The Impacts of US-China Trade Tensions on Indonesia

Lili Yan Ing, Lead Advisor, Ministry of Trade of Indonesia Yessi Vadila, Trade Analyst

The US and China now intensifies the trade talks to resolve the on-going trade disputes between the two. The talk aims to reach the finish line before 2 March 2019. Today, it is almost a year after the first increase tariffs on steel and aluminum the US implement on 9 March 2018.

Starting from March last year, the US increased tariffs on exports. It is estimated that if the US implements duties, as threatened, the average tariff rate of American imports will rise by 3.4%, and firms will pass these costs onto customers. At the end, it will be US producers and customers will bear the costs, as many US economists had warned. A study by McKibbin (2017) estimates that it will lower the US GDP by 1.2%.

In fact, if we see the current development, the tariffs that US implements does not reduce its deficits vis a vis China. Based on the US-ITC data, in 2017, the US exports to China were USD 130 bn imports and its imports from China were US USD 505 bn. The US recorded a trade deficit of USD 375 bn.

In 2018, between January and October, the US exports to China were 102 bn and its imports from China were USD 447 billion. So, the US recorded a trade deficit of USD 345 billion, or increased by 10% compared to the same period in 2017.

But the tension between the US and China is not only limited to tariffs. Many see, even if the US and China could have a deal on tariffs, the tension between them and to some extent with the West is growing, which also includes technology, intellectual property right, industrial subsidy, e-commerce, and other trade and investment issues, even to the issue of the hegemony of the world, that may never be to an end.

In 2018, Chinese investment into Europe and America fell by 73%. The global value of cross border investment by multinational companies sank by about 20%.

Considering these prolonged trade tensions, all of international organizations and investment banks lower their estimation of the world economic growth. The world is expected to grow at an average of 3.7% from this year to 2021, and if the tensions continue, the world is even predicted to grow at 3.6% from 2022 to 2025.

So, how this has affected Indonesia’s trade and investment and what is Indonesia’s Strategy to cope with these challenges?

In 2018, it is true that Indonesia recorded a trade deficit of USD 8,6 billion. Indonesia’s exports to the world were USD 180 bn and we imported USD 188,6 billion. Well I do not mean to find an excuse, because now I am in the government. But if we look into details:

First the components of imports were largely intermediate and capital goods, which contributed 92% to Indonesia’s total imports in 2018. Imports of bulldozer, crane, steel and aluminum increased significantly. Imports of intermediate goods and capital goods increased 24% and 21%, respectively.

Second, if we see both in terms of value and volume of exports of Indonesia, considering the rising trade tensions and lower global demand, Indonesia was still be able to record an increase in exports. In 2018, the value of exports increased 7% from USD 168.8 billion in 2017 to USD 180 billion in 2018.

The volume of exports increased even a higher rate. The volume of exports increased 10%, from 546 billion kgs in 2017 to 609 billion kgs in 2018.  10% which was more than double than the growth of the world trade volume, which was at 4.4%.

At the same time, in 2018, Indonesia’s total Investments recorded a growth of 4%, not much, but this is much better than global investment which was contracted by 20%.  Indonesia’s total investment increased from IDR 692 trillion in 2017 to IDR 721 trillion in 2018.

Indonesia’s strategy is very clear. President Joko Widodo clearly mentioned that the engines to realize a target of 5.3% economic growth in the next three years are Export and Investment.

On investment, In the Negative List of Investment 2016, Indonesia leaves 45 business lines to become more open to foreign investment. The most visible openness can be seen in retail, tourism and creative economy, transportation, communication and IT, non-formal education, medicine, hospital, electricity power construction, and banking.

Indonesia is currently in the process of revising it, with a direction to become more open to foreign investment as well as enabling domestic investment to grow while facilitating SMEs to grow. On top of this, Indonesia is committed to continue its development of infrastructure, which is the best way to support the development of all sectors.

On trade, Indonesia will continue its reforms agenda to lowering tariffs on capital goods, streamlining export and import licensing. At the same time, to maintain the existing trade partners as well as to expand exports to non-traditional markets, Indonesia is very active in engaging herself in number of trade agreements.

Indonesia recently concluded Trade Agreements with Chile (Indonesia—Chile CEPA), Australia (Indonesia—Australia CEPA), and EFTA countries which consist of Swiss, Iceland, Liechtenstein, and Norway (Indonesia—EFTA CEPA). Indonesia is currently engaging with the EU and the 16 East Asian countries (the RCEP). Simultaneously, Indonesia is also also engaging with Turkey, Palestine, Tunisia and Morocco; and soon, Indonesia will relaunch the Indonesia—South Korea CEPA.

In conclusion, in the rising trade tensions and lower global demand, the Indonesian economy was doing relatively well.

Indonesia might be only a trillion-dollar economy today, but she will be the fourth largest economy by 2050 with 50% of the populations are in productive age. Indonesia is definitely one of promising investment destinations.

Moreover, today, Indonesia has a very clear stance on trade. She is against any punitive unilateral actions. Indonesia has vowed to manage its openness and uphold ‘fair and non-discriminatory treatment’ to all countries, and expects that her trading partners to do the same way. The current trade tensions create opportunities for Indonesia in the short run, but in the long run, it will lower world demand and investment, and it is not good for everyone.