ACFTA-Which options for Indonesia

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Facing a Political Lock-In Situation with the ACFTAWhich options for Indonesia?

Ivan Lim, Philipp Kauppert, FES Jakarta, March 2010

• By signing a Free Trade Agreement with China, ASEAN expects to strengthen its bar-gaining position for international trade. Being one of the key members of ASEAN, In-donesia has been promoting ACFTA proactively.

• For the supporters, ACFTA creates better opportunities for local business to exportmore goods to the important Chinese market and increases bilateral trade and invest-ment across the region. For the opponents, ACFTA has the potential to seriouslydamage domestic industries and lead to mass layoffs.

• The Indonesian Government is urged to take preventive measures in anticipating andcompensating the negative impacts of ACFTA. Those efforts include renegotiatingseveral tariff posts, granting fiscal incentives for the affected industries, improving thenational infrastructure and reforming the deficient Social Security System.

Since 1 January 2010, the ASEAN1-ChinaFree Trade Agreement (ACFTA) has becomefully effective in introducing zero tariffs on6682 tariff posts in 17 sectors, including 12 inmanufacturing and 5 in agriculture, mining and

maritime sectors. This has triggered a livelypublic debate in Indonesia; some voices em-phasize the opportunities, while others con-sider it as a threat to the Indonesian economy.The concern seemed plausible: the statisticsof the Ministry of Trade showed that althoughthe amount of total trade between Indonesiaand China has more than tripled from US$ 8.7billion in 2004 to US$ 26.8 billion in 2008 witha usual record of surplus, it indicated a deficitof US$ 3.6 billion for Indonesia in 2008.

The political situation is unlikely to allow acomplete renegotiation of the ACFTA. So fac-ing the initiated upcoming of the free tradeagreement, this article will try to answer thefollowing question: Is a win-win solution forIndonesia actually possible? By beginning withthe introduction of ACFTA, its origins and mo-tivation from both China and ASEAN perspec-

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The Association of Southeast Asian Nations (ASEAN)comprises Brunei-Darussalam, Cambodia, Indonesia,Lao PR, Malaysia, Myanmar, Philippines, Singapore,

Thailand and Viet Nam.

tives, this article will approach its initial ques-tion. It then follows with the perspective ofIndonesia, focusing on its government, busi-ness organizations and trade unions. Theconclusion shows some possible solutions

offered by experts from various backgroundsand the government for those fearing the neg-ative impacts of the ACFTA implementation.2

ACFTA, the third biggest free trade area be-sides the European Union and the NorthernAmerican Free Trade Agreement (NAFTA), isan agreement among the ten member statesof ASEAN and China. It is predicted that theestablishment of the ACFTA will create aneconomic region with 1.7 billion consumers, aregional Gross Domestic Product (G.D.P.) of

about US$ 2 trillion and a total trade volumeestimated at US$ 1.23 trillion. The removal oftrade barriers between ASEAN and China isexpected to result in lower costs of produc-tion through economies of scale, expandedintra-regional trade and increased economicefficiency. Simulations conducted by the

2Ivan Lim is an International Business student at the

German Swiss University of Jakarta and has worked forFES Jakarta during an internship. Philipp Kauppert isDeputy Resident Director of FES Jakarta. The opinions

expressed reflect the views of the authors.



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ASEAN Secretariat using the Global TradeAnalysis Project (GTAP) suggest that anACFTA will increase ASEAN’s exports toChina by 48% and China’s exports to ASEANby 55.1% and could probably raise ASEAN’sG.D.P. by 0.9% or by US$ 5.4 billion whileChina’s real G.D.P. could expand by 0.3% orby US $2.2 billion. The governments support-ing this initiative hope that with the formationof an ACFTA, enterprises in ASEAN andChina will become more efficient and furtherpromote specialization in order to be morecompetitive than other world regions. This issupposed to boost productivity and economicwelfare as well as attracting more investmentinto the region.

The Origins of ACFTA

The idea of a free trade area between Chinaand ASEAN was first proposed by ChinesePremier Zhu Rongji at the November 2000China-ASEAN summit. In October 2001, theChina-ASEAN Expert Group on EconomicCooperation issued an official report recom-mending a “WTO-consistent ASEAN-ChinaFTA within ten years”. A month later, at theNovember 2001 China-ASEAN summit, therelevant leaders endorsed the ideas of the

Expert Group and the negotiation processofficially commenced. Then, at the EighthChina-ASEAN Summit in November 2002,the ASEAN leaders and Chinese PremierZhu Rongji signed the “Framework Agree-ment on Comprehensive Economic Coopera-tion”. As laid out in the framework agreement,a free trade area covering trade in goodsbetween China and the original five ASEANmembers (Indonesia, Malaysia, Singapore,the Philippines and Thailand) is to be com-pleted by 2010. The remaining five ASEAN

members are expected to fully join by 2015.

1. The Perspective of China

China’s new diplomatic strategy seeks tocapitalize on globalization to accelerate Chi-na’s economic development in order to copewith the growing demands and to hinder so-cial conflicts. In Southeast Asia, the “peacefulrise” is promoted through an FTA agendareflecting geopolitical and economic objec-tives - cultivating goodwill among neighbors,maintaining regional stability, and securingkey markets and raw materials needed forChina’s economic growth. China sees

ACFTA as a tool to respond to challengesposed by competitive regionalisms in theworld economy, to consolidate growing eco-nomic ties with Southeast Asia, to secure theaccess to raw materials, and to ensure apeaceful environment to support China’sgrowing influence to counterbalance Ameri-can and Japanese power.

2. The Perspective of ASEAN

By signing a Free Trade Agreement with Chi-na, ASEAN expects to improve its bargainingposition in the international arena. Moreover,increased trade between the two sides sincethe normalization of ASEAN-China bilateralrelationships in the early 1990s has fuelled

the confidence of ASEAN policy-makers, whonow feel that ACFTA could provide a muchneeded economic boost to a Southeast Asiastill weakened by the 1997 economic crisis.As China’s economy lacks of natural re-sources, the demand for ASEAN exportsmight even still increase in the near future. Asa further advantage of the ACFTA, ASEANcountries can benefit from a growing numberof Chinese tourists due to the rise of Chinesemiddle class. In any respect, ACFTA could beseen as a bulwark against potential hostile

behavior from China towards the SoutheastAsian region. Nevertheless, despite a closerrelationship between the two parties, Chinamight remain a concern for ASEAN countries.China’s defense expenditure rose from US$6.06 billion in 1990 to US$ 14.6 billion in2002. This development alone constitutes akey rationale for the Southeast Asian gov-ernments to seriously further engage them-selves with the growing power of China.

3. The Perspective of Indonesia

Being the largest country in Southeast Asiaand rich in resources, Indonesia is of strateg-ic importance for the development of thewhole region. As one of the key membercountries of ASEAN, this country has been amajor player in promoting ACFTA which hasbeen carried out since January 1 of 2004,through an Early Harvest Program reducingtariffs on many agricultural products.

a. Government, the Supporters of ACFTA

President Susilo Bambang Yudhoyono ex-pressed his opinion that the Free Trade



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Agreement between ASEAN and China(ACFTA) would not threaten Indonesia’s in-dustries, but would rather create a higheramount of opportunities for local business toexport more goods to China.

The Ministry of Trade emphasized that theimplementation of ACFTA was expected tostrengthen bilateral trade and investmentacross the region. This is yet another impor-tant element of the context of the strategicpartnership between Indonesia and China. The Minister of State-Owned Enterprises(SOEs) explained that ACFTA created higheropportunities for three industrial sectors forexports, namely maritime, food and beve-rage, forestry and agriculture products. To

anticipate negative impacts of the ACFTA,SOEs planned to engage in the domesticsteel industry. Hereby, the Minister requestedto apply more stringent regulations on im-ported products from China.

But there are also voices fearing a negativeimpact of ACFTA within the government.Based on the field research in Tanah AbangMarket and Cibaduyut, the State Minister ofCooperatives and SMEs informed that localgarments and shoes industries are basically

fitted to compete with foreign industries inACFTA. However, he asserted that theACFTA might cause some damage to a highnumber of Medium Enterprises (SMEs) whichplay an important role in Indonesian overallbusiness, quoting data from the Central Statis-tics Agency (BPS).

The consequences for the public financialsituation also seem ambiguous. Finance Mi-nister Sri Mulyani Indrawati estimated thatACFTA could cause government to lose Rp

1.6 trillion in import duties on the one hand,but on the other hand these losses should becompensated by increasing value added taxon imported goods, estimated to rise by morethan 50% from Rp 66.3 trillion to Rp 102.2trillion.

b. Profit Organizations: ControversialIssues

Research by the Chamber of Commerce hasclarified that this trade agreement providesbenefits to certain sectors (i.e. rubber, miner-als, machinery and equipment products), butthere are others that will experience pressure

such as leather, apparel and metal products.Nevertheless, the option to delay ACFTA isnot a wise one because:

• The competitiveness of Indonesian prod-ucts would be eroded by other ASEANcountries whose products are cheaper forChina.

• The products of ASEAN countries in gen-eral could be more competitive becausethey could afford cheaper raw materialsor intermediate products from China.

• It could happen that other ASEAN coun-tries get their products from China andexport them to Indonesia. Although it isforbidden, it would be difficult to preventsuch practices.

•In general, multilateral agreements underthe umbrella of ASEAN might provide abetter regulatory framework than differentsingle bilateral agreements among theengaged countries.

The businessmen associated in the Indone-sian Iron and Steel Industry Association(USIA) complained that they have been hav-ing troubles already with 5% tariffs, and that afurther reduction to zero tariffs will likelycause serious consequences. The General

Chairman, Fazwar Bujang promised to en-hance the competitiveness of the nationalsteel industry if ACFTA could be postponedfor another two years. In addition, he men-tioned that the government should reduce thecosts and guarantee a reliable availability ofenergy.

Indonesia Employers Association (APINDO)Chairman, Sofyan Wanandi claimed that theadverse effect could be seen in the next threeto six months after the beginning of the im-plementation of ACFTA. He added that Indo-nesia, together with India and China, is oneof the countries that have been able to with-stand the global crisis. Therefore, now couldbe the most powerful momentum to attractmore inward investment.

A basically optimistic view was felt by themembers of Indonesian Textile Associations(API). But, the Executive Secretary of APIalso hoped that the government would pro-

vide protection to local entrepreneurs thatcould be undermined if there is no strict pub-lic supervision.



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c. Trade Unions and Other Opponents

According to the Indonesian Farmers Strug-gle Front, about twenty trade union organiza-tions in a press conference in Jakarta held bythe Labor Revolutionary Command (KOBAR)expressed their rejection against the ACFTAimplementation that could cause masslayoffs. In this occasion, the Secretary Gen-eral of All Indonesian Workers Organization(OPSI), Timboel Siregar stated that the sign-ing of the agreement would lead to an in-crease in unemployment and de-industrialization.

The Chairman of the Confederation of All-Indonesian Workers Union (KSPSI), Mathias

Tambing pointed out that the entry of Chi-nese products has a great impact on the do-mestic market. Not only that they are cheap-er, but their qualities are better too. Subse-quently, he assumed that the implementationof ACFTA would be more suitable if domesticproductivity could first be overhauled toachieve equal competitiveness.

Fearing the unfavorable result of ACFTA, theDirector of Operation and Service of theJamsostek company, Ahmad Anshori calcu-

lated that about 2.5 million workers in thelabor-intensive leather and garment factoriesand agribusiness industries could potentiallylose their jobs. In the worst case, the compa-ny has prepared a budget of more than Rp. 1trillion to fund employee termination claims.

Besides the different social and economiceffects for Indonesia, the environmental im-pacts of ACFTA might also be quite negative.The Executive Director of the IndonesianEnvironment Forum (WALHI), Berry Nahdian

was certain that the implementation of a freetrade scheme like the ACFTA model couldexploit a larger amount of Indonesian naturalresources. He clarified that the ACFTA wouldlegalize more coal dredging, logging and landacquisition activities where many were hit bythe flood yearly due to forests around themthat have turned into coal mining areas.

The Political Lock-In Situation

The Indonesian President has made clearthat he is not willing to break an agreement atthis stage that has been designed and signedby all the ASEAN members and China al-

ready years ago. Nevertheless, he wasaware that it is essential to protect public in-terest and prepare the relevant elements byworking together with the different Ministers.

In order to help to protect the local industries,the House of Representatives’ commission VIoverseeing industry and trade has demandedthe government to renegotiate a number of228 tariff posts, covering garments, furnitureand footwear among others. The Minister ofIndustry MS Hidayat assumed that theACFTA implementation could hurt domesticfirms, and expressed that the governmenthas sent a letter regarding this matter and itwould take some time to be processed.

Coordinating Economic Minister Hatta Rajasaconfirmed the renegotiation and mentionedthat the government was willing to help bol-ster local industries’ competitiveness by pro-viding more support to improve the nationalinfrastructure as well as through fiscal incen-tives to those actors directly affected by theACFTA agreement.

“We support the implementation of the Indo-nesian National Standard (SNI) as an antic-ipatory measure against goods of below

standards coming into the country,” statedManpower and Transmigration Minister Mu-haimin Iskandar. In seeking a solution fordealing with global competition and anticipat-ing possible layoffs following the ACFTA im-plementation, he announced that the gov-ernment would assign a special team to mon-itor and detect layoffs that are not done ac-cording to procedures and laws.

Another perspective on the anticipation of thenegative effects has been expressed by

Rieke Diah Pitaloka, member of the House ofRepresentatives Commission IX,. In a round-table discussion on ACFTA organized by thenetwork of Asian Social Democrats3, shesuggested that the best solution would be abetter implementation and a reform of theNational Social Security System (SJSN),where the legal basis already exists since theformulation of its laws in 2004. An effectiveand just social security system could be apositive public measure to protect the Indo-

3This event took place in Jakarta on the 22

ndof Febru-

ary 2010. Find more information about the networkunder: www.socdem.asia



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nesian workers against the thread of potentialmassive lay-offs in consequence to the freetrade agreement.

In response to the anxiety among workersover potential dismissals ACFTA couldcause, the employers’ organization APINDO,together with a number of trade unions, de-cided to form the National Bipartite Forum(FBN). “Everyone realized that business con-tinuity should be maintained in order to pro-vide job security for all employees of thecompany”, said Sofyan Wanandi. FBN issupposed to build mutual trust among theemployers and their employees with the goalto create healthier businesses and betterworking conditions that could generally con-

tribute to social welfare.

Conclusion

The guiding question raised at the beginningof this article was whether a win-win-solutionfor Indonesia was still possible given the factthat Indonesia was facing a political lock-insituation with regards to the implementationof ACFTA. To answer this question, the dif-ferent positions presented in this article couldbe divided into the three following categories:

• The Government is generally supportingthe ACFTA implementation, despite thefact that the Minister of Industry showedhis worries about the danger of hurtingdomestic firms.

• The Business Organizations are dividedinto potential winners and losers ofACFTA. Finally, it depends on which in-dustry is capable to compete and there-fore might benefit or which might ratherbe affected from it.

• Trade Unions and others actors who areopposing ACFTA, especially those work-ing in a labor-intensive industry whichhave a low chance to survive the strongcompetition with inflowing, cheap Chineseproducts.

The current political situation in Indonesiaindicates that the government is committed tothe agreement and has no intention to breakit. However, both the supporters and the op-

ponents groups are trying to design somekind of preventive measures to cope with thedifferent future negative impacts of ACFTA.On the side of the government, the renegotia-

tion of some tariff posts with the Chinesegovernment has been requested. Anotherfocus lies on the improvement of the nationalinfrastructures and the provision of fiscal in-centives to the negatively affected industries.On the employers and trade unions side,some of them decided to strengthen futurecollaboration by forming a national bipartiteforum. Their hope is that this forum wouldfind a solution for the improvement of indus-trial relations in Indonesia.

A main problem for the Indonesian industry isits deficient infrastructures, as the electricitycrisis in 2008 has caused the economy andbusiness community to suffer. That could beone of the reasons why Indonesia’s imports

from China outgrew its exports to China.Based on the presentation by the former In-donesian Ambassador for China 2006-2009,there was a significant increase in the importsof electric equipment from about US$ 400 to800 million, steam generators from aboutUS$ 45 to 300 million and several capitalgoods that contributed the most to the deficitin the balance of trade with China. In a publiclecture held at the University of Indonesia on9 February, he argued that investments intothese capital goods would be highly valuable

for future development in Indonesia. There-fore, the trading balance deficit could be re-garded as a minor source of concern whichcould have some positive economic effects inthe long term.

The Head of Research and Development ofthe economic and social department from theUniversity of Indonesian Education (UPI),Nana Jiwayana concluded the threat ofACFTA should not be viewed as a frighteningspecter; it would be more useful if it was seen

as a whip for Indonesia to keep pace with theimprovement efforts. Considering the poten-tial opportunities presented in this article,perhaps ACFTA could generate some posi-tive effects for Indonesia’s economic devel-opment. The main challenges lie in copingwith the potential negative effects such as de-industrialization and unemployment. If thoseeffects could be prevented by public meas-ures such as an effective social security sys-tem or higher investments in the national in-frastructure and education, Indonesia mightcreate a win-win solution and be able to profitfrom the long-term, positive effects ofACFTA.

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ACFTA-Which options for Indonesia