Trade
Indonesia’s protectionism debate needs more than domestic input
Authors: Deasy Pane, Bappenas and Arianto Patunru, ANU
The rising interconnectedness of production centres around the world highlights the role of imported intermediate inputs in manufacturing processes. Intermediate inputs are partly finished goods, such as an automotive engine, that help produce a final product, like a car.
Firms from different countries work together to produce final products by building production networks made up of buyers and suppliers. These networks have increased the flow of unfinished goods across economies such that the trade in intermediate goods now surpasses half of total world trade. There are several mechanisms by which imported inputs increase firm performance.
Higher quality intermediate inputs increase the quality of final products, increasing the demand for said products and raising firm profitability. They help reduce production costs because they are often more affordable than domestic inputs of similar quality. Imported inputs also contribute to a more efficient division of labour, increasing the productivity of firms as each node in the production network specialises in producing a single component of the final product.
The experience of Indonesian firms is consistent with this explanation. Importing inputs of greater value and variety has raised the productivity and export capacity of Indonesian manufacturing firms. The main benefits come from access to a broader range of inputs. These benefits are larger when inputs originate from developed countries such as Japan, a country from which Indonesia sources more than 15 per cent of its imported intermediate inputs.
The effects are larger still when imports originate from firms in East Asia. More than 40 per cent of Indonesia’s intermediate inputs are imported from Japan, China, South Korea, Taiwan, Singapore and Hong Kong. Their high-tech electronics, electrical appliance and automotive industries show that participating in regional production networks positively affects productivity.
These findings should inform policymakers in dealing with increasing calls for protectionism and mercantilism — trade strategies that see imports as a threat to the economy. Reducing restrictions on imported intermediate inputs would assist in promoting productivity and export growth.
Protectionism in Indonesia goes up and down. As in other countries, the pandemic has facilitated more protectionist measures. Indonesian President Joko ‘Jokowi’ Widodo wants to increase the local content or ‘domestic value added’ of Indonesian products and exports. Local content requirements have been promoted and enforced for products including electronics and pharmaceuticals. These policies require manufacturers to obtain local content certificates indicating the percentage of domestic content in their products.
While the majority of inputs in pharmaceutical products are imported and only a few drugs can be domestically produced, the government intends to increase the local content of pharmaceutical products to 55 per cent. One common justification is that Indonesia was able to produce COVID-19 vaccines with 79 per cent of local content.
Presidential Regulation 55/2019 stipulates that the domestic electric vehicle industry is similarly subject to a local content requirement of at least 35 per cent. Jakarta assesses local content based on manufacturer activities such as the production of electric vehicle components, research and development and assembly. Chinese electric vehicle company, SAIC-GM-Wuling, began producing electric vehicles in Indonesia with 40 per cent local content in the middle of this year.
In 2021, the Indonesian government enacted Government Regulation 28/2021, establishing a new legal framework to regulate industry access to imported inputs. It defines thousands of products as ‘intermediate inputs’ that, if imported, can be restricted by Jakarta. Government Regulation 29/2021 provides a more detailed mechanism for export and import approval based on neraca komoditas (commodity balance) — a national database system that tracks production, consumption and trade.
In March 2022, Jokowi issued Presidential Instruction 2/2022, which requires local governments to spend a minimum of 40 per cent of their goods and services expenditure budget on local products from micro-businesses, small enterprises and cooperatives.
While the government claims that such policies increase local production, create jobs and encourage technological transfer from abroad, they may have the opposite effect. These policies raise the cost of…
Trade
Self-Reliance and Openness: Core Principles of China’s Third Plenary Session
The Third Plenum communique from the CCP indicates a prioritization of stability and compromise in response to China’s economic challenges. It highlights the concept of Chinese-style modernization and establishes political guidelines for balancing regulation and market forces.
The CCP’s Third Plenum communique signals a focus on stability and compromise in the face of China’s economic challenges. It emphasises Chinese-style modernisation and sets political directions for balancing regulation and market forces. While not as groundbreaking as previous plenums, it acknowledges the importance of market mechanisms and technological self-reliance, aiming to address issues like high youth unemployment and private sector uncertainty. The communique seeks to navigate the complexities of global competition and domestic innovation, potentially reshaping global supply chains and trade dynamics. Overall, it presents a pragmatic blueprint for China’s economic future.
Source : Self-reliance and openness central pillars of China’s Third Plenum | East Asia Forum
Trade
Trade Prevails Over Political Persuasions in China-Germany Relations
China and Germany maintain a strong bilateral relationship, rooted in economic cooperation despite ideological differences. Recent visits and agreements focus on expanding trade and addressing mutual concerns, navigating challenges while nurturing ties.
Evolving Bilateral Ties
China and Germany share a strong bilateral relationship, rooted in history since 1972. This connection has seen moments of cooperation intertwined with periods of tension. German Chancellor Olaf Scholz’s April 2024 visit underscores Germany’s commitment to fostering this partnership, reflecting a mutual interest in maintaining economic ties despite ideological differences.
Economic Pragmatism
As the second and third largest global economies, China and Germany’s economic interdependence is crucial. Germany emerged as China’s primary trading partner in 2023, with trade values reaching €254.4 billion (US$280 billion). In response to global scrutiny, Germany has taken a balanced approach, emphasizing economic stability over political discord. This was evident during Scholz’s prior visit in November 2022, where his diplomatic tone contrasted with broader EU sentiments.
Facing Challenges Together
Despite increasing public skepticism in Germany regarding China’s global influence and human rights issues, both nations continue to seek common ground. Their October 2023 Joint Statement highlights intentions to pursue cooperation in areas like carbon neutrality and open markets. To navigate these complex terrains, Germany can utilize its institutional frameworks to enhance dialogue, while also considering supply chain diversification to reduce dependency on China. The intertwining nature of their economies suggests that, despite challenges, both countries will continue to prioritize their substantial trade relations.
Source : Trade trumps political persuasions in China–Germany relations
Trade
Fixing fragmentation in the settlement of international trade disputes
Fragmentation in global trade due to the lack of development in multilateral trade rules at the WTO has led to an increase in FTAs. The Appellate Body impasse has further exacerbated fragmentation, requiring a multilateral approach for reform.
Fragmentation in Global Trade
Fragmentation in global trade is not new. With the slow development of multilateral trade rules at the World Trade Organization (WTO), governments have turned to free trade agreements (FTAs). As of 2023, almost 600 bilateral and regional trade agreements have been notified to the WTO, leading to growing fragmentation in trade rules, business activities, and international relations. But until recently, trade dispute settlements have predominantly remained within the WTO.
Challenges with WTO Dispute Settlement
The demise of the Appellate Body increased fragmentation in both the interpretation and enforcement of trade law. A small number of WTO Members created the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) as a temporary solution, but in its current form, it cannot properly address fragmentation. Since its creation in 2020, the MPIA has only attracted 26 parties, and its rulings have not been consistent with previous decisions made by the Appellate Body, rendering WTO case law increasingly fragmented.
The Path Forward for Global Trade
Maintaining the integrity and predictability of the global trading system while reducing fragmentation requires restoring the WTO’s authority. At the 12th WTO Ministerial Conference in 2022, governments agreed to re-establish a functional dispute settlement system by 2024. Reaching a consensus will be difficult, and negotiations will take time. A critical mass-based, open plurilateral approach provides a viable alternative way to reform the appellate mechanism, as WTO Members are committed to reforming the dispute settlement system.
Source : Fixing fragmentation in the settlement of international trade disputes
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