Global Business Guide Indonesia

Indonesia
Sign up for the GBG Indonesia Quarterly Business Intelligence Report for the latest news on your sector.
Sign Up
Business Updates | Understanding Indonesia’s New Trade Law

Indonesia’s parliament on 11th February 2014 passed into law the country’s first over-arching trade bill in a move that provides the government with the legislative foundation from which to exert greater control over exports and imports. At face value, the introduction of a comprehensive trade law comes as great relief to a country that still bases its approach to trade on regulations that date back to the Dutch colonial era. The decision to introduce the trade law, however, has been met with widespread media coverage focused on what the bill means for economic nationalism and whether it contributes to growing protectionism in Indonesia. This has drawn attention away from the trade law’s most concerning shortcoming; its lack of clarity and potential to cause rising uncertainty amongst local and foreign companies.

Now in the midst of a transitional period in which the government and relevant ministries draft the bevy of implementing regulations mandated by the new trade law; businesses in Indonesia are advised to take stock of what this legislative framework entails and understand why it has elicited such strong reactions from the international business community.

Pushing Protectionism?

Following on from a year in which rising imports fuelled a significant current account deficit; Indonesia has sought to limit its reliance on overseas shipments. The 2014 Trade Law makes clear its immediate priorities of achieving economic growth through the development of Indonesia's local production capabilities. As explained by former Minister of Trade, Mr Gita Wirjawan, the bill was created to ensure that Indonesia’s sustained growth is driven by the emergence of local products to meet the needs of an increasingly consumptive population (Jakarta Globe). To achieve this goal, the new trade law puts in place several directives that facilitate government intervention to protect local industries.

Article 22 of the trade law spells out the government’s initiative to promote the use of locally produced goods through socialisation programs and marketing campaigns as a means of spurring growth in domestic industries. Moreover, the article provides the legal basis for the Indonesian government to make the use of some locally produced goods mandatory in accordance with existing laws, though additional information on the type of products and specific laws being referred to is not detailed in the bill.

It is important to note that Article 22 does not make any distinction between foreign or domestic producers located in Indonesia, insofar as the company produces goods within the country. In fact, Clauses 7 and 14 of Article 1 define local products as goods made by legal entities/corporations established and domiciled in the Republic of Indonesia.

Indonesia’s move towards a more hands on approach to intervention is made evident in Article 35, which grants the government with the authority to impose trade restrictions and bans on goods/services in the interests of domestic trade, and Article 54, which allows the government to restrict exports and imports to serve national interests. The bill’s spectrum of reasons to potentially limit exports includes ensuring that local demand is met, guaranteeing the supply of raw materials for domestic industries, and in the case of commodities, anticipating a ‘drastic’ price increase in global markets. Imports can be restricted under circumstances in which doing so would accelerate and protect the development of local industries, or maintain the country’s trade balance. 

Mixed Reactions

The introduction of the trade law has seen international media outlets questioning Indonesia’s continued viability as a lucrative destination for foreign investment. This argument is largely based on the assertion that introducing measures to protect local industries is the latest step in a broader plan to embrace economic nationalism. Furthermore, foreign entities have argued that the trade law in its present form leaves itself vulnerable to challenges from trading partners due to its deviation from guidelines put in place by the World Trade Organisation (WTO). As explained in the European Chamber of Commerce’s 2014 Position Papers, the trade law currently fails to include provisions which state that any trade limiting measures taken by the Indonesian government will not be maintained for a period longer than four years or ‘if the circumstances giving rise to their adoption no longer exist’, despite the fact that these provisions are required by the WTO Agreement on Safeguards and the WTO Agreement on Technical Barriers to Trade.

It is important to keep in mind, however, that the new trade law has produced the exact opposite reaction amongst some Indonesians. Whereas the foreign press has been quick to point to growing market intervention, local media coverage has emphasised portions of the bill thought to demonstrate growing liberalisation such as Article 2.C, which references the trade bill’s goal of ensuring equality of opportunity and fairness in carrying out business activities in Indonesia but does not distinguish between local or foreign owned companies. Indonesian economic analysts have also posited that the law opens up opportunities for regional governments and the local business community to establish trade avenues in retail without requiring the involvement of the national government (Article 12).

These differences in opinion are symptomatic of the bill’s most pressing issue – its lack of clarity in discussing the various justifications for government intervention. Reports published by the American Chamber of Commerce and EuroCham discuss at great length the bill’s vague assertions that leave considerable room for interpretation and thus build towards uncertainty. Article 35, for example, includes Clause 1.H., which states that the government can intervene in trade when it is deemed that doing so is ‘in accordance with the government’s duties and tasks’; thereby making trade restrictions legally justifiable under almost any conceivable circumstance.

In truth, without a clear understanding of what is meant by ‘national interests’ or ‘drastic increase in global commodity prices’ it is impossible to discern whether the trade law leans towards economic nationalism or otherwise. The onus is thus on the government in drafting the trade law’s implementing regulations to elucidate upon aspects of the bill currently insufficiently defined such as how it intends to assess legitimate risks to Indonesia’s national interests and what constitutes scarcity (AmCham).

Outlook

Uncertainty caused by the trade law’s room for interpretation can be allayed (if only marginally) by remembering that Indonesia has already demonstrated a pattern in imposing export restrictions and may very well stick to similar guidelines in the future. As seen in their decision to restrict the export of unprocessed commodities (See Incentivising Downstream Investment; A Look into Export Tariffs on Agricultural Commodities), Indonesia has by and large abided by the general principle of limiting the international sale of its raw materials to meet its goal of moving up the value added chain. In the immediate term, it is likely that export bans – should they be implemented – will be similarly focused on value added processing, which bodes well for downstream industries in Indonesia.

With that said, there is also precedent for Indonesia choosing to limit the import of commodities and foodstuffs with the single objective of controlling prices and protecting domestic industries. In 2013, the Ministry of Trade attempted to restrict the import of beef and cattle to shield local livestock companies; an initiative that resulted in shortages and higher beef prices in Indonesia and had to be abandoned. This is indicative of a more trial and error approach on the part of the Indonesian government as it tests the water in exercising greater control over trade.

The true impact of this bill is still in the balance, as much depends on the 9 Government Regulations, 14 Presidential Decrees, and 20 Ministerial Regulations needed to fully implement the legal framework put in place by the 2014 Trade Law. Moreover, the ongoing election will likely push the formal enactment of this legislation back, thereby becoming the responsibility of a new presidential administration potentially less encumbered with the need to appeal to nationalist sentiments once the election is over. In the meantime, businesses in Indonesia, particularly those in upstream industries or raw material extraction/cultivation, should consider preparing for an eventual rise in government trade intervention by expanding into the production of value added goods for a domestic consumer base gradually being weaned off imports. 

Global Business Guide Indonesia - 3rd March 2014

icone share