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Indonesia's wily textile
traders
By Bill Guerin
JAKARTA - While the news this week that the
European Union, the US and Canada are to end the current
textile quota system to meet a World Trade Organization
ruling is a severe blow to Indonesia's textile industry,
it also has the potential to clear up a distorted
production system that has led to a flourishing and
shady trade in the quotas themselves.
Though
Industry and Trade Minister Rini M Soewandi has lobbied
trade ministers in the three markets, the system will
end by the close of 2004, leaving Indonesia at the mercy
of international competition. The country's total
textile production is valued at more than $US15 billion,
although export revenues have declined steadily over the
past few years, from around $8.4 billion in 2000 to $6.8
billion last year.
The sector, which employs
around 1.5 million people, has been hard hit by soaring
operating costs, earlier reductions in textile quotas
and weakening purchasing power in the US and Europe,
which, with Japan, account for about 45 percent of
Indonesia's textile exports. Non-quota countries in the
Middle East, Latin America and Africa take the remainder
of Indonesia's export volume. The US is the most
exclusive and demanding market by far for Indonesian
textile producers, but it rewards those who succeed with
high prices for high-quality garments, provided they can
obtain quotas and factor the cost into the selling
price.
In addition to fuel price hikes, the
industry has also had to cope with higher minimum wages
imposed by the government, an electricity price hike,
higher import duties for imported raw materials and
heavier taxation burdens. The regional textile industry
as a whole faces crucial obstacles to becoming
competitive and efficient. Among the diverse problems
are labor, high tariffs and duties and government
regulations, which have retarded development of the
industry.
But Indonesia also faces the problem
of blatant trading of textile exports and product quotas
by brokers, which present exporters with an added hurdle
to be dealt with, one that inflates the industry's
operating costs while distorting the supply chain. The
practice has also raised allegations by opposition
politicians of favoritism toward well-connected textile
companies. Some estimates put the broker-controlled
transactions at 60 percent of government-allocated
quotas.
The quotas were originally fixed and
could not be changed. However, in January 2001 former
trade minister, Luhut B Pandjaitan, issued a decree
empowering the government to reallocate unused fixed
quotas to companies that could use them. The idea was
that Indonesia would thus be able to fulfill its entire
national production allocation under WTO rules.
Never mind that the simple laws of supply and
demand had already ensured that any part of a quota not
realized would usually be sold off to another party. The
name of the company that sells the unrealized quota is
used on the export documents to avoid detection.
Exporters call this "under the name of shipment", but
the practice makes it difficult for the government to
pin down the culprits as company sales records at the
Ministry of Industry and Trade appear in order and the
quotas are fully realized.
In any case, the
result of Pandjaitan's decree was that savvy brokers
learned that they could snap up the unused quotas from
companies not fulfilling them and sell them to companies
with textile products to get rid of. This has since led
to a bewildering but lucrative market in quotas, with
even a "season" for quota distribution when a mad
scramble for quotas by producers and brokers ensues.
Quotas are now frequently sold at around $30 for
every dozen export items, compared with the more average
$5 to $8 at which they were previously sold. Industry
sources say many of the quotas are in fact sold to
companies in other countries. Only garment quotas have
any significant value, depending on the type of product
and how much it is sought after in the market. The
higher the value, the higher the quota price.
In
2001, fixed quotas equivalent to millions of garments
were returned by 152 genuine textile exporters as they
were unable to realize the mandatory half of their
quotas. This, said the Indonesian Textile Association
(API), was ample proof that many exporters, including
some without the necessary production facilities, had
overstated their production capabilities simply to get
the prized quotas.
The scale of the problem is
still alarming. By May 2002, for example, when in a
normal year more than three quarters of the country's
annual export quota of trousers and jeans should still
have been available, 70 percent had already been taken
up. Though this equated in quota value to some
190,000,000 million pairs of jeans, there had been no
corresponding boost in output from the producers. This
prompted the API to call for an independent audit of
quota management by the Ministry of Industry and Trade,
complaining they were unable to trace the total quotas
allocated by the government and their holders.
API, condemning the government's lack of
transparency in distributing export quotas, said it was
even prepared to pay for a costly audit by
Pricewaterhouse Coopers to get to the bottom of the
situation. Amid claims by opposition legislators that
companies with a close relationship with the current
administration make up the bulk of quota holders, API
urged the government to come clean and publicize the
name of 21 quota-holders, which the ministry had said
ended up with the quotas.
The original decree
has since been modified by Soewandi in a vain effort to
clear up matters although the problem is still alarming
for the textile companies. Those failing to fully use up
their fixed quotas face reduction in their next year's
quotas. There is also a maze-like series of temporary,
flexibility, growth or shift specification quotas.
Exporters can transfer their fixed quotas to other
exporters in pursuit of a larger export share in value
or volume, but must first obtain approval from the
Minister of Industry and Trade.
In addition to
quota constraints, textile producers have raw material
issues to contend with. Jakarta has several times asked
for, and failed to get, special treatment from the US on
account of Indonesia's position as the largest importer
of American cotton. It imports 30 percent of the total
500,000-ton cotton imports for raw materials, worth $1
billion, from the US every year. Australia accounts for
another 40 percent of the cotton imports.
The
trade relationships over textiles are tetchy at times.
US textiles and apparel exports to Indonesia are not
significant, around $17 million a year at best, but the
US textile industry and its supporters in Congress were
irked last year when Jakarta temporarily banned all
textiles and apparel imports. This was in response to a
flood of imports from China but was a violation of WTO
rules. US manufacturers charged that Indonesia had high
tariff rates, arbitrary customs valuations, add-on
taxes, excessive paperwork and customs delays that have
limited US textile exports.
The EU projects an
increase in the global market for textiles and garments
to around $400 billion in 2005 from $350 billion this
year once the quota system has ended. Much will depend
on the quality of products, rather than the price.
API believes that the local textile industry
must improve its competitiveness to succeed in this
growing market, and to do this, it needs the government
to improve the investment climate.
On the
sidelines of a recent Association of Southeast Asian
Nations (ASEAN) business and investment summit, API's
chief of international relations, Sunjoto Tanudjaja,
said that only 20 percent or so of textile exports would
be affected by the quota elimination. He pointed out
that the government must quickly finalize the long
awaited new investment law, amend the labor law,
accelerate tax reforms and take other measures to
improve the unfavorable business climate.
The
problems may be even more multi-dimensional than APO
admits, however. In addition to the need to produce
quality products, textile exports are exposed to
external volatility, such as the sluggish global
economy. Now that China is in the WTO it is likely to be
Indonesia's strongest competitor in Western markets.
The US and the EU have also been implementing
standards needed to promote better market protection
though product standardization that will come into
effect by 2005. Rules issued by markets there have
become a major source of concern for the Indonesian
industry.
The implementation of WTO standards is yet
another hurdle. More challenges lie ahead for Indonesia
with human rights issues, labor concerns and
environmental protection being put on the agenda.
Last year's implementation of the standards of
Worldwide Responsible Apparel Production (WRAP) by the
US essentially means that textiles from Indonesia and
other Asian countries should be produced by exporters
with licenses issued by human rights and labor
certifying agencies. Further regulations to follow
include compliance with safety at the workplace and
other non-tariff barriers.
Industry analysts
believe that other forms of trade barriers will be
created to replace the quota system of the main
importing countries. As Benny Benyamin, director of
Amico Group, explains: "Every month there is now a new
form of vendor compliance involving visits to the
factories to ensure they fulfill requirements in respect
of wages, health insurance, environmental issues etc."
Thus, notwithstanding the encouraging figures
for January to September, when exports reached $6.3
billion against the target of $7 billion, the textile
industry's target of around 9 percent growth in annual
production seems somewhat misplaced.
(Copyright
2003 Asia Times Online Co, Ltd. All rights reserved.
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