Trade challenges and Indonesia’s ideal response

Trade challenges and Indonesia’s ideal response Kiki Verico ;   The writer is co-editor of Journal of Economics and Finance in Indonesia (EFI) published by the Institute for Economic and Social Research at the University of Indonesia’s School of Economics, currently living in Canberra

JAKARTA POST, 15 Februari 2013

In mid-January this year, the World Bank (WB) released its Global Economic Prospects that showed that the source of global economic growth was still largely contributed by developing countries’ economic growth. The WB estimates that economic growth of developing countries may potentially increase from 5.1 percent in 2012 to 5.7 percent in 2013 while economic growth of developed countries in 2013 is estimated to stand still at 1.3 percent as it was in 2012. An important engine of developing countries’ economic growth is international trade, also known as “trade-led growth”, which requires fair trade circumstances. Yet, the recent global economic turmoil that decreased global market demand can easily deceive countries to gain trade surplus by imposing protectionism on the demand-side economy using either tariffs or quotas. If this happens then the classic mercantilism doctrine is likely to reemerge worldwide. The doctrine itself was proven to fail hundreds of years ago because of its inability to predict “retaliation actions” from trade partners. International economic theory has warned that import protection does not come without a cost. Banning import policy on trade partner products in a country’s domestic market will encourage similar banning policies from its trade partners in their respective domestic markets. Protection is myopically popular for the short-term yet actually generates “deadweight loss” and costs the economy in the long run. This deadweight loss can be seen from an increase in domestic prices. It often burdens net buyers and worsens both urban and rural poverty. Besides, protection induces rent-seeking behavior. Take for example the recent bribery case on Indonesia’s beef import quotas. On the other side of the coin, protection will oppress exporting countries and in the end, fluctuate the international price. At the global level, when countries are trapped in this trade retaliation, international trade will naturally be set back into a “lose-lose situation”.  Trade protection stimulates a global trade protection as the “dominant strategy” which resembles a cycle of revenge. This causes international trade to be caught in a severe recovery path. In order to prevent international trade from being held hostage by this retaliation trap, the WTO has to impose its important role in “dispute and settlement” issues and resolve any trade quarrels. Its member states must comply with multilateral agreements in order to maintain both conditions where (1) no country turns to be “the only country that imposed such trade barriers” and (2) the international trade system remains on the right track. An emerging economy like Indonesia needs to be cautious in formulating its trade policies because the impact will not only affect its domestic market but also the global economy. This year Indonesia is appointed to be the host for the ninth Ministerial Conference, the topmost decision-making body of the WTO. The world will witness whether Indonesia is in fact on board to harmonize the pendulum between her domestic interests and the multilateral economic rationales. My own calculations on Indonesia’s trade comparative advantage with the Revealed Comparative Advantage (RCA) index before the global economic crisis (2006-2008) and afterward (2009-2011) shows that Indonesia‘s comparative trade advantage still remains in the primary sector of agricultural and food products, fuels and mining and the labor intensive sector of textiles and clothing products. My other calculation, using the constant market share analysis (CMSA) method, shows that after the global economic crisis, Indonesia’s manufacturing exports have been growing faster than those of global exports. The latter indicates that recently Indonesia has not only relied on the primary and labor intensive sector but has in fact gone up into a higher value-added sector of manufacturing exports. Hence, what about Indonesia’s supply-side economy?  One of the useful figures is the Global Competitiveness Report of the World Economic Forum (WEF) that describes the supply-side economy of countries and frames them in ranks. In its 2012-2013 report, it shows that Indonesia’s competitiveness rank has slightly decreased from 44 out of 139 countries (2010-2011) to 50 out of 144 countries (2012-2013).  Indonesia’s situation is rather interesting, market size-wise. Indonesia’s rank for this factor is 16 out of 144 countries which establishes her to become one of the G-20 member states. In addition, Indonesia has performed great on the macroeconomic environment at rank 25 and rather good on innovation and business sophistication factors at rank 40. However, this report shows Indonesia still has to work harder in enhancing its supply-side economy: one, for basic requirements of infrastructure due to her fairly low rank of 78, institutions (72) and health and primary education (70). Two, for efficiency enhancers of labor market efficiency due to her lowest rank of 120, technological readiness (85), higher education and training (73), financial market development (70) and goods market efficiency (63). For mercantilism doctrines to have net export surplus by simply protecting demand-side economy through the implementation of import trade barriers, with no regard to managing production base competitiveness, is simply counterproductive. To increase economic growth via trade, a country needs to boost its supply-side economy.  This requires an immense and comprehensive effort as the main objective is to achieve both the country’s comparative and competitive advantage. Ideally, each country including Indonesia should focus on strenghtening its supply-side economy instead of risking becoming entangled in the demand-side protectionism and trade retaliation trap. ●