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International business management

Should Indonesia join the Trans-Pacific Partnership Agreement?

Hendra Kurniawan  International Trade Specialist

Hendra Kurniawan  International Trade Specialist

President Republic of Indonesia Joko Widodo – known domestically as Jokowi – recently stated that Indonesia intends to join the Trans-Pacific Partnership (TPP) Agreement. 

The TPP is between 12 countries (United States, Canada, Mexico, Japan, Vietnam, Singapore, Brunei, Malaysia, Australia, New Zealand, Peru and Chile) bordering the Pacific Ocean, and is being considered as the biggest trade deal the world has seen with trade rules covering nearly 40 percent of the world economy and a collective population of about 800 million. This represents $28.5 trillion in combined gross domestic product of the 12 trade-pact countries.

The benefits of joining

For Indonesian consumers, TPP provides a mechanism for the release of trade barriers providing consumers with access to better quality products at less cost.

For industry, TPP provides an opportunity to open up export markets for Indonesian products to TPP member countries, especially the U.S., Canada, Japan and Australia.

Today, leading Indonesian products are still affected by high import duties. Footwear manufacturers, for example, have to pay import duties of up to 30 percent to enter the U.S. market.  The TPP promises a much lower tariff giving Indonesia the opportunity to take product market share from China.

Indonesia versus Vietnam

Indonesia currently competes with Vietnam in the U.S. market. Vietnam has had a Free Trade Agreement with the U.S. in place since 2001. By joining the TPP, Vietnam is expected to be in a better position to market its products in the U.S.

In the textiles and textile products business, Indonesia began exporting globally in 1984 but in the last 5 years has noted a heavy decline and stagnation with only a 2-3 percent increase. Indonesia textile exports this year are estimated to be only US $12.9 billion. In contrast, Vietnamese textile exports are approaching US $25 billion.

In addition, the TPP will open up investment into Indonesian industrial sectors to market to Asia-Pacific countries, especially from the U.S. The hope is that foreign investors will make Indonesia a production base to take manufactured goods into TPP member countries.

Challenges ahead

There are significant challenges faced by the government in joining the TPP.

The Indonesian economy will become more liberal with economic activities run by the private rather than state-owned, sector.

Indonesia has a population of around 250 million and will become an attractive target market for TPP member countries with a subsequent detrimental impact on Indonesia’s domestic manufacturing base.

To compete, Indonesia’s domestic products will need to improve in quality making them more attractive to overseas markets.

To accomplish this, Indonesia will have to follow all the TPP rules that have been set including the elimination of the negative investment list and privilege for the state owned enterprises. Jokowi’s government currently provides many opportunities and privileges for developing state-owned enterprises.

Next steps

The Indonesian government is currently conducting a study and strategy review before declaring whether to join the TPP or not. It will take at least 2-3 years for the government to reach this decision.

The timing may not be 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 developments believe that if Indonesia is to prevent the erosion in competitiveness of its products, it must join the TPP.

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