The Indonesian government under the leadership of President Joko Widodo is eager to join the Trans-Pacific Partnership (TPP), the trade deal (signed in October 2015) that involves twelve countries, including the USA and Japan. However, opinions vary about whether it would be a wise decision for Indonesia to join the TPP. Airlangga Hartarto, Indonesian Minister of Industry, is a supporter, claiming that Indonesia can become a more attractive export hub for Japanese manufacturers due to zero export tariffs.
Hartarto believes that Indonesia becomes an attractive production hub for Japanese manufacturers given the low gas prices and the large Indonesian market. Moreover, under the TPP deal output of these Japanese manufacturers will become more competitive due to the scrapping of various import/export tariffs between TPP member nations. Therefore, Indonesia could become an attractive production and export hub. Existing Japanese manufacturers are reportedly planning to increase production capacity at their plants in Indonesia, particularly in the glass, caustic soda, and automotive industries.
Japan is one of the biggest foreign (direct) investors in Indonesia. Since 2010 Japanese investors have invested up to USD $16 billion in Indonesia. In 2015 Japan invested USD $2.87 billion in Indonesia (in a total of 2,030 projects), up 6 percent from investment realization one year earlier.
Indonesia's Lower Gas Prices
Earlier in October, Indonesian President Joko Widodo said he wants to see the nation's gas prices drop from around USD $9.50 per million British thermal unit (mmbtu) to below USD $6 per mmbtu before the end of November. This cut should have a multiplier effect on the development of manufacturing industries in Indonesia as their competitiveness will get a boost (on the back of lower production costs). Many companies - for example in the textile sector - have complained that high gas prices make their output uncompetitive. Although the government had already promised to cut gas prices in the third economic policy package (released in October 2015), industries are still waiting for the government to take action.
The ten industries that will be allowed to enjoy the cheaper gas prices in Indonesia include the fertilizer, petrochemical, food & beverage, footwear, gloves, pulp & paper, ceramics and steel industries. Earlier this month the Industry Ministry's staff expert Dyah Winarni Poedjiwati said gas prices are expected to be adjusted to between USD $5 and $6 per mmbtu per 1 January 2017.
However, Indonesia's competitors are also taking action. Malaysian authorities have already cut gas prices for industrial use from USD $4 per mmbtu to USD $2.5 mmbtu in an effort to safeguard the nation's competitiveness in the manufacturing industry. Especially Chinese glass producers are rapidly moving to Malaysia to take advantage of low gas prices.
Trans-Pacific Partnership (TPP)
Whether it would be a smart move for Indonesia to join the TPP is up to debate. Supporters say it would make the Indonesian economy more efficient (as Indonesia will need to improve measures to combat bureaucracy, improve the business climate as well as the standard of products) and Indonesian exports more competitive due to the scrapping of various tariffs between member nations.
Critics fear that Indonesia merely becomes a lucrative export destination for the more competitive economies, particularly because Indonesia (with more than 255 million people and a rapidly expanding middle class) has a great consumer force.
Poll Indonesia Investments:
Should Indonesia join the Trans-Pacific Partnership deal?
Voting possible: -
- Yes (60.6%)
- No (27.5%)
- I don't know (11.9%)
Total amount of votes: 160