Indonesia has always been hesitant to join free-trade deals with other nations on fears that domestic industries cannot compete with foreign counterparts, which could lead to an influx of cheaper, yet higher-quality foreign products. During his visit to the White House, Indonesian President Joko Widodo said Indonesia intends to join the Trans-Pacific Partnership (TPP) trade deal. Back home, this statement led to concern. What are the negative consequences for Indonesia when joining this deal?
The TPP is designed to boost trade among its (current) 12 member countries (which include the USA, Japan, Malaysia and Vietnam) as it lowers tariffs for a wide variety of products. Through liberalizing trade to a high degree, the trade deal targets to boost economic growth, support job creation as well as innovation, productivity and competitiveness, reduce poverty, promote transparency as well as good governance, and enhance both labor and environmental protection in the region.
After five years of negotiation, the involved countries decided to go-ahead with the TPP, creating the world's largest free trade area (an area that covers about 40 percent of world trade) and forming a counterbalance to the large economic influence of China, the world's second-largest economy.
However, the question remains whether - although it boosting trade - Indonesia can benefit from joining this trade deal by becoming a net exporter (bringing in foreign exchange), or will the country's participation in the deal put more pressure on Indonesia's trade balance (and current account balance)?
One of the key problems is that Indonesia's manufacturing sector lacks competitiveness. This situation is due to underdeveloped industries as well as the country's weak infrastructure (such as roads, ports, and electricity). The lack of quality and quantity of infrastructure is a main cause for Indonesia's high logistics costs, making products less competitive. Those countries with well-developed export-driven manufacturing industries, on the other hand, will benefit far more from the deal than those that lack such industries.
For example, after the ASEAN-China Free Trade Agreement (ACFTA) came into effect in early 2010, Indonesia's trade deficit with China doubled within the time-span of one year only as Indonesia mainly offers exports of raw commodities (such as coal, palm oil and gas) and which have been affected by weakening prices since 2011.
When we read the goals of the TPP again (mentioned above) there is also a major difference detectable from other free trade deals. The TPP will not just eliminate tariffs to boost trade but aims to have a much bigger impact on domestic conditions of member nations (such as promoting transparent, good governance, and stricter safeguards for patents).
For example, Indonesia will need to reform its state-owned sector to allow for greater competition in procurement (the same problem arose in Malaysia and Vietnam when joining the TPP). Such reforms go against interests of the state.
Moreover, Indonesia will need to remove restrictions on foreign ownership in certain industries (a move that would require approval from parliament). Removal of restriction on foreign ownership will surely meet resistance in a country that has walked a more protectionist path in recent years.
As such, although President Widodo said Indonesia intends to join the TPP, it will be a difficult path to create a conducive domestic environment within a few years.