VIVAnews - The idea of establishing Asean-China Free Trade Agreement was initiated by former Chinese Prime Minister Zhu Rongji at the 6th ASEAN Final Meeting in 2000. On November 5, 2002, ASEAN countries and China signed the Free Trade Area (ACFTA) Agreement for 10 years in Phnom Penh, which came into force on January 1, 2010.
That means the transfer of goods, services, capital and manpower between the ASEAN countries and China is under free duty. The purpose of the agreement is to improve trade which would increase the efficiency of production and consumption in the two regions. The final goal is to establish prosper lives in the countries.
However, various opinions, both of which are optimistic and pessimistic, on the agreement are emerging. The optimists assume that the agreement would be geo-strategically and economically beneficial for Indonesia and the ASEAN countries. China’s economic growth will also lead the country to having a significant role in Asia.
On the other hand, the agreement is predicted to diminish local industries in Indonesia that are less competitive than Chinese products. Textile, garment, and footwear are known as industries that absorb large number of workers. The existence of cheap Chinese products is feared to take down local products.
Based on the results of Tongzon research in 2005 entitled “ASEAN-China Free Trade Area: A Bane or Boon for ASEAN Countries?”, China has the same import structure with ASEAN countries but with relatively lower unit labor costs.
An analysis from Roland-Host and Weiss in 2004 called “ASEAN and China: Export Rivals or Partners in Regional Growth?” states that China is a big competitor because it has experienced a shift from labor intensive to capital and technological intensive. This is why Chinese products are relatively cheaper. This is also what Indonesian local producers are worried about.
When it comes to economy, we will always talk about supply and demand. In terms of demand, consumers in Indonesia will benefit from it because they will be able to consume goods with lower prices. However, in terms of supply, domestic producers will lose the competition and suffer from losses, especially those with minimum capital and abilities.
The concern was raised by the data from from the Indonesian Trade Department showing that there was an increase in the total number of Indonesian and Chinese trade from US$ 8.7 billion in 2004 to some US$ 26.8 billion in 2008, but also with the deficit of US$ 3.6 billion in 2008.
Does that mean Indonesia will be scathed by the agreement? Meanwhile, if it is further reviewed, there are several points in the agreement that are supposed to be favorable to Indonesia.
One of them is the facility that is known as the Early Harvest Program and the establishment of safety guard mechanism for sectors that experience financial losses due to overly cheap prices. Meantime, Early Harvest Program allows Indonesia to propose 14 agricultural products that have been excluded from the agreement.
Furthermore, Indonesia and other ASEAN countries are able to export some of the agricultural products to China without any cost from 2004 to early 2010. Unfortunately, Indonesia has not been able to make use of the beneficial scheme until early 2010.
It seems that Indonesia is not sharp enough to make the most out of the agreement. Indonesia should be able to increase its comparative advantage against Chinese products and it requires a specialization. With a specialization, Indonesia will be able to import and export goods from and to China. Indonesia’s main products include rubber, coal, gas, raw metallic mineral basic materials, textile, paper and crude palm oil. These products have a quite big penetration to Chinese market.
Therefore, the government’s role is highly required in the implementation of the agreement. The government must improve various policies such as increasing the capacity, the production and the quality of Indonesian agricultural commodities.
A policy to boost the export competitiveness of agricultural products like palm oil, rubber, cocoa, mangos teen, snake fruit, pineapple and other horticultural commodities must also be established. It is important to consider that in 2008, there was a surplus in the trade balance for farming commodities, jumping almost three fold to US$ 2.757 billion.
The government also needs to prepare a policy that uses the cheapness of Chinese products to support production in local market. Low prices will lead to the increase of Indonesians’ real income which is expected to raise the awareness of local producers to seize the chance.
Thirdly, the government should encourage the enhancement of main product differentiation. The products should not only rely on commodities that are given by God to the people of Indonesia. The country needs to upgrade its ability to increase the number of processed products that could add values to Indonesian economy. So, our main products will not only be agricultural and farming products, but also intermediate goods or even final goods that are competitive enough to compete against Chinese products which tend to have comparative disadvantage.
Finally, the government needs to cut and eliminate challenges in regional trades. High prices in other regions are often caused by the high-cost economy that could be minimized by the government. Low-price and secure transportation and communication facilities are very crucial in the attempt to repair the structure of domestic product prices.
Generally, the ACFTA opens up a chance to Indonesia. ACFTA will enhance access to market for Indonesia, not only for agricultural and mining products, but also services such as tourism, finance, education, investment, environmental factors and human rights.
Therefore, Indonesia and other ASEAN countries have a chance to gain profit in this agreement. Indonesia should actively protect local products as well as compete against products from China and any other countries.
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*The writer is an economic analyst at VIVAnews and lecturer in University of Indonesia
Translated by: Nataya Ermanti
