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Facing a Political Lock-In Situation with the ACFTA

Which options for Indonesia?

Ivan Lim, Philipp Kauppert, FES Jakarta, March 2010

• By signing a Free Trade Agreement with China, ASEAN expects to strengthen its bar-
gaining position for international trade. Being one of the key members of ASEAN, In-
donesia has been promoting ACFTA proactively.
• For the supporters, ACFTA creates better opportunities for local business to export
more goods to the important Chinese market and increases bilateral trade and invest-
ment across the region. For the opponents, ACFTA has the potential to seriously
damage domestic industries and lead to mass layoffs.
• The Indonesian Government is urged to take preventive measures in anticipating and
compensating the negative impacts of ACFTA. Those efforts include renegotiating
several tariff posts, granting fiscal incentives for the affected industries, improving the
national infrastructure and reforming the deficient Social Security System.

Since 1 January 2010, the ASEAN1-China tives, this article will approach its initial ques-
Free Trade Agreement (ACFTA) has become tion. It then follows with the perspective of
fully effective in introducing zero tariffs on Indonesia, focusing on its government, busi-
6682 tariff posts in 17 sectors, including 12 in ness organizations and trade unions. The
manufacturing and 5 in agriculture, mining and conclusion shows some possible solutions
maritime sectors. This has triggered a lively offered by experts from various backgrounds
public debate in Indonesia; some voices em- and the government for those fearing the neg-
phasize the opportunities, while others con- ative impacts of the ACFTA implementation.2
sider it as a threat to the Indonesian economy.
The concern seemed plausible: the statistics ACFTA, the third biggest free trade area be-
of the Ministry of Trade showed that although sides the European Union and the Northern
the amount of total trade between Indonesia American Free Trade Agreement (NAFTA), is
and China has more than tripled from US$ 8.7 an agreement among the ten member states
billion in 2004 to US$ 26.8 billion in 2008 with of ASEAN and China. It is predicted that the
a usual record of surplus, it indicated a deficit establishment of the ACFTA will create an
of US$ 3.6 billion for Indonesia in 2008. economic region with 1.7 billion consumers, a
regional Gross Domestic Product (G.D.P.) of
The political situation is unlikely to allow a about US$ 2 trillion and a total trade volume
complete renegotiation of the ACFTA. So fac- estimated at US$ 1.23 trillion. The removal of
ing the initiated upcoming of the free trade trade barriers between ASEAN and China is
agreement, this article will try to answer the expected to result in lower costs of produc-
following question: Is a win-win solution for tion through economies of scale, expanded
Indonesia actually possible? By beginning with intra-regional trade and increased economic
the introduction of ACFTA, its origins and mo- efficiency. Simulations conducted by the
tivation from both China and ASEAN perspec-
Ivan Lim is an International Business student at the
The Association of Southeast Asian Nations (ASEAN) German Swiss University of Jakarta and has worked for
comprises Brunei-Darussalam, Cambodia, Indonesia, FES Jakarta during an internship. Philipp Kauppert is
Lao PR, Malaysia, Myanmar, Philippines, Singapore, Deputy Resident Director of FES Jakarta. The opinions
Thailand and Viet Nam. expressed reflect the views of the authors.
ASEAN Secretariat using the Global Trade ACFTA as a tool to respond to challenges
Analysis Project (GTAP) suggest that an posed by competitive regionalisms in the
ACFTA will increase ASEAN’s exports to world economy, to consolidate growing eco-
China by 48% and China’s exports to ASEAN nomic ties with Southeast Asia, to secure the
by 55.1% and could probably raise ASEAN’s access to raw materials, and to ensure a
G.D.P. by 0.9% or by US$ 5.4 billion while peaceful environment to support China’s
China’s real G.D.P. could expand by 0.3% or growing influence to counterbalance Ameri-
by US $2.2 billion. The governments support- can and Japanese power.
ing this initiative hope that with the formation
of an ACFTA, enterprises in ASEAN and 2. The Perspective of ASEAN
China will become more efficient and further
promote specialization in order to be more By signing a Free Trade Agreement with Chi-
competitive than other world regions. This is na, ASEAN expects to improve its bargaining
supposed to boost productivity and economic position in the international arena. Moreover,
welfare as well as attracting more investment increased trade between the two sides since
into the region. the normalization of ASEAN-China bilateral
relationships in the early 1990s has fuelled
The Origins of ACFTA the confidence of ASEAN policy-makers, who
now feel that ACFTA could provide a much
The idea of a free trade area between China needed economic boost to a Southeast Asia
and ASEAN was first proposed by Chinese still weakened by the 1997 economic crisis.
Premier Zhu Rongji at the November 2000 As China’s economy lacks of natural re-
China-ASEAN summit. In October 2001, the sources, the demand for ASEAN exports
China-ASEAN Expert Group on Economic might even still increase in the near future. As
Cooperation issued an official report recom- a further advantage of the ACFTA, ASEAN
mending a “WTO-consistent ASEAN-China countries can benefit from a growing number
FTA within ten years”. A month later, at the of Chinese tourists due to the rise of Chinese
November 2001 China-ASEAN summit, the middle class. In any respect, ACFTA could be
relevant leaders endorsed the ideas of the seen as a bulwark against potential hostile
Expert Group and the negotiation process behavior from China towards the Southeast
officially commenced. Then, at the Eighth Asian region. Nevertheless, despite a closer
China-ASEAN Summit in November 2002, relationship between the two parties, China
the ASEAN leaders and Chinese Premier might remain a concern for ASEAN countries.
Zhu Rongji signed the “Framework Agree- China’s defense expenditure rose from US$
ment on Comprehensive Economic Coopera- 6.06 billion in 1990 to US$ 14.6 billion in
tion”. As laid out in the framework agreement, 2002. This development alone constitutes a
a free trade area covering trade in goods key rationale for the Southeast Asian gov-
between China and the original five ASEAN ernments to seriously further engage them-
members (Indonesia, Malaysia, Singapore, selves with the growing power of China.
the Philippines and Thailand) is to be com-
pleted by 2010. The remaining five ASEAN 3. The Perspective of Indonesia
members are expected to fully join by 2015.
Being the largest country in Southeast Asia
1. The Perspective of China and rich in resources, Indonesia is of strateg-
ic importance for the development of the
China’s new diplomatic strategy seeks to whole region. As one of the key member
capitalize on globalization to accelerate Chi- countries of ASEAN, this country has been a
na’s economic development in order to cope major player in promoting ACFTA which has
with the growing demands and to hinder so- been carried out since January 1 of 2004,
cial conflicts. In Southeast Asia, the “peaceful through an Early Harvest Program reducing
rise” is promoted through an FTA agenda tariffs on many agricultural products.
reflecting geopolitical and economic objec-
tives - cultivating goodwill among neighbors, a. Government, the Supporters of ACFTA
maintaining regional stability, and securing
key markets and raw materials needed for President Susilo Bambang Yudhoyono ex-
China’s economic growth. China sees pressed his opinion that the Free Trade

Agreement between ASEAN and China such as leather, apparel and metal products.
(ACFTA) would not threaten Indonesia’s in- Nevertheless, the option to delay ACFTA is
dustries, but would rather create a higher not a wise one because:
amount of opportunities for local business to
export more goods to China. • The competitiveness of Indonesian prod-
ucts would be eroded by other ASEAN
The Ministry of Trade emphasized that the countries whose products are cheaper for
implementation of ACFTA was expected to China.
strengthen bilateral trade and investment • The products of ASEAN countries in gen-
across the region. This is yet another impor- eral could be more competitive because
tant element of the context of the strategic they could afford cheaper raw materials
partnership between Indonesia and China. or intermediate products from China.
The Minister of State-Owned Enterprises • It could happen that other ASEAN coun-
(SOEs) explained that ACFTA created higher tries get their products from China and
opportunities for three industrial sectors for export them to Indonesia. Although it is
exports, namely maritime, food and beve- forbidden, it would be difficult to prevent
rage, forestry and agriculture products. To such practices.
anticipate negative impacts of the ACFTA, • In general, multilateral agreements under
SOEs planned to engage in the domestic the umbrella of ASEAN might provide a
steel industry. Hereby, the Minister requested better regulatory framework than different
to apply more stringent regulations on im- single bilateral agreements among the
ported products from China. engaged countries.

But there are also voices fearing a negative The businessmen associated in the Indone-
impact of ACFTA within the government. sian Iron and Steel Industry Association
Based on the field research in Tanah Abang (USIA) complained that they have been hav-
Market and Cibaduyut, the State Minister of ing troubles already with 5% tariffs, and that a
Cooperatives and SMEs informed that local further reduction to zero tariffs will likely
garments and shoes industries are basically cause serious consequences. The General
fitted to compete with foreign industries in Chairman, Fazwar Bujang promised to en-
ACFTA. However, he asserted that the hance the competitiveness of the national
ACFTA might cause some damage to a high steel industry if ACFTA could be postponed
number of Medium Enterprises (SMEs) which for another two years. In addition, he men-
play an important role in Indonesian overall tioned that the government should reduce the
business, quoting data from the Central Statis- costs and guarantee a reliable availability of
tics Agency (BPS). energy.

The consequences for the public financial Indonesia Employers Association (APINDO)
situation also seem ambiguous. Finance Mi- Chairman, Sofyan Wanandi claimed that the
nister Sri Mulyani Indrawati estimated that adverse effect could be seen in the next three
ACFTA could cause government to lose Rp to six months after the beginning of the im-
1.6 trillion in import duties on the one hand, plementation of ACFTA. He added that Indo-
but on the other hand these losses should be nesia, together with India and China, is one
compensated by increasing value added tax of the countries that have been able to with-
on imported goods, estimated to rise by more stand the global crisis. Therefore, now could
than 50% from Rp 66.3 trillion to Rp 102.2 be the most powerful momentum to attract
trillion. more inward investment.

b. Profit Organizations: Controversial A basically optimistic view was felt by the

Issues members of Indonesian Textile Associations
(API). But, the Executive Secretary of API
Research by the Chamber of Commerce has also hoped that the government would pro-
clarified that this trade agreement provides vide protection to local entrepreneurs that
benefits to certain sectors (i.e. rubber, miner- could be undermined if there is no strict pub-
als, machinery and equipment products), but lic supervision.
there are others that will experience pressure

c. Trade Unions and Other Opponents ready years ago. Nevertheless, he was
aware that it is essential to protect public in-
According to the Indonesian Farmers Strug- terest and prepare the relevant elements by
gle Front, about twenty trade union organiza- working together with the different Ministers.
tions in a press conference in Jakarta held by
the Labor Revolutionary Command (KOBAR) In order to help to protect the local industries,
expressed their rejection against the ACFTA the House of Representatives’ commission VI
implementation that could cause mass overseeing industry and trade has demanded
layoffs. In this occasion, the Secretary Gen- the government to renegotiate a number of
eral of All Indonesian Workers Organization 228 tariff posts, covering garments, furniture
(OPSI), Timboel Siregar stated that the sign- and footwear among others. The Minister of
ing of the agreement would lead to an in- Industry MS Hidayat assumed that the
crease in unemployment and de- ACFTA implementation could hurt domestic
industrialization. firms, and expressed that the government
has sent a letter regarding this matter and it
The Chairman of the Confederation of All- would take some time to be processed.
Indonesian Workers Union (KSPSI), Mathias
Tambing pointed out that the entry of Chi- Coordinating Economic Minister Hatta Rajasa
nese products has a great impact on the do- confirmed the renegotiation and mentioned
mestic market. Not only that they are cheap- that the government was willing to help bol-
er, but their qualities are better too. Subse- ster local industries’ competitiveness by pro-
quently, he assumed that the implementation viding more support to improve the national
of ACFTA would be more suitable if domestic infrastructure as well as through fiscal incen-
productivity could first be overhauled to tives to those actors directly affected by the
achieve equal competitiveness. ACFTA agreement.

Fearing the unfavorable result of ACFTA, the “We support the implementation of the Indo-
Director of Operation and Service of the nesian National Standard (SNI) as an antic-
Jamsostek company, Ahmad Anshori calcu- ipatory measure against goods of below
lated that about 2.5 million workers in the standards coming into the country,” stated
labor-intensive leather and garment factories Manpower and Transmigration Minister Mu-
and agribusiness industries could potentially haimin Iskandar. In seeking a solution for
lose their jobs. In the worst case, the compa- dealing with global competition and anticipat-
ny has prepared a budget of more than Rp. 1 ing possible layoffs following the ACFTA im-
trillion to fund employee termination claims. plementation, he announced that the gov-
ernment would assign a special team to mon-
Besides the different social and economic itor and detect layoffs that are not done ac-
effects for Indonesia, the environmental im- cording to procedures and laws.
pacts of ACFTA might also be quite negative.
The Executive Director of the Indonesian Another perspective on the anticipation of the
Environment Forum (WALHI), Berry Nahdian negative effects has been expressed by
was certain that the implementation of a free Rieke Diah Pitaloka, member of the House of
trade scheme like the ACFTA model could Representatives Commission IX,. In a round-
exploit a larger amount of Indonesian natural table discussion on ACFTA organized by the
resources. He clarified that the ACFTA would network of Asian Social Democrats3, she
legalize more coal dredging, logging and land suggested that the best solution would be a
acquisition activities where many were hit by better implementation and a reform of the
the flood yearly due to forests around them National Social Security System (SJSN),
that have turned into coal mining areas. where the legal basis already exists since the
formulation of its laws in 2004. An effective
The Political Lock-In Situation and just social security system could be a
positive public measure to protect the Indo-
The Indonesian President has made clear
that he is not willing to break an agreement at
3 nd
this stage that has been designed and signed This event took place in Jakarta on the 22 of Febru-
by all the ASEAN members and China al- ary 2010. Find more information about the network

nesian workers against the thread of potential tion of some tariff posts with the Chinese
massive lay-offs in consequence to the free government has been requested. Another
trade agreement. focus lies on the improvement of the national
infrastructures and the provision of fiscal in-
In response to the anxiety among workers centives to the negatively affected industries.
over potential dismissals ACFTA could On the employers and trade unions side,
cause, the employers’ organization APINDO, some of them decided to strengthen future
together with a number of trade unions, de- collaboration by forming a national bipartite
cided to form the National Bipartite Forum forum. Their hope is that this forum would
(FBN). “Everyone realized that business con- find a solution for the improvement of indus-
tinuity should be maintained in order to pro- trial relations in Indonesia.
vide job security for all employees of the
company”, said Sofyan Wanandi. FBN is A main problem for the Indonesian industry is
supposed to build mutual trust among the its deficient infrastructures, as the electricity
employers and their employees with the goal crisis in 2008 has caused the economy and
to create healthier businesses and better business community to suffer. That could be
working conditions that could generally con- one of the reasons why Indonesia’s imports
tribute to social welfare. from China outgrew its exports to China.
Based on the presentation by the former In-
Conclusion donesian Ambassador for China 2006-2009,
there was a significant increase in the imports
The guiding question raised at the beginning of electric equipment from about US$ 400 to
of this article was whether a win-win-solution 800 million, steam generators from about
for Indonesia was still possible given the fact US$ 45 to 300 million and several capital
that Indonesia was facing a political lock-in goods that contributed the most to the deficit
situation with regards to the implementation in the balance of trade with China. In a public
of ACFTA. To answer this question, the dif- lecture held at the University of Indonesia on
ferent positions presented in this article could 9 February, he argued that investments into
be divided into the three following categories: these capital goods would be highly valuable
for future development in Indonesia. There-
• The Government is generally supporting fore, the trading balance deficit could be re-
the ACFTA implementation, despite the garded as a minor source of concern which
fact that the Minister of Industry showed could have some positive economic effects in
his worries about the danger of hurting the long term.
domestic firms.
• The Business Organizations are divided The Head of Research and Development of
into potential winners and losers of the economic and social department from the
ACFTA. Finally, it depends on which in- University of Indonesian Education (UPI),
dustry is capable to compete and there- Nana Jiwayana concluded the threat of
fore might benefit or which might rather ACFTA should not be viewed as a frightening
be affected from it. specter; it would be more useful if it was seen
• Trade Unions and others actors who are as a whip for Indonesia to keep pace with the
opposing ACFTA, especially those work- improvement efforts. Considering the poten-
ing in a labor-intensive industry which tial opportunities presented in this article,
have a low chance to survive the strong perhaps ACFTA could generate some posi-
competition with inflowing, cheap Chinese tive effects for Indonesia’s economic devel-
products. opment. The main challenges lie in coping
with the potential negative effects such as de-
The current political situation in Indonesia industrialization and unemployment. If those
indicates that the government is committed to effects could be prevented by public meas-
the agreement and has no intention to break ures such as an effective social security sys-
it. However, both the supporters and the op- tem or higher investments in the national in-
ponents groups are trying to design some frastructure and education, Indonesia might
kind of preventive measures to cope with the create a win-win solution and be able to profit
different future negative impacts of ACFTA. from the long-term, positive effects of
On the side of the government, the renegotia- ACFTA.