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Business Updates | Indonesia and the Trans-Pacific Partnership – Worth the Membership?

As a sign of furthering global integration, President Joko Widodo has expressed his intentions for Indonesia to join the Trans-Pacific Partnership (TPP) during a recent meeting with US President Barack Obama on 26th October 2015. Following on from this announcement, the administration has faced a backlash of criticism for its plans to join the 12-member nation pact – encompassing Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam – while many question Indonesia’s actual readiness to become a future member of a partnership network that would encompass 40% of the global economy and bring about greater competition for local businesses. The Trans-Pacific Partnership boasts strong commercial attractiveness with a combined GDP value of $27.8 trillion USD as well as providing better trade access to developed economies such as the United States and Japan which has been a long-awaited request from local companies. Regardless, mounting reports of secrecy and backdoor negotiations related to the Trans-Pacific Partnership demonstrates an underlying necessity for the Joko Widodo administration to thoroughly review the 6,000-page, US-led free trade agreement (FTA) through the lens of Indonesia’s current and anticipated future economic standing.

Enrolment in the Trans-Pacific Partnership is deemed a mandatory step by Minister of Trade, Mr Thomas Trikasih Lembong, as a means of keeping pace with regional neighbours. In doing so, Indonesia would be required to uphold a willingness to not impose protectionist policies – as done with the electronics local content requirement (See Rising Local Content Requirements for 4G Smartphones in Indonesia) – while securing a sound level of its industries’ competitiveness before proceeding with the partnership. Uncertainty from local companies ahead of the ASEAN Economic Community (AEC) in 2016 (See Indonesia and the ASEAN Economic Community – Ready for Regional Integration?) in addition to incomplete regulatory fulfilment to support the full integration of the AEC portends imposing challenges for local players should the government carry onwards with plans to obtain Trans-Pacific Partnership membership. Indonesia holds many opportunities to broaden its export destinations through the Trans-Pacific Partnership with the removal of trade barriers, however, industry experts across the board question whether the country would benefit from more expansive trade channels given its continued difficulties in diversifying its export base beyond its traditional mainstay of commodities.

Textiles in a tangled web

Assessing the Trans-Pacific Partnership’s impact on Indonesia presents the challenge of projecting pros and cons that vary on a sector by sector basis. As an industry with a longstanding presence within Indonesia’s economy, textiles and textile products (TPT) are set to benefit from a potential membership within the Trans-Pacific Partnership. As the fourth-largest contributor to GDP – encompassing 9% of the GDP in 2013 – Indonesia’s investment within its TPT industry has led to the development of a mature upstream and downstream TPT sector evident in the 2,980 garment factories spread throughout the archipelago (See Indonesia’s Textile and Clothing Industry). Furthermore, employing nearly 2.9 million workers in 2012 (Central Statistics Agency) – totalling 21.7% of the non-oil and gas manufacturing industries workforce – the TPT sector is both a major employer as well as a principal net exporter. To stay afloat amidst stronger competition, Indonesia’s robust TPT industry would open itself up to new opportunities particularly in finding a specialised area of focus in the global textile supply chain should it decide to join the lucrative organisational body. Notably, the Indonesian Textile Association and the Indonesian Footwear Association have requested the government to become a Trans-Pacific Partnership member to improve the competitiveness of local textile goods relative to regional neighbour, Vietnam.

Vietnam’s active status in the Trans-Pacific Partnership should stand as caution for Indonesia’s TPT industry given the advantages Vietnam has in terms of TPT exports. Currently, the United States is cited as both ASEAN members’ largest export market with each respective nation-state exporting a total of $5 billion USD (Indonesia) and $8 billion USD (Vietnam) in knit and woven apparel exports to the US in 2013. Vietnam has benefitted from lower trade tariffs through the US-Vietnam Bilateral Trade Agreement since 2006 while Indonesian businesses wait for a prospective FTA with the United States. As Indonesia encounters more aggressive competition from its ASEAN partner in addition to facing domestic issues such as workers union protests (See Labour Pains in Indonesia), annual wage increases (See Indonesia Moves to Address Minimum Wage Woes), and the fluctuating value of the rupiah (See The Present Plight of the Indonesian Rupiah), the country’s TPT industry is arguably losing some of its edge as a major TPT manufacturing base.

Having become the 7th largest global garment exporter in 2013, Vietnam has surpassed Indonesia which stood in the 14th position in the same category after experiencing a 2.4% decline in global garment trade (United Nations). Vietnam’s membership in the newly-formed Trans-Pacific Partnership will only see it encounter additional benefits, particularly a 50% increase in global apparel and footwear exports for the next 10 years as well as a trade tariff reduction to nearly zero percent with the US for exported garments and shoes. Such implications stand as a reminder of what Indonesia can potentially lose out to should it decide to opt out of the Trans-Pacific Partnership.

Fishing for opportunities

For Indonesia, the Trans-Pacific Partnership would boast added benefits for the local fisheries industry given the country’s standing as the largest producer of fishery products in the ASEAN (See Indonesia’s Aquaculture & Fisheries Sector). As an archipelago, Indonesia has yet to take advantage of the pronounced opportunities in relation to its fisheries industry despite the sector having the economic potential to contribute 3 trillion IDR annually. Indonesia’s gross domestic product of the fisheries industry grew 8.64% in the first quarter of 2015 and is the second-largest sector in the agriculture category (Central Statistics Agency).

Similar to the TPT industry, local fisheries businesses play a significant role in national employment as well as spearheading economic growth. Under the Joko Widodo administration, Indonesia has proceeded in realising measures to further strengthen the country’s maritime and fisheries industries, however, with many Indonesian fishermen lacking proper equipment for high-volume live catches coupled with inadequate maritime infrastructure, there remains doubt whether Indonesia would have sufficient time to benefit from the wider channels of trade partners within the Trans-Pacific Partnership pact (See Indonesia's Maritime Ambitions Require Massive Upgrade of Seaports).

Under the Trans-Pacific Partnership, Indonesia would be better positioned to maintain its lead as the foremost player in fisheries within the ASEAN despite having to face Vietnam as a direct competitor. Indonesia maintains its competitive edge having produced 10.83 million tonnes of live catch in 2010 whilst Vietnam produced 5.2 million tonnes of fisheries in the same year (Invest in ASEAN) and has since continued to increase this total. The US is leading Vietnam’s incremental rise in fisheries exports given that it is a major importer of its tuna and shrimp products thus serving to narrow the annual production gap with Indonesia.

Should Indonesia progress with efforts to join the Trans-Pacific Partnership, it has the viable potential to benefit from its main export destinations for fisheries given that Japan, US, Singapore, and Vietnam are Trans-Pacific Partnership members. It is worth noting that since 29th July 2015, Indonesian businesses are subject to a zero percent tariff for 34 fisheries products delivered to the US under the US’ Generalised System of Preference (GSP) enabling local businesses to take advantage of the opportunity to increase the volume of exports in advanced economies.

The latest accomplishment indicates steps taken by the government to support the fisheries industry without the provision of an FTA. Due to the Ministry of Maritime Affairs and Fisheries’ target of $5 billion USD in exports in 2015, the government has had to turn to other markets including the EU – specifically France – in a bid to achieve its target while building upon its trade network. In 2013, fishery exports to France totalled more than $43 million USD – a 33.5% increase from 2012. Furthermore, the Joko Widodo administration has restarted discussions in a bid to finalise the Indonesia-EU Comprehensive Economic Partnership Agreement thereby presenting the archipelagic state a solid platform to explore beyond its current network of trade partners.

A wrong remedy for pharmaceuticals

As with most free trade agreements, there are setbacks to be faced, in which the foremost implications under the Trans-Pacific Partnership is in regards to access for affordable drugs and medicine. The Trans-Pacific Partnership clause on pharmaceuticals stipulates patent rights of five to eight years for biologics which are cutting-edge drugs that use living cells to treat life-threatening ailments. Criticism of the clause points to the possibility of causing a rise in generic drug prices and creating an inevitable barricade to vital healthcare access, especially for the lower income strata.

The extended duration required to produce generic versions of biologic drugs would prove costly when taking into consideration the reality that generic medicine in Indonesia costs 50% less than its brand-name counterparts (World Health Organization). As such, membership to the Trans-Pacific Partnership would serve as a contradictory move for the Joko Widodo government given the purpose of the country's national healthcare system ('JKN'). In a report by The Guardian, Mr Irfan Humaidi from the National Social Security Agency underlined that there are 133.4 million Indonesians currently registered under the healthcare scheme. With less than half of the 250 million population left to cover, Indonesia under the Trans-Pacific Partnership would be hindering its own strategy to fully implement the country’s ambitious healthcare plans (See Indonesia’s Healthcare Sector).

To TPP or not to TPP?

Indonesia’s interest to partake in the Trans-Pacific Partnership is in keeping with the current government’s focus on developing an export-oriented economy. With this said, Indonesia should remain cautious in the steps it takes before making any final decision with regards to membership, and take advantage of the fact that it is not yet formally obligated to join a trade agreement that in its current state remains highly-controversial. The aforementioned challenges related to the pharmaceutical industry is by no means the only red flags associated with the Trans-Pacific Partnership, and exposes deep-rooted problems with how the Trans-Pacific Partnership has typically been negotiated on a bilateral basis cloaked in secrecy and characterised by horse-trading.

Indonesia’s recent experience in partaking in a globally-oriented trade market should serve as a reminder of the need to carefully evaluate the positive and negative implications of signing on to a new FTA. The country needs only to look back at the ASEAN-China Free Trade Agreement – in which the local market was flooded by cheap Chinese goods – to understand the importance of thoroughly examining where it stands to gain and lose from the Trans-Pacific Partnership.

Unlike its ASEAN counterparts, Indonesia has a strong domestic market that has long-served as the country’s economic engine; this means that joining the Trans-Pacific Partnership is less of an immediate issue for Indonesia as compared to more export-oriented economies such as Vietnam and Singapore. Time is Indonesia’s friend at this current stage of evaluating the Trans-Pacific Partnership and as such the government should not rush into making any concrete decisions. The country would not be the only nation to decide upon a wait-and-see strategy; regional neighbours such as Thailand as well as Asian powerhouses South Korea and India have also expressed interest while refraining from signing on as official members.

Global Business Guide Indonesia - 2nd december 2015

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