Fruits of the Past: Revisiting Indonesia’s trade policy

Indonesia’s past is an integrated part of the country’s economy. Since 1980’s the government has been able to successfully reduce international trade barrier.

Indonesia cannot afford to lose its focus on improving its trade policies. Joko Widodo’s administration has been moving in the right direction in terms of the deregulation packages, substantially stimulating Indonesia’s economic growth. To implement the policy in a right manner, the government must be prudent in terms of imports policy that generally include quotas, import licensing, and local content requirements.

The goal of Joko Widodo’s administration to promote domestic industry has been well reflected in these deregulation packages. As an agricultural country, Indonesia requires a structured strategy to improve its downstream agro-based industry as well as its upstream farming sector . A strong agricultural sector is key to the government in improving the farmers’ living standards and protecting domestic industry from dependence on imports of raw materials.

Agriculture plays an important role in the Indonesian economy as it sustains the livelihoods of more than 50 million Indonesians, mostly farmers in rural areas. In this era of globalization, international trade rules provide the framework for countries around the world in formulating their agriculture policies. Noncompliance with these rules may create trade disputes between countries.

For an example, last December the Dispute Settlement Body of the World Trade Organization (WTO) ruled that Indonesia’s import policy in relation to its horticulture products violated international trade rules. The problems began in 2012, when Indonesia introduced several import measures for imported fruits and vegetables, such as a restrictive import licensing regime, periodic and fixed import terms, local content requirements, and reference prices for certain food commodities.

This defeat at the WTO will negatively affect Indonesia’s reputation and credibility. In addition, the complainant country may ask for compensation or apply retaliation against Indonesian products if Indonesia does not adjust its policy to comply with the WTO ruling. As precedented in the US – COOL case when Mexico and Canada were allowed to carry out retaliation against the United States in the amount of US$ 1 billion annually.

With the global recession, many groups view international trade rules as a threat as they can impede a country’s ability to manage its domestic economy. Nevertheless, the very same rules enabled the successful growth of Indonesia’s agriculture sector over the last few decades.

What can we learn from the past?

When we look back, Indonesia has indeed made a great effort to integrate its economy into the global economy. This integration process began in the 1980s and accelerated during the 1990s.
During that period, the government succeeded in substantially reducing international trade barriers and opened up the economy to foreign investment. The momentum for Indonesia’s market opening measures was the sharp drop in oil prices. The government took the correct steps to restructure the economy by diversifying the trade sector away from its reliance on oil and gas.

During the late 1980s, trade policy reforms were implemented through a series of deregulation packages issued at least once each year. This aimed to reduce the non-tariff barriers (NTBs) to trade. Restrictions on foreign investment were gradually removed.
The government’s next focus at that time was to address import licensing restrictions. In the 1990s, such restrictions affected more than 1,000 items in Indonesia’s tariff code. Six years later, the number of products requiring import licenses had fallen to 200. This number has since declined even further as Indonesia has implemented its WTO commitments to eliminate all NTBs for commodities bound under the WTO.

This integration has supported the growth necessary for this country. Government policies have been highly successful at attracting foreign investment into labor-intensive export industries and led to the rapid growth of Indonesia’s agriculture-based industries.

Future concerns Considering the huge potential of the Indonesian agriculture sector, the government could look at the past policy as a reference. As is known, Indonesia is the world’s largest producer of palm oil, cloves and cinnamon. It’s the second largest producer of nutmeg, natural rubber, cassava, vanilla and coconut oil. It’s the third largest producer of rice and cocoa, the fourth largest producer of coffee and fifth largest tobacco producer, as well as the sixth largest tea producer.

Those commodities tend to be regulated sectorally. In addition to the Palm Oil Bill, recently Indonesia’s parliament deliberated the Tobacco Bill as a DPR initiative draft. Based on media reports, this bill will implement local content schemes and tobacco import quotas. It also sets a high tax for imported tobacco.

The policies under deliberation may lead to heavy burdens for domestic market and counterproductive for the Indonesian economy. The imports policies under deliberation are also likely to cause similar issues as seen in the trade dispute over horticultural products. It would thus be wise to imply non-tariff barrier schemes in relation to national security, protection of health, safety, the environment, morality, intellectual property and compliance with international obligations. The most common justification given these practices is that this may enable Indonesia to accelerate its industrial development and it is also in accordance with WTO rules.