The impact of ASEAN – China Free Trade Agreement on Indonesia

Before the full implementation of ACFTA (Association of Southeast Asian Nations (ASEAN)-

China Free Trade Agreement) in the early 2010, the agreement had actually taken place as early as 2004

when it took the form of EHP (Early Harvest Program) that involves the ASEAN 61 and China. Since the

inception of the agreement, the goal was clear: to promote trade and better relationship among the

involved countries. Indeed, the expected result since the implementation of EHP until the full

implementation of ACFTA was realized as the total trade between Indonesia and China rose significantly

from USD 14.9 billion in 2006 to USD 36.1 billion in 2010. In fact, the effect of EHP had taken place as

it was implemented; the total trade between Indonesia and China increased significantly between 2003

(prior to EHP) and 2006 (beginning of EHP) from USD 3.8 billion to USD 14.9 billion respectively2. On

the surface, ACFTA is beneficial for Indonesia economy. However, despite the good implications of

ACFTA will do to Indonesia, the full implementation of the agreement has raised many doubts and

anxieties within Indonesia. As such, a question is raised: Is ACFTA beneficial for Indonesia?

The impacts of ACFTA on the health of local producers

As a developing country and one of the nations involved in the FTA, the health of Indonesian

local producers is crucial to determine the economic power of Indonesia and her capability to compete

with other nations. There seems to be a consensus saying that Indonesia was not ready for ACFTA or any

Free Trade Agreement as local producers voiced their resentment against ACFTA for they are now losing

out in the competition against low price import goods from China. Between 2006 and 2007, the balance

of trade (BOT) between Indonesia and China was in favor of Indonesia as Indonesia experienced a trade

surplus with China. However, from 2008 onwards, Indonesia suffers from a deficit BOT which

deteriorates over the years. By 2014, Indonesia has a BOT deficit of approximately USD 13 billion,

which is almost twice as worse as the previous year at USD 7.2 billion2. Most of the imported goods from

China are non-oil and gas products. Such great number of imported non-oil and gas products may threaten

the health of local producers in Indonesia, especially in labor-intensive industries. Indeed, Indonesia has

abundant resources and labors at low price. However, her trading partner, China, also has a similar

comparative advantage - or even better. Indonesia’s lack of infrastructures and small pool of low-price

high skilled labors have put Indonesia at disadvantage. Unless there are authority’s involvements in

mending such imbalance, this can create serious unemployment in the long run.

1ASEAN 6 includes Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand.2 Source: The Ministry of Trade of the Republic of Indonesia.

An example of the devastating effect of ACFTA on Indonesia local producers is discussed in an

article by Global Business Guide Indonesia in 2015, which explains the current difficulties faced by

Indonesia’s textile and garment industry – difficulties that can be translated to other industries in

Indonesia. Indonesia had been performing well despite the competition with other ASEAN members.

However, by putting China into the picture through the realization of the ACFTA, local producers are

struggling to sell their products. The industry could not offer the end product at a cheaper price than

China (a big competitor in the industry) as the industry depends heavily on imported raw materials and

intermediate goods. China, on the other hand, has better comparative advantage: better infrastructures and

a bigger pool of cheap skilled workers, which makes their end products both cheap and of good quality.

Furthermore, the flow of imported goods from China is virtually unstoppable due to the absence of tariff

or any anti-dumping policies thanks to ACFTA. As a result, Indonesia’s export of good fabrics is falling

behind from the influx of imported fabrics from China. Such condition is worsened with the weakening of

Indonesia’s currency and the devaluation of Chinese Yuan, as capital will move away from Indonesia to

China.

As mentioned before, if this problem was left unattended, local producers will slow down and

may result in their closures, which will cause serious unemployment problem that can lead to domestic

political unrest. With the local producers being powerless against such issue, the blame will start to shift

towards the Government. Indonesian industries are clueless, so as the government seems to be clueless on

how to make use of the ACFTA fully (Nasution). According to world rankings based on the index of

Economic Freedom by Heritage, Indonesia was categorized under ‘mostly unfree’, while Singapore, her

ASEAN partner, was categorized under ‘free’. Indonesia has worse regulatory efficiency and less

Investment freedom than Singapore. This is believed to cause Indonesia to be unattractive to Foreign

Direct Investment (FDI). And, it also shows the incompetence of Indonesia government in improving the

business climate for local producers to promote efficiency in general. Hence, the people of Indonesia –

mostly producers – are anxious about the ACFTA because Indonesia has actually been struggling to

compete with her fellow ASEAN members even without China being in the FTA; the government did not

prepare them well for the battle. Looking back at the heat during the 2014 Indonesian presidential

election, the performance of the new and radical government head is now even more scrutinized by the

public. With higher fuel price due to the partial removal of fuel subsidy and more expensive goods in

general, the people’s patient is on edge.

It is too early to judge the negative impact of ACFTA on Indonesia

However, has ACFTA only been detrimental to Indonesia so far? Not entirely so. First of all, the

effect of a macroeconomic policy, such as FTA, will not take place in a short term period. Indeed,

Indonesia is suffering from a severe BOT deficit with China since the full implementation of ACFTA.

Taking it positively, this is a natural occurrence for a developing country like Indonesia. More imports

would mean that Indonesia is in the stage of learning process and supplementing herself. As business

interaction with China become more active, Indonesia’s local producers can experience the cost of their

inefficiencies and, thus, their incompetence to compete with other nation in the FTA. So, with ACFTA,

Indonesia local producers will have the motivation to improve and learn from their competitors. The

current government is also pumping most of the nation’s fund into building infrastructures, such as

maritime highways and more railways around Indonesia, in order to suffice the needs of local producers

to grow in the future. This explains the high non-oil and gas imports, which does not actually mean that

Indonesia has not been performing well.

Furthermore, Indonesia is not too young of a nation to participate in the global economic arena.

In fact, Indonesia had already gone through her trial period with AFTA, which had taken place more than

a decade before ACFTA. So, the cause of the seemingly poor performance of Indonesia economic should

not solely because of ACFTA. In 2010, the world had just gone through a global economic recession.

This might have adverse effects onto Indonesia economy. Furthermore, in 2014, it is the first time in

Indonesia to have only two presidential candidates, which resulted in the most heated presidential election

in Indonesia since her Reformation in 1998. At that time, Indonesia Stock Exchange (IHSG) 3 was

stagnant, but bounced back to create a bull market after the election. This shows that the political

disturbance in Indonesia in 2014 also caused her poor economic performance. Currently, the world is

facing another global economic crisis, which also putting pressures on Indonesia economy. Thus, there

are many other reasons as to why Indonesia had not been performing well, in addition to the malicious

side effects of ACFTA.

Five years after the ACFTA, the President of People’s Republic of China and the President of the

Republic of Indonesia had come together to sign “Joint Statement on Strengthening Comprehensive

Strategic Partnership between the People’s republic of China and The Republic of Indonesia”, which took

place in Beijing, 26 March 2015. The joint statement mentioned several improvements in both parties’

contribution in politics, trades, technologies, cultures, international and regional affairs. This means that

there are attempts to reduce or to repair the negative impacts of ACFTA on Indonesia. Under bullet

number 13 in the joint statement, China agrees to promote imported goods from Indonesia. Thus, this will

3 Indonesia Stock Exchange is IHSG (Indeks Harga Saham Gabungan) in English;

help to alleviate Indonesia BOT deficit. Moreover, under bullet number 19, there will be additional

capital from China for the construction of Indonesia infrastructures. This further shows that the negative

effects of ACFTA are short term. It is too early to judge that ACFTA is the culprit that causes Indonesia

poor performance.

Political benefits

Putting the impact of ACFTA on Indonesia economy aside, the enhancement of Indonesia

political relationship with China poses several positive implications on Indonesia internally and

internationally. With the Joint Statement, Indonesia’s domestic and international political stability are

assured by China. As such, Indonesia can now stand more confidently to face her own political problem.

Being the only nation from ASEAN in the G-20, political support from China will make Indonesia a

stronger member. Since the beginning of the new government in 2014, Indonesia faced many criticisms

from her neighbors: tensions arise through the radical eradication of illegal fishing in Indonesian waters

and the recalling of foreign ambassadors as Indonesia showed her law integrity to execute foreign drug

traffickers. Now, with the political support from China, Indonesia will stand sturdier in fending off

political attacks from other countries. Therefore, the implementation of ACFTA would mean to

strengthen the relationship between Indonesia and China, which are partly beneficial for Indonesia’s

political assurance.

Implications on Indonesia’s consumers

Not only ACFTA beneficial for Indonesia’s politics, but it also gives positive implications on

Indonesia’s consumers. Despite the more expensive imported goods, Indonesia private consumption

seems to grow over the past 5 years of the implementation of ACFTA. According to Indonesia central

Bureau of Statistics, Indonesia’s private consumption experienced a 4.26% growth in 2010 and increased

at a 5.14% growth in 2014. This translates into greater purchasing power of the consumers, which can

also means that the consumers are now enjoying the benefits of ACFTA; one of them is the capability of

buying higher quality imported goods at lower price.

One of the drawbacks of having greater private consumption is greater expenditure on consumers.

This is alarming because Indonesia industries are mostly labor-intensive and most Indonesia’s consumers

are labors. The government needs to ensure the good health of local producers that provide jobs to the

labors, who now have a greater purchasing power. Otherwise, unemployment rate in Indonesia will

increase. Hence, back to square one, the state of local producers in Indonesia has a direct correlation with

the state of Indonesia economy. What the government could do to alleviate this imposing problem is to

reduce interest rate, so that small businesses and other industries in Indonesia will tend to invest more

capital to promote growth and employment.

Conclusion