Us and the Trade War
Arif Havas Oegroseno
Vietnam, Taiwan, Bangladesh and South Korea are deemed to be the winners of the US-China trade war. The trade war failed to encourage US businesspeople to buy from US producers, but instead to seek to replace Chinese goods with goods from countries with low import tariffs.
The US Census Bureau’s data shows that since the beginning of the year, US imports from China have dropped 12 percent, while imports from Vietnam have increased 36 percent, from Taiwan 23 percent, from Bangladesh 14 percent and from South Korea 12 percent.
On the other hand, Vietnam, South Korea and Taiwan are on the list of counties with which the US has a large trade deficit. Vietnam, South Korea and Taiwan respectively ranks sixth, eighth, and 14th on the list, while Indonesia, which ranks 15th on the list, has experienced a decline in overall exports.
Statistics Indonesia (BPS) reported that Indonesia’s export value fell 13.1 percent year-on-year in April and declined 10.80 percent month-to-month.
In addition to the relocation of clothing and electronics factories from China to Vietnam, which occurred long before Trump entered the White House, Vietnam has a competitive labor wage, so their products are cheaper Chinese products.
The US Chamber of Commerce’s May 2019 survey showed that 40 percent of its members were planning to relocate their factories from China because of the trade tariffs. Only 6 percent plan to relocate to the US, around a quarter plan to relocate to Southeast Asia and the rest will head to South Asia or Latin America. Countries with competitive labor wages, such as Vietnam and Cambodia, are the top relocation destinations.
Opportunity to "win"
It is a challenge for Indonesia to take advantage of the opportunities and emerge as a "winner" of the US-China trade war – which is not actually a tariff war, nor is it related to the issue of the US trade deficit but geopolitics.
As the third largest democracy in the world and with hundreds of trade unions, Indonesia has found it difficult to determine competitive wages so it can compete with other countries that have a one-party or authoritarian political system. The Fitch Solutions Group indicated in May that wage was a major factor in determining manufacturing competitiveness.
In addition, Indonesia is now a G-20 member and has lost its status as a beneficiary country under the Generalized System of Preferences Plus (GSP Plus) program and even the regular GSP scheme, so its tariffs are high.
Indonesia’s fishery products, for example, are subject to European Union (EU) import tariffs while its competitors in seafood exports to the EU, such as Vietnam and the Philippines, are not. The Philippines even continues to benefit from the GSP Plus. Indonesian pineapple exports to the EU are also suffering the same fate.
Indonesia still enjoys about US$1.9 billion through the US GSP facilities, or 9 percent of total exports to the US.
The products that still enjoy the US GSP facilities include electronics and machinery, chemicals, plastics, rubber and aluminum. The factory relocations from China to Southeast Asia will not result in any significant additional investment to Indonesia, because Indonesia is not part of the China-US supply chain for electronics, machinery and components, or optical equipment like televisions.
Vietnam, the Philippines and Cambodia, which are suppliers to China, are clearly the more profitable relocation options. Of the 10 East and Southeast Asian countries that could replace China in exports to the US due to tariffs, Indonesia ranks 9th, only one rank higher than Myanmar.
The US has interests in a number of Asian countries, and the demands of those countries receive its special attention.
Taiwan ranks first, followed by Thailand, Malaysia, Vietnam and the Philippines (analysis by M. Cali, World Bank senior economist). Indonesia\'s efforts to be exempted from US tariff increases have also experienced a number of challenges stemming from the stick-and-carrot approach of US bilateral trade. The US has interests in a number of Asian countries, and the demands of those countries receive its special attention.
Regarding Indonesia, the US is still mulling agricultural and livestock products, intellectual property rights (the recent defeat of DC Comics in the Superman chocolates case is one such example) and the national payment gateway of Bank Indonesia.
The US also questioned the location of the data center as regulated in Government Regulation (PP) No. 82/2012. Indonesia\'s efforts to increase its exports to a US under the Trump administration carry a high risk.
Russia also took this step, with the WTO exempting the country from its national security rules in the Russia-Ukraine case. Jurisprudence is beginning to take shape.
Instead of gaining market access, Indonesia might actually have to change its strategic interests with respect to unequal exchange rates. The US has used the national security issue to impose high tariffs on certain Chinese products. Russia also took this step, with the WTO exempting the country from its national security rules in the Russia-Ukraine case. Jurisprudence is beginning to take shape.
The US-China trade war is not merely an economic problem, and is rooted in geopolitics. The direction the US is taking with China in our as yet unstable region is one of the main factors. The rise of China and the prevailing American dominance in Asia has still not arrived at the appropriate equilibrium. An analogous example is trans-Atlantic relations, which has been able to mitigate escalation in trade conflicts despite trade tensions, because of cultural similarities and strong geopolitical alliances.
In fact, the EU, whose politicians have banned palm oil-based biofuels on environmental grounds for the sake of its relations with the US that has withdrawn from the Paris Agreement, has bought large quantities of US vegetable oils. Our palm oil has been eliminated by US vegetable oils, with US vegetable oil exports to the EU jumping 75 percent this year.
Trident of commercial diplomacy
Emerging as a "winner" of the US-China trade war is certainly not easy, due to the many factors above. The big picture that must be drawn is to significantly increase Indonesia\'s performance of in international trade through a multilateralism framework that is based on mutually agreed and compliant international rules.
It is certainly not easy, especially in the multilateral context. An analogy exists in the context of the United Nations Convention on the Law of the Sea (UNCLOS), to which China has been a party since its inception in 1982, but the country does not recognize the results of the arbitration established under UNCLOS; meanwhile the US complies with customary international law on the use of the sea, but still refuses to ratify UNCLOS.
Indonesia needs to develop a trident strategy, a comprehensive three-line approach: national, bilateral-regional and multilateral. At the national level, institutional synergy is needed to design strategies in trade promotion, market penetration, antidumping identification and solution actions, and a stronger position in trade negotiations and dispute resolutions through the WTO or other forums.
Another important factor in international trade is Indonesian corporate investments abroad. Some countries like Australia have a ministry of foreign affairs and trade, but the challenges are different: Australia does not need to deal with the complexities of the chili price and rice stock like Indonesia does.
Even in the EU, the Trade Commission administers international trade separately from the European External Action Services Office (EEAS), which deals with the EU’s foreign and defense policies. The US has the US Trade Representative (USTR) that is separate from the State Department, which manages foreign policy and international affairs.
The EU Trade Commission and the USTR both place their trade negotiating team and antidumping team under the same framework. This is important, because these two things cannot be separated.
The distribution of the trade promotion fund across several ministries and institutions also needs special attention. The Tourism Ministry’s success in increasing foreign arrivals is inseparable from its integrated strategies in financing and promotion. The ministry’s advertising, branding and sales strategies can be replicated as international trade strategies.
Investment Law No. 25/2007 actually reflects the inferior way in which we as a nation define investment in the sole context of doing business in Indonesian territory. Indonesia needs to promote and protect the foreign investments of Indonesian companies, which have proven their capability in Europe, Africa and Asia.
Seeing Chinese banks in German cities always remind me of the absence of Indonesian banks in Europe or other Southeast Asian nations. We see many Malaysian and Singapore banks in remote parts of Indonesia, but we don’t see Indonesian banks in Malaysia or Singapore.
The large number of Indonesians observing the umroh (minor pilgrimage), which reaches up to 2 million people, and 300,000 haj pilgrims should be maximized through Indonesia\'s financial penetration in the Middle East.
Indonesia also needs to carry out reforms to make the country more competitive. The Superman case should be of primary concern. We often feel angry about foreign claims to batik or other cultural property, but it is ironic that we justify taking ideas that belong to other nations. Just imagine if other countries make food products branded Prabu Siliwangi or Jaka Tingkir and claim these Indonesian heroes as theirs.
At the bilateral-regional level, Indonesia needs to continue to encourage market openness by reducing tariffs as a key element of bilateral relations with both individual countries and groups of countries like the EU, and continue to strengthen market openness for Indonesia in Asia (with or without the US).
Middle power countries should fill this vacancy to avoid the chaos spreading to other regions.
At the multilateral level, the world is experiencing a leadership crisis. The escalating conflicts in the Middle East, tensions within the Transatlantic Alliance and the US-China trade war have been deemed the cause of a general absence of leadership, including at the WTO. Middle power countries should fill this vacancy to avoid the chaos spreading to other regions.
As the largest ASEAN country and a G-20 member, Indonesia must play an active role in accordance with its character as a free and active country. Indonesia needs to formulate a commercial diplomacy stance that covers the important aspects of international trade, Indonesian foreign investment, funding to support market access and trade promotion, and its strong geopolitical and security relationships.
Commercial diplomacy can also be combined synergistically with maritime diplomacy that covers sovereignty and public welfare. In the end, as an archipelagic country, the security of Indonesia\'s national economy greatly influences our national security.
Arif Havas Oegroseno, Indonesian ambassador to Germany and deputy chairman of the Indonesia-EU CEPA
