World Economic Forum in Davos: Indonesia in a Protectionist World
While political leaders, bankers and economists met in Davos (Switzerland) for the World Economic Forum (17-20 January 2017), Donald Trump was sworn in as the 45th US president in Washington. His speech was all about "America first", including a protectionist approach in trade, which Trump believes will lead to great prosperity and strength for the USA. Also in Europe anti-globalization sentiments are heard (such as the exit of Britain from the European Union). Most guests in Davos, on the contrary, favor higher global trade and worldwide economic participation.
Still, global trade, foreign direct investment (FDI), and cross-border lending are expected to slow further in 2017 according to the World Economic Forum (WEF). This may have a particularly large impact on Asia, a continent that saw major inflows of investment and became a key player in global trade over the past decades. However, even in terms of cheap labor Asia is starting to lose its competitive advantage due to advancements in automation and digitization in developed nations. Companies can now manufacture products at home with minimal workforce required.
This means that Asia's growth model, which has been primarily based on the development of labor-intensive manufacturing (for export purposes), needs to be changed. Some Asian nations have already managed to develop a solid manufacturing industry (hence becoming middle or high income countries along the way). However, an economy such as Indonesia, which still has an underdeveloped manufacturing industry, it will now most likely become harder to attract foreign direct investment in this sector.
But if worldwide trade continues to slow amid protectionist and anti-globalization sentiments, there is a possibility that intra-regional trade will become more important. For example, the role of the Association of Southeast Asian Nations (ASEAN) may gain significance and can therefore somewhat offset the negative impact of global protectionism.
In Davos, former Indonesian trade minister Mari Elka Pangestu said Indonesia as well as all other countries that have direct economic relations with the USA are to be affected by Donald Trump's looming protectionist policies. Meanwhile, Indonesian Finance Minister Sri Mulyani Indrawati is more optimistic stating that Indonesia's strong macroeconomic fundamentals will allow Southeast Asia's largest economy to survive a new global order in which the USA becomes more reclusive. She did add that Indonesia needs to be careful regarding the uncertain global conditions.
The USA is a key trading trading partner of Indonesia and therefore the imposition of punitive trade tariffs in the USA will definitely have an impact on Indonesia (even though Indonesia's export performance plays a smaller role toward total economic growth, compared to domestic consumption). Especially Indonesia's textile, rubber, electronic components and footwear exporters can be affected as they contributed 11.9 percent of Indonesia's total non-oil exports (about USD $15.7 billion) to the United States in 2016.