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Business Updates | Indonesia Raises Import Tariffs on Consumer Goods

As the latest step taken by a government looking to address slowing growth in Southeast Asia’s largest economy, Indonesia in July 2015 moved forward with plans to raise import tariffs on a broad array of consumer goods. By increasing import tariffs on items ranging from coffee to cars and clothing, President Joko Widodo’s administration has set its sights on spurring a domestic manufacturing sector that grew by 4.4% year-on-year in Q2 2015 (Central Statistics Agency) - a rate far-removed from earlier industry projections for 2015 of over 6%, and below the economy as a whole at 4.67%.

Unsurprisingly, this course of action has been met with widespread international criticism despite the fact that the new import tariffs will not apply to countries with whom Indonesia has a Free Trade Agreement. The introduction of new trade barriers only serves to reinforce the perception of heightened protectionism under President Widodo during more challenging economic headwinds. Unlike previous protectionist-leaning regulations that apply only to a narrow segment of sub-industries such as the manufacture of 4G smartphones (See Rising Local Content Requirements for 4G Smartphones in Indonesia), the law mandating a rise in import tariffs covers in excess of 1,000 consumer goods and in several cases necessitates import tariffs more than triple the present rate.

Industries Impacted

Among the collection of consumer goods subject to an increase in import tariffs are a number of products that have a significant bearing upon inflation as items that factor heavily into the calculation of Indonesia’s CPI. Though dependent upon the availability of these consumer goods locally and from FTA partners (such as China, Japan, Korea, Australia, New Zealand, India, Pakistan and fellow ASEAN nations), this rise in import tariffs thus has the potential to exacerbate an ongoing decline in consumer confidence and consumption.

Indonesia’s Import Tariffs on Notable Consumer Goods

Indonesia’s Import Tariffs on Notable Consumer Goods 

Source: Ministry of Finance, www.beacukai.go.id

However, in applying an import tariff hike to the goods listed above, the government was likely motivated by factors that should mitigate negative impacts felt at the consumer level. In the case of items such as coffee and tea, an increase from 5% to 20% can be attributed to Indonesia’s existing strength in the cultivation and production of these goods (See Indonesia’s Coffee Industry Needs Growth Capital and Teatime in Indonesia), and the government’s confidence in local industries to meet consumer demand. 

Similarly, a steep increase in import tariffs on meats should be counter-balanced by the fact that Indonesia already has in place FTAs with its main beef supplier, Australia, through the ASEAN – Australia – New Zealand Free Trade Agreement (AANZFTA). It remains to be seen how a recent decision to lower the quota of cattle imports from Australia in Q3 2015 and the subsequent likelihood that Indonesia may look elsewhere for beef products will affect this dynamic going forward.

In other cases, the import tariff hike is largely a function of the government taking immediate action to revive flagging areas of business. An import tariff on clothing ranging from 15-20% depending upon the garment type should come as relief to a local textile industry that has suffered in recent months as raw materials purchased in US dollars become more expensive due to a weakening rupiah. With the Indonesian Textile Association recently reporting the shut-down of 18 firms in Java and lay-offs nearing 30,000 workers (The Jakarta Post, 9th May 2015), pressure is on the government to reverse the industry’s trajectory (See Indonesia’s Textile Industry – Testing Times Upstream).

Increasing import duties should also serve to harmonize the tariff system with the government’s economic priorities such as moving further into downstream manufacturing industries. As explained by Mr Adhi S. Lukman as Chairman of the Indonesian Food and Beverage Association (GAPMMI), previous import tariffs on sugar confectionary were lower than the tariff for sugar itself, thereby providing less of an incentive for businesses in this field to produce consumer goods such as chewing gum locally (Reuters, 23rd July 2015).

Plastering over problems?

All told, the selection of consumer goods detailed in the previous section comprise only a small portion of the 1,000+ products now subject to more prohibitive barriers to trade. For many of these items, justifications for an increased import tariff will be harder to come by and less convincing. At its core, this policy is undoubtedly protectionist and will thus need to bear the brunt of criticism such as the Lowy Institute’s assertion that the measure will harm Indonesia’s economic prospects – one of the key findings in a report titled ‘Trade Protectionism in Indonesia: Bad Times and Bad Policy'.

To be sure, the decision to raise import tariffs will not address the core issues that have impeded local businesses’ ability to compete with international brands. Underdeveloped infrastructure (See Concrete Developments in Indonesia’s Infrastructure), high logistics costs and difficult to navigate regulations remain the major hurdles faced by Indonesian companies, and as concluded by the Lowy Institute report, it is addressing these challenges that should be prioritised. Moreover, the coddling of local businesses at a time when they should be encouraged to improve through exposure to global competition may in fact stunt their development over the long-term.

However, it is worth keeping in mind that some analysts suggest that Indonesia’s move to raise import tariffs is in part driven by the desire for leverage in negotiating new FTAs (The Establishment Post, 5th August 2015). In this regard, the introduction of steeper import duties for countries that do not have an FTA with Indonesia may, somewhat counter-intuitively, be a precursor to the freer movement of goods from a wider range of markets. Whether other economies respond in line with Indonesia’s expectations is open to speculation, and it will be interesting to see how the country reacts to the announcement of a bilateral EU-Vietnam FTA on 4th August 2015.

Finally, it is also important to note that Indonesia’s import tariffs, while increasing, are starting from a level lower that other emerging markets at an average of 6.8% compared to 9.6% in China and 13% in India (The Jakarta Post, 24th July 2015). The government should thus be afforded with some room to maneuver in providing local business with support akin to its fellow Asian economic powerhouses.

Global Business Guide Indonesia - 10th August 2015

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