Is Indonesia Trump’s next target on trade?

US Vice-President Mike Pence made clear to President Joko Widodo that his government must level the playing field and break down barriers

Jakarta, April 21, 2017 2:02 PM (UTC+8)
US Vice President Mike Pence stands with Indonesian President Joko Widodo as he talks to reporters at the Presidential Palace in Jakarta, Indonesia April 20, 2017. Photo: Reuters/Beawiharta
US Vice President Mike Pence stands with Indonesian President Joko Widodo as he talks to reporters at the Presidential Palace in Jakarta, Indonesia April 20, 2017. Photo: Reuters/Beawiharta

When US President Donald Trump’s administration gets around to pointing fingers after the current review of American trade relations with 16 nations, Indonesia might not be as prominent as others despite a rising trend of protectionism and economic nationalism.

Overall two-way trade last year amounted to US$23.4 billion, the lowest in five years, with Indonesian exports outweighing US imports by US$19.2 billion to US$6 billion, according to the US Census Bureau.

Knit and woven apparel account for the biggest share, followed by rubber, electrical machinery and footwear, which amount to about half of the value of imports from its 28th largest trading partner.

But as America-Indonesia Chamber of Commerce president Wayne Forrest points out, the US has always run a “congenital deficit” with Indonesia because it doesn’t grow key tropical products like rubber, coffee, vanilla, cinnamon, tea, teak, essential oils, palm oil and quinine.

Will the current imbalance upset Trump? When low-key Vice-President Mike Pence visited Jakarta this week he made it clear to President Joko Widodo that he had to “level the playing field and break down barriers” to ensure US exporters can fully participate in Indonesian markets.

Protectionism is a significant issue, along with the current contractual stand-off between the Indonesian government and Arizona-based mining giant Freeport McMoran Copper & Gold, which Pence touched on during his hour-long meeting with Widodo.

Pence’s staff held several briefings with Freeport executives before the visit and the company’s chief executive, Richard Adkerson, had a quiet meeting in Washington with Finance Minister Sri Mulyani Indrawati a day prior to Pence’s arrival.

U.S. Vice President Mike Pence listens during a meeting with Indonesian Muslim community leaders at the Istiqlal Mosque in Jakarta, Indonesia April 20, 2017. REUTERS/Beawiharta - RTS1330C
US Vice-President Mike Pence at a meeting with Indonesian Muslim community leaders at the Istiqlal Mosque in Jakarta on April 20, 2017. Photo: Reuters/Beawiharta

Trump adviser Carl Icahn is Freeport’s largest individual investor and a leading advocate of the company’s threat to take the government to international arbitration; Adkerson, for his part, has had a long friendship with Secretary of State Rex Tillerson.

Overall, Trump and his advisers won’t find many US manufacturers have moved significant jobs and operations to Indonesia, which is still struggling to rationalize its economic nationalist policies with a desire for more foreign investment.

Indeed, one of the very few culprits may be Barbie. Indonesia, as it turns out, has the largest Barbie doll factory in the world, with the shapely icon just as popular in the Muslim-dominated domestic market as it is among other sectors around the globe.

An Indonesian street vendor sells Barbie dolls in Jakarta November 21. With last month's presidential election peacefully out of the way, the soldiers guarding the streets against rioters have gone back to their barracks and streetlife in the capital is returning to normal as the economy picks up. The dolls sell for about 40,000 rupiah each, or about $6.TJF/PB - RTRSL1S
An Indonesian street vendor sells Barbie dolls in Jakarta. Photo: Reuters

Some US manufacturers have expanded their operations to Indonesia when it has made commercial sense. Proctor & Gamble, for example, makes diapers in-country now that the middle class has grown to 15% of the country’s 262 million-strong population.

Forrest believes that over time more American consumer product companies will establish factories in Indonesia to serve the wider Asian market – as long as the Indonesian government doesn’t go out of its way to protect local competitors, as it is often prone to do.

He says the Commerce Department should be aware that the structure of the deficit is not a major cause for concern because the US supplies Indonesia with large quantities of its own agricultural products, such as cotton, wheat and soybeans.

The cotton, he notes, helps balance garment imports, but where there have been some difficulties are in fruit, beef, vegetables and pharmaceuticals, which have been addressed both bilaterally and through the World Trade Organization (WTO).

Last December, the WTO dispute settlement panel found in favor of a 2015 US challenge to Indonesia’s “opaque and complex” system of restrictions and prohibitions on horticultural and other agricultural products the previous Susilo Bambang Yudhoyono government introduced in 2012.

Former Indonesian President Susilo Bambang Yudhoyono deliver a speech during campaign for Agus Harimurti Yudhoyono, candidate in the running to lead the Indonesian capital Jakarta, in Bogor, Indonesia, February 8, 2017, in this photo taken by Antara Foto. Picture taken February 8, 2017. Antara Foto/Yulius Satria Wijaya/via REUTERS ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD PARTY. FOR EDITORIAL USE ONLY. MANDATORY CREDIT. INDONESIA OUT. - RTSYNEV
Former Indonesian President Susilo Bambang Yudhoyono. Photo: Antara Foto/Yulius Satria Wijaya via Reuters

Among the new non-tariff barriers was a decision to exclude Jakarta’s Tanjang Priok port from four authorized gateways for horticultural products for supposed bio-security reasons – a decision that would have killed the trade because of spoilage and the cost of transportation.

Critics blamed the new policies on then Economic Coordinating Minister Hatta Rajasa, ambitious new Trade Minister Gita Wirjawan and Agriculture Minister Suswono, along with the influence of vested political and business interests keen to avoid foreign competition.

But a strong rupiah, growing anti-foreign sentiment, increased Chinese competition in the global supply chain and Widodo’s populist instincts have all pushed Indonesia further along the protectionist path.

Washington wants Indonesia to relax restrictions on refurbished machinery and reduce tariffs on high-tech equipment like medical CAT scanners that are inexplicably classified as luxury items, in the same category as Harley Davidson motorcycles.

Harley Davidson is also a sore point. During his speech to a joint session of Congress earlier this year, Trump complained that the Milwaukee-based firm faced a 100% tariff in at least one country. He did not name it, but he is believed to have been talking about Indonesia.

Customers of PT Mabua Harley-Davidson walk near displayed Harley-Davidson motorcycles in Jakarta, Indonesia, February 10, 2016. Djonnie Rahmat, the chief executive of Indonesia's sole authorised dealer for Harley-Davidson motorbikes, PT Mabua Harley-Davidson, told reporters to stop distribution of the motorbikes in the country due to weak profit margins, tax increases. REUTERS/Beawiharta - RTX26BRR
Customers of Mabua Harley-Davidson walk near several of the iconic motorcycles on show in Jakarta, Indonesia, February 10, 2016. Photo: Reuters/Beawiharta

Indonesia’s attempts to legislate local production often backfires. An export ban on raw rattan in the latter years of Yudhoyono’s presidency did not lead to any significant increase in foreign investment and typically benefited only the largest and highest-end furniture manufacturers and smugglers.

While the sentiment behind the value-added policy is understandable, the ban on mineral ore exports has had the same mixed results and led indirectly to the heated contract dispute with Freeport, which has so far defied a win-win solution.

With the Trans-Pacific Partnership agreement (TPP) on the rocks, Indonesia is justifiably nervous. It was no coincidence that the government made concerted efforts to find a way for Freeport to resume exporting concentrate before Pence arrived.

Beyond that, there are other points of friction, including a series of regulations that limit pharmaceutical imports, reduce the footprint of on-line service providers, force local content on cell phone makers and potentially curb the activities of US banking and insurance companies.

US President Donald Trump holds up an executive order withdrawing the US from the Trans-Pacific Partnership after signing it in the Oval Office of the White House in Washington, DC, January 23, 2017.Trump signed the decree Monday, effectively ending US participation in a sweeping trans-Pacific free trade agreement negotiated under former president Barack Obama. / AFP PHOTO / SAUL LOEB
US President Donald Trump holds up an executive order withdrawing the US from the Trans-Pacific Partnership at the White House. Photo: AFP/Saul Loeb

Forrest maintains that the best way to correct trade deficits is not to frame them as a zero sum game. “Policy makers should understand that a better balance between savings and consumption – perhaps through taxation and incentives – can mitigate them,” he says.

Economists Arianto Patunru and Sjamsu Rahadja warned in a 2015 Lowy Institute paper that protectionism would prove counter-productive, raising prices for Indonesian consumers, notably at a time when their purchasing power is declining, and reducing the competitiveness of Indonesian firms.

In the past, bad times were perceived to have led to good policies in Indonesia, evidenced by the reaction to plunging oil revenue in the 1980s and the reforms forced on it in the aftermath of the 1997-98 Asian financial crisis. But it is not happening now – and that won’t be good for future US-Indonesian relations with a reactionary Trump at the US’ helm.

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