Building a community: Trade liberalisation is progressing with an increasing number of FTAs

The year 2015 is set to mark a watershed in regional affairs, as Indonesia, along with its neighbours in ASEAN, form the ASEAN Economic Community (AEC). This historic occasion will mean the final removal of many trade barriers between the ASEAN member states, and with the bloc also the signatory to a host of free trade agreements with other economic powers – deals which may even be replaced by an umbrella free trade agreement (FTA) – an unprecedented degree of openness in international trade will result. As the association’s largest economy, this poses opportunities and challenges for Indonesia, with the country’s political agenda also likely to be influenced by the ongoing process of regional trade liberalisation.

TWO PHASES: While all 10 members of ASEAN become members of the AEC at the start of 2015, Cambodia, Laos, Myanmar and Vietnam – known as CLMV – form a second tier to begin with, as they will be allowed until 2018 to reach the same level of trade liberalisation. Amongst the six other nations, by 2010 almost all trade tariffs had been reduced to zero, leaving only non-tariff barriers (NTBs) in place. The effect of this on intra-ASEAN trade has been impressive. From Indonesia’s perspective, in 2007, when the ASEAN Charter was signed, setting out the path to the AEC, the country’s total exports to ASEAN member states stood at $22.29bn. By 2010, this had risen to $33.35bn, with the latest figures, for 2011, totalling $42.10bn, according to the Department of Statistics. In terms of imports, the respective figures were $23.79bn in 2007, $38.91bn in 2010 and $51.11bn in 2011. Total trade between ASEAN and Indonesia, therefore, more than doubled, from $46.08bn to $93.21bn.

Where FTAs have been signed, trade has also surged. The ASEAN-China FTA came into effect at the start of 2010. In 2009, Indonesia exported $11.50bn to China, rising to $15.69bn in 2010 and $22.94bn in 2011. Indonesia imported $14bn of goods and services from China in 2009, reaching $20.43bn in 2010 and $26.21bn in 2011. Trade by value almost doubled in three years.

The NTBs continue to protect certain sensitive industries and professions – for example, Indonesia’s prohibition on foreign doctors practising in the country. These NTBs can take a variety of forms, with strong political sensitivities present around them. The surge in imports from countries such as China has not been welcomed by some Indonesian businesses, or politicians, while NTBs have been imposed in areas such as on imports of fresh fruit and vegetables from Thailand with a view to protecting farmers.

At the same time, Indonesia has pointed out that NTBs also exist in many developed markets. Speaking at the World Export Development Forum in October 2012, President Susilo Bambang Yudhoyono said that Indonesia’s agriculture and commodity exports in particular were impacted by NTBs, such as European requirements on sustainable palm oil. This had also led to a redirection of trade to developing economies with fewer NTBs, to the benefit of intra-emerging market trade.

LONG-TERM COMMITMENT: While tariffs may soon be largely a thing of the past within the AEC, these other restrictions on free trade may survive for longer. Yet Indonesia remains committed to an opening up of its markets, albeit in a measured way that takes into account domestic concerns. Indeed, the country has shown its willingness to boost free trade via its pursuit of the AEC agenda, as well as in its membership of the Asia Pacific Economic Cooperation, which Indonesia will chair in 2013, the World Trade Organisation, and a number of bilateral FTAs either signed or in negotiation, such as those with Turkey, Chile and the European Free Trade Area. At the same time though, Indonesia has shown circumspection in its attitude to the Trans-Pacific Partnership, concerned over its effect on ASEAN’s centrality and Indonesia’s own trading interests.

A balanced approach has been sought to international trade. So far, Indonesia’s path has led to unprecedented growth in exports and imports, while the hope is that the barriers that remain will buy time for domestic industries to sharpen their global competitiveness.