00074918.2015.1061917
Bulletin of Indonesian Economic Studies
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
THE ASEAN–CHINA FREE TRADE AGREEMENT:
POLITICAL ECONOMY IN INDONESIA
Stephen V. Marks
To cite this article: Stephen V. Marks (2015) THE ASEAN–CHINA FREE TRADE AGREEMENT:
POLITICAL ECONOMY IN INDONESIA, Bulletin of Indonesian Economic Studies, 51:2, 287-306,
DOI: 10.1080/00074918.2015.1061917
To link to this article: http://dx.doi.org/10.1080/00074918.2015.1061917
Published online: 24 Aug 2015.
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Date: 17 January 2016, At: 23:14
Bulletin of Indonesian Economic Studies, Vol. 51, No. 2, 2015: 287–306
THE ASEAN–CHINA FREE TRADE AGREEMENT:
POLITICAL ECONOMY IN INDONESIA
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Stephen V. Marks*
Pomona College
The ASEAN–China Free Trade Agreement has been the most consequential trade
agreement for ASEAN in the past decade. In this article, I use partial equilibrium
modelling to estimate the direct impacts of the agreement on Indonesia and China,
and from these estimates draw political economy implications for Indonesia.
Although the agreement has contributed to a modest trade surplus for Indonesia
overall, it has led to a larger bilateral deicit with China. In addition, the shifts to
surplus for Indonesia have mostly been in resource-based sectors, while the shifts
to deicit have occurred in many manufacturing sectors that the government would
like to see grow. I argue that pushback against the agreement has contributed to a
resurgence of non-tariff trade barriers in the country, although other political economy forces also have been at work. The agreement ultimately provides a cautionary
tale: cutting regional import tariffs can lead to pressures for more complex and less
transparent trade policies.
Keywords: ASEAN, China, free-trade agreements, political economy
JEL classiication: F13, F15
INTRODUCTION
Recent years have witnessed dramatic change in trade relations in East Asia;
China’s accession to the WTO in late 2001 was a watershed. For Southeast Asia,
the ASEAN–China Free Trade Agreement (ACFTA), under which tariff reductions were initiated in 2005, rivals the earlier ASEAN Free Trade Agreement as the
most economically signiicant regional trade agreement of recent decades. This
article examines the political economy of the ACFTA in Indonesia, where controversies related to the agreement have contributed to a major change of direction
in trade policy.
Under the ACFTA, China and the original ASEAN-6 (Brunei, Indonesia,
Malaysia, the Philippines, Singapore, and Thailand) were to reduce tariffs for
* This article is a revision of a previous study (Marks 2012a), which was produced under
the auspices of the Support for Economic Analysis Development in Indonesia (SEADI) Project, United States Agency for International Development and Ministry of Trade, Republic
of Indonesia. The author is grateful to Moekti P. Soejachmoen of the SEADI Project for assistance in obtaining the trade and tariff data, and to the two anonymous referees for their
helpful comments. The views in this article are those of the author alone.
ISSN 0007-4918 print/ISSN 1472-7234 online/15/000287-20
http://dx.doi.org/10.1080/00074918.2015.1061917
© 2015 Indonesia Project ANU
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Stephen V. Marks
normal-track items to zero by 2010. Tariffs on sensitive products were to be
reduced to at most 20% by 2012 and then to at most 5% by 2018. Tariffs on highly
sensitive products were to be reduced to at most 50% by 2015, but then no further
reductions were required. Vietnam, Cambodia, Laos, and Myanmar were required
to complete these tariff reductions on a slower schedule—by 2015 for items on the
normal and highly sensitive lists, and by 2020 for those on the sensitive list. All
countries were also allowed to exclude lists of items from the agreement on the
grounds of morals or national security.
This article estimates the effects of the ACFTA through a simple partial equilibrium simulation methodology, based on minimal structure and assumptions
about parameter values. The approach is similar to the SMART model maintained
by the United Nations Conference on Trade and Development and the World
Bank.1 I use trade data from 2010, and evaluate the effects of the agreement on the
basis of the inal import-tariff rates that will apply in each country by 2020, when
the agreement will be fully implemented.
Partial equilibrium analysis of this sort can be used to obtain ex-ante predictions of the effects of a free-trade agreement. It is by no means a perfect approach—
particularly in evaluating the effects of comprehensive trade-liberalisation
measures—given that resource constraints, the endogeneity of national income,
competition with other countries in global markets, and other factors could be
better taken into account with a general equilibrium approach. On the other
hand, the implications of general equilibrium models can be greatly altered by the
model-closure rules applied; one commonly used rule is that the current account
balance with the rest of the world is not affected by a policy change. In reality,
such an equilibrium may take a long time to work itself out, while important
political economy developments could arise in the interim. In any case, the quantitative indings presented in this article should be treated as illustrative rather
than deinitive.
An alternative to a simulation approach is to use a gravity model, in which
trade data are examined econometrically ex post, in an effort to determine how an
agreement affected subsequent trade lows. In a gravity model, exports from one
country to another are posited to be functions of the GDP of each country, their
distance from each other, and other factors. The ACFTA has yet to be fully implemented, however, so the trade data do not relect the full impact of the agreement,
and thus the lines between ex ante and ex post are blurred. The partial equilibrium framework offers a particularly simple way to correct for the ACFTA’s being
only partially implemented by the 2010 base year. The framework also allows
examination of the impact of policies at a detailed commodity level, which can be
relevant in political economy terms, though in this article I mostly aggregate the
indings into broad sectoral categories.
I irst outline the ideological background for views on the ACFTA within
Indonesia. I then discuss the methodology and data in detail, and present the indings of the quantitative analysis—speciically the effects of the ACFTA on import
duty rates in Indonesia and China, on trade lows of Indonesia, and on customs
1. The SMART model was originally developed by Laird and Yates (1986). Jammes and
Olarreaga (2005) offer a useful presentation of the algebra of the SMART model. Full details of the implementation used in this article are available from the author upon request.
The ASEAN–China Free Trade Agreement: Political Economy in Indonesia
289
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revenues and net economic welfare of Indonesia and China. I interpret these
effects from different ideological perspectives, and then look at recent Indonesian
history to characterise the political economy context in which Indonesia entered
into the ACFTA and to relate the effects of import-tariff reductions mandated
under the agreement to subsequent developments in trade policy.
ECONOMIC NATIONALISTS AND TECHNOCRATS
In debates over trade and other economic policies in Indonesia since the Soeharto
era, two basic camps can be identiied. On one side, economic nationalists have
prioritised industrial and technological development. Bresnan (1993) observes
that Indonesian economic nationalism has long had a measure of racism. Basri and
Hill (2002) similarly note that mistrust of foreign and sometimes non-indigenous
actors as well as of market forces has characterised the nationalists, and that economic nationalism and rent-seeking have often gone hand in hand. On the other
side have been the technocrats, policymakers with advanced training in economics who have had more faith in markets and thus have been less inclined to advocate policy interventions strongly contrary to market forces.
On trade per se, many politicians and policymakers, particularly those with a
strongly nationalist bent, have taken mercantilist positions—favouring the expansion of exports and the contraction of imports. I will offer interpretations of the
effects of the ACFTA in both mercantilist and economic terms, and will examine the roles played by technocratic and nationalist actors in the negotiation and
aftermath of the agreement.
METHODOLOGY
Preferential tariff cuts within a bloc of countries result in both trade creation and
trade diversion. Trade creation occurs when lower-cost imports from within the
bloc displace higher-cost production and allow for expanded consumption within
a member country. It enhances the economic welfare of that country and results
in allocative eficiency gains in production and consumption. Trade diversion
occurs when higher-cost imports from within the bloc displace lower-cost imports
from outside the bloc. It leads to a welfare loss for the importing country because
its terms of trade deteriorate as its imports shift to higher-cost source countries.
On balance, preferential tariff cuts may or may not provide welfare gains to the
country.
Partial equilibrium trade-policy models like the SMART model are closely tied
to this basic theory. The analysis in this article is conducted at a detailed level,
based on six-digit Harmonized System (HS) commodity classiications. For a
given commodity, the key behavioural parameter for trade creation is the ownprice elasticity of import demand. I assume that a change in the price of one commodity does not affect the demand for imports of other commodities. I apply the
Armington (1969) assumption that there is imperfect substitution among imports
of a particular commodity from the various source countries; the elasticity of
substitution between these imports is the key behavioural parameter for trade
diversion. To close the model, net trade diversion is set equal to zero: increases in
imports from bloc members are offset by decreases in imports from other countries. Trade diversion is assigned to individual countries on the basis of their initial
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Stephen V. Marks
shares of trade among these two groups. Finally, I assume that importers actually
claim the tariff preferences allowed under the agreement. In practice, complying
with rules of origin can be costly, and importers may not bother to claim the preferential rate if it is not much different from the most-favoured-nation (MFN) rate
applied by the country.
This analysis does not allow tariff-rate changes to cause import changes for
commodities for which imports were previously zero: trade creation and trade
diversion can occur only for products for which there was initially a positive level
of imports from the country being granted trade preferences.2 It also assumes that
export supply elasticities for all products are ininite: each country as an importer
faces constant external prices for all commodities. This assumption oversimpliies
circumstances in some sectors in larger importing countries, but in the absence of
reliable estimates of export supply elasticities it provides a workable approach.
The analysis accounts for the effects of trade liberalisation in China in favour
of ASEAN countries and in Indonesia and all other ASEAN countries in favour
of China. In Indonesia, imports from China increase because of Indonesian tariff
cuts in favour of China, but imports from other countries decrease owing to substitution towards China as an import source country. Indonesian exports to China
increase because of the tariff cuts there on Indonesian products, but decrease
because of the same tariff cuts on products from other ASEAN countries. Tariff
cuts in other ASEAN countries in favour of imports from China reduce Indonesian
exports to those countries as well. Given the partial equilibrium nature of the
analysis, these effects are examined one at a time and combined additively for
each country.
This analysis also provides a basis for estimating changes in customs revenue.
For a given commodity, a weighted-average tariff rate can be calculated by using
the share of the value of imports from the various trading partners to aggregate
their respective tariff rates. Using data from before and after the preferential
arrangement is put into effect, this weighted-average tariff rate is multiplied by
the total value of imports of a given commodity from all countries, and the product of these amounts is then summed across all tariff lines to estimate the change
in customs revenue. The net effect on national economic welfare can be estimated
by adding to this revenue effect the net change in domestic consumer surplus and
producer surplus.3
DATA AND COMPLICATIONS
This article uses trade data for all countries from the UN Comtrade database
and draws on import-tariff data from the oficial commitments by each country under the ACFTA. Because these data are in some cases taken from different
2. This makes sense, in the absence of information on how much lower the prices of imports of the various products would have to be before imports started being demanded in
positive quantities. In principle, such a problem would also arise in a general equilibrium
(GE) model. With the broader commodity aggregates of a GE model there may not be zero
imports, but then the problem would be the greater extent of aggregation bias than in a
more disaggregated model. Zero imports also create dilemmas for gravity models.
3. This net change is calculated relative to the import demand curve. Part of the customs
revenue lost to the tariff cuts is in effect transferred to domestic consumers.
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The ASEAN–China Free Trade Agreement: Political Economy in Indonesia
291
HS classiications, I established a concordance between the tariff data and trade
data for China and for each ASEAN country. The tariff data are given at a highly
detailed level: HS eight or ten digits. For each six-digit commodity classiication, I calculated simple averages of the more detailed tariff rates within that
classiication.
I account for both ad valorem and speciic tariffs but not for policies not covered by the ACFTA, such as non-tariff trade restrictions, export taxes, and trade
facilitation. A comprehensive, reliable database on non-tariff measures (NTMs) in
China or the ASEAN countries is not available at present.4 Moreover, some products subject to powerful NTMs were included on the highly sensitive list or general
exclusion list for countries that were party to the agreement, and thus these products were not necessarily subject to tariff cuts anyway. This is true, for example,
of rice, sugar, and irearm imports for Indonesia. In some cases, however, import
tariffs may have been cut under the ACFTA in sectors in which non-tariff barriers
could alter the elasticity of import demand; the estimated effects of the ACFTA
tariff cuts on trade lows would then be in error, and typically overstated, even
if the underlying model and assumed demand elasticities were correct. Indeed,
there have been concerns that non-tariff barriers in China would limit the export
growth that ASEAN might otherwise expect because of the ACFTA (Tongzon
2005); there is recent evidence of such effects (Devadason and Chenayah 2014).
For Brunei, the most recent trade data are from 2004. Also, oficial trade data
are not available for Laos. I therefore used adjusted estimates of Lao imports in
2006 based on exports to Laos reported by its partner countries. I then rescaled the
data on the basis of the ratio of total import values reported in 2010 versus 2004
(for Brunei) and 2006 (for Laos) in the International Financial Statistics database of
the IMF to obtain rough estimates of imports by commodity in 2010.
I assign elasticities of import demand from Stern, Francis, and Schumacher’s
(1976) survey to the various commodity classiications, rather than use the new
default elasticities used by the SMART model. The default values are based on the
estimates of Kee, Nicita, and Olarreaga (2008), who use an econometric approach
based on the assumption of national-income maximisation. While the earlier elasticity data are no doubt dated for many commodity classiications, many of the
estimates of Kee, Nicita, and Olarreaga seem implausible. Moreover, the implementation of the approach in the SMART model, which must interpolate in some
fashion to assign elasticities to sectors for which estimates are missing, seems
rather arbitrary in some cases.
The SMART model assumes by default that the elasticity of substitution
between imports from various source countries equals 1.5 for all commodities and
countries. However, a study by Broda, Greenield, and Weinstein (2006) estimates
elasticities of substitution within three-digit HS sectors for a number of countries,
including China, Indonesia, Malaysia, and Thailand. I apply these estimates to
all of the six-digit product categories within the various three-digit HS sectors for
these countries, and by inference for the other ASEAN members. This approach
4. One effort to produce a global NTM database is by Kee, Nicita, and Olarreaga (2009).
Their estimates of the tariff-rate equivalents of non-tariff import restraints on sugar and
rice in Indonesia, at only 0% and 1% respectively, are highly questionable: Marks and
Rahardja (2012) offer much higher estimates, in a study of Indonesia alone.
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Stephen V. Marks
is imperfect, for a variety of reasons.5 Given these concerns, I have conducted a
simple sensitivity analysis (see footnote 9).
The analysis is complicated by the use of 2010 trade data, which should relect
the effects of the ACFTA tariff reductions to that point. I handle this by irst subtracting from the actual 2010 import values the estimated trade creation and trade
diversion caused by the 2010 ACFTA tariff rates—to get a baseline scenario for
2010 as if the ACFTA tariff cuts had not yet been enacted. Solving for this baseline
requires using constrained non-linear optimisation: the trade creation and trade
diversion being calculated in this case are themselves functions of the baseline
import levels being solved for, and import levels must be non-negative.6
Once these baseline import levels for 2010 have been obtained, it is straightforward to apply the inal ACFTA commitments to baseline imports of each product, calculating the trade creation and trade diversion implied, still subject to the
constraint that imports be non-negative.7
QUANTITATIVE FINDINGS
The implications of the ACFTA tariff cuts for Indonesia can be summarised in a
number of ways. I present the indings for 17 broad commodity categories, along
with totals for all tradable-goods sectors.
Effects on Average Duty Rates
Table 1 indicates the impact of the ACFTA import-tariff cuts on overall weightedaverage import duty rates in Indonesia and China, based on the rates that would
have been in effect in 2010 with ACFTA preferences excluded, and then with the
inal ACFTA rates being applied.8 For Indonesia, the average import duty rate is
5. Hillberry and Hummels (2013) critique the approach on which Broda, Greenield, and
Weinstein’s analysis and its precursors are based.
6. Subtracting trade creation and trade diversion from the actual level of imports from the
country being granted preferential status could cause its baseline imports to become negative. For other source countries, removing trade diversion caused by the 2010 ACFTA preferences would make the level of baseline imports higher than the actual level of imports,
and so the non-negativity constraint would not bind.
7. In this case, trade diversion is set as the smaller of that calculated in the model and the
initial level of imports from a particular source country, to avoid imports becoming negative, as shown in equation (13) of Jammes and Olarreaga (2005). This is the only algebraic
difference between my analysis and the SMART model, which instead modiies the functional form for trade diversion in order to prevent imports from being negative, as shown
in equation (14) of Jammes and Olarreaga. The authors note that this modiication causes a
downward bias in the calculation of trade diversion.
8. In forming these weighted-average tariff rates as of 2010, and in estimating customsrevenue impacts for Indonesia and China, I accounted for the following preferential trade
agreements as well as the MFN tariff schedules. For Indonesia: the ASEAN, ASEAN–
Korea, ASEAN–Australia and New Zealand, and ASEAN–India free-trade agreements, as
well as the Indonesia–Japan Economic Partnership Agreement. No other agreements were
as yet in effect for Indonesia. In some cases, oficial preferential tariffs, including those
under the ACFTA, have been higher than MFN rates, but in these cases Indonesia applies
the lower of the two rates, according to Ministry of Finance oficials, and this is the rate
The ASEAN–China Free Trade Agreement: Political Economy in Indonesia
293
TABLE 1 Overall Import Duty Rates in Indonesia and China,
without and with the ACFTA, Based on 2010 Trade Data (%)
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In Indonesia
In China
Without
ACFTA
With
ACFTA
Without
ACFTA
With
ACFTA
Food crops
Estate & other crops
Livestock & their products
Forestry
Fisheries
Oil & gas extraction
Other mining
Food, beverages, & tobacco
Textiles, apparel, & leather
Wood products
Paper products
Chemicals
Oil reining & liqueied natural gas
Non-metal products
Metals & metal products
Machinery & transport equipment
Other manufacturing
4.6
2.5
3.6
1.5
3.0
0.4
1.1
8.4
4.7
0.3
2.7
2.8
0.9
4.7
3.6
2.0
2.4
3.1
2.1
3.6
0.9
1.2
0.4
0.9
8.0
2.3
0.1
2.4
2.3
0.5
3.3
2.7
1.4
1.4
20.1
10.0
8.6
5.6
9.9
1.0
0.9
6.3
14.6
0.2
2.9
6.4
6.8
10.2
3.5
4.3
6.3
13.8
7.3
8.4
3.5
9.2
0.7
0.6
5.2
14.0
0.1
2.9
5.8
5.3
7.2
3.3
4.1
6.2
Total
2.5
1.9
4.4
4.1
Note: ACFTA = ASEAN–China Free Trade Agreement
estimated to fall from 2.5% without the ACFTA to 1.9% with the ACFTA fully in
effect. For China, it falls from 4.4% to 4.1%.
Table 2 similarly shows the weighted-average import duty rates that Indonesia
and China would have imposed on each other in 2010, without the ACFTA and
with the ultimate ACFTA import tariffs in effect. Here the effects of the agreement
seem remarkably similar for the two countries: Indonesia’s average duty rate on
imports from China is estimated to fall from 5.2% to 0.8%, while China’s average
duty rate on imports from Indonesia falls from 5.1% to 1.1%.
Tables 1 and 2 weight import duties by the dollar value of imports. This inevitably introduces aggregation bias in that the value of imports will be higher for
products for which the duty rate is lower, all else equal. For example, China
imposes no duty on its imports of ASEAN coal, which contributed more than 26%
of the total value of its imports from Indonesia.
that I use. For China: the free-trade agreements with Bangladesh (under the Asia-Paciic
Trade Agreement), Chile, Hong Kong, Macau, New Zealand, and Pakistan that are included in the TRAINS trade-policy database from the United Nations Conference on Trade
and Development. I omitted certain regional agreements with minor trading partners and
narrower commodity coverage.
Stephen V. Marks
294
TABLE 2 Bilateral Import Duty Rates in Indonesia and China,
without and with the ACFTA, Based on 2010 Trade Data (%)
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In Indonesia
Food crops
Estate & other crops
Livestock & their products
Forestry
Fisheries
Oil & gas extraction
Other mining
Food, beverages, & tobacco
Textiles, apparel, & leather
Wood products
Paper products
Chemicals
Oil reining & liqueied natural gas
Non-metal products
Metals & metal products
Machinery & transport equipment
Other manufacturing
Total
In China
Without
ACFTA
With
ACFTA
Without
ACFTA
With
ACFTA
7.7
5.0
5.0
4.4
5.3
0.8
2.4
12.8
10.5
4.4
4.9
4.9
4.0
10.6
7.8
3.3
8.0
0.5
0.0
0.0
0.0
0.0
1.3
0.0
8.4
0.4
0.0
0.0
0.5
0.0
2.9
0.9
0.3
0.5
11.4
13.5
11.3
10.0
9.0
2.1
2.8
9.4
8.0
0.2
5.3
5.3
3.2
18.8
3.5
2.3
9.2
0.0
2.0
0.0
0.0
0.0
0.4
0.0
3.6
0.2
0.2
5.0
0.3
0.0
4.4
0.0
0.1
0.0
5.2
0.8
5.1
1.1
Note: ACFTA = ASEAN–China Free Trade Agreement
Table 2 shows that both countries offered sharply lower preferential tariffs for
agriculture, forestry, and isheries under the ACFTA. Indonesia maintained relatively high tariffs against China on food, beverages, and tobacco. Both countries
maintained relatively high tariffs against each other on non-metal products, which
include plastic, rubber, ceramics, and glass. China also maintained relatively high
tariffs against Indonesia on paper products.
The general impression from table 1 is that average import tariffs remain
more protective in China overall, particularly in textiles, apparel, and leather.
Agriculture and isheries in China remain relatively heavily protected by tariffs
on a global basis, as are food, beverages, and tobacco in Indonesia.
Impact on Imports, Exports, and the Trade Balance
Table 3 shows the estimated impact of the ACFTA on Indonesia’s imports, exports,
and trade balance. These are initial impacts based on the partial equilibrium theory. Equilibrating adjustments in exchange rates, prices, and incomes would be
expected to reduce these impacts over time. Economists would also downplay the
importance of bilateral trade imbalances or an increase in imports from a particular country. Such phenomena may elicit considerable concern among politicians,
however, for whom the relevant time horizon may be much closer, particularly if
the other country is perceived to be an especially powerful rival.
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TABLE 3 Effects of the ASEAN–China Free Trade Agreement on Indonesia’s Trade Flows ($ million)
Changes in Indonesia’s
exports to China
Changes in Indonesia’s
imports from China
Trade
Change in
diversion Trade
exports to
diversion
from
Net
ASEAN change in Trade
Net
Trade
other to ASEAN
creation countries countries change countriesa exports creationb
Trade
diversion
to China
from other
Net
countries change
Net change in
trade balance
Overall With China
Food crops
Estate & other crops
Livestock & their products
Forestry
Fisheries
Oil & gas extraction
Other mining
Food, beverages, & tobacco
Textiles, apparel, & leather
Wood products
Paper products
Chemicals
Oil reining & liqueied natural gas
Non-metal products
Metals & metal products
Machinery & transport equipment
Other manufacturing
1.7
1.4
0.5
1.1
4.4
34.3
250.5
138.2
61.2
1.0
0.8
106.9
1.3
172.3
20.6
56.0
15.4
17.8
1.7
1.3
1.1
16.1
89.2
309.9
375.6
95.0
1.7
3.7
181.2
2.3
795.1
107.0
362.9
19.3
–32.0
–0.5
–0.5
–0.6
–2.8
–29.5
–15.9
–299.4
–17.1
–1.2
–0.2
–57.9
–0.0
–777.6
–10.5
–54.8
–1.3
–12.5
2.5
1.3
1.5
17.6
94.0
544.4
214.5
139.1
1.5
4.3
230.2
3.6
189.7
117.1
364.1
33.4
–4.8
–3.1
0.0
–0.5
–2.5
–0.1
–0.5
–6.7
–42.4
–7.4
–11.4
–26.2
–0.0
–24.2
–36.4
–113.0
–8.4
–17.3
–0.5
1.2
1.1
15.2
93.9
543.9
207.8
96.7
–5.9
–7.2
204.0
3.5
165.5
80.6
251.2
25.0
23.6
0.3
0.8
0.0
4.2
0.0
3.4
20.8
271.0
4.7
6.9
129.1
2.2
142.7
157.4
468.1
131.9
9.2
0.6
8.9
0.1
5.2
0.0
4.2
29.6
372.9
3.4
10.7
123.4
3.0
86.0
231.8
885.8
72.8
32.8
0.9
9.6
0.1
9.4
0.0
7.6
50.4
643.9
8.1
17.5
252.5
5.2
228.7
389.2
1,353.9
204.7
–41.0
–0.9
0.5
1.1
11.0
93.9
540.5
187.0
–174.3
–10.6
–14.0
74.9
1.3
22.8
–76.8
–217.0
–107.0
–45.3
1.6
–8.4
1.5
8.3
94.0
536.8
164.1
–504.8
–6.7
–13.3
–22.3
–1.7
–38.9
–272.2
–989.8
–171.3
Total
867.4
2,380.9
–1,301.9
1,946.3
–287.7
1,658.7
1,367.2
1,847.5
3,214.7
291.5
–1,268.3
Note: Discrepancies are due to rounding; –0.0 denotes a negative value rounded to zero.
a
Due to trade diversion in favour of China.
b
Net increase in Indonesia’s total imports.
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Stephen V. Marks
The irst set of columns in table 3 shows the impact on Indonesia’s exports to
China. The irst column indicates trade creation in China in favour of Indonesian
exports, as a consequence of tariff cuts in China on imports from Indonesia. The
second shows Indonesia’s gain from trade diversion away from exports of other
countries to the China market, owing to these same cuts. For a number of product aggregates, the export gains for Indonesia owing to trade diversion in China
considerably exceed those owing to trade creation; in total, the effects of trade
creation are less than half those of trade diversion.9
The third column shows Indonesia’s loss in exports to China related to trade
diversion to other ASEAN countries caused by China’s tariff cuts on imports
from these countries under the ACFTA. For most product categories, these losses
in favour of other ASEAN countries are considerably smaller than the gains to
Indonesia from trade diversion in China from all other countries. The fourth column shows that the estimated net impact on Indonesia’s exports to China is positive for all product categories except food crops. The negative sign in that case
is driven by trade diversion away from Indonesia for two commodities—cassavas and mangosteens—to Vietnam and especially Thailand, which had relatively
large shares of the market in China. For both commodities, trade creation in China
is estimated to be relatively small. The overall net gain in exports to China is estimated at $1.9 billion, or 10.4% of Indonesia’s baseline exports to China. The gains
are most pronounced in non–oil and gas mining; machinery and transport equipment; chemicals; and food, beverages, and tobacco.
The ifth column in table 3 shows Indonesia’s loss in exports to other ASEAN
countries owing to trade diversion in favour of China in those markets, given
their tariff reductions for imports from China. This amount in total is dwarfed
by the changes in exports to China in most sectors. The sixth column shows the
estimated net effect of the ACFTA on Indonesia’s exports. Overall, exports are
estimated to increase by $1.7 billion, 1.1% above the baseline level. The sectors
with the largest export gains to China also enjoy the largest overall net export
gains when other trade diversion effects are taken into account. For food and
estate crops, wood products, and paper products there are estimated to be small
decreases in exports.
The next set of columns in table 3 shows the effects of the ACFTA on imports to
Indonesia. The irst of these columns shows trade creation caused by the tariff cuts
for China, $1.4 billion in total. Given that trade diversion has a zero net impact
on imports, this trade creation equals Indonesia’s net increase in imports overall
and amounts to 1.0% of baseline imports. The sectors with the biggest increases
9. In a simple sensitivity analysis, if one assumes an elasticity of substitution among import
source countries of 2.5 for all products (more than the default value of 1.5 in the SMART
model), the effects on trade lows are generally smaller, particularly for trade diversion. For
example, for China the substitution elasticity estimates of Broda, Greenield, and Weinstein
(2006) range from 1.3 to 108.2, and an elasticity of 2.5 is typically on the low side. This will
have a direct effect on trade diversion. It also affects trade creation and trade diversion
indirectly, however, because the baseline import estimates are affected by the magnitude
of the trade diversion that is initially removed from the actual 2010 import values. The size
of these baseline values then affects subsequent trade creation and diversion as the inal
ACFTA tariffs are applied. Full details of the calculations using the alternative elasticity of
substitution are available upon request.
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The ASEAN–China Free Trade Agreement: Political Economy in Indonesia
297
are machinery and transport equipment as well as textiles, apparel, and leather.
Metals and metal products, non-metal products, chemicals, and other manufacturing also indicate substantial increases in imports.
The second column in the second set indicates additional increases in imports
from China owing to trade diversion from other source countries. For machinery
and transport equipment, as well as textiles, apparel, and leather, this trade diversion is substantial. Overall, it exceeds trade creation. The third column in this set
sums the irst two columns and shows the total increase in imports from China to
be $3.2 billion, or 18.1% of baseline imports from China.
Among the Indonesian sectors with the largest net increases in imports in percentage terms are textiles, apparel, and leather (3.6% overall, but with a 44.5%
increase in imports from China), other manufacturing (2.8% overall, 33.7% from
China), and non-metal products (1.3% overall, 13.4% from China). For all tradableproducts sectors , the increase was 0.9% overall and 15.3% from China.
The last two columns of table 3 indicate the estimated effect of the ACFTA on
Indonesia’s balance of trade in goods. The irst of these shows the net change in
the overall trade balance, the second the net change in Indonesia’s trade balance
with China. Indonesia’s overall trade balance is estimated to have increased by
$0.3 billion on account of the ACFTA, but its trade balance with China is estimated to have decreased by $1.3 billion. By sector, the decrease in the trade balance is most pronounced in machinery and transport equipment (especially from
China); textiles, apparel, and leather; other manufacturing; and metal products.
The increase in the trade balance is most pronounced in non–oil and gas mining
but is also substantial in food, beverages, and tobacco. Other resource-based sectors show increases as well.
In political economy terms, deterioration of the trade balances in all manufacturing sectors other than food, beverages, and tobacco would be perceived as a
liability of the agreement by economic nationalists in Indonesia who privilege the
development of value added in manufacturing. The larger deterioration in the
bilateral balance with China would also be problematic, as an indicator of visible
market penetration by a powerful rival.
Some Mercantilist Comparisons
If we are keeping score in mercantilist terms, how do the totals in table 3 for
Indonesia compare with those for China? China’s exports overall are estimated to
increase by $16.7 billion, or 1.1% of the baseline level. This net increase in exports
is all directed to ASEAN, given the logic of the model in this article. Imports to
China increase by $5.6 billion, or by 0.4% of the baseline level, equal to its trade
creation with the ASEAN countries. It would seem, then, that the net increase
in imports to China overall, in percentage terms, is quite a bit less than the
1.0% increase in imports noted above for Indonesia. Additional trade diversion
towards ASEAN and away from suppliers of imports to China in the rest of the
world means that the increase in exports from ASEAN countries to China totals
$15.0 billion, or 15.0% of the baseline amount. Given the total increase in imports
to China noted above, trade diversion from the rest of the world to ASEAN in the
China market equals $9.4 billion.
In ASEAN, imports overall increase by $7.9 billion. Given the increase of
imports from China of $16.7 billion noted above, and given a decrease of imports
to ASEAN countries from other ASEAN countries of $2.2 billion, this implies that
298
Stephen V. Marks
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$6.6 billion worth of imports to ASEAN from the rest of the world is diverted to
China.
China enjoys an increase in its trade balance of $1.7 billion with ASEAN (nearly
$1.3 billion of that from Indonesia, from table 3), of $9.4 billion with countries
outside ASEAN (equal to the trade diversion noted above), and thus of $11.1 billion overall (as could also be inferred from the above igures on the changes in its
exports and imports). Indonesia ekes out a narrow increase of $0.3 billion in its
trade balance, while ASEAN gains $4.9 billion.
Impact on Customs Revenue and Net National Welfare
Indonesia is estimated to incur a loss of $0.8 billion in customs revenue owing to
the ACFTA. Not only are import duties lower, and in many cases zero, on imports
from China, but trade diversion to China from other countries subject to positive
import duties lowers customs revenue further. However, offsetting gains to the
private sector yield a modest net economic welfare gain for Indonesia of $0.6 billion. One gets similar results for China on a larger scale: China is estimated to lose
$5.1 billion in customs revenue owing to the ACFTA, but enjoys a net welfare gain
of $0.3 billion.
For Indonesia and China, then, the ACFTA appears to be mutually beneicial
overall in economic terms. However, the predictions of the partial equilibrium
framework that there would be a surge of imports—particularly of many manufactured products—from China to Indonesia is consistent with China’s being
perceived by Indonesians as more of a threat in general and especially in certain
sectors.
RECENT TRADE-POLICY DEVELOPMENTS WITHIN INDONESIA
Trade-policy developments in Indonesia within the last four years have been
marked by a reversal of much of the earlier momentum towards economic
reform.10 There is much circumstantial and some direct evidence that the enactment of the ACFTA has contributed to this trend, and speciically to the imposition of non-tariff restraints on imports.
Reservations about the ACFTA
Table 4 shows the ratio of Indonesia’s inlation-adjusted import and export values
for 2013 relative to 2000.11 Indonesia’s trade with China, in particular, grew rapidly, especially on the import side. The merchandise trade balance (not adjusted
for inlation) swung from a surplus of $39.7 billion in 2006 to a deicit of $4.1 billion in 2013. Indonesia had a bilateral trade surplus with China of $0.7 billion in
2000 but began to run deicits in 2008, and these had drifted upwards to $7.2 billion by 2013. A major reason for the swing towards deicit was undoubtedly the
welcome resumption of higher rates of economic growth in Indonesia in recent
10. Marks and Rahardja (2012) characterise trade and related policies in Indonesia as of
early 2008, and quantify their impacts.
11. The inlation adjustment is done using the US producer price index, from the IMF’s
International Financial Statistics database. The trade data are from the UN Comtrade
database.
The ASEAN–China Free Trade Agreement: Political Economy in Indonesia
299
TABLE 4 Ratio of Indonesia’s Inlation-Adjusted Trade Values in 2013 Relative to 2000
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China
Other
World
Exports
Imports
5.3
1.8
1.9
9.6
3.2
3.6
years, as will be discussed below. Nevertheless, these trade developments, coupled with the perception that regional trade liberalisation initiatives were contributing to the trade imbalance, led to political stresses within the country. For some
time there have been concerns within Indonesia that the country perhaps did not
get the best of the ACFTA negotiations. For example, under the Early Harvest
Programme of initial tariff reductions under the ACFTA, a sore spot was that
Indonesia paid higher import duties on processed cocoa products in China than
did Malaysia or Singapore, because of the failure of the Indonesian government to
request these tariff cuts (Kompas, 9 May 2005). Moreover, in an analysis of regional
trading agreements in which Indonesia has participated, Graef and Anas (2012, 6)
argue that, in the ACFTA, ‘China’s exclusion and sensitive list reads like a list of
Indonesia’s top non-oil exports’. They point out, however, that many of the products on these lists are also major exports for Malaysia, Thailand, and Vietnam.
The evidence presented in this article is mixed on the question of which country
might have got an advantage in mercantilist terms. The impact of the import-tariff
cuts in Indonesia and China (table 2) indicates that weighted-average bilateral
tariff rates in the two countries moved in parallel on account of the ACFTA, with
duties in Indonesia ending up only slightly lower than those in China after the
implementation of the agreement. The weighted-average global tariff rates of the
two countries (table 1) indicate a slightly greater decrease in the average duty
in Indonesia than in China. The evidence on changes in trade lows points to a
greater discrepancy: Indonesia is estimated to enjoy a small increase of $0.3 billion
in its global trade balance but a decrease of $1.3 billion in its bilateral balance with
China, while China is estimated to gain $11.2 billion in its global trade balance. As
noted earlier, we would not expect these to be the ultimate changes in the respective trade balances, given the equilibrating forces at work, but the difference is
suggestive.
To the extent that there was any bias in the outcome of the negotiations,
Indonesia could be excused for not having as strategic an approach as it might
have done, given some issues of timing but also of ideology. The irst presidential
term of Susilo Bambang Yudhoyono, which began in October 2004, represented
the zenith of post-Soeharto institutionalised economic reform in Indonesia, with
several prominent technocrats joining his government. This did not happen all at
once, however, nor did it last.
Aswicahyono and Hill (2004) observe that Yudhoyono enjoyed a strong mandate from the electorate, and that it was imperative to restore business conidence
through predictable policies oriented towards economic growth. Both foreign and
domestic investment had been weak. Foreign direct investment in particular had
not recovered from the 1997–98 Asian inancial crisis or the lingering threat of terrorism and had been negative, on balance, into the irst half of 2004. Aswicahyono
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Stephen V. Marks
and Hill note, however, that incoming vice-president Jusuf Kalla had a reputation as an economic nationalist who had long been a recipient of government
patronage aimed at indigenous Indonesian businesses. Soesastro and Atje (2005)
similarly saw the Yudhoyono economic team in the October 2004 cabinet as rather
a disappointment—notably with the appointment of the wealthy, well-connected
businessman Aburizal Bakrie as coordinating minister for economic affairs.
One bright spot in technocratic terms was the new minister of trade, Mari Elka
Pangestu, a respected Indonesian economist with impeccable reformist credentials who had been trained at The Australian National University and had a PhD
from the University of California, Davis. Within six weeks of taking ofice she
had become one of the signatories in Vientiane, Laos, of the ACFTA Agreement
on Trade in Goods. This agreement committed the signatory countries to their
normal, sensitive, highly sensitive, and exclusion lists for all tradable commodities. In these negotiations, Minister Pangestu laboured under some disadvantages: McLeod (2005) notes that she did not even have her top staff appointments
approved until ive months into her term.
Sri Mulyani Indrawati, also a respected and reform-oriented economist, had
a PhD from the University of Illinois and had spent two years as the director of
the IMF Regional Ofice for Asia and the Paciic. She joined the initial Yudhoyono
cabinet as minister of national development planning, a relatively less powerful
position, but in a December 2005 cabinet reshufle became minister of inance,
clearly a critically important role in economic policy-making.
In the same cabinet reshufle, Aburizal Bakrie was replaced as coordinating
minister for economic affairs by a respected economist noted for his integrity,
Boediono, who had a PhD from the Wharton School and had served as minister of
inance from 2001 to 2004 and in other senior positions in government.
Given the mandate of the electorate in 2004 and the urgency of policy reform
for the promotion of investment, it was understandable both that the president
would appoint senior oficials steeped in Western economic analysis and ideology and that Indonesia would move resolutely towards trade liberalisation. By
April 2010, however, in the second ive-year term of President Yudhoyono—with
normal-track tariff elimination under the ACFTA completed and the deterioration of the bilateral trade balance with China underway—there was much talk in
Jakarta about whether the ACFTA might be renegotiated on behalf of Indonesia
by adjusting 228 tariff lines for industrial products—mostly within the iron and
steel, textiles and apparel, and footwear sectors—or in even more comprehensive ways. It was concluded that Indonesia would not be able to alter the basic
agreement with China, since it was locked into its ACFTA commitments with its
ASEAN partners. A meeting between Mari Pangestu and the Chinese trade minister led to an announcement in early April 2010 of an agreement that included
promises of Chinese infrastructure investments in Indonesia and of steps by the
surplus country to boost its imports and provide other support to its ACFTA
partners.12 The announcement of the agreement revealed an unusually public rift
in the Indonesian government, as the minister of industry, Mohamad Suleman
12. In a 2013 visit to Indonesia, Chinese President Xi Jinping proposed the establishment of
an infrastructure investment bank that would help fund development projects in Southeast
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The ASEAN–China Free Trade Agreement: Political Economy in Indonesia
301
Hidayat, complained that he had not been consulted by Mari Pangestu until after
the agreement had been reached (DetikFinance, 6 Apr. 2010). The minister of trade
was in a position of some vulnerability politically, as one of only a handful of ethnic Chinese Indonesians ever to hold a cabinet post in the country.13
As resistance to economic reform in Indonesia hardened, and with criticisms
in the air over a controversial bank bailout, Sri Mulyani resigned from her post
as minister of inance in May 2010. In June of the following year, the portion of
Minister of Trade Regulation 39/2010 that authorised the importation of inished
goods by producers was annulled in an unusual intervention by the Indonesian
Supreme Court in response to a lawsuit by an apparel manufacturer. The threat
of import competition, notably from China, owing in part to lower interest rates
in that country, was mentioned by the court in its decision. It also cited a survey
from the Ministry of Industry that showed the harmful effects of the ACFTA on
producers of goods included in the 228 tariff lines mentioned above.
Mari Pangestu moved to a restructured cabinet position as the minister of tourism and creative economy in a reshufle in October 2011.14 Boediono had left the
cabinet in 2008 to become governor of Bank Indonesia, the central bank, but in
October 2009 was elected vice-president for the second Yudhoyono term. Their
successors in the Yudhoyono cabinet were not oriented towards economic reform
along technocratic lines.15 Indeed, economic nationalism has enjoyed a resurgence
in Indonesia, and within the past several years a variety of new trade barriers
have been imposed by the government.
The Resurgence of Non-tariff Barriers to Trade
A compilation by the Australia Indonesia Partnership for Economic Governance
(reported in Marks 2014) shows that the number of tariff lines in Indonesia subject
to NTMs on the import side grew from 3,714 in 2009 to 4,861 in 2014. Many of
these tariff lines were subject to multiple requirements, as the number of NTMs
grew from 6,537 to 11,719. On the export side, similarly, the number of tariff lines
subject to NTMs grew from 386 in 2009 to 954 in 2014, while the number of NTMs
grew from 485 to 1,782. Most of these new regulations have been issued by the
Ministry of Trade, but the Ministry of Agriculture, the Ministry of Energy and
Mineral Resources, the Ministry of Industry, and the Food and Drug Agency have
also been involved. The new policies have often pushed the limits of the rules of
Asia. The progeny of this proposal, the China-directed Asian Infrastructure Investment
Bank, is expected to begin operations by the end of 2015.
13. For instance, in a later public forum, a member of the national legislature from the
Golkar political party stated that the minister had ‘prioritized the interests of her ancestors’
in an aircraft purchase from China in 2011 (Jakarta Post, 21 May 2011).
14. Sri Mulyani became a managing director of the World Bank Group in June 2010, and
Mari Pangestu was nominated by the Indonesian government in
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
THE ASEAN–CHINA FREE TRADE AGREEMENT:
POLITICAL ECONOMY IN INDONESIA
Stephen V. Marks
To cite this article: Stephen V. Marks (2015) THE ASEAN–CHINA FREE TRADE AGREEMENT:
POLITICAL ECONOMY IN INDONESIA, Bulletin of Indonesian Economic Studies, 51:2, 287-306,
DOI: 10.1080/00074918.2015.1061917
To link to this article: http://dx.doi.org/10.1080/00074918.2015.1061917
Published online: 24 Aug 2015.
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Date: 17 January 2016, At: 23:14
Bulletin of Indonesian Economic Studies, Vol. 51, No. 2, 2015: 287–306
THE ASEAN–CHINA FREE TRADE AGREEMENT:
POLITICAL ECONOMY IN INDONESIA
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Stephen V. Marks*
Pomona College
The ASEAN–China Free Trade Agreement has been the most consequential trade
agreement for ASEAN in the past decade. In this article, I use partial equilibrium
modelling to estimate the direct impacts of the agreement on Indonesia and China,
and from these estimates draw political economy implications for Indonesia.
Although the agreement has contributed to a modest trade surplus for Indonesia
overall, it has led to a larger bilateral deicit with China. In addition, the shifts to
surplus for Indonesia have mostly been in resource-based sectors, while the shifts
to deicit have occurred in many manufacturing sectors that the government would
like to see grow. I argue that pushback against the agreement has contributed to a
resurgence of non-tariff trade barriers in the country, although other political economy forces also have been at work. The agreement ultimately provides a cautionary
tale: cutting regional import tariffs can lead to pressures for more complex and less
transparent trade policies.
Keywords: ASEAN, China, free-trade agreements, political economy
JEL classiication: F13, F15
INTRODUCTION
Recent years have witnessed dramatic change in trade relations in East Asia;
China’s accession to the WTO in late 2001 was a watershed. For Southeast Asia,
the ASEAN–China Free Trade Agreement (ACFTA), under which tariff reductions were initiated in 2005, rivals the earlier ASEAN Free Trade Agreement as the
most economically signiicant regional trade agreement of recent decades. This
article examines the political economy of the ACFTA in Indonesia, where controversies related to the agreement have contributed to a major change of direction
in trade policy.
Under the ACFTA, China and the original ASEAN-6 (Brunei, Indonesia,
Malaysia, the Philippines, Singapore, and Thailand) were to reduce tariffs for
* This article is a revision of a previous study (Marks 2012a), which was produced under
the auspices of the Support for Economic Analysis Development in Indonesia (SEADI) Project, United States Agency for International Development and Ministry of Trade, Republic
of Indonesia. The author is grateful to Moekti P. Soejachmoen of the SEADI Project for assistance in obtaining the trade and tariff data, and to the two anonymous referees for their
helpful comments. The views in this article are those of the author alone.
ISSN 0007-4918 print/ISSN 1472-7234 online/15/000287-20
http://dx.doi.org/10.1080/00074918.2015.1061917
© 2015 Indonesia Project ANU
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Stephen V. Marks
normal-track items to zero by 2010. Tariffs on sensitive products were to be
reduced to at most 20% by 2012 and then to at most 5% by 2018. Tariffs on highly
sensitive products were to be reduced to at most 50% by 2015, but then no further
reductions were required. Vietnam, Cambodia, Laos, and Myanmar were required
to complete these tariff reductions on a slower schedule—by 2015 for items on the
normal and highly sensitive lists, and by 2020 for those on the sensitive list. All
countries were also allowed to exclude lists of items from the agreement on the
grounds of morals or national security.
This article estimates the effects of the ACFTA through a simple partial equilibrium simulation methodology, based on minimal structure and assumptions
about parameter values. The approach is similar to the SMART model maintained
by the United Nations Conference on Trade and Development and the World
Bank.1 I use trade data from 2010, and evaluate the effects of the agreement on the
basis of the inal import-tariff rates that will apply in each country by 2020, when
the agreement will be fully implemented.
Partial equilibrium analysis of this sort can be used to obtain ex-ante predictions of the effects of a free-trade agreement. It is by no means a perfect approach—
particularly in evaluating the effects of comprehensive trade-liberalisation
measures—given that resource constraints, the endogeneity of national income,
competition with other countries in global markets, and other factors could be
better taken into account with a general equilibrium approach. On the other
hand, the implications of general equilibrium models can be greatly altered by the
model-closure rules applied; one commonly used rule is that the current account
balance with the rest of the world is not affected by a policy change. In reality,
such an equilibrium may take a long time to work itself out, while important
political economy developments could arise in the interim. In any case, the quantitative indings presented in this article should be treated as illustrative rather
than deinitive.
An alternative to a simulation approach is to use a gravity model, in which
trade data are examined econometrically ex post, in an effort to determine how an
agreement affected subsequent trade lows. In a gravity model, exports from one
country to another are posited to be functions of the GDP of each country, their
distance from each other, and other factors. The ACFTA has yet to be fully implemented, however, so the trade data do not relect the full impact of the agreement,
and thus the lines between ex ante and ex post are blurred. The partial equilibrium framework offers a particularly simple way to correct for the ACFTA’s being
only partially implemented by the 2010 base year. The framework also allows
examination of the impact of policies at a detailed commodity level, which can be
relevant in political economy terms, though in this article I mostly aggregate the
indings into broad sectoral categories.
I irst outline the ideological background for views on the ACFTA within
Indonesia. I then discuss the methodology and data in detail, and present the indings of the quantitative analysis—speciically the effects of the ACFTA on import
duty rates in Indonesia and China, on trade lows of Indonesia, and on customs
1. The SMART model was originally developed by Laird and Yates (1986). Jammes and
Olarreaga (2005) offer a useful presentation of the algebra of the SMART model. Full details of the implementation used in this article are available from the author upon request.
The ASEAN–China Free Trade Agreement: Political Economy in Indonesia
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revenues and net economic welfare of Indonesia and China. I interpret these
effects from different ideological perspectives, and then look at recent Indonesian
history to characterise the political economy context in which Indonesia entered
into the ACFTA and to relate the effects of import-tariff reductions mandated
under the agreement to subsequent developments in trade policy.
ECONOMIC NATIONALISTS AND TECHNOCRATS
In debates over trade and other economic policies in Indonesia since the Soeharto
era, two basic camps can be identiied. On one side, economic nationalists have
prioritised industrial and technological development. Bresnan (1993) observes
that Indonesian economic nationalism has long had a measure of racism. Basri and
Hill (2002) similarly note that mistrust of foreign and sometimes non-indigenous
actors as well as of market forces has characterised the nationalists, and that economic nationalism and rent-seeking have often gone hand in hand. On the other
side have been the technocrats, policymakers with advanced training in economics who have had more faith in markets and thus have been less inclined to advocate policy interventions strongly contrary to market forces.
On trade per se, many politicians and policymakers, particularly those with a
strongly nationalist bent, have taken mercantilist positions—favouring the expansion of exports and the contraction of imports. I will offer interpretations of the
effects of the ACFTA in both mercantilist and economic terms, and will examine the roles played by technocratic and nationalist actors in the negotiation and
aftermath of the agreement.
METHODOLOGY
Preferential tariff cuts within a bloc of countries result in both trade creation and
trade diversion. Trade creation occurs when lower-cost imports from within the
bloc displace higher-cost production and allow for expanded consumption within
a member country. It enhances the economic welfare of that country and results
in allocative eficiency gains in production and consumption. Trade diversion
occurs when higher-cost imports from within the bloc displace lower-cost imports
from outside the bloc. It leads to a welfare loss for the importing country because
its terms of trade deteriorate as its imports shift to higher-cost source countries.
On balance, preferential tariff cuts may or may not provide welfare gains to the
country.
Partial equilibrium trade-policy models like the SMART model are closely tied
to this basic theory. The analysis in this article is conducted at a detailed level,
based on six-digit Harmonized System (HS) commodity classiications. For a
given commodity, the key behavioural parameter for trade creation is the ownprice elasticity of import demand. I assume that a change in the price of one commodity does not affect the demand for imports of other commodities. I apply the
Armington (1969) assumption that there is imperfect substitution among imports
of a particular commodity from the various source countries; the elasticity of
substitution between these imports is the key behavioural parameter for trade
diversion. To close the model, net trade diversion is set equal to zero: increases in
imports from bloc members are offset by decreases in imports from other countries. Trade diversion is assigned to individual countries on the basis of their initial
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Stephen V. Marks
shares of trade among these two groups. Finally, I assume that importers actually
claim the tariff preferences allowed under the agreement. In practice, complying
with rules of origin can be costly, and importers may not bother to claim the preferential rate if it is not much different from the most-favoured-nation (MFN) rate
applied by the country.
This analysis does not allow tariff-rate changes to cause import changes for
commodities for which imports were previously zero: trade creation and trade
diversion can occur only for products for which there was initially a positive level
of imports from the country being granted trade preferences.2 It also assumes that
export supply elasticities for all products are ininite: each country as an importer
faces constant external prices for all commodities. This assumption oversimpliies
circumstances in some sectors in larger importing countries, but in the absence of
reliable estimates of export supply elasticities it provides a workable approach.
The analysis accounts for the effects of trade liberalisation in China in favour
of ASEAN countries and in Indonesia and all other ASEAN countries in favour
of China. In Indonesia, imports from China increase because of Indonesian tariff
cuts in favour of China, but imports from other countries decrease owing to substitution towards China as an import source country. Indonesian exports to China
increase because of the tariff cuts there on Indonesian products, but decrease
because of the same tariff cuts on products from other ASEAN countries. Tariff
cuts in other ASEAN countries in favour of imports from China reduce Indonesian
exports to those countries as well. Given the partial equilibrium nature of the
analysis, these effects are examined one at a time and combined additively for
each country.
This analysis also provides a basis for estimating changes in customs revenue.
For a given commodity, a weighted-average tariff rate can be calculated by using
the share of the value of imports from the various trading partners to aggregate
their respective tariff rates. Using data from before and after the preferential
arrangement is put into effect, this weighted-average tariff rate is multiplied by
the total value of imports of a given commodity from all countries, and the product of these amounts is then summed across all tariff lines to estimate the change
in customs revenue. The net effect on national economic welfare can be estimated
by adding to this revenue effect the net change in domestic consumer surplus and
producer surplus.3
DATA AND COMPLICATIONS
This article uses trade data for all countries from the UN Comtrade database
and draws on import-tariff data from the oficial commitments by each country under the ACFTA. Because these data are in some cases taken from different
2. This makes sense, in the absence of information on how much lower the prices of imports of the various products would have to be before imports started being demanded in
positive quantities. In principle, such a problem would also arise in a general equilibrium
(GE) model. With the broader commodity aggregates of a GE model there may not be zero
imports, but then the problem would be the greater extent of aggregation bias than in a
more disaggregated model. Zero imports also create dilemmas for gravity models.
3. This net change is calculated relative to the import demand curve. Part of the customs
revenue lost to the tariff cuts is in effect transferred to domestic consumers.
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The ASEAN–China Free Trade Agreement: Political Economy in Indonesia
291
HS classiications, I established a concordance between the tariff data and trade
data for China and for each ASEAN country. The tariff data are given at a highly
detailed level: HS eight or ten digits. For each six-digit commodity classiication, I calculated simple averages of the more detailed tariff rates within that
classiication.
I account for both ad valorem and speciic tariffs but not for policies not covered by the ACFTA, such as non-tariff trade restrictions, export taxes, and trade
facilitation. A comprehensive, reliable database on non-tariff measures (NTMs) in
China or the ASEAN countries is not available at present.4 Moreover, some products subject to powerful NTMs were included on the highly sensitive list or general
exclusion list for countries that were party to the agreement, and thus these products were not necessarily subject to tariff cuts anyway. This is true, for example,
of rice, sugar, and irearm imports for Indonesia. In some cases, however, import
tariffs may have been cut under the ACFTA in sectors in which non-tariff barriers
could alter the elasticity of import demand; the estimated effects of the ACFTA
tariff cuts on trade lows would then be in error, and typically overstated, even
if the underlying model and assumed demand elasticities were correct. Indeed,
there have been concerns that non-tariff barriers in China would limit the export
growth that ASEAN might otherwise expect because of the ACFTA (Tongzon
2005); there is recent evidence of such effects (Devadason and Chenayah 2014).
For Brunei, the most recent trade data are from 2004. Also, oficial trade data
are not available for Laos. I therefore used adjusted estimates of Lao imports in
2006 based on exports to Laos reported by its partner countries. I then rescaled the
data on the basis of the ratio of total import values reported in 2010 versus 2004
(for Brunei) and 2006 (for Laos) in the International Financial Statistics database of
the IMF to obtain rough estimates of imports by commodity in 2010.
I assign elasticities of import demand from Stern, Francis, and Schumacher’s
(1976) survey to the various commodity classiications, rather than use the new
default elasticities used by the SMART model. The default values are based on the
estimates of Kee, Nicita, and Olarreaga (2008), who use an econometric approach
based on the assumption of national-income maximisation. While the earlier elasticity data are no doubt dated for many commodity classiications, many of the
estimates of Kee, Nicita, and Olarreaga seem implausible. Moreover, the implementation of the approach in the SMART model, which must interpolate in some
fashion to assign elasticities to sectors for which estimates are missing, seems
rather arbitrary in some cases.
The SMART model assumes by default that the elasticity of substitution
between imports from various source countries equals 1.5 for all commodities and
countries. However, a study by Broda, Greenield, and Weinstein (2006) estimates
elasticities of substitution within three-digit HS sectors for a number of countries,
including China, Indonesia, Malaysia, and Thailand. I apply these estimates to
all of the six-digit product categories within the various three-digit HS sectors for
these countries, and by inference for the other ASEAN members. This approach
4. One effort to produce a global NTM database is by Kee, Nicita, and Olarreaga (2009).
Their estimates of the tariff-rate equivalents of non-tariff import restraints on sugar and
rice in Indonesia, at only 0% and 1% respectively, are highly questionable: Marks and
Rahardja (2012) offer much higher estimates, in a study of Indonesia alone.
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292
Stephen V. Marks
is imperfect, for a variety of reasons.5 Given these concerns, I have conducted a
simple sensitivity analysis (see footnote 9).
The analysis is complicated by the use of 2010 trade data, which should relect
the effects of the ACFTA tariff reductions to that point. I handle this by irst subtracting from the actual 2010 import values the estimated trade creation and trade
diversion caused by the 2010 ACFTA tariff rates—to get a baseline scenario for
2010 as if the ACFTA tariff cuts had not yet been enacted. Solving for this baseline
requires using constrained non-linear optimisation: the trade creation and trade
diversion being calculated in this case are themselves functions of the baseline
import levels being solved for, and import levels must be non-negative.6
Once these baseline import levels for 2010 have been obtained, it is straightforward to apply the inal ACFTA commitments to baseline imports of each product, calculating the trade creation and trade diversion implied, still subject to the
constraint that imports be non-negative.7
QUANTITATIVE FINDINGS
The implications of the ACFTA tariff cuts for Indonesia can be summarised in a
number of ways. I present the indings for 17 broad commodity categories, along
with totals for all tradable-goods sectors.
Effects on Average Duty Rates
Table 1 indicates the impact of the ACFTA import-tariff cuts on overall weightedaverage import duty rates in Indonesia and China, based on the rates that would
have been in effect in 2010 with ACFTA preferences excluded, and then with the
inal ACFTA rates being applied.8 For Indonesia, the average import duty rate is
5. Hillberry and Hummels (2013) critique the approach on which Broda, Greenield, and
Weinstein’s analysis and its precursors are based.
6. Subtracting trade creation and trade diversion from the actual level of imports from the
country being granted preferential status could cause its baseline imports to become negative. For other source countries, removing trade diversion caused by the 2010 ACFTA preferences would make the level of baseline imports higher than the actual level of imports,
and so the non-negativity constraint would not bind.
7. In this case, trade diversion is set as the smaller of that calculated in the model and the
initial level of imports from a particular source country, to avoid imports becoming negative, as shown in equation (13) of Jammes and Olarreaga (2005). This is the only algebraic
difference between my analysis and the SMART model, which instead modiies the functional form for trade diversion in order to prevent imports from being negative, as shown
in equation (14) of Jammes and Olarreaga. The authors note that this modiication causes a
downward bias in the calculation of trade diversion.
8. In forming these weighted-average tariff rates as of 2010, and in estimating customsrevenue impacts for Indonesia and China, I accounted for the following preferential trade
agreements as well as the MFN tariff schedules. For Indonesia: the ASEAN, ASEAN–
Korea, ASEAN–Australia and New Zealand, and ASEAN–India free-trade agreements, as
well as the Indonesia–Japan Economic Partnership Agreement. No other agreements were
as yet in effect for Indonesia. In some cases, oficial preferential tariffs, including those
under the ACFTA, have been higher than MFN rates, but in these cases Indonesia applies
the lower of the two rates, according to Ministry of Finance oficials, and this is the rate
The ASEAN–China Free Trade Agreement: Political Economy in Indonesia
293
TABLE 1 Overall Import Duty Rates in Indonesia and China,
without and with the ACFTA, Based on 2010 Trade Data (%)
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In Indonesia
In China
Without
ACFTA
With
ACFTA
Without
ACFTA
With
ACFTA
Food crops
Estate & other crops
Livestock & their products
Forestry
Fisheries
Oil & gas extraction
Other mining
Food, beverages, & tobacco
Textiles, apparel, & leather
Wood products
Paper products
Chemicals
Oil reining & liqueied natural gas
Non-metal products
Metals & metal products
Machinery & transport equipment
Other manufacturing
4.6
2.5
3.6
1.5
3.0
0.4
1.1
8.4
4.7
0.3
2.7
2.8
0.9
4.7
3.6
2.0
2.4
3.1
2.1
3.6
0.9
1.2
0.4
0.9
8.0
2.3
0.1
2.4
2.3
0.5
3.3
2.7
1.4
1.4
20.1
10.0
8.6
5.6
9.9
1.0
0.9
6.3
14.6
0.2
2.9
6.4
6.8
10.2
3.5
4.3
6.3
13.8
7.3
8.4
3.5
9.2
0.7
0.6
5.2
14.0
0.1
2.9
5.8
5.3
7.2
3.3
4.1
6.2
Total
2.5
1.9
4.4
4.1
Note: ACFTA = ASEAN–China Free Trade Agreement
estimated to fall from 2.5% without the ACFTA to 1.9% with the ACFTA fully in
effect. For China, it falls from 4.4% to 4.1%.
Table 2 similarly shows the weighted-average import duty rates that Indonesia
and China would have imposed on each other in 2010, without the ACFTA and
with the ultimate ACFTA import tariffs in effect. Here the effects of the agreement
seem remarkably similar for the two countries: Indonesia’s average duty rate on
imports from China is estimated to fall from 5.2% to 0.8%, while China’s average
duty rate on imports from Indonesia falls from 5.1% to 1.1%.
Tables 1 and 2 weight import duties by the dollar value of imports. This inevitably introduces aggregation bias in that the value of imports will be higher for
products for which the duty rate is lower, all else equal. For example, China
imposes no duty on its imports of ASEAN coal, which contributed more than 26%
of the total value of its imports from Indonesia.
that I use. For China: the free-trade agreements with Bangladesh (under the Asia-Paciic
Trade Agreement), Chile, Hong Kong, Macau, New Zealand, and Pakistan that are included in the TRAINS trade-policy database from the United Nations Conference on Trade
and Development. I omitted certain regional agreements with minor trading partners and
narrower commodity coverage.
Stephen V. Marks
294
TABLE 2 Bilateral Import Duty Rates in Indonesia and China,
without and with the ACFTA, Based on 2010 Trade Data (%)
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In Indonesia
Food crops
Estate & other crops
Livestock & their products
Forestry
Fisheries
Oil & gas extraction
Other mining
Food, beverages, & tobacco
Textiles, apparel, & leather
Wood products
Paper products
Chemicals
Oil reining & liqueied natural gas
Non-metal products
Metals & metal products
Machinery & transport equipment
Other manufacturing
Total
In China
Without
ACFTA
With
ACFTA
Without
ACFTA
With
ACFTA
7.7
5.0
5.0
4.4
5.3
0.8
2.4
12.8
10.5
4.4
4.9
4.9
4.0
10.6
7.8
3.3
8.0
0.5
0.0
0.0
0.0
0.0
1.3
0.0
8.4
0.4
0.0
0.0
0.5
0.0
2.9
0.9
0.3
0.5
11.4
13.5
11.3
10.0
9.0
2.1
2.8
9.4
8.0
0.2
5.3
5.3
3.2
18.8
3.5
2.3
9.2
0.0
2.0
0.0
0.0
0.0
0.4
0.0
3.6
0.2
0.2
5.0
0.3
0.0
4.4
0.0
0.1
0.0
5.2
0.8
5.1
1.1
Note: ACFTA = ASEAN–China Free Trade Agreement
Table 2 shows that both countries offered sharply lower preferential tariffs for
agriculture, forestry, and isheries under the ACFTA. Indonesia maintained relatively high tariffs against China on food, beverages, and tobacco. Both countries
maintained relatively high tariffs against each other on non-metal products, which
include plastic, rubber, ceramics, and glass. China also maintained relatively high
tariffs against Indonesia on paper products.
The general impression from table 1 is that average import tariffs remain
more protective in China overall, particularly in textiles, apparel, and leather.
Agriculture and isheries in China remain relatively heavily protected by tariffs
on a global basis, as are food, beverages, and tobacco in Indonesia.
Impact on Imports, Exports, and the Trade Balance
Table 3 shows the estimated impact of the ACFTA on Indonesia’s imports, exports,
and trade balance. These are initial impacts based on the partial equilibrium theory. Equilibrating adjustments in exchange rates, prices, and incomes would be
expected to reduce these impacts over time. Economists would also downplay the
importance of bilateral trade imbalances or an increase in imports from a particular country. Such phenomena may elicit considerable concern among politicians,
however, for whom the relevant time horizon may be much closer, particularly if
the other country is perceived to be an especially powerful rival.
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TABLE 3 Effects of the ASEAN–China Free Trade Agreement on Indonesia’s Trade Flows ($ million)
Changes in Indonesia’s
exports to China
Changes in Indonesia’s
imports from China
Trade
Change in
diversion Trade
exports to
diversion
from
Net
ASEAN change in Trade
Net
Trade
other to ASEAN
creation countries countries change countriesa exports creationb
Trade
diversion
to China
from other
Net
countries change
Net change in
trade balance
Overall With China
Food crops
Estate & other crops
Livestock & their products
Forestry
Fisheries
Oil & gas extraction
Other mining
Food, beverages, & tobacco
Textiles, apparel, & leather
Wood products
Paper products
Chemicals
Oil reining & liqueied natural gas
Non-metal products
Metals & metal products
Machinery & transport equipment
Other manufacturing
1.7
1.4
0.5
1.1
4.4
34.3
250.5
138.2
61.2
1.0
0.8
106.9
1.3
172.3
20.6
56.0
15.4
17.8
1.7
1.3
1.1
16.1
89.2
309.9
375.6
95.0
1.7
3.7
181.2
2.3
795.1
107.0
362.9
19.3
–32.0
–0.5
–0.5
–0.6
–2.8
–29.5
–15.9
–299.4
–17.1
–1.2
–0.2
–57.9
–0.0
–777.6
–10.5
–54.8
–1.3
–12.5
2.5
1.3
1.5
17.6
94.0
544.4
214.5
139.1
1.5
4.3
230.2
3.6
189.7
117.1
364.1
33.4
–4.8
–3.1
0.0
–0.5
–2.5
–0.1
–0.5
–6.7
–42.4
–7.4
–11.4
–26.2
–0.0
–24.2
–36.4
–113.0
–8.4
–17.3
–0.5
1.2
1.1
15.2
93.9
543.9
207.8
96.7
–5.9
–7.2
204.0
3.5
165.5
80.6
251.2
25.0
23.6
0.3
0.8
0.0
4.2
0.0
3.4
20.8
271.0
4.7
6.9
129.1
2.2
142.7
157.4
468.1
131.9
9.2
0.6
8.9
0.1
5.2
0.0
4.2
29.6
372.9
3.4
10.7
123.4
3.0
86.0
231.8
885.8
72.8
32.8
0.9
9.6
0.1
9.4
0.0
7.6
50.4
643.9
8.1
17.5
252.5
5.2
228.7
389.2
1,353.9
204.7
–41.0
–0.9
0.5
1.1
11.0
93.9
540.5
187.0
–174.3
–10.6
–14.0
74.9
1.3
22.8
–76.8
–217.0
–107.0
–45.3
1.6
–8.4
1.5
8.3
94.0
536.8
164.1
–504.8
–6.7
–13.3
–22.3
–1.7
–38.9
–272.2
–989.8
–171.3
Total
867.4
2,380.9
–1,301.9
1,946.3
–287.7
1,658.7
1,367.2
1,847.5
3,214.7
291.5
–1,268.3
Note: Discrepancies are due to rounding; –0.0 denotes a negative value rounded to zero.
a
Due to trade diversion in favour of China.
b
Net increase in Indonesia’s total imports.
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296
Stephen V. Marks
The irst set of columns in table 3 shows the impact on Indonesia’s exports to
China. The irst column indicates trade creation in China in favour of Indonesian
exports, as a consequence of tariff cuts in China on imports from Indonesia. The
second shows Indonesia’s gain from trade diversion away from exports of other
countries to the China market, owing to these same cuts. For a number of product aggregates, the export gains for Indonesia owing to trade diversion in China
considerably exceed those owing to trade creation; in total, the effects of trade
creation are less than half those of trade diversion.9
The third column shows Indonesia’s loss in exports to China related to trade
diversion to other ASEAN countries caused by China’s tariff cuts on imports
from these countries under the ACFTA. For most product categories, these losses
in favour of other ASEAN countries are considerably smaller than the gains to
Indonesia from trade diversion in China from all other countries. The fourth column shows that the estimated net impact on Indonesia’s exports to China is positive for all product categories except food crops. The negative sign in that case
is driven by trade diversion away from Indonesia for two commodities—cassavas and mangosteens—to Vietnam and especially Thailand, which had relatively
large shares of the market in China. For both commodities, trade creation in China
is estimated to be relatively small. The overall net gain in exports to China is estimated at $1.9 billion, or 10.4% of Indonesia’s baseline exports to China. The gains
are most pronounced in non–oil and gas mining; machinery and transport equipment; chemicals; and food, beverages, and tobacco.
The ifth column in table 3 shows Indonesia’s loss in exports to other ASEAN
countries owing to trade diversion in favour of China in those markets, given
their tariff reductions for imports from China. This amount in total is dwarfed
by the changes in exports to China in most sectors. The sixth column shows the
estimated net effect of the ACFTA on Indonesia’s exports. Overall, exports are
estimated to increase by $1.7 billion, 1.1% above the baseline level. The sectors
with the largest export gains to China also enjoy the largest overall net export
gains when other trade diversion effects are taken into account. For food and
estate crops, wood products, and paper products there are estimated to be small
decreases in exports.
The next set of columns in table 3 shows the effects of the ACFTA on imports to
Indonesia. The irst of these columns shows trade creation caused by the tariff cuts
for China, $1.4 billion in total. Given that trade diversion has a zero net impact
on imports, this trade creation equals Indonesia’s net increase in imports overall
and amounts to 1.0% of baseline imports. The sectors with the biggest increases
9. In a simple sensitivity analysis, if one assumes an elasticity of substitution among import
source countries of 2.5 for all products (more than the default value of 1.5 in the SMART
model), the effects on trade lows are generally smaller, particularly for trade diversion. For
example, for China the substitution elasticity estimates of Broda, Greenield, and Weinstein
(2006) range from 1.3 to 108.2, and an elasticity of 2.5 is typically on the low side. This will
have a direct effect on trade diversion. It also affects trade creation and trade diversion
indirectly, however, because the baseline import estimates are affected by the magnitude
of the trade diversion that is initially removed from the actual 2010 import values. The size
of these baseline values then affects subsequent trade creation and diversion as the inal
ACFTA tariffs are applied. Full details of the calculations using the alternative elasticity of
substitution are available upon request.
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The ASEAN–China Free Trade Agreement: Political Economy in Indonesia
297
are machinery and transport equipment as well as textiles, apparel, and leather.
Metals and metal products, non-metal products, chemicals, and other manufacturing also indicate substantial increases in imports.
The second column in the second set indicates additional increases in imports
from China owing to trade diversion from other source countries. For machinery
and transport equipment, as well as textiles, apparel, and leather, this trade diversion is substantial. Overall, it exceeds trade creation. The third column in this set
sums the irst two columns and shows the total increase in imports from China to
be $3.2 billion, or 18.1% of baseline imports from China.
Among the Indonesian sectors with the largest net increases in imports in percentage terms are textiles, apparel, and leather (3.6% overall, but with a 44.5%
increase in imports from China), other manufacturing (2.8% overall, 33.7% from
China), and non-metal products (1.3% overall, 13.4% from China). For all tradableproducts sectors , the increase was 0.9% overall and 15.3% from China.
The last two columns of table 3 indicate the estimated effect of the ACFTA on
Indonesia’s balance of trade in goods. The irst of these shows the net change in
the overall trade balance, the second the net change in Indonesia’s trade balance
with China. Indonesia’s overall trade balance is estimated to have increased by
$0.3 billion on account of the ACFTA, but its trade balance with China is estimated to have decreased by $1.3 billion. By sector, the decrease in the trade balance is most pronounced in machinery and transport equipment (especially from
China); textiles, apparel, and leather; other manufacturing; and metal products.
The increase in the trade balance is most pronounced in non–oil and gas mining
but is also substantial in food, beverages, and tobacco. Other resource-based sectors show increases as well.
In political economy terms, deterioration of the trade balances in all manufacturing sectors other than food, beverages, and tobacco would be perceived as a
liability of the agreement by economic nationalists in Indonesia who privilege the
development of value added in manufacturing. The larger deterioration in the
bilateral balance with China would also be problematic, as an indicator of visible
market penetration by a powerful rival.
Some Mercantilist Comparisons
If we are keeping score in mercantilist terms, how do the totals in table 3 for
Indonesia compare with those for China? China’s exports overall are estimated to
increase by $16.7 billion, or 1.1% of the baseline level. This net increase in exports
is all directed to ASEAN, given the logic of the model in this article. Imports to
China increase by $5.6 billion, or by 0.4% of the baseline level, equal to its trade
creation with the ASEAN countries. It would seem, then, that the net increase
in imports to China overall, in percentage terms, is quite a bit less than the
1.0% increase in imports noted above for Indonesia. Additional trade diversion
towards ASEAN and away from suppliers of imports to China in the rest of the
world means that the increase in exports from ASEAN countries to China totals
$15.0 billion, or 15.0% of the baseline amount. Given the total increase in imports
to China noted above, trade diversion from the rest of the world to ASEAN in the
China market equals $9.4 billion.
In ASEAN, imports overall increase by $7.9 billion. Given the increase of
imports from China of $16.7 billion noted above, and given a decrease of imports
to ASEAN countries from other ASEAN countries of $2.2 billion, this implies that
298
Stephen V. Marks
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$6.6 billion worth of imports to ASEAN from the rest of the world is diverted to
China.
China enjoys an increase in its trade balance of $1.7 billion with ASEAN (nearly
$1.3 billion of that from Indonesia, from table 3), of $9.4 billion with countries
outside ASEAN (equal to the trade diversion noted above), and thus of $11.1 billion overall (as could also be inferred from the above igures on the changes in its
exports and imports). Indonesia ekes out a narrow increase of $0.3 billion in its
trade balance, while ASEAN gains $4.9 billion.
Impact on Customs Revenue and Net National Welfare
Indonesia is estimated to incur a loss of $0.8 billion in customs revenue owing to
the ACFTA. Not only are import duties lower, and in many cases zero, on imports
from China, but trade diversion to China from other countries subject to positive
import duties lowers customs revenue further. However, offsetting gains to the
private sector yield a modest net economic welfare gain for Indonesia of $0.6 billion. One gets similar results for China on a larger scale: China is estimated to lose
$5.1 billion in customs revenue owing to the ACFTA, but enjoys a net welfare gain
of $0.3 billion.
For Indonesia and China, then, the ACFTA appears to be mutually beneicial
overall in economic terms. However, the predictions of the partial equilibrium
framework that there would be a surge of imports—particularly of many manufactured products—from China to Indonesia is consistent with China’s being
perceived by Indonesians as more of a threat in general and especially in certain
sectors.
RECENT TRADE-POLICY DEVELOPMENTS WITHIN INDONESIA
Trade-policy developments in Indonesia within the last four years have been
marked by a reversal of much of the earlier momentum towards economic
reform.10 There is much circumstantial and some direct evidence that the enactment of the ACFTA has contributed to this trend, and speciically to the imposition of non-tariff restraints on imports.
Reservations about the ACFTA
Table 4 shows the ratio of Indonesia’s inlation-adjusted import and export values
for 2013 relative to 2000.11 Indonesia’s trade with China, in particular, grew rapidly, especially on the import side. The merchandise trade balance (not adjusted
for inlation) swung from a surplus of $39.7 billion in 2006 to a deicit of $4.1 billion in 2013. Indonesia had a bilateral trade surplus with China of $0.7 billion in
2000 but began to run deicits in 2008, and these had drifted upwards to $7.2 billion by 2013. A major reason for the swing towards deicit was undoubtedly the
welcome resumption of higher rates of economic growth in Indonesia in recent
10. Marks and Rahardja (2012) characterise trade and related policies in Indonesia as of
early 2008, and quantify their impacts.
11. The inlation adjustment is done using the US producer price index, from the IMF’s
International Financial Statistics database. The trade data are from the UN Comtrade
database.
The ASEAN–China Free Trade Agreement: Political Economy in Indonesia
299
TABLE 4 Ratio of Indonesia’s Inlation-Adjusted Trade Values in 2013 Relative to 2000
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China
Other
World
Exports
Imports
5.3
1.8
1.9
9.6
3.2
3.6
years, as will be discussed below. Nevertheless, these trade developments, coupled with the perception that regional trade liberalisation initiatives were contributing to the trade imbalance, led to political stresses within the country. For some
time there have been concerns within Indonesia that the country perhaps did not
get the best of the ACFTA negotiations. For example, under the Early Harvest
Programme of initial tariff reductions under the ACFTA, a sore spot was that
Indonesia paid higher import duties on processed cocoa products in China than
did Malaysia or Singapore, because of the failure of the Indonesian government to
request these tariff cuts (Kompas, 9 May 2005). Moreover, in an analysis of regional
trading agreements in which Indonesia has participated, Graef and Anas (2012, 6)
argue that, in the ACFTA, ‘China’s exclusion and sensitive list reads like a list of
Indonesia’s top non-oil exports’. They point out, however, that many of the products on these lists are also major exports for Malaysia, Thailand, and Vietnam.
The evidence presented in this article is mixed on the question of which country
might have got an advantage in mercantilist terms. The impact of the import-tariff
cuts in Indonesia and China (table 2) indicates that weighted-average bilateral
tariff rates in the two countries moved in parallel on account of the ACFTA, with
duties in Indonesia ending up only slightly lower than those in China after the
implementation of the agreement. The weighted-average global tariff rates of the
two countries (table 1) indicate a slightly greater decrease in the average duty
in Indonesia than in China. The evidence on changes in trade lows points to a
greater discrepancy: Indonesia is estimated to enjoy a small increase of $0.3 billion
in its global trade balance but a decrease of $1.3 billion in its bilateral balance with
China, while China is estimated to gain $11.2 billion in its global trade balance. As
noted earlier, we would not expect these to be the ultimate changes in the respective trade balances, given the equilibrating forces at work, but the difference is
suggestive.
To the extent that there was any bias in the outcome of the negotiations,
Indonesia could be excused for not having as strategic an approach as it might
have done, given some issues of timing but also of ideology. The irst presidential
term of Susilo Bambang Yudhoyono, which began in October 2004, represented
the zenith of post-Soeharto institutionalised economic reform in Indonesia, with
several prominent technocrats joining his government. This did not happen all at
once, however, nor did it last.
Aswicahyono and Hill (2004) observe that Yudhoyono enjoyed a strong mandate from the electorate, and that it was imperative to restore business conidence
through predictable policies oriented towards economic growth. Both foreign and
domestic investment had been weak. Foreign direct investment in particular had
not recovered from the 1997–98 Asian inancial crisis or the lingering threat of terrorism and had been negative, on balance, into the irst half of 2004. Aswicahyono
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Stephen V. Marks
and Hill note, however, that incoming vice-president Jusuf Kalla had a reputation as an economic nationalist who had long been a recipient of government
patronage aimed at indigenous Indonesian businesses. Soesastro and Atje (2005)
similarly saw the Yudhoyono economic team in the October 2004 cabinet as rather
a disappointment—notably with the appointment of the wealthy, well-connected
businessman Aburizal Bakrie as coordinating minister for economic affairs.
One bright spot in technocratic terms was the new minister of trade, Mari Elka
Pangestu, a respected Indonesian economist with impeccable reformist credentials who had been trained at The Australian National University and had a PhD
from the University of California, Davis. Within six weeks of taking ofice she
had become one of the signatories in Vientiane, Laos, of the ACFTA Agreement
on Trade in Goods. This agreement committed the signatory countries to their
normal, sensitive, highly sensitive, and exclusion lists for all tradable commodities. In these negotiations, Minister Pangestu laboured under some disadvantages: McLeod (2005) notes that she did not even have her top staff appointments
approved until ive months into her term.
Sri Mulyani Indrawati, also a respected and reform-oriented economist, had
a PhD from the University of Illinois and had spent two years as the director of
the IMF Regional Ofice for Asia and the Paciic. She joined the initial Yudhoyono
cabinet as minister of national development planning, a relatively less powerful
position, but in a December 2005 cabinet reshufle became minister of inance,
clearly a critically important role in economic policy-making.
In the same cabinet reshufle, Aburizal Bakrie was replaced as coordinating
minister for economic affairs by a respected economist noted for his integrity,
Boediono, who had a PhD from the Wharton School and had served as minister of
inance from 2001 to 2004 and in other senior positions in government.
Given the mandate of the electorate in 2004 and the urgency of policy reform
for the promotion of investment, it was understandable both that the president
would appoint senior oficials steeped in Western economic analysis and ideology and that Indonesia would move resolutely towards trade liberalisation. By
April 2010, however, in the second ive-year term of President Yudhoyono—with
normal-track tariff elimination under the ACFTA completed and the deterioration of the bilateral trade balance with China underway—there was much talk in
Jakarta about whether the ACFTA might be renegotiated on behalf of Indonesia
by adjusting 228 tariff lines for industrial products—mostly within the iron and
steel, textiles and apparel, and footwear sectors—or in even more comprehensive ways. It was concluded that Indonesia would not be able to alter the basic
agreement with China, since it was locked into its ACFTA commitments with its
ASEAN partners. A meeting between Mari Pangestu and the Chinese trade minister led to an announcement in early April 2010 of an agreement that included
promises of Chinese infrastructure investments in Indonesia and of steps by the
surplus country to boost its imports and provide other support to its ACFTA
partners.12 The announcement of the agreement revealed an unusually public rift
in the Indonesian government, as the minister of industry, Mohamad Suleman
12. In a 2013 visit to Indonesia, Chinese President Xi Jinping proposed the establishment of
an infrastructure investment bank that would help fund development projects in Southeast
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The ASEAN–China Free Trade Agreement: Political Economy in Indonesia
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Hidayat, complained that he had not been consulted by Mari Pangestu until after
the agreement had been reached (DetikFinance, 6 Apr. 2010). The minister of trade
was in a position of some vulnerability politically, as one of only a handful of ethnic Chinese Indonesians ever to hold a cabinet post in the country.13
As resistance to economic reform in Indonesia hardened, and with criticisms
in the air over a controversial bank bailout, Sri Mulyani resigned from her post
as minister of inance in May 2010. In June of the following year, the portion of
Minister of Trade Regulation 39/2010 that authorised the importation of inished
goods by producers was annulled in an unusual intervention by the Indonesian
Supreme Court in response to a lawsuit by an apparel manufacturer. The threat
of import competition, notably from China, owing in part to lower interest rates
in that country, was mentioned by the court in its decision. It also cited a survey
from the Ministry of Industry that showed the harmful effects of the ACFTA on
producers of goods included in the 228 tariff lines mentioned above.
Mari Pangestu moved to a restructured cabinet position as the minister of tourism and creative economy in a reshufle in October 2011.14 Boediono had left the
cabinet in 2008 to become governor of Bank Indonesia, the central bank, but in
October 2009 was elected vice-president for the second Yudhoyono term. Their
successors in the Yudhoyono cabinet were not oriented towards economic reform
along technocratic lines.15 Indeed, economic nationalism has enjoyed a resurgence
in Indonesia, and within the past several years a variety of new trade barriers
have been imposed by the government.
The Resurgence of Non-tariff Barriers to Trade
A compilation by the Australia Indonesia Partnership for Economic Governance
(reported in Marks 2014) shows that the number of tariff lines in Indonesia subject
to NTMs on the import side grew from 3,714 in 2009 to 4,861 in 2014. Many of
these tariff lines were subject to multiple requirements, as the number of NTMs
grew from 6,537 to 11,719. On the export side, similarly, the number of tariff lines
subject to NTMs grew from 386 in 2009 to 954 in 2014, while the number of NTMs
grew from 485 to 1,782. Most of these new regulations have been issued by the
Ministry of Trade, but the Ministry of Agriculture, the Ministry of Energy and
Mineral Resources, the Ministry of Industry, and the Food and Drug Agency have
also been involved. The new policies have often pushed the limits of the rules of
Asia. The progeny of this proposal, the China-directed Asian Infrastructure Investment
Bank, is expected to begin operations by the end of 2015.
13. For instance, in a later public forum, a member of the national legislature from the
Golkar political party stated that the minister had ‘prioritized the interests of her ancestors’
in an aircraft purchase from China in 2011 (Jakarta Post, 21 May 2011).
14. Sri Mulyani became a managing director of the World Bank Group in June 2010, and
Mari Pangestu was nominated by the Indonesian government in