Ensuring quality: As the country begins reducing tariffs, the government is looking for the means to both liberalise and maintain competitiveness

The country has pursued openness for years, lowering tariffs and working to follow the letter and spirit of its World Trade Organisation (WTO) commitments. Until the mid-1980s, the country had charted a protectionist course, which was successful and was followed in 1985 by a period of aggressive liberalisation. The tariff rate (simple mean, most favoured nations, all products) fell from 22.18% in 1989 to 6.72% in 2010. Foreign investment has also been significantly liberalised, particularly after the 1997-98 financial crisis. Indonesia has one of the most open economies in South-east Asia in terms of ownership and control of domestic corporations.

UNBALANCED: The country has continued to accept and pursue liberal trade policies. The ASEAN-China Free Trade Area agreement, which came into effect in 2010, reduced tariffs on 7881 product categories, or 90% of imported goods, to zero among ASEAN’s 10 member states and China. But the results have not been satisfactory: between 2011 and 2012 the country’s trade deficit in industrial goods with China jumped 23.3%, and by 2012 Indonesia was running a record overall trade deficit. Indonesian firms are at a great disadvantage when it comes to battling their Chinese counterparts. Their cost of capital and logistics costs are higher, so even without any government assistance Chinese companies can readily take market share. The Indonesian government is starting to fight back, however, not like before; tariff rates are not going to return to 20%. Instead, the country is instituting a number of non-tariff barriers to take some of the heat off.

Labour has also voiced concerns regarding current outsourcing policy that more strictly regulates the practice. Leonardus Hanjoy, the president director of local tea producer 2 Tang, told OBG, “The new outsourcing policy might be a good step forward for the employed population, but its consequences must be analysed. On the one hand you are improving social benefits, but in the long run it could have a negative impact on unemployment as it discourages hiring.”

NON-TARIFF BARRIERS: Even before the threat of Chinese goods, Indonesia had a range of potential barriers. Among them are a number of national standards, criteria set out by the government that must be met by importers wanting to sell goods in the country. While there are many good reasons to impose standards, such as preventing the importation of baby products made with harmful chemicals, they are often used to block imports in a way that does not violate WTO rules.

Because of the recent influx of foreign goods, the Indonesian government is now looking to use more of these sorts of non-tariff barriers or use them more effectively. In late 2011 the government discussed revising the quarantine policy to require certain imports to go to specific ports and increasing the number of goods subject to national standards.

LABELLING: Labelling is one of the newer restrictions being placed upon imports. According to draft rules issued in early 2012, all fabric being imported for use in baby or children’s clothing must be certified by a laboratory designated by the National Accreditation Body of Indonesia and properly labelled. The products must be tested for azo dyes and formaldehyde and the label must properly identify the brand, the type of fibre being used, the country or origin and whether the product is intended for children or babies. The provisions will also be applied to children’s toys as of March 31, 2013. As with clothing, the products – such as bicycles, tricycles, pedal cars, trains and dolls – will have to be tested for hazardous chemicals.

While foreign investors have been focussed on export restrictions, the measures against imports may in the end be just as important. They are being carefully undertaken to comply with international obligations, while seeking to give domestic manufactures an advantage. Many foreign investors approve of the idea of labelling and say they maintain quality and ultimately favour the higher-quality manufacture. But if the rules are implemented in a protectionist way, the market becomes less competitive and the consumer ultimately gets hurt.