Paper Indonesia China Trade in ACFTA
ACTIVE WORKING PAPER NO.1/2013
INDONESIA–CHINA
TRADE IN ACFTA:
MAPPING OF
COMPETITIVENESS AND
SPECIALIZATION
CONTACT US
APINDO-EU ACTIVE Project
Gedung Permata Kuningan Lantai 20
Jl. Kuningan Mulia Kav. 9C,
Guntur – Setiabudi,
Jakarta 12980 – Indonesia
Tel: +62-21-83780594
Faks: +62-21-8378 0823, 8378 0746
E-mail: daniel.purba@apindo.or.id
Website: www.apindo.or.id
Join us on social media
@DPN_APINDO
www.facebook.com/pages/APINDO-EU-ACTIVE-Project
Advancing Indonesia’s Civil
Society in Trade and Investment
Climate (ACTIVE) Programme
INDONESIA–CHINA TRADE
IN ACFTA: MAPPING OF
COMPETITIVENESS AND
SPECIALIZATION
Advancing Indonesia’s Civil
Society in Trade and Investment
Climate (ACTIVE) Programme
2
ACKNOWLEDGEMENT
A
PINDO-ACTIVE working papers are issued in joint cooperation
between Indonesia Employer Association (APINDO) and
Advancing Indonesia’s Civil Society in Trade and Investment
(ACTIVE), a project co-funded by the European Union. ACTIVE project aims
to strengthen APINDO’s policy making advocacy capabilities in preparing
the business environment and to empower national competitiveness in
facing global integration.
For more information, please contact ACTIVE Project Manager, telephone
+6221-8378-0824 or visit www.apindo.or.id where copies are available
in pdf format. The authors may be contacted at rosa@apindo.or.id or
fandi@apindo.or.id.
Further information about ACTIVE project can be accessed at:
www.apindo.or.id/index.php/trade-a-investment/active-project/tentangactive-project.
APINDO-EU Active Project Team Members:
Tiarma Fitriani P. (Project Manager)
Fandi Achmad (Economist)
Rosa Situmorang (Economist)
Daniel P. Purba (Public Afairs & Media Oicer)
Disclaimer
The contents of APINDO-ACTIVE working papers are the sole
responsibility of the author(s) and can in no way be taken to
reflect the views of Indonesia Employer Association (APINDO)
or its partner institutions. APINDO-ACTIVE working papers are
preliminary documents posted on the APINDO website (www.
apindo.or.id) and widely circulated to stimulate discussion and
critical comment.
3
FORE WORD
A
fter the full implementation of ACFTA on January 1, 2010, zero
tariffs have been imposed on 6,682 tariff posts in 17 sectors.
Zero tariffs make even bigger trade deficit compared to 2011 for
Indonesia. ACFTA also impacts the growth of industries and restructures
the supply chain network in the region. Experience with ACFTA is strongly
influencing public perception about the responsiveness of the government
to improve trade and investment environment in order to be prepared for
more open trade and investment.
The closer integration puts Indonesia in a severe competition because
China’s products are cheaper and substitutive to Indonesia’s products. Hence,
Indonesia should also be aware of its competitiveness and specialization
in trade with China to survive in the ACFTA.
This study maps the changing pattern of trade competitiveness and
specialization between Indonesia and China. This map shows products
in which Indonesia is more specialized in bilateral trade with China. In
addition, when a country has competitiveness in producing goods relatively
to the average ability of the world, it does not necessarily mean it has
specialization in bilateral trade. Therefore country to country analysis
should be considered in making trade policies for the next international
trade agreements.
We would like to thank Rosa Situmorang and Fandi Achmad for conducting
this study. We also like to appraise the contribution of Advancing Indonesia’s
Civil Society in Trade and Investment (ACTIVE) program which address the
lack of capacity in APINDO to analyze, evaluate and advocate adequately
the Indonesian business sector’s interests in many free trade agreements.
After all, we believe that the findings in this study will give great insight
for policy makers and our social partners. We hope it will generate useful
discussions and give significant contribution to Indonesia’s development.
Sofjan Wanandi
General Chairman
Chris Kanter
Vice Chairman
Indonesia Employer Association (APINDO)
Indonesia Employer Association (APINDO)
4
CONTENTS
Abstract I 6
Overview ASEAN–China Free Trade Area I 7
Indonesia-China Trade: Facts and Figures I 13
Methodology I 19
Data I 19
Trade Competitiveness I 19
Trade Specialization I 24
Mapping: Indonesia–China Trade Commodities I 25
Analysis of Indonesia-China Trade Competitiveness and
Specialization I 27
Recommendation I 32
References I 33
Appendix I 35
FIGU RES
Figure 1.1
Indonesia’s Free Trade Agreement through ASEAN
Figure 1.2
Historical Lines of ASEAN-China Free Trade Area
Figure 1.3
Approaches to Establish ASEAN-China Free Trade Area
Figure 1.4
Types of Wholly Obtained Product in Rules of Origin
Figure 1.5
Commitments to Open Up Services
Figure 2.1
Indonesia-China Trade Growth 2007-2011
Figure 2.2
Indonesia-China Export-Import 2007-2011
Figure 2.3
Indonesia’s Largest Export Value to China
Figure 2.4
Indonesia’s Largest Import Value from China
Figure 2.5
Indonesia’s Import Pattern from China 2001-2011
Figure 2.6
Indonesia’s Export Pattern to China 2001-2011
Figure 3.1
The Evolution of Trade Competitiveness Measurement
Figure 3.2
Mapping of Trade Competitiveness and Specialization of
ASEAN-China Free Trade Area
5
Figure 4.1
Indonesia’s Trade Distance Indexes against China (Top 10
Specialized Commodities)
Figure 4.2
China’s Trade Distance Indexes against Indonesia (Top 10
Specialized Commodities)
Figure 4.3
Indonesia-China Trade Commodities Mapping 2004
Figure 4.4
Indonesia-China Trade Commodities Mapping 2011
Figure A2.1
Indonesia’s Trade on Section TTA 2011
Figure A2.2
Indonesia’s Trade of TTA and Cotton 2001-2011
Figure A2.3
Share of Cotton Commodities 2011
Figure A3.1
Export Share Based on the Distribution of Export Growth
(2011)
Figure A3.2
Share of Export to China Based on the Distribution of
Export Growth (2011)
TABLES
Table 1.1
Schedules of Tariff Reduction in ASEAN-China Free Trade
Agreement
Table 3.1
Comparison of Six Comparative Advantage Measurement
Table A3.1
Products with Export Growth Above 400% p.a. of 20072011 calculation
Table A3.2
Products with China as Main Market for Indonesia’s Export
6
ABSTR ACT
A
SEAN-China Free Trade Area (ACFTA) opens opportunities for
Indonesia to gain benefit from non-tariff barriers on several
products. There are some competitive areas in which Indonesia
has comparative advantage in the world trade. However, in the context
of bilateral trade, the relative specialization between Indonesia and China
more precisely determines the trade opportunities. This paper presents
commodities competitiveness and specialization mapping of IndonesiaChina trade. Competitiveness represents the comparative advantage of
a country on certain commodities in the world trade and specialization
explains the relative difference of comparative advantage within two
countries in bilateral trade. The map explains Indonesia’s areas of
specialization and the sectors which need attention.
Keywords: ACFTA, FTA, Specialization, Competitiveness.
OVERVIEW ASEAN–CHINA
FREE TRADE AREA
I
ndonesia grows many regional trade agreements through ASEAN in recent years.
As a part of the ASEAN, Indonesia has several free trade agreements with China, Korea,
Japan, India, Australia, New Zealand, and 9 members of ASEAN itself. The increasing
tendency to form trade agreements deserves special attention, particularly in regard to
the advantages and disadvantages. Therefore, every free trade agreements have to be
examined and directed to prioritize Indonesia’s interest.
FIGURE 1.1 indoneSia’S free Trade agreemenT Through aSean
One of default in these agreements is when Indonesia did not prepare yet for ASEAN –
China Free Trade Area (ACFTA). ASEAN-China Free Trade Area (ACFTA) is an agreement
between countries members of ASEAN with China to create a free trade area by eliminating
or reducing tariff or non-tariff barriers to trade in goods, increasing market access to
services, reforming rules and regulations of investment to improve the welfare of ASEAN
countries and China. ACFTA provides opportunities to increase export from Indonesia.
Ibrahim (2010) found that Indonesia obtained a net trade creation amounted to 2%
and total export growth increased by 1.8%. However, the commodity structure of China
and the non-competing behavior of ASEAN countries including Indonesia (tends to be
complement) caused China is relatively easier to penetrate export to the ASEAN market
than ASEAN itself (Ibrahim et al, 2010).
Despite several disadvantages, there are some reasons why ACFTA becomes important.
Jian (2003) has pointed out why Southeast Asia would maintain its strategic advantage
in its relations with Northeast Asian countries, particularly China. Firstly, it provides a
key strategic influence for both parties. For China, in particular, ASEAN is an important
regional forum to counter the US influence. Secondly, ASEAN and China have strategically
important geo-political reason, as most of world trade must pass through ASEAN and China.
Thirdly, ASEAN and China have also perceived the growing population of Southeast Asia
as a potential market to penetrate. Therefore, the deepening of economic integration is
seen as crucial by leaders of both regions.
8
Indonesia-China Trade in ACFTA: Mapping of Competitiveness and Specialization
FIGURE 1.2 hiSTorical lineS aSean–china free Trade area
ACFTA has built up by its long story. The formation of ACFTA can be traced back to Chinese
Premier Li Peng’s visit to Bangkok in 1989 when he stated four principles in establishing,
restoring, and developing relations with all ASEAN countries. These were: (1) peaceful
coexistence despite differences in social and political systems, (2) anti-hegemonic ideology,
i.e. China will not seek to be a hegemony power nor will it interfere in the domestic affairs
of ASEAN countries, (3) further development of economic relations and (4) continuing
support of regional cooperation and initiatives from ASEAN (Baviera, 1999). Since then,
there have been significant milestone in China – ASEAN economic cooperation.
Economic cooperation opened up in the year 1991. Qian Qinchen, Chinese Foreign Minister,
attended the opening of ASEAN Ministerial Meeting in Kuala Lumpur on July 1991. He
showed China’s interest to cooperate with ASEAN. It is responded positively by agreement
to establish two joint committees - Joint Committee on Scientific and Technological
Cooperation and Joint Committee on Economic and Trade Cooperation (ACJETC). These
committees were formally established in September 1993 when Dato’ Ajit Singh, ASEAN
Secretary General, visited Beijing. During the talks on economic and trade cooperation,
ACJETC mainly exchanged views on international and regional economic issues and
discussed how to put forward bilateral trade and investment cooperation.
Mapping of Competitiveness and Specialization
9
In December 1997, a document of Good Neighborliness and Good Mutual Trust was
established as the framework of ASEAN-China relations. It gave priority to economic
relations and trade with the principle of comparative advantages and mutual benefit.
It also encouraged the cooperation in the areas of resources, technology, market, banking,
information, human resources, development and investment.
As real steps on economic cooperation in ASEAN, China respectively signed framework
documents on bilateral trade cooperation with Thailand and Malaysia and signed joint
statements on future cooperation with Viet Nam and Brunei in 1997. Moreover, China had
already signed all bilateral trade cooperation documents with each ASEAN countries
by the end of 2000. All of this bilateral trade cooperation encouraged ASEAN and China
to begin negotiations to set up a free trade area at The 7th ASEAN Summit in Brunei.
ASEAN-China economic cooperation progressed to a new stage in November 2002 by the
signing of Framework Agreement on Comprehensive Economic Cooperation between
ASEAN and China. It was signed by Premier Zhu Rongji and the leaders of the ASEAN
countries. Based on the agreement, the ASEAN-China Free Trade Area should cover trade
in goods, trade in services, investment, and economic cooperation with trade in goods as
the core. It included the setting rules of origin, and disciplines on anti-dumping measures,
countervailing measures, safeguards, and dispute settlement mechanism, as guarantee
methods to smooth the running of trade exchange between ASEAN and China. For areas
of economic cooperation, it encouraged to focus in 5 priority sectors, including agriculture,
information and communications technology, human resources development, investment,
Mekong River basin development and can be extended to other areas. Overall, this
agreement laid the foundations for the ASEAN – China Free Trade Area.
FIGURE 1.3 approacheS To eSTaBliSh aSean–china
free Trade area
Through Framework Agreement on Comprehensive Economic
Cooperation, China and ASEAN countries agreed to negotiate
in within 10 years. Negotiation was directed through several
approaches in order to strengthen and enhance economic
cooperation. These approaches will be outlined into
regulations as guidance for ASEAN – China Free Trade Area.
In January 2004, ASEAN – China Free Trade Area was initially
implemented under the early harvest of agreement on trade
in goods of the Framework Agreement on Comprehensive
Economic Cooperation. Early harvest program aimed to
accelerate tariff reduction and elimination in agricultural
products as the first major step in realizing free trade area.
Then, In July 2005, the tariff reduction plan was officially
launched. This tariff reduction plan consisted of 5 tracks
including early harvest program.
10
Indonesia-China Trade in ACFTA: Mapping of Competitiveness and Specialization
In January 2004, ASEAN – China Free Trade Area was initially implemented under
the early harvest of agreement on trade in goods of the Framework Agreement on
Comprehensive Economic Cooperation. Early harvest program aimed to accelerate tariff
reduction and elimination in agricultural products as the first major step in realizing free
trade area. Then, In July 2005, the tariff reduction plan was officially launched. This
tariff reduction plan consisted of 5 tracks including early harvest program.
TABLE 1.1 ScheduleS of Tariff reducTion in aSean- china free Trade area
Track
Early
Harvest
Program
Indonesia’s Products*
Rules
Products with applied MFN tariff rates higher than 15% should reduce
not more than 10 % by January 1, 2004, not more than 5% by January
1, 2005, and 0% by January 1, 2006
8 (HS 2 Digit)
Products with applied MFN tariff rates between 5% and 15% should
reduce not more than 5 % by January 1, 2004 and 0% by January 1, 2005
Products with applied MFN tariff rates lower than 5% should reduce to
0% by January 1, 2004
Normal
Track I
Normal
Track II
Sensitive
Track
1880 (HS 6 Digit)
By July 1, 2005, should reduce tariff at 0% - 5% for at least 40% tariffs
line placed in the normal track
2820 (HS 6 Digit)
By January 1, 2007, should reduce tariff at 0% - 5% for at least 60%
tariffs line placed in the normal track
6683 (HS 6 Digit)
By January 1, 2010, should eliminate all tariffs for tariffs line placed in
the normal track
263 (HS 6 Digit)
Flexibility to have tariffs of some tariff line under normal track I, not
exceeding 150 tariff lines and eliminated by January 1, 2012
Sensitive track placed for 400 tariff lines at the HS 6-digit level and
10% of the total import for Indonesia. Value is based on 2001 trade
statistics
304 (HS 6 Digit)
MFN tariff rates for products placed in the Sensitive track shall be
reduced to 20% by January 1, 2012
Tariff rates shall be subsequently reduced to 0%-5% by January 1,
2018
Highly
Sensitive
Track
47 (HS 6 Digit)
Tariff placed in the highly sensitive track should be not more than
40% of the total number of tariff lines in the Sensitive Track or 100
tariff lines at the HS 6-digit level
MFN tariff rates for products placed in the Highly Sensitive Track shall
be reduced not more than 50% by 1 January 2015 for ASEAN 6 +
China and January 1, 2018 for newer ASEAN member
Source: Agreement on Comprehensive Economic Co-operation between the Association of South East Asian
Nations and the People’s Republic of China Document. * Ministry of Trade of Indonesia
Mapping of Competitiveness and Specialization
FIGURE 1.4 TYpeS of whollY oBTained producT in ruleS of origin
11
Beside tariff reduction, there are other
regulations to support trade between ASEANChina. One of the regulations gets concern
from trader is the rule of origin. The products
imported by a trader should be deemed to
be originating and eligible for preferential
concessions if they conform to the origin
requirements. Rules of origin divided products
to wholly obtained product and not wholly
obtained product. For not wholly obtained
products, it can be traded if they fulfill
minimum 40% of its content originates
from any party (ACFTA member countries)
or if the total value of the materials produce
originating from outside of the territory of a
Party (i.e. non-ACFTA) does not exceed 60% of
the FOB value of the product. In the free trade
area, rules of origin discourage aggregate trade
flows and encourage trade in intermediate
goods (Estevadeordal and Suominen, 2005).
Thus, Indonesia has to respond to it carefully.
Besides trade in goods, ACFTA also look at the
opportunity of trade in services. ASEAN and
China agreed to liberalize trade in services
with substantial sectors coverage. In this case,
Indonesia committed to open up new market in 10 services area while China opened
5 services area (Directorate General of International Trade Cooperation of Indonesia,
2010). Trade in services is boosted through progressive elimination of substantially all
discrimination between countries, except for measures permitted under Article V(l)(b) of
the WTO General Agreement on Trade in Services (GATS). The exceptions are only for the
purposes to: (1) protect public morals, (2) protect human, animal, and plant life, (3) secure
compliance with laws or regulations which are not inconsistent with the provisions of this
agreement, and (4) safeguard balance of payment.
Services play a major role in all modern economies. Indeed, it would be hard for any
economic activities to run without services such as telecommunications, banking and
freight logistics. Then, an efficient services sector is critical for trade in goods and economic
growth. Furthermore, promoting greater trade in services through open markets and
non-discriminatory treatment can lead to higher employment levels, higher incomes and
higher standards of living through jobs creation in this field.
12
Indonesia-China Trade in ACFTA: Mapping of Competitiveness and Specialization
FIGURE 1.5 commiTmenT To open up ServiceS
COMMITMENT TO OPEN UP SERVICES
INDONESIA
1. Business Services (Computer Related Services, Real
Estate Services, Market Research, Management
Consulting)
2. Construction and engineering related services
3. Environmental Services
4. Transport Services
5. Recreational, Cultural and Sporting Services
6. Tourism and travel related services
7. Educational services
8. Telecommunication services
9. Health-related and social services
10. Energy services
CHINA
1. Business Services (Computer Related Services,
Real Estate Ser vices, Market Research,
Management Consulting)
2. Construction and engineering related services
3. Environmental Services
4. Transport Services
5. Recreational, Cultural and Sporting Services
Source: Directorate General of International Trade Cooperation, Ministry of Trade of Indonesia
The opening of certain services sectors can create competition and provide consumers
with access to a broader range of services. It also brings out a greater depth of expertise
from domestic and overseas. In addition, openness in services influences long run growth
performance. Mattoo, et al (2001) estimated that countries with fully open telecom and
financial services sectors grow up to 1.5 percentage points faster than others (Mattoo et
al, 2006). Indonesia openness in services seems to grab this opportunity.
Ultimately, the establishment of ASEAN-China Free Trade Area would welcome an economy
area with USD 1.9 billion consumers which are 27.8% of total consumer in the world. It
also produces over USD 9.4 trillion of GDP (13.56% of world GDP) and USD 6.05 trillion of
total volume of trades, 16.8% of total volume of trade in the world (2011)1. ASEAN-China
Free Trade Area would be one of the most populous free trade area of the world, and the
largest free trade area formed by developing countries.
1
Calculation based on World Bank data. Data is in 2011. Data is accessed in 2012.
Mapping of Competitiveness and Specialization
13
inDonesia-CHina traDe:
FaCts anD FigUres
FIGURE 2.1 indoneSia-china Trade growTh 2007-2011
Source: International Trade Centre, based on calculation of UN COMTRADE
T
he full implementation of ACFTA on January 1, 2010 has abolished the tariffs on 6,683
posts in 17 sectors. This free trade was established to strengthen trade partnership
between China and ASEAN countries by creating a wider space for both parties to
expand their trade. In 2011, Indonesia’s export value to China reached USD 22.94 million
and the import value reached USD 26.21 million. The trade volume had been flared for
more than ten times within the last decade, while in the last five years Indonesia’s import
value has grown 29% p.a. and export grew 22% p.a2.
ACFTA successfully jacked up the trade volume between two countries. The trend of
Indonesia-China trade shows an ascending trade value, especially steeper in the last five
years (Figure 2.2). In fact, the diminishing of trade barriers (which actually have started
gradually since 2005) has given a big hit in Indonesia’s trade balance. The free tariffs have
blown-in a huge amount of commodities from China. The products inflow grew more
rapidly than the outflow causing deficit trade balance records for Indonesia since 2008.
In 2010, when the ACFTA was fully implemented, the deficit was over USD 4 billion. The
export capacity of China was supported by the investment climate and infrastructure
2
The growth rate is based on the calculation of International Trade Centre, the computation formula of the growth rate over
∑
)
five years is the following: ( ((∑
)
)
Where is the value of the i-th year in current US Dollar. More information about the calculation can be accessed in the
web www.trademap.org.
14
Indonesia-China Trade in ACFTA: Mapping of Competitiveness and Specialization
which boosted up the industrialization. In 2011, the industrial production growth rate3 of
China was 13.90%, while Indonesia was left far behind by 4.10%. The gap of industrial
production growth also reflects Indonesia’s lack of capacity to enter the FTA with China.
The downstream industries were not supported by upstream industries and still relied on
imported capital goods and raw materials.
FIGURE 2.2 indoneSia-china exporT-imporT 2007-2011
Source: International Trade Centre, based on calculation of UN COMTRADE
Mineral fuels, oil and distillation products became the largest Indonesia’s chapter of export
commodities4 to China, with the volume of export in 2011 reached USD 8,923 million
(Figure 2.3), followed by animals/vegetable oils, ores, rubber, and organic chemicals. The
export value of those five chapters was more than 80% of Indonesia’s total export to
China. The main mineral export commodity was coal (included bituminous coal) with the
value of USD 6,007 million or 67% of total exported mineral products. The export of coal
had grown very fast within the last five years with the annual growth between 2007-2011
more than 80% p.a.
Among the ten largest chapters of export commodities, ores, slag and ash grew the fastest
within 2007-2011 with 46% p.a. The largest value of exported ore was nickel (41.1%),
aluminum (27.1%), copper (16.7%) and iron ore (10.4%). Iron ore was the fastest growing
ore commodity with the annual export growth rate in 2007-2011 up to 80% p.a.
3
Industrial production rate is the annual percentage increase in industrial production, including manufacturing, mining, and
production (data from Central Intelligence Agency United States’ World Fact Book, https://www.cia.gov/library/publications/
the-world-factbook/).
4
Chapter of Commodities is a group of commodities which is classified based on 2 digits Harmonized System (HS) by World
Custom Organization.
Mapping of Competitiveness and Specialization
15
FIGURE 2.3 indoneSia’S largeST exporT value To china
Source: International Trade Centre, based on calculation of UN COMTRADE
On import side (Figure 2.4), machinery and electrical equipment were the largest
commodities in 2011 with the value for both commodities remarkably exceeding USD 10
billion. The largest value of imported products in the chapter of machinery was portable
digital computers (USD 1,113 million) and the largest value of imported electrical equipment
was telephone (for cellular networks mobile telephones/ for other wireless) with the value
of USD 1,000 million.
There are some highlights on the data of Indonesia’s import from China. First, the third
largest import value in 2011, iron and steel, showed a deceleration in 2007-2011 of 1% p.a.
The decline of iron and steel import value was in accordance with the revision of import
regulation which was enforced to control the import of iron and steel5.
5
The Ministry of Trade has issued several regulations to restrict the import of iron and steel by requiring the importers to
have a surveyor report documents (Regulation No. 21/M-DAG/PER/6/2009). The Regulation No. 21 then had been revised
by Regulation No. 8/2009, this new regulation required all importers of iron and steel to register as producer importers (or
registered importers) and to do a technical verification at the loading por
16
Indonesia-China Trade in ACFTA: Mapping of Competitiveness and Specialization
In the other hand, the import of cotton had the highest growth among the ten largest
import chapters of commodities. Indonesia has been a net importer of cotton since the
growing national demand of cotton was not supported by the national production. So
far, up to 99% of domestic demand for cotton has been fulfilled by import. The estimated
volume of domestic cotton produced was only 33,000 tons per year, whereas the domestic
demand was up to 700,000-800,000 tons per year6. As the main cotton producer which
produces 29% of world cotton (based on statistics from US Department of Agriculture)7,
Indonesia’s domestic demand from grew rapidly. Indonesia’s dependence on imported
cotton brought Indonesia to uncompetitive position in its textile products. But interestingly,
out of the dependence on imported cotton, chapter cotton itself has been the fifth largest
export to the world in section textile and textile articles8 with the value of USD 811 million
in 2011. This fact indicated some possible situations in domestic cotton industry. First, it
might show the intra industry product specialization and the second, it might indicate
the unmatched demand and supply of cotton between the upstream and downstream
industry in Indonesia, see [APPENDIX 2].
FIGURE 2.4 indoneSia’S largeST imporT value from china
Source: International Trade Centre, based on calculation of UN COMTRADE
6
Indonesia’s main suppliers of cotton were US, Brazil, and Australia (http://industri.kontan.co.id/news/walau-harga-naik-industritekstil-tetap-genjot-impor-kapas--1).
7
The data can be retrieved from Nationmaster (Nationmaster is a vast compilation of data from such sources as the CIA World
Factbook, UN, and OECD). It can be accessed through the website www.nationmaster.com.
8
The section textile and textile articles based on HS 2012 contents 14 chapters of commodities in textile and textile articles
industries.
Mapping of Competitiveness and Specialization
17
Over years, Indonesia and China have expanded the bilateral trade between both countries.
The trade pattern has also changed. Figure 2.5 and figure 2.6 show the Import and export
pattern of Indonesia-China over the period 2001-2011. The chapters of commodities
presented here are classified by the term of sections9. With the rapid technology development
in China within last decade, the pattern of Indonesia’s import from China had also been
switched. In early 2000s, machinery and electrical equipment was not main import
commodity from China. Fantastically, in ten years the share of machinery and electrical
equipment in total import sharply grew three times bigger and dominated the import
value. At the same time, the share of chemical and mineral products gradually shrank.
FIGURE 2.5 indoneSia’S imporT paTTern from china 2001-2011
Source: International Trade Centre, based on calculation of UN COMTRADE
As the switch of the import pattern from mineral products to high-tech commodity, the
export pattern of Indonesia to China also changed. As mentioned before, the mineral
products became the largest Indonesia’s export to China with the share of more than half
of Indonesia’s total export to China. Animal/vegetables oil share also grew more than two
times in ten years. The main commodity in this category is palm oil with the value of
USD 2,080 million in 2011 and 25% growth p.a. in the last five years. On the other hand,
the share of pulp and paper declined incisively.
9
The term SECTION is based on the Harmonized System 2012 which classified 97 chapters of commodities into 22 sections.
18
Indonesia-China Trade in ACFTA: Mapping of Competitiveness and Specialization
FIGURE 2.6 indoneSia’S exporT paTTern To china 2001-2011
Source: International Trade Centre, based on calculation of UN COMTRADE
Mapping of Competitiveness and Specialization
19
METHODOLOGY
DATA
This research aims to map trade competitiveness and specialization between Indonesia
and China before and after ACFTA. It also tries to examine the changing pattern
of competitiveness and specialization between the two countries. Therefore, trade
competitiveness and trade specialization become two main variables in this research. Details
of these variables including the development are explained below. Trade competitiveness
is proxied by Normalized Index (NI) while trade specialization is proxied by Trade Distance
Index (TDI).
Data on export and import, the basic variables to calculate normalized index (NI) and
trade distance index (TDI), is published by International Trade Centre (ITC)10. Internationally,
traded products are classified according to some international standards of classification
such as the Standard International Trade Classification (SITC), the Harmonized Commodity
Description and Coding System (HS) and the Broad Economic Categories (BEC). This research
uses HS 201211. This research focuses to examine the year 2004 and 2011 to compare trade
competitiveness and specialization before and after ACFTA.
These trade data are based on the Harmonized System (HS) 2-digit level of aggregation,
which consists of 97 classifications (from HS 01 to HS 99 with HS 77 and 98 being empty as
“reserved for possible future use”). In this case, those classifications are called chapter. See
[APPENDIX 1] for the description of HS 2-digit codes. Furthermore, HS can be elaborated
to be approximately 5000 article/product descriptions that appear as headings and
subheadings and grouped in 21 sections.
TRADE COMPETITIVENESS
The Evolution of Trade Competitiveness Measurement
The term trade competitiveness is widely used but has a lot of interpretation. OECD defines
trade competitiveness as a measurement of a country’s advantage or disadvantage in
selling its products in international markets. In the micro level, competitiveness pertains
to the ability and performance of a firm, sub-sector or country to sell and supply goods
and services in a given market, in relation to the ability and performance of other firms,
sub-sectors or countries in the same market12.
10
Based on United Nations Commodity Trade Statistics Database (UNCOMTRADE) calculation (link: www.intracen.org).
11
The Harmonized Commodity Description and Coding System (HS) of tariff nomenclature is an internationally standardized
system of names and numbers for classifying traded products developed and maintained by the World Customs Organization
(WCO).
12
Definition from OECD Economic Outlook 2012. It is used as competitiveness indicator definition.
20
Indonesia-China Trade in ACFTA: Mapping of Competitiveness and Specialization
FIGURE 3.1 The evoluTion of Trade compeTiTiveneSS meaSuremenT
Assessing trade competitiveness was started by Liesner (1958). Liesner proposed Index
of Relative Export Performance (REP). It is used as a proxy for comparative costs in
an effort to assess the effects of an entry into the European Common Market on British
industry. The equation is as showed below:
Where X represents exports, i is a country, j is a commodity (or industry), and n is a set of
countries (e.g. the world). Since it has a lot of weakness on the application, comprehensive
measurement is evolved.
A more advanced measure of trade competitiveness was later on presented by Balassa
(1965), popularly known as the Balassa Index (BI). Alternatively, as the actual export flows
‘reveal’ the country’s strong sectors, it is also known as Revealed Comparative Advantage
(RCA). The equation for BI is following:
Where X represents exports value, i is a country, j is a commodity, t is a set of commodities
and n is a set of countries.
BI is based on observed trade patterns. It measures a country’s export of a commodity
in relation to its total exports and to the corresponding export performance of a set
of countries. If BI>1, then a comparative advantage is revealed, the commodity can be
considered as competitive. The higher value of BI means country is more competitive
Mapping of Competitiveness and Specialization
21
to sell the products. However, BI got a lot of critics of its limit to compare with other
countries. For example, the value of BI in mineral oils is 500 in Indonesia while it is 100
in machinery. It means Indonesia is more competitive to sell mineral oils than machinery
to the world. But, we cannot state that Japan more competitive to sell mineral oils than
Indonesia when their BI value at 600. The higher Japan’s BI value in mineral oils can be
caused by the decreasing of total export of all products in Japan despite there are nothing
changes in the production or selling of Japan’s mineral oil. Furthermore, using exports to
measure comparative advantage, in view of the increasing importance of intra-industry
trade may lead to erroneous conclusion13. Therefore, import has to be included.
Lafay Index (LI) in 1992 tried to solve it by inserting import and GDP to the equation. It
takes account of both exports and imports and is therefore more suitable for a country with
intra-industry trade. Lafay Index gives weight to each product based on its contribution
according to the respective importance in trade. It is also controlling the distortions due
to the macroeconomic factors with the GDP variable (Alessandrini et al, 2007). Lafay Index
is shown by following equation:
(
)
(
∑(
)
∑(
)
)
Where X represents exports value, M represent imports value, i is a country, j is a commodity,
Y is GDP and t is a set of commodities. It is considered to have a comparative advantage
(disadvantage) in a given commodity when the LI’s value exceeds (is less than) zero. Yet, LI
does not measure trade competitiveness with respect to other countries, but with respect
to total trade of a given country. Moreover, there is suggestion to accommodate different
value of export share since sum of LI for all sectors will be zero.
Solution for the importance of export share in specific product is raised by Proudman and
Redding (1998). They use cross section mean to fix mean of BI, called Weighted Index
(WI). WI adopts a measurement in which an economy’s export share in given sector is
evaluated relative to its average export share in all sectors. WI’s equation as follows:
∑
BI represents value of Balassa Index, i is a country, j is a commodity, and n is a set of
countries. By construction, the mean value of WI is constant and equal to one, which
enables to compare over time and over country. But, WI does not overcome the problem
of asymmetry. It values ranging from zero to infinity. Another problem with the WI, also LI
and BI, is that its value is asymmetric; it varies from one to infinity for products in which a
country has a revealed comparative advantage, but only from zero to one for commodities
with a comparative disadvantage.
13
Intra-industry trade means the trade exchange is occurred in similar products belonging to the same industry, where the
same types of goods or services are both imported and exported.
22
Indonesia-China Trade in ACFTA: Mapping of Competitiveness and Specialization
Dalum et al (1998) proposed a revealed symmetric comparative advantage (RSCA) through
Symmetric Index (SI) to alleviate the problem of asymmetric as follows:
Where BI represents value of Balassa Index, i is a country, j is a commodity. The SI value
ranges from minus one to plus one and is equal to zero at the comparative-advantageneutral point (
). Hence, it is called symmetric. The SI measure preserves most of
distribution characteristics of the original BI, and it can be considered a more elegant
substitute of BI. Nevertheless, the “forced” symmetric may obscure BI’s dynamic, especially
when it is expressed by a change of the symmetric itself. Its reduced asymmetry does
not imply normality. Benedictictis and Tamberi (2001) found that only with low level of
disaggregation level it will possible to have normal distributed residuals14.
Other solution for asymmetric problem is using Additive Index (AI) by Hoen and Oosterhaven
(2006). It is also well known as additive revealed comparative advantage. It identifies the
sectors in which an economy has a comparative advantage, and to track changes over
time. Unlike the BI index, it is symmetric. The AI is defined as the difference of two shares:
The share of a country’s total exports of the commodity of interest in its total exports and
the export share of set of countries exports to its total exports. The equation as follows:
Where X represents exports value, i is a country, j is a commodity, t is a set of commodities
and n is a set of countries. The first term is the share of good j in the exports of country
i, while the second term is the share of good i in the exports of countries group. It takes
a value between –1 and +1. Country has a revealed comparative advantage if the value
exceeds zero, vice versa.
However, the comparability in cross-country analysis is in doubt: the sum of AI values with
respect to a given sector is not stable in the cross country analysis, thus leads to variant
mean value. Furthermore, although its empirical distribution is bell-shaped and the mean
value is centered and constant, it does not follow normality due to far too high kurtosis15.
None of alternative measurements above have satisfactorily overcome all of its shortcomings.
Then, Yu et al (2009) try to develop Normalized Revealed Comparative Advantage or
Normalized Index (NI) in 2009. The NI calculates the degree of deviation of a country’s
actual export from its comparative-advantage-neutral level in terms of its relative scale
14
Benedictictis and Tamberi used SITC to exercise distribution of error. At 2 digits, only 4 out of 13 cases are rejected while 3
digits only 3 pass the normality test. At 4 digits level none pass.
15
High kurtosis makes assumption of normality is biased and rejected to include in the modeling analysis (Hoen and Oosterhaven,
2006)
Mapping of Competitiveness and Specialization
23
with respect to the world export market and thus provides a proper indication of the
underlying comparative advantage. It features include its symmetrical distribution and
independence from the number of countries and sectors. Therefore, the value can be
used as comparable score among commodity, time, or country. The NI can be expressed
as follows:
̂
̂
Where:
Xij
Xi
Xw
Xwj
NI
(
(
)
)
: Export of country i in commodity j
: Export of country i in all commodities
: World export in all commodities
: World export in commodity j
: Normalized Index
Values of NI is between -0,25 to +0,25. According to the equation, NI > 0 or NI < 0 indicates
that country’s actual export of commodity j is higher or lower than its comparativeadvantage-neutral level. Thus, NI > 0 means commodity is comparative advantage, on the
other hand NI < 0 means commodity is comparative disadvantage. The greater (or the
lower) the NI value is, the stronger the comparative advantage (or disadvantage) would be.
Besides its comparability, one of the advantages of NI is the sum of NI is stable and equal
zero. It explains well the condition if a country gains comparative advantage in one sector,
then the country loses comparative advantage in other sectors; and if one country gains
comparative advantage in a sector, then other countries lose comparative advantage in that
sector. Furthermore, NI is neither affected by the level of sectors aggregation nor by the
choice of reference group of countries, while the AI has attached this problem. However,
NI is sensitive to commodity classification in which case more disaggregated classification
might show different result than that of a less disaggregated ones16.
The Selection of Revealed Comparative Advantage Index as Trade Competitiveness
Measurement
Each one of the revealed comparative advantage indexes above has advantages and
disadvantages. Thus, it should be important to have knowledge on the property of indices
and properly use them. Sanidas and Shin (2010) exercised six indicators i.e. BI, LI, WI, SI,
AI, and NI to find the best one. The findings are summarized below:
16
It was presented by Ullah, et al (2011) in 6th Annual London Business Research Conference.
24
Indonesia-China Trade in ACFTA: Mapping of Competitiveness and Specialization
TABLE 3.1 compariSon of Six comparaTive advanTage meaSuremenT
PROPERTIES
BI
LI
WI
SI
AI
NI
Comparative advantage neutral point
1
0
1
0
0
0
Sum over sectors
-
0
-
-
0
0
Sum over countries
-
-
-
-
-
0
Independence from aggregation level
X
X
X
X
√
√
Independence from reference group of countries
X
X
X
X
X
√
Symmetry
X
X
X
√
√
√
Normality
X
X
X
X
X
X
BI
LI
WI
SI
AI
NI
Cross-sector
X
X
X
X
X
√
Cross-country
X
X
√
X
√
√
Over-time
X
√
X
X
√
√
Source: Sanidas and Shin (2010)
COMPARABILITY
Source: Sanidas and Shin (2010)
Based on the properties and comparability, NI seems a best indicator to measure trade
competitiveness even though it cannot fill normality requirements. NI can compare
cross sector and country with over time. In addition, NI has more favorable features than
the others, especially its stable mean across space and time, and independence from
aggregation level that can be very helpful in analyzing trade competitiveness. Therefore,
this research uses value of NI as a proxy of trade competitiveness17.
TRADE SPECIALIZATION
Another important variable to assess the importance of bilateral or regional trade is trade
specialization. Trade specialization is different with trade competitiveness. Since trade
competitiveness measures the ability of country to sell commodities in the set of countries,
trade specialization is more to how different commodities sold between countries in the
bilateral or multilateral trade. How different commodities sold is translated to be “distance”
in this research. Therefore, trade distance index is used to measure trade specialization.
Trade distance index is measured by cross-country difference between the average shares
across time of a particular sector in total exports. This difference is called “distance”. Normally,
it adds up distances calculated from all sectors to get overall sectors distance measure
for total export. The equation is following:
17
Sanidas and Shin (2010) also used OLS Galtonian regression to assess how similar or dissimilar the distributions of revealed
comparative advantages at two different points of time are to each other, hence the stability, or convergence/divergence of
the trade specialization patterns. They found that SI seems to have the closest distribution to normality, although the normality
is not always guaranteed (Laursen, 1998).
Mapping of Competitiveness and Specialization
∑
∑
25
∑
This paper is simplified it. It only analyzes the trade specialization between two countries
in commodities level, thus do not need to sum distance of export share. In addition, it
also do not use average shares across time since it only uses data from last available year
in 2011. The new equation as follows:
eint stands for the share of sector n in total export of country i at time t while ejnt stands
for the share of sector n in total export of country j at time t. the value of TDI can be
positive and negative. Thus, TDIij > 0 means commodity is specialized for country i, on
the other hand TDIij < 0 means commodity is specialized for country j. The greater (or
the lower) the TDIij value is, the stronger (weakened) the specialization of those countries
in commodity. In this case, trade distance index is used only to analyze on bilateral trade
between two countries at a time per each commodity. As a result, the value of trade
distance index shows the strength of its specialization.
MAPPING: INDONESIA – CHINA TRADE COMMODITIES
This mapping focuses on Indonesia and China as trade partners using combination of
two main variables into map. They are stuck into two lines, horizontal and vertical line.
Horizontal line shows value of normalized index while vertical line shows value of trade
distance index. This map combines trade competitiveness of a country with its specialization
on bilateral trade in a given commodity. Since NI > 0 means commodity is comparative
advantage (has trade competitiveness) and NI < 0 means commodity is comparative
disadvantage (does not have trade competitiveness), the midpoint value for horizontal
line is zero. Moreover, the midpoint for vertical line is also zero. If TDI > 0, this commodity
is highly specialized for Indonesia rather than China while TDI < 0 means commodity is
less specialized for Indonesia than China. Then, it identifies four regions in the mapping
of Indonesia – China Trade Commodities.
Quadrant Supreme shows Indonesia has ability to sell commodities relative to the average
ability of the world. At the same time, Indonesia is also relatively more specialized in the
bilateral trade with China. It means China does not yet have a more competitiveness in
these commodities relative to Indonesia.
26
Indonesia-China Trade in ACFTA: Mapping of Competitiveness and Specialization
FIGURE 3.2 mapping of Trade compeTiTiveneSS and SpecializaTion of aSean
– china free Trade area
The upper left quadrant shows Indonesia has competitiveness to sell the commodities
relative to the average ability of the world. Nevertheless, Indonesia is more specialized
in exporting these commodities relatively than china in bilateral trade between the two
countries. The name Irrational refers to the fact that Indonesia still can be specialized
exporter relative to China despite its competitiveness in the world trade. It indicates that
China is less concerned relative to Indonesia on these commodities.
Quadrant Inferior shows the commodities where Indonesia does not have competitiveness
relative to the ability of the world and is also not specialized in bilateral trade with China.
Therefore, this is not an area where Indonesia should focus its export.
The last quadrant is Rivalry which shows Indonesia has competitiveness relative to the
average ability of the world. But, Indonesia is relatively less specialized in bilateral trade
with China. It indicates both of Indonesia and China have competitiveness on these
commodities in the world trade. This can be a threat because with more concern on
these, China is able to penetrate Indonesian market and gain the market share Indonesia
in the world. Therefore, Indonesia should encourage the industry in these commodities
to be more competitive.
Mapping of Competitiveness and Specialization
27
ANALYSIS OF INDONESIA-CHINA
TRADE COMPETITIVENESS AND
SPECIALIZATION
F
ree trade creates more opportunity for each country to expand its economy and
reach its maximum productivity stage. Since every country is endowed with different
resources, the repealed tariff barriers will free the countries to fulfill their needs by
importing the products which their domestic industries are not able to produce. Essentially, a
free trade aims to open the market which in turn will encourage each country to specialize
in their production. The specialization is established as a result of comparative advantage
where a country can produce a product more efficient than others. The specialization can
be inter or intra industries18.
As mentioned before, Trade Distance Index measures the distance and direction between
two countries. Thus, in the case of Indonesia and China, ACFTA has been expected to create
the specialization distance between Indonesia and China. The increase of absol
INDONESIA–CHINA
TRADE IN ACFTA:
MAPPING OF
COMPETITIVENESS AND
SPECIALIZATION
CONTACT US
APINDO-EU ACTIVE Project
Gedung Permata Kuningan Lantai 20
Jl. Kuningan Mulia Kav. 9C,
Guntur – Setiabudi,
Jakarta 12980 – Indonesia
Tel: +62-21-83780594
Faks: +62-21-8378 0823, 8378 0746
E-mail: daniel.purba@apindo.or.id
Website: www.apindo.or.id
Join us on social media
@DPN_APINDO
www.facebook.com/pages/APINDO-EU-ACTIVE-Project
Advancing Indonesia’s Civil
Society in Trade and Investment
Climate (ACTIVE) Programme
INDONESIA–CHINA TRADE
IN ACFTA: MAPPING OF
COMPETITIVENESS AND
SPECIALIZATION
Advancing Indonesia’s Civil
Society in Trade and Investment
Climate (ACTIVE) Programme
2
ACKNOWLEDGEMENT
A
PINDO-ACTIVE working papers are issued in joint cooperation
between Indonesia Employer Association (APINDO) and
Advancing Indonesia’s Civil Society in Trade and Investment
(ACTIVE), a project co-funded by the European Union. ACTIVE project aims
to strengthen APINDO’s policy making advocacy capabilities in preparing
the business environment and to empower national competitiveness in
facing global integration.
For more information, please contact ACTIVE Project Manager, telephone
+6221-8378-0824 or visit www.apindo.or.id where copies are available
in pdf format. The authors may be contacted at rosa@apindo.or.id or
fandi@apindo.or.id.
Further information about ACTIVE project can be accessed at:
www.apindo.or.id/index.php/trade-a-investment/active-project/tentangactive-project.
APINDO-EU Active Project Team Members:
Tiarma Fitriani P. (Project Manager)
Fandi Achmad (Economist)
Rosa Situmorang (Economist)
Daniel P. Purba (Public Afairs & Media Oicer)
Disclaimer
The contents of APINDO-ACTIVE working papers are the sole
responsibility of the author(s) and can in no way be taken to
reflect the views of Indonesia Employer Association (APINDO)
or its partner institutions. APINDO-ACTIVE working papers are
preliminary documents posted on the APINDO website (www.
apindo.or.id) and widely circulated to stimulate discussion and
critical comment.
3
FORE WORD
A
fter the full implementation of ACFTA on January 1, 2010, zero
tariffs have been imposed on 6,682 tariff posts in 17 sectors.
Zero tariffs make even bigger trade deficit compared to 2011 for
Indonesia. ACFTA also impacts the growth of industries and restructures
the supply chain network in the region. Experience with ACFTA is strongly
influencing public perception about the responsiveness of the government
to improve trade and investment environment in order to be prepared for
more open trade and investment.
The closer integration puts Indonesia in a severe competition because
China’s products are cheaper and substitutive to Indonesia’s products. Hence,
Indonesia should also be aware of its competitiveness and specialization
in trade with China to survive in the ACFTA.
This study maps the changing pattern of trade competitiveness and
specialization between Indonesia and China. This map shows products
in which Indonesia is more specialized in bilateral trade with China. In
addition, when a country has competitiveness in producing goods relatively
to the average ability of the world, it does not necessarily mean it has
specialization in bilateral trade. Therefore country to country analysis
should be considered in making trade policies for the next international
trade agreements.
We would like to thank Rosa Situmorang and Fandi Achmad for conducting
this study. We also like to appraise the contribution of Advancing Indonesia’s
Civil Society in Trade and Investment (ACTIVE) program which address the
lack of capacity in APINDO to analyze, evaluate and advocate adequately
the Indonesian business sector’s interests in many free trade agreements.
After all, we believe that the findings in this study will give great insight
for policy makers and our social partners. We hope it will generate useful
discussions and give significant contribution to Indonesia’s development.
Sofjan Wanandi
General Chairman
Chris Kanter
Vice Chairman
Indonesia Employer Association (APINDO)
Indonesia Employer Association (APINDO)
4
CONTENTS
Abstract I 6
Overview ASEAN–China Free Trade Area I 7
Indonesia-China Trade: Facts and Figures I 13
Methodology I 19
Data I 19
Trade Competitiveness I 19
Trade Specialization I 24
Mapping: Indonesia–China Trade Commodities I 25
Analysis of Indonesia-China Trade Competitiveness and
Specialization I 27
Recommendation I 32
References I 33
Appendix I 35
FIGU RES
Figure 1.1
Indonesia’s Free Trade Agreement through ASEAN
Figure 1.2
Historical Lines of ASEAN-China Free Trade Area
Figure 1.3
Approaches to Establish ASEAN-China Free Trade Area
Figure 1.4
Types of Wholly Obtained Product in Rules of Origin
Figure 1.5
Commitments to Open Up Services
Figure 2.1
Indonesia-China Trade Growth 2007-2011
Figure 2.2
Indonesia-China Export-Import 2007-2011
Figure 2.3
Indonesia’s Largest Export Value to China
Figure 2.4
Indonesia’s Largest Import Value from China
Figure 2.5
Indonesia’s Import Pattern from China 2001-2011
Figure 2.6
Indonesia’s Export Pattern to China 2001-2011
Figure 3.1
The Evolution of Trade Competitiveness Measurement
Figure 3.2
Mapping of Trade Competitiveness and Specialization of
ASEAN-China Free Trade Area
5
Figure 4.1
Indonesia’s Trade Distance Indexes against China (Top 10
Specialized Commodities)
Figure 4.2
China’s Trade Distance Indexes against Indonesia (Top 10
Specialized Commodities)
Figure 4.3
Indonesia-China Trade Commodities Mapping 2004
Figure 4.4
Indonesia-China Trade Commodities Mapping 2011
Figure A2.1
Indonesia’s Trade on Section TTA 2011
Figure A2.2
Indonesia’s Trade of TTA and Cotton 2001-2011
Figure A2.3
Share of Cotton Commodities 2011
Figure A3.1
Export Share Based on the Distribution of Export Growth
(2011)
Figure A3.2
Share of Export to China Based on the Distribution of
Export Growth (2011)
TABLES
Table 1.1
Schedules of Tariff Reduction in ASEAN-China Free Trade
Agreement
Table 3.1
Comparison of Six Comparative Advantage Measurement
Table A3.1
Products with Export Growth Above 400% p.a. of 20072011 calculation
Table A3.2
Products with China as Main Market for Indonesia’s Export
6
ABSTR ACT
A
SEAN-China Free Trade Area (ACFTA) opens opportunities for
Indonesia to gain benefit from non-tariff barriers on several
products. There are some competitive areas in which Indonesia
has comparative advantage in the world trade. However, in the context
of bilateral trade, the relative specialization between Indonesia and China
more precisely determines the trade opportunities. This paper presents
commodities competitiveness and specialization mapping of IndonesiaChina trade. Competitiveness represents the comparative advantage of
a country on certain commodities in the world trade and specialization
explains the relative difference of comparative advantage within two
countries in bilateral trade. The map explains Indonesia’s areas of
specialization and the sectors which need attention.
Keywords: ACFTA, FTA, Specialization, Competitiveness.
OVERVIEW ASEAN–CHINA
FREE TRADE AREA
I
ndonesia grows many regional trade agreements through ASEAN in recent years.
As a part of the ASEAN, Indonesia has several free trade agreements with China, Korea,
Japan, India, Australia, New Zealand, and 9 members of ASEAN itself. The increasing
tendency to form trade agreements deserves special attention, particularly in regard to
the advantages and disadvantages. Therefore, every free trade agreements have to be
examined and directed to prioritize Indonesia’s interest.
FIGURE 1.1 indoneSia’S free Trade agreemenT Through aSean
One of default in these agreements is when Indonesia did not prepare yet for ASEAN –
China Free Trade Area (ACFTA). ASEAN-China Free Trade Area (ACFTA) is an agreement
between countries members of ASEAN with China to create a free trade area by eliminating
or reducing tariff or non-tariff barriers to trade in goods, increasing market access to
services, reforming rules and regulations of investment to improve the welfare of ASEAN
countries and China. ACFTA provides opportunities to increase export from Indonesia.
Ibrahim (2010) found that Indonesia obtained a net trade creation amounted to 2%
and total export growth increased by 1.8%. However, the commodity structure of China
and the non-competing behavior of ASEAN countries including Indonesia (tends to be
complement) caused China is relatively easier to penetrate export to the ASEAN market
than ASEAN itself (Ibrahim et al, 2010).
Despite several disadvantages, there are some reasons why ACFTA becomes important.
Jian (2003) has pointed out why Southeast Asia would maintain its strategic advantage
in its relations with Northeast Asian countries, particularly China. Firstly, it provides a
key strategic influence for both parties. For China, in particular, ASEAN is an important
regional forum to counter the US influence. Secondly, ASEAN and China have strategically
important geo-political reason, as most of world trade must pass through ASEAN and China.
Thirdly, ASEAN and China have also perceived the growing population of Southeast Asia
as a potential market to penetrate. Therefore, the deepening of economic integration is
seen as crucial by leaders of both regions.
8
Indonesia-China Trade in ACFTA: Mapping of Competitiveness and Specialization
FIGURE 1.2 hiSTorical lineS aSean–china free Trade area
ACFTA has built up by its long story. The formation of ACFTA can be traced back to Chinese
Premier Li Peng’s visit to Bangkok in 1989 when he stated four principles in establishing,
restoring, and developing relations with all ASEAN countries. These were: (1) peaceful
coexistence despite differences in social and political systems, (2) anti-hegemonic ideology,
i.e. China will not seek to be a hegemony power nor will it interfere in the domestic affairs
of ASEAN countries, (3) further development of economic relations and (4) continuing
support of regional cooperation and initiatives from ASEAN (Baviera, 1999). Since then,
there have been significant milestone in China – ASEAN economic cooperation.
Economic cooperation opened up in the year 1991. Qian Qinchen, Chinese Foreign Minister,
attended the opening of ASEAN Ministerial Meeting in Kuala Lumpur on July 1991. He
showed China’s interest to cooperate with ASEAN. It is responded positively by agreement
to establish two joint committees - Joint Committee on Scientific and Technological
Cooperation and Joint Committee on Economic and Trade Cooperation (ACJETC). These
committees were formally established in September 1993 when Dato’ Ajit Singh, ASEAN
Secretary General, visited Beijing. During the talks on economic and trade cooperation,
ACJETC mainly exchanged views on international and regional economic issues and
discussed how to put forward bilateral trade and investment cooperation.
Mapping of Competitiveness and Specialization
9
In December 1997, a document of Good Neighborliness and Good Mutual Trust was
established as the framework of ASEAN-China relations. It gave priority to economic
relations and trade with the principle of comparative advantages and mutual benefit.
It also encouraged the cooperation in the areas of resources, technology, market, banking,
information, human resources, development and investment.
As real steps on economic cooperation in ASEAN, China respectively signed framework
documents on bilateral trade cooperation with Thailand and Malaysia and signed joint
statements on future cooperation with Viet Nam and Brunei in 1997. Moreover, China had
already signed all bilateral trade cooperation documents with each ASEAN countries
by the end of 2000. All of this bilateral trade cooperation encouraged ASEAN and China
to begin negotiations to set up a free trade area at The 7th ASEAN Summit in Brunei.
ASEAN-China economic cooperation progressed to a new stage in November 2002 by the
signing of Framework Agreement on Comprehensive Economic Cooperation between
ASEAN and China. It was signed by Premier Zhu Rongji and the leaders of the ASEAN
countries. Based on the agreement, the ASEAN-China Free Trade Area should cover trade
in goods, trade in services, investment, and economic cooperation with trade in goods as
the core. It included the setting rules of origin, and disciplines on anti-dumping measures,
countervailing measures, safeguards, and dispute settlement mechanism, as guarantee
methods to smooth the running of trade exchange between ASEAN and China. For areas
of economic cooperation, it encouraged to focus in 5 priority sectors, including agriculture,
information and communications technology, human resources development, investment,
Mekong River basin development and can be extended to other areas. Overall, this
agreement laid the foundations for the ASEAN – China Free Trade Area.
FIGURE 1.3 approacheS To eSTaBliSh aSean–china
free Trade area
Through Framework Agreement on Comprehensive Economic
Cooperation, China and ASEAN countries agreed to negotiate
in within 10 years. Negotiation was directed through several
approaches in order to strengthen and enhance economic
cooperation. These approaches will be outlined into
regulations as guidance for ASEAN – China Free Trade Area.
In January 2004, ASEAN – China Free Trade Area was initially
implemented under the early harvest of agreement on trade
in goods of the Framework Agreement on Comprehensive
Economic Cooperation. Early harvest program aimed to
accelerate tariff reduction and elimination in agricultural
products as the first major step in realizing free trade area.
Then, In July 2005, the tariff reduction plan was officially
launched. This tariff reduction plan consisted of 5 tracks
including early harvest program.
10
Indonesia-China Trade in ACFTA: Mapping of Competitiveness and Specialization
In January 2004, ASEAN – China Free Trade Area was initially implemented under
the early harvest of agreement on trade in goods of the Framework Agreement on
Comprehensive Economic Cooperation. Early harvest program aimed to accelerate tariff
reduction and elimination in agricultural products as the first major step in realizing free
trade area. Then, In July 2005, the tariff reduction plan was officially launched. This
tariff reduction plan consisted of 5 tracks including early harvest program.
TABLE 1.1 ScheduleS of Tariff reducTion in aSean- china free Trade area
Track
Early
Harvest
Program
Indonesia’s Products*
Rules
Products with applied MFN tariff rates higher than 15% should reduce
not more than 10 % by January 1, 2004, not more than 5% by January
1, 2005, and 0% by January 1, 2006
8 (HS 2 Digit)
Products with applied MFN tariff rates between 5% and 15% should
reduce not more than 5 % by January 1, 2004 and 0% by January 1, 2005
Products with applied MFN tariff rates lower than 5% should reduce to
0% by January 1, 2004
Normal
Track I
Normal
Track II
Sensitive
Track
1880 (HS 6 Digit)
By July 1, 2005, should reduce tariff at 0% - 5% for at least 40% tariffs
line placed in the normal track
2820 (HS 6 Digit)
By January 1, 2007, should reduce tariff at 0% - 5% for at least 60%
tariffs line placed in the normal track
6683 (HS 6 Digit)
By January 1, 2010, should eliminate all tariffs for tariffs line placed in
the normal track
263 (HS 6 Digit)
Flexibility to have tariffs of some tariff line under normal track I, not
exceeding 150 tariff lines and eliminated by January 1, 2012
Sensitive track placed for 400 tariff lines at the HS 6-digit level and
10% of the total import for Indonesia. Value is based on 2001 trade
statistics
304 (HS 6 Digit)
MFN tariff rates for products placed in the Sensitive track shall be
reduced to 20% by January 1, 2012
Tariff rates shall be subsequently reduced to 0%-5% by January 1,
2018
Highly
Sensitive
Track
47 (HS 6 Digit)
Tariff placed in the highly sensitive track should be not more than
40% of the total number of tariff lines in the Sensitive Track or 100
tariff lines at the HS 6-digit level
MFN tariff rates for products placed in the Highly Sensitive Track shall
be reduced not more than 50% by 1 January 2015 for ASEAN 6 +
China and January 1, 2018 for newer ASEAN member
Source: Agreement on Comprehensive Economic Co-operation between the Association of South East Asian
Nations and the People’s Republic of China Document. * Ministry of Trade of Indonesia
Mapping of Competitiveness and Specialization
FIGURE 1.4 TYpeS of whollY oBTained producT in ruleS of origin
11
Beside tariff reduction, there are other
regulations to support trade between ASEANChina. One of the regulations gets concern
from trader is the rule of origin. The products
imported by a trader should be deemed to
be originating and eligible for preferential
concessions if they conform to the origin
requirements. Rules of origin divided products
to wholly obtained product and not wholly
obtained product. For not wholly obtained
products, it can be traded if they fulfill
minimum 40% of its content originates
from any party (ACFTA member countries)
or if the total value of the materials produce
originating from outside of the territory of a
Party (i.e. non-ACFTA) does not exceed 60% of
the FOB value of the product. In the free trade
area, rules of origin discourage aggregate trade
flows and encourage trade in intermediate
goods (Estevadeordal and Suominen, 2005).
Thus, Indonesia has to respond to it carefully.
Besides trade in goods, ACFTA also look at the
opportunity of trade in services. ASEAN and
China agreed to liberalize trade in services
with substantial sectors coverage. In this case,
Indonesia committed to open up new market in 10 services area while China opened
5 services area (Directorate General of International Trade Cooperation of Indonesia,
2010). Trade in services is boosted through progressive elimination of substantially all
discrimination between countries, except for measures permitted under Article V(l)(b) of
the WTO General Agreement on Trade in Services (GATS). The exceptions are only for the
purposes to: (1) protect public morals, (2) protect human, animal, and plant life, (3) secure
compliance with laws or regulations which are not inconsistent with the provisions of this
agreement, and (4) safeguard balance of payment.
Services play a major role in all modern economies. Indeed, it would be hard for any
economic activities to run without services such as telecommunications, banking and
freight logistics. Then, an efficient services sector is critical for trade in goods and economic
growth. Furthermore, promoting greater trade in services through open markets and
non-discriminatory treatment can lead to higher employment levels, higher incomes and
higher standards of living through jobs creation in this field.
12
Indonesia-China Trade in ACFTA: Mapping of Competitiveness and Specialization
FIGURE 1.5 commiTmenT To open up ServiceS
COMMITMENT TO OPEN UP SERVICES
INDONESIA
1. Business Services (Computer Related Services, Real
Estate Services, Market Research, Management
Consulting)
2. Construction and engineering related services
3. Environmental Services
4. Transport Services
5. Recreational, Cultural and Sporting Services
6. Tourism and travel related services
7. Educational services
8. Telecommunication services
9. Health-related and social services
10. Energy services
CHINA
1. Business Services (Computer Related Services,
Real Estate Ser vices, Market Research,
Management Consulting)
2. Construction and engineering related services
3. Environmental Services
4. Transport Services
5. Recreational, Cultural and Sporting Services
Source: Directorate General of International Trade Cooperation, Ministry of Trade of Indonesia
The opening of certain services sectors can create competition and provide consumers
with access to a broader range of services. It also brings out a greater depth of expertise
from domestic and overseas. In addition, openness in services influences long run growth
performance. Mattoo, et al (2001) estimated that countries with fully open telecom and
financial services sectors grow up to 1.5 percentage points faster than others (Mattoo et
al, 2006). Indonesia openness in services seems to grab this opportunity.
Ultimately, the establishment of ASEAN-China Free Trade Area would welcome an economy
area with USD 1.9 billion consumers which are 27.8% of total consumer in the world. It
also produces over USD 9.4 trillion of GDP (13.56% of world GDP) and USD 6.05 trillion of
total volume of trades, 16.8% of total volume of trade in the world (2011)1. ASEAN-China
Free Trade Area would be one of the most populous free trade area of the world, and the
largest free trade area formed by developing countries.
1
Calculation based on World Bank data. Data is in 2011. Data is accessed in 2012.
Mapping of Competitiveness and Specialization
13
inDonesia-CHina traDe:
FaCts anD FigUres
FIGURE 2.1 indoneSia-china Trade growTh 2007-2011
Source: International Trade Centre, based on calculation of UN COMTRADE
T
he full implementation of ACFTA on January 1, 2010 has abolished the tariffs on 6,683
posts in 17 sectors. This free trade was established to strengthen trade partnership
between China and ASEAN countries by creating a wider space for both parties to
expand their trade. In 2011, Indonesia’s export value to China reached USD 22.94 million
and the import value reached USD 26.21 million. The trade volume had been flared for
more than ten times within the last decade, while in the last five years Indonesia’s import
value has grown 29% p.a. and export grew 22% p.a2.
ACFTA successfully jacked up the trade volume between two countries. The trend of
Indonesia-China trade shows an ascending trade value, especially steeper in the last five
years (Figure 2.2). In fact, the diminishing of trade barriers (which actually have started
gradually since 2005) has given a big hit in Indonesia’s trade balance. The free tariffs have
blown-in a huge amount of commodities from China. The products inflow grew more
rapidly than the outflow causing deficit trade balance records for Indonesia since 2008.
In 2010, when the ACFTA was fully implemented, the deficit was over USD 4 billion. The
export capacity of China was supported by the investment climate and infrastructure
2
The growth rate is based on the calculation of International Trade Centre, the computation formula of the growth rate over
∑
)
five years is the following: ( ((∑
)
)
Where is the value of the i-th year in current US Dollar. More information about the calculation can be accessed in the
web www.trademap.org.
14
Indonesia-China Trade in ACFTA: Mapping of Competitiveness and Specialization
which boosted up the industrialization. In 2011, the industrial production growth rate3 of
China was 13.90%, while Indonesia was left far behind by 4.10%. The gap of industrial
production growth also reflects Indonesia’s lack of capacity to enter the FTA with China.
The downstream industries were not supported by upstream industries and still relied on
imported capital goods and raw materials.
FIGURE 2.2 indoneSia-china exporT-imporT 2007-2011
Source: International Trade Centre, based on calculation of UN COMTRADE
Mineral fuels, oil and distillation products became the largest Indonesia’s chapter of export
commodities4 to China, with the volume of export in 2011 reached USD 8,923 million
(Figure 2.3), followed by animals/vegetable oils, ores, rubber, and organic chemicals. The
export value of those five chapters was more than 80% of Indonesia’s total export to
China. The main mineral export commodity was coal (included bituminous coal) with the
value of USD 6,007 million or 67% of total exported mineral products. The export of coal
had grown very fast within the last five years with the annual growth between 2007-2011
more than 80% p.a.
Among the ten largest chapters of export commodities, ores, slag and ash grew the fastest
within 2007-2011 with 46% p.a. The largest value of exported ore was nickel (41.1%),
aluminum (27.1%), copper (16.7%) and iron ore (10.4%). Iron ore was the fastest growing
ore commodity with the annual export growth rate in 2007-2011 up to 80% p.a.
3
Industrial production rate is the annual percentage increase in industrial production, including manufacturing, mining, and
production (data from Central Intelligence Agency United States’ World Fact Book, https://www.cia.gov/library/publications/
the-world-factbook/).
4
Chapter of Commodities is a group of commodities which is classified based on 2 digits Harmonized System (HS) by World
Custom Organization.
Mapping of Competitiveness and Specialization
15
FIGURE 2.3 indoneSia’S largeST exporT value To china
Source: International Trade Centre, based on calculation of UN COMTRADE
On import side (Figure 2.4), machinery and electrical equipment were the largest
commodities in 2011 with the value for both commodities remarkably exceeding USD 10
billion. The largest value of imported products in the chapter of machinery was portable
digital computers (USD 1,113 million) and the largest value of imported electrical equipment
was telephone (for cellular networks mobile telephones/ for other wireless) with the value
of USD 1,000 million.
There are some highlights on the data of Indonesia’s import from China. First, the third
largest import value in 2011, iron and steel, showed a deceleration in 2007-2011 of 1% p.a.
The decline of iron and steel import value was in accordance with the revision of import
regulation which was enforced to control the import of iron and steel5.
5
The Ministry of Trade has issued several regulations to restrict the import of iron and steel by requiring the importers to
have a surveyor report documents (Regulation No. 21/M-DAG/PER/6/2009). The Regulation No. 21 then had been revised
by Regulation No. 8/2009, this new regulation required all importers of iron and steel to register as producer importers (or
registered importers) and to do a technical verification at the loading por
16
Indonesia-China Trade in ACFTA: Mapping of Competitiveness and Specialization
In the other hand, the import of cotton had the highest growth among the ten largest
import chapters of commodities. Indonesia has been a net importer of cotton since the
growing national demand of cotton was not supported by the national production. So
far, up to 99% of domestic demand for cotton has been fulfilled by import. The estimated
volume of domestic cotton produced was only 33,000 tons per year, whereas the domestic
demand was up to 700,000-800,000 tons per year6. As the main cotton producer which
produces 29% of world cotton (based on statistics from US Department of Agriculture)7,
Indonesia’s domestic demand from grew rapidly. Indonesia’s dependence on imported
cotton brought Indonesia to uncompetitive position in its textile products. But interestingly,
out of the dependence on imported cotton, chapter cotton itself has been the fifth largest
export to the world in section textile and textile articles8 with the value of USD 811 million
in 2011. This fact indicated some possible situations in domestic cotton industry. First, it
might show the intra industry product specialization and the second, it might indicate
the unmatched demand and supply of cotton between the upstream and downstream
industry in Indonesia, see [APPENDIX 2].
FIGURE 2.4 indoneSia’S largeST imporT value from china
Source: International Trade Centre, based on calculation of UN COMTRADE
6
Indonesia’s main suppliers of cotton were US, Brazil, and Australia (http://industri.kontan.co.id/news/walau-harga-naik-industritekstil-tetap-genjot-impor-kapas--1).
7
The data can be retrieved from Nationmaster (Nationmaster is a vast compilation of data from such sources as the CIA World
Factbook, UN, and OECD). It can be accessed through the website www.nationmaster.com.
8
The section textile and textile articles based on HS 2012 contents 14 chapters of commodities in textile and textile articles
industries.
Mapping of Competitiveness and Specialization
17
Over years, Indonesia and China have expanded the bilateral trade between both countries.
The trade pattern has also changed. Figure 2.5 and figure 2.6 show the Import and export
pattern of Indonesia-China over the period 2001-2011. The chapters of commodities
presented here are classified by the term of sections9. With the rapid technology development
in China within last decade, the pattern of Indonesia’s import from China had also been
switched. In early 2000s, machinery and electrical equipment was not main import
commodity from China. Fantastically, in ten years the share of machinery and electrical
equipment in total import sharply grew three times bigger and dominated the import
value. At the same time, the share of chemical and mineral products gradually shrank.
FIGURE 2.5 indoneSia’S imporT paTTern from china 2001-2011
Source: International Trade Centre, based on calculation of UN COMTRADE
As the switch of the import pattern from mineral products to high-tech commodity, the
export pattern of Indonesia to China also changed. As mentioned before, the mineral
products became the largest Indonesia’s export to China with the share of more than half
of Indonesia’s total export to China. Animal/vegetables oil share also grew more than two
times in ten years. The main commodity in this category is palm oil with the value of
USD 2,080 million in 2011 and 25% growth p.a. in the last five years. On the other hand,
the share of pulp and paper declined incisively.
9
The term SECTION is based on the Harmonized System 2012 which classified 97 chapters of commodities into 22 sections.
18
Indonesia-China Trade in ACFTA: Mapping of Competitiveness and Specialization
FIGURE 2.6 indoneSia’S exporT paTTern To china 2001-2011
Source: International Trade Centre, based on calculation of UN COMTRADE
Mapping of Competitiveness and Specialization
19
METHODOLOGY
DATA
This research aims to map trade competitiveness and specialization between Indonesia
and China before and after ACFTA. It also tries to examine the changing pattern
of competitiveness and specialization between the two countries. Therefore, trade
competitiveness and trade specialization become two main variables in this research. Details
of these variables including the development are explained below. Trade competitiveness
is proxied by Normalized Index (NI) while trade specialization is proxied by Trade Distance
Index (TDI).
Data on export and import, the basic variables to calculate normalized index (NI) and
trade distance index (TDI), is published by International Trade Centre (ITC)10. Internationally,
traded products are classified according to some international standards of classification
such as the Standard International Trade Classification (SITC), the Harmonized Commodity
Description and Coding System (HS) and the Broad Economic Categories (BEC). This research
uses HS 201211. This research focuses to examine the year 2004 and 2011 to compare trade
competitiveness and specialization before and after ACFTA.
These trade data are based on the Harmonized System (HS) 2-digit level of aggregation,
which consists of 97 classifications (from HS 01 to HS 99 with HS 77 and 98 being empty as
“reserved for possible future use”). In this case, those classifications are called chapter. See
[APPENDIX 1] for the description of HS 2-digit codes. Furthermore, HS can be elaborated
to be approximately 5000 article/product descriptions that appear as headings and
subheadings and grouped in 21 sections.
TRADE COMPETITIVENESS
The Evolution of Trade Competitiveness Measurement
The term trade competitiveness is widely used but has a lot of interpretation. OECD defines
trade competitiveness as a measurement of a country’s advantage or disadvantage in
selling its products in international markets. In the micro level, competitiveness pertains
to the ability and performance of a firm, sub-sector or country to sell and supply goods
and services in a given market, in relation to the ability and performance of other firms,
sub-sectors or countries in the same market12.
10
Based on United Nations Commodity Trade Statistics Database (UNCOMTRADE) calculation (link: www.intracen.org).
11
The Harmonized Commodity Description and Coding System (HS) of tariff nomenclature is an internationally standardized
system of names and numbers for classifying traded products developed and maintained by the World Customs Organization
(WCO).
12
Definition from OECD Economic Outlook 2012. It is used as competitiveness indicator definition.
20
Indonesia-China Trade in ACFTA: Mapping of Competitiveness and Specialization
FIGURE 3.1 The evoluTion of Trade compeTiTiveneSS meaSuremenT
Assessing trade competitiveness was started by Liesner (1958). Liesner proposed Index
of Relative Export Performance (REP). It is used as a proxy for comparative costs in
an effort to assess the effects of an entry into the European Common Market on British
industry. The equation is as showed below:
Where X represents exports, i is a country, j is a commodity (or industry), and n is a set of
countries (e.g. the world). Since it has a lot of weakness on the application, comprehensive
measurement is evolved.
A more advanced measure of trade competitiveness was later on presented by Balassa
(1965), popularly known as the Balassa Index (BI). Alternatively, as the actual export flows
‘reveal’ the country’s strong sectors, it is also known as Revealed Comparative Advantage
(RCA). The equation for BI is following:
Where X represents exports value, i is a country, j is a commodity, t is a set of commodities
and n is a set of countries.
BI is based on observed trade patterns. It measures a country’s export of a commodity
in relation to its total exports and to the corresponding export performance of a set
of countries. If BI>1, then a comparative advantage is revealed, the commodity can be
considered as competitive. The higher value of BI means country is more competitive
Mapping of Competitiveness and Specialization
21
to sell the products. However, BI got a lot of critics of its limit to compare with other
countries. For example, the value of BI in mineral oils is 500 in Indonesia while it is 100
in machinery. It means Indonesia is more competitive to sell mineral oils than machinery
to the world. But, we cannot state that Japan more competitive to sell mineral oils than
Indonesia when their BI value at 600. The higher Japan’s BI value in mineral oils can be
caused by the decreasing of total export of all products in Japan despite there are nothing
changes in the production or selling of Japan’s mineral oil. Furthermore, using exports to
measure comparative advantage, in view of the increasing importance of intra-industry
trade may lead to erroneous conclusion13. Therefore, import has to be included.
Lafay Index (LI) in 1992 tried to solve it by inserting import and GDP to the equation. It
takes account of both exports and imports and is therefore more suitable for a country with
intra-industry trade. Lafay Index gives weight to each product based on its contribution
according to the respective importance in trade. It is also controlling the distortions due
to the macroeconomic factors with the GDP variable (Alessandrini et al, 2007). Lafay Index
is shown by following equation:
(
)
(
∑(
)
∑(
)
)
Where X represents exports value, M represent imports value, i is a country, j is a commodity,
Y is GDP and t is a set of commodities. It is considered to have a comparative advantage
(disadvantage) in a given commodity when the LI’s value exceeds (is less than) zero. Yet, LI
does not measure trade competitiveness with respect to other countries, but with respect
to total trade of a given country. Moreover, there is suggestion to accommodate different
value of export share since sum of LI for all sectors will be zero.
Solution for the importance of export share in specific product is raised by Proudman and
Redding (1998). They use cross section mean to fix mean of BI, called Weighted Index
(WI). WI adopts a measurement in which an economy’s export share in given sector is
evaluated relative to its average export share in all sectors. WI’s equation as follows:
∑
BI represents value of Balassa Index, i is a country, j is a commodity, and n is a set of
countries. By construction, the mean value of WI is constant and equal to one, which
enables to compare over time and over country. But, WI does not overcome the problem
of asymmetry. It values ranging from zero to infinity. Another problem with the WI, also LI
and BI, is that its value is asymmetric; it varies from one to infinity for products in which a
country has a revealed comparative advantage, but only from zero to one for commodities
with a comparative disadvantage.
13
Intra-industry trade means the trade exchange is occurred in similar products belonging to the same industry, where the
same types of goods or services are both imported and exported.
22
Indonesia-China Trade in ACFTA: Mapping of Competitiveness and Specialization
Dalum et al (1998) proposed a revealed symmetric comparative advantage (RSCA) through
Symmetric Index (SI) to alleviate the problem of asymmetric as follows:
Where BI represents value of Balassa Index, i is a country, j is a commodity. The SI value
ranges from minus one to plus one and is equal to zero at the comparative-advantageneutral point (
). Hence, it is called symmetric. The SI measure preserves most of
distribution characteristics of the original BI, and it can be considered a more elegant
substitute of BI. Nevertheless, the “forced” symmetric may obscure BI’s dynamic, especially
when it is expressed by a change of the symmetric itself. Its reduced asymmetry does
not imply normality. Benedictictis and Tamberi (2001) found that only with low level of
disaggregation level it will possible to have normal distributed residuals14.
Other solution for asymmetric problem is using Additive Index (AI) by Hoen and Oosterhaven
(2006). It is also well known as additive revealed comparative advantage. It identifies the
sectors in which an economy has a comparative advantage, and to track changes over
time. Unlike the BI index, it is symmetric. The AI is defined as the difference of two shares:
The share of a country’s total exports of the commodity of interest in its total exports and
the export share of set of countries exports to its total exports. The equation as follows:
Where X represents exports value, i is a country, j is a commodity, t is a set of commodities
and n is a set of countries. The first term is the share of good j in the exports of country
i, while the second term is the share of good i in the exports of countries group. It takes
a value between –1 and +1. Country has a revealed comparative advantage if the value
exceeds zero, vice versa.
However, the comparability in cross-country analysis is in doubt: the sum of AI values with
respect to a given sector is not stable in the cross country analysis, thus leads to variant
mean value. Furthermore, although its empirical distribution is bell-shaped and the mean
value is centered and constant, it does not follow normality due to far too high kurtosis15.
None of alternative measurements above have satisfactorily overcome all of its shortcomings.
Then, Yu et al (2009) try to develop Normalized Revealed Comparative Advantage or
Normalized Index (NI) in 2009. The NI calculates the degree of deviation of a country’s
actual export from its comparative-advantage-neutral level in terms of its relative scale
14
Benedictictis and Tamberi used SITC to exercise distribution of error. At 2 digits, only 4 out of 13 cases are rejected while 3
digits only 3 pass the normality test. At 4 digits level none pass.
15
High kurtosis makes assumption of normality is biased and rejected to include in the modeling analysis (Hoen and Oosterhaven,
2006)
Mapping of Competitiveness and Specialization
23
with respect to the world export market and thus provides a proper indication of the
underlying comparative advantage. It features include its symmetrical distribution and
independence from the number of countries and sectors. Therefore, the value can be
used as comparable score among commodity, time, or country. The NI can be expressed
as follows:
̂
̂
Where:
Xij
Xi
Xw
Xwj
NI
(
(
)
)
: Export of country i in commodity j
: Export of country i in all commodities
: World export in all commodities
: World export in commodity j
: Normalized Index
Values of NI is between -0,25 to +0,25. According to the equation, NI > 0 or NI < 0 indicates
that country’s actual export of commodity j is higher or lower than its comparativeadvantage-neutral level. Thus, NI > 0 means commodity is comparative advantage, on the
other hand NI < 0 means commodity is comparative disadvantage. The greater (or the
lower) the NI value is, the stronger the comparative advantage (or disadvantage) would be.
Besides its comparability, one of the advantages of NI is the sum of NI is stable and equal
zero. It explains well the condition if a country gains comparative advantage in one sector,
then the country loses comparative advantage in other sectors; and if one country gains
comparative advantage in a sector, then other countries lose comparative advantage in that
sector. Furthermore, NI is neither affected by the level of sectors aggregation nor by the
choice of reference group of countries, while the AI has attached this problem. However,
NI is sensitive to commodity classification in which case more disaggregated classification
might show different result than that of a less disaggregated ones16.
The Selection of Revealed Comparative Advantage Index as Trade Competitiveness
Measurement
Each one of the revealed comparative advantage indexes above has advantages and
disadvantages. Thus, it should be important to have knowledge on the property of indices
and properly use them. Sanidas and Shin (2010) exercised six indicators i.e. BI, LI, WI, SI,
AI, and NI to find the best one. The findings are summarized below:
16
It was presented by Ullah, et al (2011) in 6th Annual London Business Research Conference.
24
Indonesia-China Trade in ACFTA: Mapping of Competitiveness and Specialization
TABLE 3.1 compariSon of Six comparaTive advanTage meaSuremenT
PROPERTIES
BI
LI
WI
SI
AI
NI
Comparative advantage neutral point
1
0
1
0
0
0
Sum over sectors
-
0
-
-
0
0
Sum over countries
-
-
-
-
-
0
Independence from aggregation level
X
X
X
X
√
√
Independence from reference group of countries
X
X
X
X
X
√
Symmetry
X
X
X
√
√
√
Normality
X
X
X
X
X
X
BI
LI
WI
SI
AI
NI
Cross-sector
X
X
X
X
X
√
Cross-country
X
X
√
X
√
√
Over-time
X
√
X
X
√
√
Source: Sanidas and Shin (2010)
COMPARABILITY
Source: Sanidas and Shin (2010)
Based on the properties and comparability, NI seems a best indicator to measure trade
competitiveness even though it cannot fill normality requirements. NI can compare
cross sector and country with over time. In addition, NI has more favorable features than
the others, especially its stable mean across space and time, and independence from
aggregation level that can be very helpful in analyzing trade competitiveness. Therefore,
this research uses value of NI as a proxy of trade competitiveness17.
TRADE SPECIALIZATION
Another important variable to assess the importance of bilateral or regional trade is trade
specialization. Trade specialization is different with trade competitiveness. Since trade
competitiveness measures the ability of country to sell commodities in the set of countries,
trade specialization is more to how different commodities sold between countries in the
bilateral or multilateral trade. How different commodities sold is translated to be “distance”
in this research. Therefore, trade distance index is used to measure trade specialization.
Trade distance index is measured by cross-country difference between the average shares
across time of a particular sector in total exports. This difference is called “distance”. Normally,
it adds up distances calculated from all sectors to get overall sectors distance measure
for total export. The equation is following:
17
Sanidas and Shin (2010) also used OLS Galtonian regression to assess how similar or dissimilar the distributions of revealed
comparative advantages at two different points of time are to each other, hence the stability, or convergence/divergence of
the trade specialization patterns. They found that SI seems to have the closest distribution to normality, although the normality
is not always guaranteed (Laursen, 1998).
Mapping of Competitiveness and Specialization
∑
∑
25
∑
This paper is simplified it. It only analyzes the trade specialization between two countries
in commodities level, thus do not need to sum distance of export share. In addition, it
also do not use average shares across time since it only uses data from last available year
in 2011. The new equation as follows:
eint stands for the share of sector n in total export of country i at time t while ejnt stands
for the share of sector n in total export of country j at time t. the value of TDI can be
positive and negative. Thus, TDIij > 0 means commodity is specialized for country i, on
the other hand TDIij < 0 means commodity is specialized for country j. The greater (or
the lower) the TDIij value is, the stronger (weakened) the specialization of those countries
in commodity. In this case, trade distance index is used only to analyze on bilateral trade
between two countries at a time per each commodity. As a result, the value of trade
distance index shows the strength of its specialization.
MAPPING: INDONESIA – CHINA TRADE COMMODITIES
This mapping focuses on Indonesia and China as trade partners using combination of
two main variables into map. They are stuck into two lines, horizontal and vertical line.
Horizontal line shows value of normalized index while vertical line shows value of trade
distance index. This map combines trade competitiveness of a country with its specialization
on bilateral trade in a given commodity. Since NI > 0 means commodity is comparative
advantage (has trade competitiveness) and NI < 0 means commodity is comparative
disadvantage (does not have trade competitiveness), the midpoint value for horizontal
line is zero. Moreover, the midpoint for vertical line is also zero. If TDI > 0, this commodity
is highly specialized for Indonesia rather than China while TDI < 0 means commodity is
less specialized for Indonesia than China. Then, it identifies four regions in the mapping
of Indonesia – China Trade Commodities.
Quadrant Supreme shows Indonesia has ability to sell commodities relative to the average
ability of the world. At the same time, Indonesia is also relatively more specialized in the
bilateral trade with China. It means China does not yet have a more competitiveness in
these commodities relative to Indonesia.
26
Indonesia-China Trade in ACFTA: Mapping of Competitiveness and Specialization
FIGURE 3.2 mapping of Trade compeTiTiveneSS and SpecializaTion of aSean
– china free Trade area
The upper left quadrant shows Indonesia has competitiveness to sell the commodities
relative to the average ability of the world. Nevertheless, Indonesia is more specialized
in exporting these commodities relatively than china in bilateral trade between the two
countries. The name Irrational refers to the fact that Indonesia still can be specialized
exporter relative to China despite its competitiveness in the world trade. It indicates that
China is less concerned relative to Indonesia on these commodities.
Quadrant Inferior shows the commodities where Indonesia does not have competitiveness
relative to the ability of the world and is also not specialized in bilateral trade with China.
Therefore, this is not an area where Indonesia should focus its export.
The last quadrant is Rivalry which shows Indonesia has competitiveness relative to the
average ability of the world. But, Indonesia is relatively less specialized in bilateral trade
with China. It indicates both of Indonesia and China have competitiveness on these
commodities in the world trade. This can be a threat because with more concern on
these, China is able to penetrate Indonesian market and gain the market share Indonesia
in the world. Therefore, Indonesia should encourage the industry in these commodities
to be more competitive.
Mapping of Competitiveness and Specialization
27
ANALYSIS OF INDONESIA-CHINA
TRADE COMPETITIVENESS AND
SPECIALIZATION
F
ree trade creates more opportunity for each country to expand its economy and
reach its maximum productivity stage. Since every country is endowed with different
resources, the repealed tariff barriers will free the countries to fulfill their needs by
importing the products which their domestic industries are not able to produce. Essentially, a
free trade aims to open the market which in turn will encourage each country to specialize
in their production. The specialization is established as a result of comparative advantage
where a country can produce a product more efficient than others. The specialization can
be inter or intra industries18.
As mentioned before, Trade Distance Index measures the distance and direction between
two countries. Thus, in the case of Indonesia and China, ACFTA has been expected to create
the specialization distance between Indonesia and China. The increase of absol