Tax & Accounting Blog

Should Indonesia Join the Trans-Pacific Partnership Agreement?

Blog, Global Trade, ONESOURCE January 22, 2016

During a meeting with the U.S. President Barrack Obama at the White House last October, the President Republic of Indonesia Joko Widodo – known domestically as Jokowi – stated that Indonesia intends to join the Trans-Pacific Partnership (TPP) Agreement.  “Indonesia is an open economy and with a population of 250 million, we are the largest economy in South East Asia.” Jokowi said[1].

The statement is in direct contrast to what had been previously stated by president Yudhoyono, who refused to join the TPP for the following reasons:

First, his preference was for Indonesia to increase its readiness for the ASEAN Economic Community[2]

Second, his goal was for Indonesia to be profitable under the China-ASEAN Free Trade Agreement

Third, Indonesia was involved negotiating Regional Comprehensive Economic Partnership (RCEP)[3] Economic Cooperation ASEAN + China, Japan and Korea; important because of the established FTA’s.

Fourth, the finished goods from Singapore, Malaysia and Vietnam (already joined the TPP) are export orientated products; while Indonesia did not join TPP as the local Indonesian market is already supportive for selling finished goods.

Fifth, there is also the existing APEC economic cooperation in Asia-Pacific. Therefore, the TPP is not the top priority for Indonesia.

Besides, “TPP has been seen by some as an attempt to counterbalance growing Chinese economic influence in the region, but it has come under fire both from the political left and from economic nationalists, who claim it undermines labor rights and national sovereignty.”[4]

What is TPP?

The Trans-Pacific Partnership (TPP) is an agreement between 12 countries (United States, Canada, Mexico, Japan, Vietnam, Singapore, Brunei, Malaysia, Australia, New Zealand, Peru and Chile) bordering the Pacific Ocean. The TPP reached a deal this October 2015 in Atlanta, Georgia.  TPP is led by the United States, with the aim to rebalance their strategic strength in the Asia Pacific region in the economic field.

Benefits

TPP will bring some benefits to Indonesia. For consumers, it provides a mechanism for the release of broader trade barriers.  Consumers become parties to these trade agreements because they can obtain access to products with cheaper price points. Under the parameters of the agreements, consumers are also provided with a better quality of the products.

For industry, it will provide a great opportunity because all the TPP member countries will become an export market for Indonesian products, especially the U.S., Canada, Japan and Australia which currently has an economic level that is relatively better than Indonesia.

Today, the leading Indonesian products are still affected by high import duties. For example footwear manufacturers have to pay import duties of up to 30 percent to enter the U.S. market.  The TPP promises a preferential tariff to be much lower. Thus, Indonesia’s products are expected to compete with the dumping of products from China, who has mastered the U.S. market, giving Indonesia an opportunity to take advantage of greater market share.

Currently, the products of Indonesia compete with the products of Vietnam which have the relative same commodities competing to penetrate the U.S. market.

Vietnam has had in force a Free Trade Agreement with the U.S. since 2001 and by joining with TPP, Vietnam is expected to have a wider market of their products into the country.

In the textiles and textile products (TPT) business, Indonesia began exporting globally in 1984, but in the last 5 years has noted a heavy decline and stagnation. There has been only a 2-3 percent increase. Indonesia textile exports this year were estimated to be only about US $12.9 billion, while the Vietnamese textile exports is approaching US $25 billion.

 Please see the Export to U.S. data at:

https://www.census.gov/foreign-trade/balance/c5520.html

https://www.census.gov/foreign-trade/balance/c5600.html?cssp=SERP

In addition, the TPP will open up investment for a number of industrial sectors with the main market from Asia-Pacific countries, especially to the U.S.  The hope from Indonesia is that foreign investors will make Indonesia its production base so that the manufactured goods will make entry into the TPP member countries.

Challenges

There are also some challenges that face the government in joining the TPP. The Indonesian economy will become more liberal (released trade barriers) in which all economic activities will be run by the private sector.  Indonesia with a population of around 250 million will also be the target market of TPP member countries for the TPP participating country exports. The concern has been for the impact to Indonesia’s domestic manufacturing with the increase of imports from the TPP participating countries.

The expectation is that domestic products should improve in quality in order to compete with products from other countries, as well as be accepted by overseas markets.  In order to accomplish this, Indonesia must follow all the rules that have been set.  One example is to eliminate the negative investment list and privilege for the state owned enterprises[5].

Conclusion

Jokowi’s government is currently providing many opportunities and privileges by developing the state-owned enterprises as the main players to run the country’s development.

From the political side, one of Jokowi’s visions in his reign period is to support the Indonesian economy “independent in economics”[6].

In comparison to Indonesian, Vietnam has the most export commodities, which is an important data point as Indonesia evaluates the benefits of joining the TPP.

The Indonesian government is currently conducting a study and strategy review, before declaring whether to join the TPP or not. When the government finally makes this decision, it will be at least 2-3 years.

This is possibly not an issue for Indonesia since the other 12 participating countries will be working through the logistics of the agreement before approval in their respective countries.

Most watching in Indonesia believe that if Indonesia does not join the TPP, then the competitiveness of Indonesian products in TPP member countries will be eroded.

Gain More Insight On The TPP

Sources:

https://tax.thomsonreuters.com/blog/onesource/tpp-trans-pacific-partnership-overview/

https://ustr.gov/tpp/overview-of-the-TPP

http://www.theguardian.com/world/2015/oct/27/indonesia-will-join-trans-pacific-partnership-jokowi-tells-obama

http://www.bbc.com/news/world-asia-34645097

http://www.bloomberg.com/news/articles/2015-10-28/here-s-why-indonesia-joining-the-tpp-is-easier-said-than-done

http://finansial.bisnis.com/read/20151030/9/487521/liberalisasi-ekonomi-trans-pasifik-ini-alasan-sby-dulu-menolak-ajakan-amerika

http://swa.co.id/business-strategy/management/lebih-banyak-ruginya-ekonom-bersatu-tolak-tpp

http://www.beritasatu.com/ekonomi/317813-manfaat-indonesia-bergabung-dengan-tpp-2.html

https://www.census.gov/foreign-trade/balance/c5520.html

https://www.census.gov/foreign-trade/balance/c5600.html?cssp=SERP

http://bisnis.tempo.co/read/news/2015/10/26/090713254/jokowi-mau-gabung-tpp-ini-manfaat-dan-mudharatnya

http://bisniskeuangan.kompas.com/read/2015/11/02/163955726/Darmin.Indonesia.Masih.Pertimbangkan.Untung.Rugi.Masuk.TPP

[1] http://www.theguardian.com/world/2015/oct/27/indonesia-will-join-trans-pacific-partnership-jokowi-tells-obama

[2] The Association of Southeast Asian Nations (ASEAN) was established on 8 August 1967. The Member States of the Association are Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. ASEAN Economic Community (AEC) substantively aims, to eliminate tariffs and facilitate  trade; advancing the services trade liberalization agenda; liberalizing and facilitating investment; streamlining and harmonizing capital market regulatory frameworks and platforms; facilitating skilled labor mobility; promoting the development of regional frameworks in competition policy, consumer protection and intellectual property rights; promoting connectivity; narrowing the development gap; and strengthening ASEAN’s relationship with its external parties. www.asean.org

[3] Regional Comprehensive Economic Partnership (RCEP) is a proposed free trade agreement (FTA) between the ten member states of the  ASEAN and the six states with which ASEAN has existing FTA’s (AustraliaChinaIndiaJapan, South Korea and New Zealand)

[4]BBC News, 27 October 2015, Joko Widodo says Indonesia will join TPP free trade deal http://www.bbc.com/news/world-asia-34645097

[5] Currently state owned companies have special privileges, i.e. state owned construction companies are provided with first rights to toll roads and seaport projects.

[6] Indonesian economy is not dependent with the other countries -Indonesia can produce its own product.

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