cross-ties) of wood 0 0
4407 Wood sawn or chipped lengthwise, sliced or peeled, whether or not 0 0
planed, sanded or end-jointed, of a thickness exceeding 6 mm
4408 Sheets for veneering (including those obtained by slicing laminated 0 0
wood), for plywood or for other similar laminated wood and other
wood, sawn lengthwise, sliced or peeled, whether or not planed, sanded,
spliced or end-jointed, of a thickness not exceeding
4409 Wood (including strips and friezes for parquet flooring, not assembled) 0 0
continuously shaped (tongued, grooved, rebated, chamfered, V-jointed,
beaded, molded, rounded or the like) along any of its edges, ends or
faces, whether or not planed, sanded or end
4410 Particle board and similar board (for example, oriented strand board and 3.50 1.36
wafer board) of wood or other ligneous materials, whether or not
agglomerated with resins or other organic binding substances
4411 Fiberboard of wood or other ligneous materials, whether or not bonded 3.50 1.36
with resins or other organic substances
4412 Plywood, veneered panels and similar laminated wood 5.25 1.89
4413 Densified wood, in blocks, plates, strips or profile shapes 0 0
Total 12.25 4.86
Average 0.0094 0.0037

Annex 7.1: World Exports of Pharmaceuticals Products to Indonesia 34

Rank Main Exporters Export in 1999 % Main Exporters Export in 2000 %
World (Aggregate) 151,262,287 100 World (Aggregate) 178,493,343 100
1 EU 71,860,382 47.51 EU 78,265,452 43.85
2 China 16,999,771 11.24 China 24,324,662 13.63
3 USA 13,751,721 9.09 Hong Kong, China 15,533,429 8.70
4 Rep. of Korea 9,692,394 6.41 USA 13,803,076 7.73
5 Hong Kong 8,818,084 5.83 Rep. of Korea 8,410,874 4.71
Rank Main Exporters Year 2001 % Main Exporters Year 2002 %

1 EU 91,092,083 47.44 EU 148,761,575 56.38
2 China 21,258,446 11.07 USA 21,367,521 8.10
3 Hong Kong, China 17,881,424 9.31 Hong Kong, China 18,898,132 7.16
4 USA 16,266,116 8.47 China 18,025,856 6.83
5 Switzerland 9,631,248 5.02 Switzerland 13,311,749 5.05
1 EU 183,750,734 48.63 EU 127,652,427 39.01
2 Singapore 63,357,022 16.77 Singapore 58,815,868 17.98
3 China 24,306,274 6.43 China 29,907,559 9.14
4 USA 21,595,777 5.72 Hong Kong, China 19,440,213 5.94
5 Hong Kong, China 17,493,263 4.63 USA 18,617,997 5.69

1 EU 115,296,724 32.88 EU 147,867,465 34.18
3 China 32,675,557 9.32 China 50,064,856 11.57
4 Hong Kong, China 25,108,099 7.16 Switzerland 27,315,973 6.32
5 USA 20,429,323 5.83 USA 26,018,543 6.02

1 EU 180,410,129 33.99 EU 187,562,458 30.72
3 China 77,413,249 14.58 China 104,740,728 17.15
4 Switzerland 36,708,225 6.92 Switzerland 33,473,603 5.48
5 USA 27,126,084 5.11 USA 30,281,958 4.96

Annexes | 325
Annex 7.2: World Exports of Industry Special Machinery to Indonesia 35

World (Aggregate) 1,001,254,896 100 World (Aggregate) 1,896,399,583 100

1 Japan 337,219,982 33.68 Japan 570,383,707 30.08
2 EU 260,456,856 26.01 EU 465,000,970 24.52
3 USA 129,584,064 12.94 USA 365,473,261 19.27
4 Rep. of Korea 82,481,071 8.24 Rep. of Korea 127,420,848 6.72
5 Australia 43,416,970 4.34 China 119,219,843 6.29

1 Japan 434,603,622 28.21 EU 396,206,641 26.82
2 EU 413,800,726 26.86 Japan 340,775,309 23.07
3 USA 229,439,657 14.89 USA 267,582,759 18.11
4 Rep. of Korea 108,699,495 7.05 China 120,721,567 8.17
5 China 96,124,877 6.24 Rep. of Korea 102,080,528 6.91

1 Singapore 1,111,216,543 42.55 Singapore 1,185,066,898 36.65
2 EU 435,228,237 16.66 Japan 624,893,305 19.32
3 Japan 418,583,681 16.03 EU 503,269,414 15.56
4 China 138,532,386 5.30 USA 224,467,147 6.94
5 USA 135,754,638 5.20 China 220,359,470 6.81

2 Japan 700,133,758 18.19 EU 617,494,377 17.33
3 EU 610,934,058 15.87 Japan 527,736,917 14.81
4 China 257,658,655 6.69 China 279,604,968 7.85
5 USA 174,460,264 4.53 USA 140,821,749 3.95

2 Japan 758,407,931 16.94 Japan 1,172,591,054 19.36
3 EU 642,991,152 14.36 China 779,017,657 12.86
4 China 475,056,365 10.61 EU 735,906,014 12.15
5 USA 174,462,359 3.90 USA 309,843,476 5.11

Annex 7.3: World Exports of Optical Instruments to Indonesia 36


1 Japan 87,009,198 41.90 Japan 143,349,804 41.02
2 EU 57,062,113 27.48 EU 116,650,561 33.38
3 USA 25,328,778 12.20 USA 25,455,089 7.28
4 China 8,203,554 3.95 China 19,361,371 5.54
5 Malaysia 7,904,866 3.81 Malaysia 12,792,840 3.66

1 Japan 124,019,729 40.64 Japan 89,124,191 35.71
2 EU 84,395,555 27.66 EU 52,878,763 21.18
3 USA 32,453,401 10.64 USA 28,106,978 11.26
4 China 16,541,132 5.42 China 20,044,791 8.03

2 Japan 129,508,598 20.98 Japan 145,458,771 17.65
3 EU 80,047,092 12.97 EU 113,431,990 13.76
4 USA 31,259,960 5.06 China 41,216,122 5.00
5 China 25,102,995 4.07 Malaysia 26,190,838 3.18

World (Aggregate) 974,098,977 100 World (Aggregate) 1,216,452,625 100
2 China 171,155,025 17.57 China 145,463,573 11.96
3 EU 99,911,299 10.26 Japan 125,747,485 10.34
4 Japan 169,177,431 17.37 EU 120,554,530 9.91
5 Malaysia 36,368,613 3.73 Rep. of Korea 101,636,881 8.36

2 China 245,223,752 18.70 China 327,914,698 19.82
3 Japan 168,686,185 12.86 Japan 273,060,645 16.50
4 EU 140,937,151 10.74 EU 152,069,546 9.19

Annexes | 327
Annex 7.4: Import Tariff Imposed by Indonesia to Pharmaceutical Products 37

HS Applied Tariff in %
Number From EU Average
2936 Provitamins and vitamins, natural or reproduced by synthesis (including 0.00 3.02
natural concentrates), derivatives thereof used primarily as vitamins, and
intermixtures of the foregoing, whether or not in any solvent.
2937 Hormones, prostaglandins, thromboxanes and leukotrienes, natural or 0.00 3.19
reproduced by synthesis; derivatives and structural analogues thereof,
including chain modified polypeptides, used primarily as hormones
2938 Glycosides, natural or reproduced by synthesis, and their salts, ethers, esters 0.00 3.58
and other derivatives.
2939 Vegetable alkaloids, natural or reproduced by synthesis, and their salts, ethers, 0.00 3.75
esters and other derivatives.
2941 Antibiotics 0.00 2.78
3001 Glands and other organs for organo-therapeutic uses, dried, whether or not 0.00 2.00
powdered; extracts of glands or other organs or of their secretions for organo-
therapeutic uses; heparin and its salts; other human or animal substances
prepared for therapeutic.
3002 Human blood; animal blood prepared for therapeutic, prophylactic or 0.00 2.55
diagnostic uses; antiserum and other blood fractions and modified
immunological products, whether or not obtained by means of
biotechnological processes; vaccines, toxins, cultures of microbe
3003 Medicaments (excluding goods of heading No 3002, 3005 or 3006) consisting 5.00 4.77
of two or more constituents which have been mixed together for therapeutic or
prophylactic uses, not put up in measured doses or in forms or packing for
retail sale.
3004 Medicaments (excluding goods of heading 3002, 3005 or 3006) consisting of 4.47 4.25
mixed or unmixed products for therapeutic or prophylactic uses, put up in
measured doses (including those in the form of trans-dermal administration
systems) or in forms or packing originating from all possible countries.
3005 Wadding, gauze, bandages and similar articles (for example, dressings, 5.00 4.77
adhesive plasters, poultices), impregnated or coated with pharmaceutical
substances or put up in forms or packing for retail sale for medical, surgical,
dental or veterinary purposes.
3006 Pharmaceutical goods specified in note 4 to this chapter. 0.64 0.5
Total 15.11 35.16
Average Tariff Rate 1.37 3.2
Source: Compiled and Calculated from International Trade Center (2010)

Annex 7.5: Import Tariff Imposed by Indonesia to Special Industry Machinery 38

Product Definition
Number
From EU Average
8429 Self-propelled bulldozers, angle dozers, graders, levelers, scrapers, mechanical 9.75 9.34
shovels, excavators, shovel loaders, tamping machines and road rollers
8430 Other moving, grading, leveling, scraping, excavating, tamping, compacting, 2.02 1.97
extracting or boring machinery, for earth, minerals or ores; pile drivers and pile-
extractors; snow ploughs and snow-blowers
8431 Parts suitable for use solely or principally with the machinery of 0.31 0.29
headings 8425 to 8430
8432 Agricultural, horticultural or forestry machinery for soil preparation or 0.48 0.36
cultivation; lawn or sports-ground rollers
8433 Harvesting or threshing machinery, including straw or fodder balers; grass or hay 2.35 2.30
mowers; machines for cleaning, sorting or grading eggs, fruit or other agricultural
produce, other than machinery of heading 8437
8434 Milking machines and dairy machinery 0.00 0.00
8435 Presses, crushers and similar machinery used in the manufacture of wine, cider, 0.00 0.00
fruit juices or similar beverages
8436 Other agricultural, horticultural, forestry, poultry-keeping or bee-keeping 0.00 0.00
machinery, including germination plant fitted with mechanical or thermal
equipment; poultry incubators and brooders
8437 Machines for cleaning, sorting or grading seed, grain or dried leguminous 2.44 2.86
vegetables; machinery used in the milling industry or for the working of cereals or
dried leguminous vegetables, other than farm-type machinery
8438 Machinery, not specified or included elsewhere in this chapter, for the industrial 0.86 0.45
preparation or manufacture of food or drink, other than machinery for the
extraction or preparation of animal or fixed vegetable fats or oils
8439 Machinery for making pulp of fibrous cellulosed material or for making or 0.00 0.00
finishing paper or paperboard
8440 Book-binding machinery, including book-sewing machines 0.00 0.00
8441 Other machinery for making up paper pulp, paper or paperboard, including 0.00 0.00
cutting machines of all kinds
8442 Machinery, apparatus and equipment (other than the machine-tools of 0.00 0.00
headings 8456 to 8465), for type-founding or type-setting, for preparing or
making printing blocks, plates, cylinders or other printing components; printing
type, blocks, plates, cylinder
8443 Printing machinery used for printing by means of the printing type, blocks, plates, 0.00 0.00
cylinders and other printing components of heading 8442; ink-jet printing
machines, other than those of heading 8471; machines for uses ancillary to
printing
8444 Machines for extruding, drawing, texturing or cutting man-made textile materials 0.00 0.00
8445 Machines for preparing textile fibers; spinning, doubling or twisting machines and 0.00 0.00
other machinery for producing textile yarns; textile reeling or winding (including
weft-winding) machines and machines for preparing textile yarns for use on the
machines
8446 Weaving machines (looms) 0.00 0.00
8447 Knitting machines, stitch-bonding machines and machines for making gimped 0.00 0.00
yarn, tulle, lace, embroidery, trimmings, braid or net and machines for tufting
8448 Auxiliary machinery for use with machines of heading 8444, 8445, 0.00 0.00
8446 or 8447 (for example jacquards, automatic stop motions, shuttle changing
mechanisms); parts and accessories suitable for use solely or principally with the
machines
8449 Machinery for the manufacture or finishing of felt or non-woven in the piece or in 0.00 0.00
shapes, including machinery for making felt hats; blocks for making hats
Annexes | 329
8450 Household or laundry-type washing machines, including wash and dry machines 4.69 4.39
8451 Machinery (other than machines of heading 8450) for washing, cleaning, 2.74 2.12
wringing, drying, ironing, pressing (including fusing presses), bleaching, dyeing,
dressing, finishing, coating or impregnating textile yarns, fabrics or made-up
textile articles
8452 Sewing machines, other than book-sewing machines of heading 8440; furniture, 0.39 0.82
bases and covers specially designed for sewing machines; sewing machine
needles
8453 Machinery for preparing, tanning or working hides, skins or leather or for making 0.00 0.00
or repairing footwear or other articles of hides, skins or leather, other than sewing
machines
8454 Converters, ladles, ingot moulds and casting machines, of a kind used in 0.00 0.00
metallurgy or in metal foundries
8455 Metal-rolling mills and rolls there of. 0.00 0.00
8456 Machine-tools for working any material by removal of material, by laser or other 0.00 0.00
light or photon beam, ultrasonic, electro discharge, electrochemical, electron
beam, ionic-beam or plasma arc processes
8457 Machining centers, unit construction machines (single station) and multi-station 0.00 0.00
transfer machines, for working metal
8458 Lathes (including turning centers) for removing metal 0.00 0.00
8459 Machine-tools (including way-type unit head machines) for drilling, boring, 0.00 0.00
milling, threading or tapping by removing metal, other than lathes (including
turning centers) of heading No 8458
8460 Machine-tools for debarring, sharpening, grinding, honing, lapping, polishing or 0.00 0.00
otherwise finishing metal or cermets by means of grinding stones, abrasives or
polishing products, other than gear cutting, gear grinding or gear finishing
machines of heading
8461 Machine-tools for planning, shaping, slotting, broaching, gear cutting, gear 0.00 0.00
grinding or gear finishing, sawing, cutting-off and other machine-tools working
by removing metal or cermets, not elsewhere specified or included
8462 Machine-tools (including presses) for working metal by forging, hammering or 0.00 0.00
die-stamping; machine-tools (including presses) for working metal by bending,
folding, straightening, flattening, shearing, punching or notching; presses for
working metal or met
8463 Other machine-tools for working metal or cermets, without removing material 0.00 0.00
8464 Machine-tools for working stone, ceramics, concrete, asbestos-cement or like 0.00 0.00
mineral materials or for cold-working glass
8465 Machine-tools (including machines for nailing, stapling, gluing or otherwise 0.00 0.00
assembling) for working wood, cork, bone, hard rubber, hard plastics or similar
hard materials
8466 Parts and accessories suitable for use solely or principally with the machines of 0.00 0.00
heading No. 8456 to 8465, including work or tool holders, self-opening die heads,
dividing heads and other special attachments for machine-tools; tool holders for
any type of
8467 Tools for working in the hand, pneumatic, hydraulic or with self-contained 3.09 2.94
electric or non-electric motor
8468 Machinery and apparatus for soldering, brazing or welding, whether or not 2.35 1.98
capable of cutting, other than those of heading 8515; gas-operated surface
tempering machines and appliances
8469 Typewriters other than printers of heading 8471; word-processing machines 0.00 0.00
8470 Calculating machines and pocket-size data-recording, reproducing and displaying 0.00 0.00
machines with calculating functions; accounting machines, postage-franking
machines, ticket-issuing machines and similar machines, incorporating a
calculating device; cash reg
8471 Automatic data-processing machines and units thereof; magnetic or optical 0.00 0.00
readers, machines for transcribing data onto data media in coded form and
machines for processing such data, not elsewhere specified or included
8472 Other office machines (for example, hectograph or stencil duplicating machines, 3.98 3.49
addressing machines, automatic banknote dispensers, coin-sorting machines,
coin-counting or wrapping machines, pencil-sharpening machines, perforating or
stapling machines)
8473 Parts and accessories (other than covers, carrying cases and the like) suitable for 0.09 0.08
use solely or principally with machines of headings 8469 to 8472
8474 Machinery for sorting, screening, separating, washing, crushing, grinding, mixing 1.25 1.08
or kneading earth, stone, ores or other mineral substances, in solid (including
powder or paste) form; machinery for agglomerating, shaping or molding solid
mineral fuels
8475 Machines for assembling electric or electronic lamps, tubes or valves or 0.00 0.00
flashbulbs, in glass envelopes; machines for manufacturing or hot working glass
or glassware
8476 Automatic goods-vending machines (for example, postage stamp, cigarette, food 6.81 3.69
or beverage machines), including money-changing machines
8477 Machinery for working rubber or plastics or for the manufacture of products from 0.00 0.00
these materials, not specified or included elsewhere in this chapter
8478 Machinery for preparing or making up tobacco, not specified or included 3.27 3.39
elsewhere in this chapter
8479 Machines and mechanical appliances having individual functions, not specified or 2.74 2.64
included elsewhere in this chapter
8480 Molding boxes for metal foundry; mould bases; molding patterns; moulds for 0.00 0.00
metal (other than ingot moulds), metal carbides, glass, mineral materials, rubber
or plastics
8481 Taps, cocks, valves and similar appliances for pipes, boiler shells, tanks, vats or 3.36 3.29
the like, including pressure-reducing valves and thermostatically controlled valves
8508 Vacuum cleaners, incl. dry cleaners and wet vacuum cleaners 0.00 0.00
8701 Tractors (other than tractors of heading 8709) 11.16 10.03
TOTAL 64.13 57.51
AVERAGE 1.17 1.05

Annexes | 331
Annex 7.6: Import Tariff Imposed by Indonesia to Scientific Instruments 39

Number From EU Average
9001 Optical fibers and optical fiber bundles; optical fiber cables other than those of 4.48 4.14
heading No 8544; sheets and plates of polarizing material; lenses (including
contact lenses), prisms, mirrors and other optical elements, of any material,
uncounted and other
9002 Lenses, prisms, mirrors and other optical elements, of any material, mounted, 3.84 3.43
being parts of or fittings for instruments or apparatus, other than such elements
of glass not optically worked
9003 Frames and mountings for spectacles, goggles or the like, and parts thereof 9.13 7.43
9004 Spectacles, goggles and the like, corrective, protective or other 10.00 9.22
9005 Binoculars, monocular, other optical telescopes, and mountings there of; other 2.97 3.13
astronomical instruments and mountings there of, but not including
instruments for radio-astronomy
9006 Photographic (other than cinematographic) cameras; photographic flashlight 5.58 5.09
apparatus and flashbulbs other than discharge lamps of heading No. 8539
9007 Cinematographic cameras and projectors, whether or not incorporating sound 9.03 7.00
recording or reproducing apparatus
9008 Image projectors, other than cinematographic; photographic (other than 9.90 8.40
cinematographic) enlargers and reducers
9010 Apparatus and equipment for photographic (including cinematographic) 6.13 4.81
laboratories (including apparatus for the projection or drawing of circuit
patterns on sensitized semi-conductor materials), not specified or included
elsewhere in this chapter; negatosc
9011 Compound optical microscopes, including those for photomicrography, cine 2.28 1.22
photomicrography or micro projection
9012 Microscopes other than optical microscopes; diffraction apparatus 0.00 0.00
9013 Liquid crystal devices not constituting articles provided for more specifically 5.00 4.77
in other headings; lasers, other than laser diodes; other optical appliances and
instruments, not specified or included elsewhere in this chapter
9014 Direction finding compasses; other navigational instruments and appliances 5.00 4.81
9015 Surveying (including photogram metrical surveying), hydrographic, 5.00 4.91
oceanographic, hydrological, meteorological or geophysical instruments and
appliances, excluding compasses; rangefinders
9016 Balances of a sensitivity of 5 cg or better, with or without weights 5.00 4.09
9017 Drawing, marking-out or mathematical calculating instruments (for example, 5.22 4.61
drafting machines, pantographs, protractors, drawing sets, slide rules, disc
calculators); instruments for measuring length, for use in the hand (for
example, measuring rods etc
9018 Instruments and appliances used in medical, surgical, dental or veterinary 4.89 4.68
sciences, including scientific graphic apparatus, other electro medical
apparatus and sight-testing instruments
9019 Mechano-therapy appliances; massage apparatus; psychological aptitude- 5.00 4.47
testing apparatus; ozone therapy, oxygen therapy, aerosol therapy, artificial
respiration or other therapeutic respiration apparatus
9020 Other breathing appliances and gas masks, excluding protective masks having 5.00 4.64
neither mechanical parts nor replaceable filters
9021 Orthopedic appliances, including crutches, surgical belts and trusses; splints 5.00 4.60
and other fracture appliances; artificial parts of the body; hearing aids and
other appliances which are worn or carried, or implanted in the body, to
compensate for a defect
9022 Apparatus based on the use of X-rays or of alpha, beta or gamma radiations, 0.00 0.00
whether or not for medical, surgical, dental or veterinary uses, including
radiography or radiotherapy apparatus, X-ray tubes and other X-ray
generators, high tension generators
9023 Instruments, apparatus and models, designed for demonstrational purposes 5.00 4.47
(for example, in education or exhibitions), unsuitable for other uses
9024 Machines and appliances for testing the hardness, strength, compressibility, 5.00 4.47
elasticity or other mechanical properties of materials (for example, metals,
wood, textiles, paper, plastics)
9025 Hydrometers and similar floating instruments, thermometers, pyrometers, 5.00 4.60
barometers, hygrometers and psycho meters, recording or not, and any
combination of these instruments
9026 Instruments and apparatus for measuring or checking the flow, level, pressure 0.00 0.00
or other variables of liquids or gases (for example, flow meters, level gauges,
manometers, heat meters), excluding instruments and apparatus of
heading 9014, 9015, 9028 or 9032
9027 Instruments and apparatus for physical or chemical analysis (for example, 0.74 0.73
polar meters, refract meters, spectrometers, gas or smoke analysis apparatus);
instruments and apparatus for measuring or checking viscosity, porosity,
expansion, surface tension
9028 Gas, liquid or electricity supply or production meters, including calibrating 5.00 4.47
meters there of
9029 Revolution counters, production counters, taximeters, milometer, pedometers 5.00 4.47
and the like; speed indicators and tachometers, other than those of
heading 9014 or 9015; stroboscopes
9030 Oscilloscopes, spectrum analyzers and other instruments and apparatus for 1.44 1.52
measuring or checking electrical quantities, excluding meters of heading 9028;
instruments and apparatus for measuring or detecting alpha, beta, gamma, X-
ray, cosmic or other ionizing
9031 Measuring or checking instruments, appliances and machines, not specified or 3.81 3.94
included elsewhere in this chapter; profile projectors
9032 Automatic regulating or controlling instruments and apparatus 5.00 4.77
9033 Parts and accessories (not specified or included elsewhere in this chapter) for 5.00 4.60
machines, appliances, instruments or apparatus of Chapter 90
Total 149.44 133.49
Average Tariff Rate 4.67 4.17

Annexes | 333
Annex 7.7: EU Complaints Listed in WTO’s Disputes Settlement (1999-2008)159 40

No Defendant Disputes Date
1 India Certain Taxes and Other Measures on Imported Wines and Spirits 22-Sep-08
Measures Affecting Financial Information Services and Foreign
2 China 3-Mar-08
Financial Information Suppliers
Customs Valuation of Certain Products from the European
3 Thailand 25-Jan-08
Communities
4 Canada Tax Exemptions and Reductions for Wine and Beer 29-Nov-06
Measures Affecting Trade in Large Civil Aircraft (Second
5 United States 27-Jun-05
Complaint)
Measures Affecting the Importation and Sale of Wines and Spirits
6 India 20-Nov-06
from the European Communities
7 United States Continued Existence and Application of Zeroing Methodology 2-Oct-06
Definitive Countervailing Measures on Olive Oil from the European
8 Mexico 31-Mar-06
Communities
9 China Measures Affecting Imports of Automobile Parts 30-Mar-06
10 Brazil Measures Affecting Imports of Retreaded Tyres 20-Jun-05
11 Argentina Countervailing Duties on Olive Oil Wheat Gluten and Peaches 29-Apr-05
12 Canada Continued Suspension of Obligations in the EC (Hormones Dispute) 8-Nov-04
13 United States Continued Suspension of Obligations in the EC (Hormones Dispute) 8-Nov-04

14 United States Section 776 of the Tariff Act of 1930 5-Nov-04
15 United States Measures Affecting Trade in Large Civil Aircraft 6-Oct-04
Provisional Countervailing Measures on Olive Oil from the
16 Mexico 18-Aug-04
European Communities
Anti-Dumping Measures on Imports of Certain Products from the
17 India 8-Dec-03
Laws Regulations and Methodology for Calculating Dumping
18 United States 12-Jun-03
Margins Zeroing)
19 Australia Quarantine Regime for Imports 3-Apr-03
Import Restrictions Maintained Under the Export and Import Policy
20 India 23-Dec-02
2002-2007
21 Korea Republic Measures Affecting Trade in Commercial Vessels 21-Oct-02
Sunset Reviews of Anti-Dumping and Countervailing Duties on
22 United States 25-Jul-02
Certain Steel Products from France and Germany
23 United States Definitive Safeguard Measures on Imports of Certain Steel Products 7-Mar-02
24 United States Anti-Dumping Duties on Seamless Pipe from Italy 5-Feb-01
25 United States Continued Dumping and Subsidy Offset Act of 2000 21-Dec-00
Definitive Safeguard Measures on Imports of Steel Wire Rod and
26 United States 1-Dec-00
Circular Welded Quality Line Pipe
Countervailing Duties on Certain Corrosion-Resistant Carbon Steel
27 United States 10-Nov-00
Flat Products from Germany
Countervailing Measures Concerning Certain Products from the
28 United States 10-Nov-00
159
WTO (2011b)
29 United States Section 306 of the Trade Act 1974 and Amendments thereto 5-Jun-00
30 Chile Measures affecting the Transit and Importing of Swordfish 19-Apr-00
Definitive Anti-Dumping Measures on Carton-Board Imports from

31 Argentina Germany and Definitive Anti-Dumping Measures on Imports of 26-Jan-00
Ceramic Tiles from Italy
32 United States Section 337 of the Tariff Act of 1930 and Amendments thereto 12-Jan-00
33 Brazil Measures on Import Licensing and Minimum Import Prices 14-Oct-99

34 United States Section 211 Omnibus Appropriations Act of 1998 8-Jul-99
Definitive Safeguard Measures on Imports of Wheat Gluten from
35 United States 17-Mar-99
the European Communities
Import Measures on Certain Products from the European
36 United States 4-Mar-99
Communities
37 United States Section 110(5) of US Copyright Act 26-Jan-99
Definitive Anti-Dumping Measures on Imports of Drill Bits from
38 Argentina 14-Jan-99
Italy
Source: WTO (2011b)

Annexes | 335
Annex 8.1: World Tariff Profiles (Selected Countries and Years) 41

Year 2006
Non advolarem Duties > 15%
Simple average Duty free
Binding duties
Countries Coverage MFN MFN MFN MFN
Bound Bound Bound Bound
applied applied applied applied
In % Share of HS 6 digit subheadings in percentage
Indonesia 96.6 37.1 6.9 2.5 21.5 0 0.2 90.7 3.1
EU 100 5.4 5.4 28.9 29 4.8 4.6 4.7 4.5
India (05) 73.8 49.2 19.2 2.8 2.4 5.3 5.3 70.4 21.6
China 100 10 9.9 6.6 7.1 0 0.4 16.4 16
Singapore 69.2 10.4 0 15.9 100 0.5 0 0.5 0
Japan 99.6 6.1 5.6 55.1 52.6 3.6 3.6 3.9 3.7
USA 100 3.5 3.5 45.6 45.6 8.2 8.2 2.8 2.8
Australia 97 9.9 3.5 20.9 49.8 0.3 0.2 13.4 4.2
Korea 94.5 17 12.1 14.1 14.1 0.5 0.4 20.1 8
Philipines 66.8 25.6 6.3 2.6 2.7 0 0 55.8 3
Thailand 74.7 28.2 10 2.8 18.3 18.7 21.9 65.9 22.6
Malaysia 83.7 25.1 8.5 6.2 57.4 2.8 0.7 36.4 21.8
Year 2007
Indonesia 96.6 37.1 6.9 2.5 22.3 0 0.2 90.7 2.7
EU 100 5.4 5.2 29 30.9 4.8 4.6 4.5 4.4
India 73.8 50.2 14.5 2.8 3.9 5.3 5.0 70.5 18.2
China 100 10 9.9 6.6 6.7 0 0.4 16.4 15.7
Singapore 69.2 12.1 0 15.9 100 0.5 0 0.5 0
Japan 99.6 5.1 5.1 55.1 52.3 3.5 3.7 3.7 3.6
USA 100 3.5 3.5 45.7 47.1 8.2 8.2 2.7 2.8
Australia 97 9.9 3.5 20.9 48.8 0.3 0.2 13.4 4.1
Korea 94.6 17 12.2 14.1 15.4 0.5 0.4 20.1 8.3
Philipines 66.8 25.6 6.3 2.6 2.8 0 0 55.8 3.1
Thailand 74.7 28.1 10 2.8 18.3 18.7 21.9 65.9 22.6
Malaysia 83.7 24.5 8.4 6.2 57.3 2.8 0.7 36.4 21.8
Year 2009
Indonesia 95.8 37.1 6.8 2.4 22.4 0 0.2 90.1 2.2
EU 100 5.2 5.3 28.9 26.7 4.8 4.6 4.4 4.4
India 73.8 48.5 12.9 2.7 2.8 5.3 5.2 70.5 17.1
China 100 10 9.6 6.4 7.5 0 0.5 16.4 14.6
Singapore 69.7 10.4 0 15.7 100 0.5 0 0.5 0
Japan 99.7 5.1 4.9 53 53.7 3.5 3.7 3.8 3.6
USA 100 3.5 3.5 45.7 45.3 8.2 8.2 2.8 2.9
Australia 97.1 10 3.5 20.7 48.8 0.3 0.2 13.7 4.1
Korea 94.6 16.6 12.1 14.1 15.8 0.7 0.4 20.5 8.3
Philipines 67 25.7 6.3 2.5 2.3 0.1 0 56 3.1
Thailand 75 28.2 9.9 2.8 21.7 19.1 10 66 22.9
Malaysia 84.3 24 8.4 6 59.2 2.9 0.7 36.8 21.3
Notes:
Binding coverage: Share of HS six-digit subheadings containing at least one bound tariff line. Full binding coverage is
indicated by 100 without further decimals. If some tariff lines are unbound but the result still rounds to 100 this is
reflected by maintaining one decimal, i.e. 100.0.
Simple average: Simple average of the ad valorem or AVE HS six-digit duty averages.
Duty-free: Share of duty-free HS six-digit subheadings in the total number of subheadings in the product group.
Partially duty-free subheadings are taken into account on a pro rata basis.
Non-ad valorem duties: Share of HS six-digit subheadings subject to non-ad valorem duties (based on factors other
than the property value such as square footage or number of units). When only part of the HS six-digit subheading is
subject to non-ad valorem duties the percentage share of these tariff lines is used.
Duties > 15 %: Share of HS six-digit subheadings subject to ad valorem duties or AVEs greater than 15 per cent.
When only part of the HS six-digit subheading is covered by such duties, the calculation is done on a pro rata basis.
Ad Valorem: duties levied on goods at certain rates per centum on their value.
Source: Compiled from WTO, 2006, 2009, 2010
Annex 8.2: Statistics Discrepancy in Import of Civil Engineering Equipment160 42

Reported by all Trade Partners Reported by Indonesia Data
Year Discrepancy
Export to Ina (FOB) Re-Export Import (CIF) Re-Import
(in USD)
1999 218,479,693 12,544,698 376,646,143 0 180,014,419
2000 495,482,698 695,469 510,038,411 0 64,103,983
2001 351,122,154 2,792,934 489,447,366 0 173,437,427
2002 418,056,311 996,446 455,794,099 421,008 79,122,411
2003 1,040,817,560 1,179,795 426,944,521 566,918 -510,358,201
2004 1,477,046,153 2,581,381 599,041,785 396,342 -730,696,095
2005 1,859,395,482 2,064,051 674,104,001 51,946 -999,403,879
2006 1,522,167,203 3,361,623 575,387,989 128,169 -794,690,663
2007 3,161,347,858 6,814,958 669,242,624 0 -2,175,970,448
2008 3,167,467,679 31,831,089 1,241,782,342 307,844 -1,609,246,413

Note:
Re-export is to export goods that were previously imported from another country
Re-import is to import back into the country of exportation.
Source: Compiled and Calculated from UNSD Comtrade (2009)
160
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Indonesia-EU Trade Relations

A Case Study of International Trade between South and North

Approved Dissertation Committee

Prof. Dr. Welf Werner

Prof. Dr. Margrit Schreier

Prof. Dr. Andreas Falke

Date of Defense: January 28, 2013

School of Humanities and Social Sciences (SHSS)

6. Deutsche Akademische Austauschdienst (DAAD) and staff, especially Frau Bergmann

Chapter II Theoretical Framework 9

Chapter III Research Design and Methods 45

Chapter IV Indonesian and EU Trade Pattern 71

Chapter V RCA Index and Export Performance Analysis 101

5.3.1 The Selection of Indonesian Cases 126

Chapter VI Incentives and Barriers of Indonesian Trade Flows to the EU 131

Chapter VII Incentives and Barriers of EU’s Exports to Indonesia 197

Chapter VIII Summary and Recommendations 247

8.1.3 Differences in Trade Patterns of Indonesia and the EU 251

Table 2.1: Index of Openness of Selected Countries 9

Table 6.10: Gaps Found in Indonesian Exports to the EU 31 184

Figure 5.1: Indonesian Map 1 105

Graph 2.1: Gains from International Trade 1 12

Graph 6.12: EU Members’ Population and Indonesian Export Volume 31 190

Annex 2.1: Profiles of Most Active Regional Blocs 1 283

AANZFTA ASEAN-Australia-New Zealand Free Trade Agreement

FoE Friend of Earth

TBT Technical Barriers to Trade

1.1 Problem Statement

market partners for Indonesia besides Japan and the US.1

the requirements for particular worth investigating reasons.

Indonesia (GOI) reports (European Commission 2000a, 2000b; European Community

questionnaires. A gap analysis, complaints-inventory database, and a gravity model will be

1.2 Research Questions

about the current Indonesia-EU trade relation?

partner market in general and in the selected cases?

and the EU in order to gain more from trade?

1.3 Outline of Case Study

a. International trade theory

basis for research findings and trade policy consideration.

b. Study on international trade negotiations

trade and not contradict with multilateral trade agreement.

c. Trade patterns between Indonesia and the EU

d. Calculation and analysis of RCA index of the EU and Indonesian exports

statistical data used.

e. BCG matrix application to export performances of Indonesia and the EU

selected sectors (cases) on the BCG matrix.

between South and North in a larger scope.

h. Recommendation of trade policy improvements and solutions for identified problems

policies toward long-lasting (sustainable) trade relations as much as increasing welfare in

improvement of knowledge on standards, market value, performance, life cycle

the EU have been recommended.

1.4 Limitation of Case Study

EU trade patterns and specialization.

2.1 The Importance of International Trade

Table 2.1: Index of Openness of Selected Countries

EU 18,387,505 1,928,554 496,042 8.98 9.01 9.95 10.49

the dependency of countries’ economies to international trade.

compared with developed countries except Singapore. Singapore is a unique example of a

Despite huge investments in engineering and production facilities as well as various

produced many benefits related to the following:8

1. Technology diffusion that contributes to the economic welfare of all people

level of economic activity as a whole

4. Increased range of consumer choice

population of stakeholders in the market. Government surplus (b-c-f-e) and welfare