23

THE INFLUENCE OF ACFTA IMPLEMENTATION ON

INCREASING MARKET COMPETITIVENESS IN

INDONESIAN DOMESTIC MARKET

Written to meet the requirement of Paper Competition Economix

Faculty of Economics, Universitas Indonesia

Written By:

Dwi Andi Rohmatika (07/253455/EK/16738)

Williem (07/257030/EK/16767)

Faculty of Economics and Business

Universitas Gadjah Mada

Yogyakarta

2010

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ACKNOWLEDGEMENT

First of all, we would like to thank God, for giving us the health, strength,

and chance to finish this project. Not forgotten to our family for supporting, such

as funding and advices, and without those things, we wonder we could have this

project done in time.

We would like to thank our fellow discussion partner, Aulia Rahman, for

guiding us throughout the project. We had some diffficulties in doing this paper,

but he patiently was able to be a sharing partner until we understand the issue

arise.

In doing this project, we use internet, computer, books, and all that our

source to complete this project. All of those things really helped us in finishing

the paper. We often bothered our librarians at Faculty of Economics and Business.

Thus, we would like to say thank ou very much for accompanying us until late at

night.

We hope this paper could give any insight and advantages to the readers.

We hope it also is able to open the discussion about this issue. We realize that this

paper has not been perfectly made. Therefore, any critiques and advices are

welcome. Thank you.

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LIST OF CONTENTS

COVER .......................................................................................................... i

ACKNOWLEDGEMENT ............................................................................ ii

LIST OF TABLES AND FIGURES ............................................................. iii

CHAPTER I INTRODUCTION ................................................................... 1

1.1 Background ............................................................................................. 1

1.2 Problems ................................................................................................. 2

1.3 Objectives ................................................................................................. 3

CHAPTER II LITERATURE REVIEW ...................................................... 4

2.1 Description of ASEAN-China Free Trade Area (ACFTA) ....................... 4

2.2 Literature, Paper, and Supporting Theories .............................................. 5

CHAPTER III CONTENT ............................................................................ 8

3.1 The Importance of ACFTA to Economic Development

of ASEAN Countries and China ................................................................... 8

3.2 The Influence of ACFTA on Individual: The Study of International

Trading Between Indonesia and China ......................................................... 12

3. 3 Evaluation of Government Protection to Domestic Industries .............. 15

CHAPTER IV CONCLUSION ................................................................... 18

4.1 Conclusion .............................................................................................. 18

4.2 Recommendation .................................................................................... 19

BIBLIOGRAPHY ........................................................................................ 21

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LIST OF TABLES AND FIGURES

Figure 1. Heckscher-Ohlin Theorem .............................................................. 6

Figure 2. Partial Equilibrium’s Theorem ....................................................... 7

Table 1. ASEAN Export and Import to China, 1993-2003 ......................... 10

Table 2. Tariff Reduction Scheme of ACFTA ............................................... 11

Figure 3. Indonesia Export to China and Import from China ...................... 12

Table 3. Indonesia Export and Import to China 2008 .................................... 13

Table 4. Indonesia Export and Import to China 2009 .................................... 14

Table 5. Indonesia Export and Import to China 2010 .................................... 15

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CHAPTER I

INTRODUCTION

1. 1. Background

Association of South East Asian Nations (ASEAN), an association which consists

of 10 countries in its regional, has developed to not only concern in its political

driven, but also in economic cooperation as the declaration mentions about (1)

fastening the economic growth, social improvement, and culture development,

and (2) encouraging an active partnership and helping one another on the

problems related to regional interest in economy, social, culture, technology, and

knowledge. The economic growth of ASEAN is considered to be one of the

significant issues in the international trading proved by the volume of export and

import trading in international market. Many commodities sold by ASEAN

member states get high demand from international buyers, such as crude palm oil,

various natural resources, foods tobacco, textile garments, and many more.

Improving the trade efficiencies among countries of ASEAN, this association has

implemented some agreements towards market liberalization, starting from

ASEAN Preferential Trade Agreement (ASEAN PTA), ASEAN Free Trade Area

(AFTA), ASEAN Investment Area (AIA), ASEAN Industrial Cooperation

(AICO), ASEAN Framework Agreement on Services (AFAS), and Mutual

Recognition Arrangement (MRA).

Internationally, ASEAN as an organization has been seen to have a significant

role in world trading. Since the issue of ASEAN’s willingness to have a free trade

area within its internal members arise in 1992, many other countries expect the

same agreement could be placed upon their partnership with ASEAN. Hadi

Susastro said that the next step of the attempt on establishing a partnership is done

by China at ASEAN-China summit in 2001 in where China states its interest in

having a free trade area agreement. Following the summit, China and ASEAN are

23

ready to sign a Framework Agreement on Comprehensive Economic Cooperation

(CEC), wherein there is also discussion of the Free Trade Agreement (FTA)

(Dewitari, et. al., 2009).

China tries to follow up the last agreement with ASEAN by proposing another

partnership called Early Harvest program, which focus on the trading of live

animals, diary produce, other animals products, live trees, vegetables, and edible

fruits and nuts. The tariffs should be decreased to zero in several years. Following

the agreement, China starts with introducing Free Trade Area Agreement to

ASEAN on 2004. This kind of agreement has been set up to not only for the tariff

reductions of export and import, but also for the investment policies. After

establishing the ACFTA agreement, another countries are attracted to join such an

agreement in international trading. One of them is a bilateral agreement of

Indonesia-Japan with Indonesia-Japan Economic Partnership Agreement (IJ-EPA)

which is established in 2006.

The history of billateral cooperation between Indonesia and China has shown a

fluctuative improvement ever since it is established. Thus, ACFTA is considered

to increase the number of goods imported from China in a massive amount and

threaten domestic enterprises in Indonesia.

1. 2. Problems

Based on the explanations above, some relevant problems are organized as

follows:

1. Why ACFTA was made between ASEAN and China? What are the

influences in the economy of Indonesia?

2. What are the implications of ACFTA implementation towards Indonesia’s

commodities in China’s and international market?

3. What commodities are threatened in a high level of competition in

Indonesia’s market?

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4. What concrete steps should be made by the government to help the

businessman minimize the negative impacts of China’s commodities

incoming?

1. 3. Objectives

This writing will raise some current issues regarding ACFTA implementations

and the implications of ACFTA on Indonesia’s markets, specifically the solutions

to local entrepreneurs of some commodities to minimize the market share

reductions done by China’s products in domestic market as well as international

market. The objectives of this writing are, firstly, understanding how ACFTA has

taken place in the international trading of ASEAN and China. Secondly, maping

the implications of ACFTA towards export trading of Indonesian commodities in

China’s market and international market. Thirdly, examining the Indonesia’s

commodities and the impacts of China’s commodities incoming in domestic

market. Fourthly, finding the proposed solutions on how the government and any

other parties could encourage the threatened industries in Indonesia compete with

China’s commodities using several ways and policies implemented.

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CHAPTER II

LITERATURE REVIEW

In this section of the writing, the concept of ACFTA along with its definition will

be discussed. To understand how this kind of agreement has a big influence either

to China as one side of a party and ASEAN as the other party, theories behind

bilateral and regional agreement between countries should be clarified. The

explanation stands as a mind map in constructing such a way of thinking in

discussing the issues stated which is related to ACFTA implementation.

2. 1. Description of ASEAN-China Free Trade Area (ACFTA)

Understanding ACFTA should be derived from the cooperative approaching done

by China using billateral agreement to some ASEAN countries. Basically,

ASEAN and China has developed and maintained a good relationship in trading

since China has joined ASEAN+3 (ASEAN 10 plus Korea, Japan, and China).

China’s involvement continues within any meeting held by ASEAN, beginning

from East Asian Summit (EAS), ASEAN Regional Forum (ARF), and later on

China’s proposal to create ASEAN China Free Trade Area (ACFTA) under the

Framework Agreement on Comprehensive Economic Cooperation (FACEC). This

agreement includes tariff reductions for most of commodities which begins in

2005 and it is scheduled to be finished in 2010 for 6 countries which consists of

Indonesia, Philippines, Thailand, Malaysia, Singapore, and Brunei. The rest of

ASEAN countries will finish this tariff reductions by 2015 (Chanborey, 2009).

ACFTA agreement has some implications on export and import done by China

and ASEAN. Free trade area means that there is not any tariff imposed on such

commodities entering any of those countries. Additionally, this agreement does

not only affects the economic cooperations of the countries, but also any other

policies involved. Investment policies, exort credit policies, and even opening

market access towards certain commodities are some examples of policies done as

the impact of ACFTA.

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2.2. Literature, Paper, and Supporting Theories

Implementation of ACFTA has some objectives to achieve. Based on the analysis

of international trading, this kind of free trade area agreement will benefit both

sides of the parties in terms of increasing market scale, doing market expansion,

and getting more production factor in lower price. Thus, this of agreement on

international trading has some advantages towards both countries.

Theory of comparative advantage from David Ricardo in his book “The Principles

of Political Economy and Taxation” states about each country which specialize

their commodities to trade to another. Seeing the economic development, the

theory is developed into The Heckscher-Ohlin Theorem of Factor-Proportions or

Factor-Endowment Theory. Heckscher-Ohlin Theorem states that: A nation will

export the commodity whose production requires the intensive use of the nation’s

relatively abundant and cheap factor and import the commodity whose production

requires the intensive use of the nation’s relatively scarce and expensive factor.

That theory explains more about the real conditions in each country using an

assumption that there are two countries, two kinds of goods, y1 and and y2, and

two production factors, L and K (Arifin, Rae, and Joseph, 2007).

This theory notifies that budget constraint in each country makes that country

produces one good in an efficient way. Finally, each country could specialize on

their own good, produce more than the demand existing in their own domestic

market, and trade it with the specific good from another country with higher

satisfaction. The H-O Theory does not require identical tastes (i.e. equal

indeference curves) in the two nations. It only requ ires that if tastes differ, they

do not differ sufficiently to neutralize the tendency of different factor endowments

and production possibility curves from leading to different relative commodity

prices and comparative advantage in the two nations (Salvatore,2004).

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Figure 1. Heckscher-Ohlin Theorem

This kind of theory will be applied in explaining the trading relationship happened

between Indonesia and China before and after ACFTA signed, on whether there

will be any change in domestic market after some commodities ae traded from

and to both countries in a different price as an impact of zero tariff imposed.

Furthermore, the theory wil be used to examine the new equilibrium which shows

new satisfaction within each countries made by that trading in a certain number

will inflence the domestic goods production or not.

Recognizing the trade happens between Indonesia and China as the main proof of

ACFTA implementations, some commodities have received the impacts greatly

on their frequencies and amount of trading. Seeing the Indonesian market through

an analitical study, we will find out only some commodities are affected

significantly in Indonesian market, such as textiles, machinery and computers, etc.

It shows the correlation with the Theory of Partial Equilibrium which certifies that

a trading of two different countries on a certain good in where each country has its

own supply and demand will affect the price and quantities of the good. The

theory strengthens onto its influence on making a new equilibrium point set by a

new price and quantities of the certain good in each country.

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Figure 2. Partial Equilibrium’s Theorem

Alhough ACFTA will benefit both parties, ASEAN and China, as general, there is

still be some concerns regarding the impact on each country. Therefore, this paper

chooses to observe the relationship between Indonesia and China before and after

ACFTA implemented. Furthermore, this paper will examine how the trading of

Indonesia and China influence greatly in the number of goods exported and

imported. The change in domestic market for certain commodities, especially in

its price and quantities, in Indonesia beyond the influence of ACFTA will be

discussed more. Some commodities which are produced by domestic entreprises

are believed to accept a great impact in the competition with imported goods.

Indonesian government has implemented some policies to overcome it. However,

the effectiveness of the policies should be observed also.

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CHAPTER III

CONTENT

3. 1. The Importance of ACFTA to Economic Development of ASEAN

Countries and China

Each country has their own demand for certain commodities. However, supplies

produced by the country itself could not meet the demand coming from the

society. Therefore, the country needs to buy some goods from outside, which will

be known as importing, while the country who selling of the commodities is

called exporting. Haberler (Salvatore, 2004) has strengthened some beneficial

effects of international trade on economic development:

1. Trade can lead to to the full utilization of otherwise underemployed domestic

resource.

2. By expanding the size of the market, trade makes possible division of labor and

economies of scale.

3. International trade is the vehicle for the transmission of new ideas, new

technology, and new managerial and other skills.

4. Trade also stimulates and facilitates the international flow of production factors

from developed to developing nations.

5. In several large developing nations, the importation of new manufactured

products has stimulated domestic demand until efficient domestic production

of these goods become feasible.

6. International trade is an excellent antimonopoly weapon because it stimulates

greater efficiency by domestic producers to meet foreign competition.

There are many forms of economic cooperation done by a country with its partner,

like international trade showed by export and import and creating a trade area like

what happened in European Union. The purpose to establish such a market

liberalization where the market itself has a power to determine its price with

minimum interfere from the government is what ASEAN seek as one of the big

regional organization in the world.

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Economic integration is seen to be one step closer to the market liberalization

which brings many benefits to the members. According to Baldwin and Venables,

economic integration has a favorable impact on economic growth (Tang and

Weiwei, 2006). While that kind of integration tries to eliminate any barriers in the

trading of the countries involved in an accordance with market liberalization

purpose, Arivind Panagariya suggested that sustained growth cannot be achieved

without rapid growth in trade, which requires either low or decline barriers to

trade (Tang and Weiwei, 2006).

Minimizing trade barriers could be done in several ways, one of the highest way is

known as setting up a free trade area. This free trade area has been seen as a form

of economic integration among countries. In the opinion of Kindleger and Linders

(1987) as citated by Koh and Toh in Esmara (Prabowo and Wardoyo, 2004:7)

about five forms of integration such as:

a. Free Trade Area is a form of economic integration in which quantitative

restriction and tariffs barriers among members are eliminated; and each country

still obliges their own tariffs towards the commodities coming from non-

members countries.

b. Custom Union is economic integration in which tariffs among members are

eliminated and “custom external tariffs” are obliged to non-members countries.

c. Common Market is an economic integration which has the characteristics of

Custom Union plus the elimination of trade barriers and the elimination of

productions capital trading between members.

d. Economic Union is a form of integration which has not only the characteristics

of Custom Union, but also the uniformity of economic and social policies.

e. Supranational Union is a form of economic integration in which the national

governments transfer their sovereignty in economic and social policy to the

supranational authority.

Arifin, Rae, and Joseph (2007) mention about various factors on why many

countries are willing to cooperate in regional trading:

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a. Building the secure condition economically and politically among the

geographical close countries,

b. Managing trade friction,

c. Increasing capacity bulding for development,

d. As a beginning step to form a multilateral liberalization

e. Policy for assuring trade diplomation,

f. The Copycat Syndrome, and

g. Competition to gain the foreign capital investment.

Since ASEAN and China has a good history record of in economic relationship

showed by table 1 below and any other cooperations, China finally propose an

agreement to tighten the relationship, specifically in economics trading through

tariffs reduction. Specifically, Southeast Asia is a region of vital importance to

China due to traditional security, geopolitical and strategic, and economic

concerns (Chanborey, 2009).

Table 1. ASEAN Export and Import to China, 1993-2003

Year Export Import

1993 4,528,694.7 4,336,364.2

1995 6,200,891.8 7,129,723.3

1997 9,167,889.0 13,482,883.2

1999 26,472,377.3 19,407,997.9

2001 31,552,091.2 23,833,075.1

2003 27,004,232.1 28,272,242.8

Notes: Value is in US$ 1000

Source: ASEAN Trade Database (Tang and Weiwei, 2006)

The good record of the trading between ASEAN and China opens the opportunity

to widen it onto the free trade area. For ASEAN itself, China has become the

fourth largest country for exporting their commodities in 2003, almost in the same

amount as United States. Moreover, the population of China with 1.7 billion

people could be considered as an opportunity for ASEAN to gain the scale to sell

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their products. China also stands as a developed country which boost its economy

drastically by looping on industrial basis. Therefore, it gives another advantages

in consuming many energies and resources from another countries, especially

ASEAN which could produce oil and gas resource in a massive amount.

Tariff reductions of ACFTA between countries involved will not be implemented

all at once, but year after year that kind of tariff is eliminated. The scheme of tariff

reductions on ACFTA will be shown in table below.

Table 2. Tariff Reductions Scheme of ACFTA

Source: Dewitari, et. al., 2009

Tariff reduction scheme has raised some fear of the economists that the income of

the country in that posts will decrease dramatically and therefore reduce the

countries’ income. Therefore the observation towards goods traded in export and

import should be done to understand the decreasing of tariff income from import

and the increasing of revenue from goods exported.

Inspection and Quarantine Bureau of ASEAN reports that in January 2010, goods

import and export value of $ 56,428,000 US positively that is up to 285.9%. On

the other hand, exports $ 35,505,000 US which is the same as up 145.5%

increasing with imports only $ 20.923 million US dollars which is up to 133.3%

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(www.fourpxarticles.com). This has showed the significant increasing which

gives the advantages to ASEAN after ACFTA implementation

3. 2. The Influence of ACFTA on Individual: The Study of International

Trading Between Indonesia and China

Indonesia and China have a long history of trading since 1960’s. Indonesia could

gain profit from the trading until 1990’s where the imported goods from China

exceeded the goods exported to China. However, several years later Indonesia

could make a positive trading in its export and import with China. However, the

fluctuative conditions still happened like the figure shows below.

Figure 3. Indonesia Export to China and Import from China

China stands for a very important country to trade with since it has a big role in

absorbing most of Indonesia’s export. Economist Riyadi Suparmo said that China

has become the third biggest export market for Indonesia in the year of 2009, with

non-oil exports to China reaching $8.9 billion after Japan ($11.98 billion) and

United States ($10.5 billion).

The data shows that Indonesia’s products are gained popularity and dominate the

market in China. Those products are for example handicrafts products from rattan

and bamboo, tin, cocoa, rubber, shoes, pulp, palm oil, and musical instruments.

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As a matter of fact, Indonesia’s products have competed with China’s products in

Indonesia since 1998 when the agreement of free trade under Word Trade

Organization (WTO) established and implemented step by step since then.

China’s products which enter Indonesia’s market in a big volume are cosmetics,

furniture, foods and beverages, textiles and textile products, hand phones, and

many more.

Table 2. Indonesia Export and Import to China 2008

No Commodity Export Import

1 Textile 175.116.118 1.039.892.763

2 Toy 6.836.788 89.571.912

3 Footwear 64.366.024 89.041.635

4 Electronic - -

5 Rubber 901.201.630 92.861.729

6 Copper 315.538.305 52.604.723

7 Cocoa 40.470.097 540.535

8 Wood 1.096.117.072 160.312.304

9 Mineral 5.235.347.974 522.438.503

Total 7.834.994.008 2.047.264.104

Notes: Value is in US$

Source: UN Comtrade

In 2008, Indonesia has some good commodities which are needed by China, such

as rubber, copper, cocoa, wood, and mineral. Most of Indonesia’s products which

indicate the positive equation between their export and import are dominated by

natural resources. While China surpass Indonesia on some products, like textile,

toy, footwear, and electronic, Indonesia could be better on other commodities.

The table above shows the application of H-O Theorem where each country

import goods to be consumed in their country itself (although it is the same kind

of goods, but it is considered different due to the characteristics of the goods

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itself, like target segmentation of the product). The amount of the similar

commoditities in export and import account then could influence the price.

Table 3. Indonesia Export and Import to China 2009

No Commodity Export Import

1 Textile 180.617.348 1.038.771.012

2 Toy 5.160.935 74.721.902

3 Footwear 39.637.651 71.114.571

4 Electronic - 417.000.000

5 Rubber 838.999.000 92.367.937

6 Copper 308.801.433 43.999.205

7 Cocoa 25.961.759 218.591

8 Wood 774.013.837 146.157.329

9 Mineral 5.371.344.637 597.970.341

Total 7.544.536.600 2.482.320.888

Notes: Value is in US$

Source: UN Comtrade

www.indonesia.go.id

In the year of 2009, the amount of goods exported is declining in almost all the

commodities exported. At the same time, the number of goods imported is

increasing from the previous year. Partial Equilibrium Theorem could be applied

to the condition that the lower price in international market resulted from the

production effectiveness in another country will attract the other to import it than

to produce the product on its own. Therefore, because of the lower price of

China’s products triggering Indonesia to import the goods in a certain amount.

The incoming of China’s products will affect the domestic market in Indonesia by

creating another competitive market to compete to domestic industries. However,

seeing the table above convincing that the domestic products have a demand in

international market based on consumer preferences, it is possibly value for

money and good quality of Indonesia’s products.

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Table 4. Indonesia Export and Import to China 2010

No Commodity Export Import

1 Textile - 70.000.000

2 Toy - 32.200.000

3 Footwear - 31.500.000

4 Electronic - 2.400.000.000

5 Rubber - -

6 Copper - -

7 Cocoa - -

8 Wood - -

9 Mineral - -

Notes: Value is in US$

Based on the six-monthly report of 2010 regarding export and import in published

by Ministry of Industrial Affairs, it could be inferred that some products have the

low import growth with high contribution towards non oil and mineral import.

Machines and electronics that are imported from all countries have only 3.1%

growth with the contribution of 32% to total import. On the contrary, Indonesia’s

non oil and gas main commodity which is showed by wood only grows for about

14.01% and contributes only to 10.5% of total ekspor from Indonesia to all over

the world.

3. 3. Evaluation of Government Proection to Domestic Industries

Indonesia faces the challenge from the incoming products from China, especially

in pricing. The situation in Indonesia recently does not support the domestic

entreprises to compete in an equal strength with China, especially for the products

produced by small and medium enterprises. The imported goods in certain

commodities; like iron and steel, machine and machinery, and machinery or

23

electronical devices, have increased in a trend of more than 50% since 2004 to

2008 (Mutakin and Salam, 2009). It causes harm to domestic products even when

it has been imposed by such 5%-20% tariff. Thus, this kind of competitiveness of

China’s products is caused by the policies taken by China’s government to help its

domestic businesses, such as fast birocrational process, infrastucture development

business innovation, and labor efficiencies. The government even gives soft loan

to the starting business to grow.

The implementation of ACFTA has raised some problems concerning the

competition of imported goods and domestic goods in Indonesian market,

especially those goods produced by small and medium enterprises. Ministry of

Industrial Affairs stated 10 policies to overcome it as it is citated by Mutakin and

Salam (2009), such as:

1. Evaluating and revising all expired Indonesian National Standard (SNI in

Indonesian abbreviation), and implementing the SNI obligatorily with prior

notification to the WTO.

2. Implementing the function of Anti Dumping Committee effectively, handling

all dumping practice presumption, and providing a direct subsidy to the trading

partners.

3. Optimizing the role of Indonesian Trade Security Committee to overcome the

dramatic jump of imported products in domestic market.

4. Increasing the government’s lobby to secure Indonesian exports from threat of

dumping and subsidy of trading-partner countries.

5. Accelerating the implementation of President Instruction no. 5/2008 regarding

to the 2008-2009 Economic Focus.

6. Harmonizing the Custom Tariff of upstream and downstream products to speed

up the investment and increase the competitive advantage.

7. Implementing the role and function of Custom Office personnel, including

analyzing the probability of Red Line implementation for the highly-smuggled

products.

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8. Banning and limiting exports of raw materials to fulfill the energy requirement

of domestic industries in order to speed up the growth of downstream

manufacturing industry and strengthen the competitive advantage of local

industries.

9. Sharpening the policy of Income Tax of investment for specific businesses

and/or areas.

10. Continuing the implementation of Regulation of Trade Minister no. 56/2008

regarding to the restriction of docking for 5 specific products in example

footwear, electronic equipments, toys, garments, and prepared-food and

beverages.

The goverment has set several policies. Yet, the implementation of the policies

has not been done effectively. It could be derived from the weak supervision and

monitoring from the central government to regional government who deals with

export and import directly by supervising the incoming goods from abroad.

Moreover, the department under Ministry of Industrial Affairs has not been

cooperated with another department to inspect the product standard stated.

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CHAPTER IV

CONCLUSION

4. 1. Conclusion

ASEAN and China has made an agreement upon ACFTA to be fully implemented

in 2010. This agreement brings zero tariff in goods trading as a consequence.

However, seeing the analytical comparison using the export and import data, there

are some advantages gained either to China and ASEAN as a whole. Seeing the

history of China becoming a major country as an export destination for ASEAN

assuring some advantages for ASEAN development itself. The number of export

from ASEAN to China in general has an increasing trend in a massive amount.

Indonesia is included in one big country among ASEAN members. Therefore, the

study of ACFTA in Indonesia market will be discussed further. Since Indonesia

and China has cooperate in goods trading for a long time, the history of export and

import could be known. Some fluctuative trend has happenend in this trading, for

a surplus trading for Indonesia before 1990’s and declining years after. However,

the recent surplus is gained slowly.

Implementation of ACFTA brings some consequence to Indonesia. Studying the

number of export and import from Indonesia for the same product, as Heckscher-

Ohlin Theorem stated, classified some commodities which benefits Indonesia and

some commodities that is needed by Indonesian market in a big number. The

awareness arise on the inflow of some China’s products to Indonesian market

greatly with the lower price. Partial Equilibrium Theory states that there will be a

change of quantities needed in domestic market as a result of the incoming foods

with low price, like iron, steel, machinery, and electronics. Therefore, it harms the

domestic enterprises which produce the same products. China’s products, which

competes with domestic products, are supported with a good management of its

enterprises along with the condusive situation created by the government.

23

Indonesian government has made some poliicies to overcome it and protect the

domestic industries. However, the implementation of the policies stated lack of

effectiveness and coordination efficiencies. Therefore, the government should ask

any parties to be involved in successing the policies implementation. Finally, the

government should be ready to receive many advices that could be done to

maximizing its effort in balancing domestic industries with foreign ones.

4. 2. Recommendation

Concerning the problems arising as an impact of ACFTA implementation towards

domestic market in Indonesia which harms many domestic enterprises, we

propose some recmmendations that could be done by the government. Those are:

1. Helping the enterprises gaining another foreign market in another countries

throughout online marketing done by the government in cooperation with

enterprises associations in the country. This could help the enterprises gaining

another consumers even if their market share in Indonesia become smaller

because of another products incoming. Moreover, it will benefit not only the

big enterprises, but also small and medium enterprises in Indonesia in ther

marketing and distribution of the products.

2. Maximizing the role of the department under Ministry of Industrial Affairs and

another departments to supervise the implementation of products

standadization test to all products made by domestic industries and incoming

products from abroad. This kind of standardization should be done to assure

that the incoming products from abroad, especially China whose price is much

lower, have the same quality as domestic products.

3. The need to increase the competitiveness of domesic enterprises with China’s

enterprises in producing goods efficiently. The labor effectiveness, technology

optimalization, and management knowledge should be applied in any

enterprises in Indonesia. There should be a cultural change to work hard and a

certification to show labor effectiveness or machine qualifications if needed.

4. The role of the government to enter and negotiate in international market in

purpose of promoting the domestic products and opening the possibility of

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exporting to another countries. Position of the government in international

trading should be strengthen more, especially in bargaining power of

negotiation between two countries.

5. Central government and regional government should coordinate to arrange the

optimalization of small and medium enterprise in Indonesia. These enterprises

have some limitation in producing goods, like the number of goods produced.

There should be a kind of regulation to synchronize the big enterprises and

small and medium enterprises, so that the small and medim enterprises will not

be harmed any further from the unfair competition with big enterprises and

incoming goods from forign countries. One of the way is the cooperation of

small and medium enterprises with big enterprises in providing raw materials,

for example.

6. The enterprises association and any other trading representatives in South East

Asia could gather to join and make some policies to distribute and market the

products from their own country, especially the small and medium enterprises

who needs help to enter and gain another market.

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