We find it hard to understand why Indonesian manufacturers raised great concerns over the probable adverse impact of the ASEAN-China Free Trade Agreement only a few weeks before the accord is supposed to come into force early next month.
The agreement, signed in November 2004 under the ASEAN-China Framework Agreement on Comprehensive Economic Cooperation, clearly sets the agenda for the gradual ushering-in of free trade arrangements beginning in 2010, thereby providing ample time for participating countries to make the necessary adjustments.
In fact, the free trade pact is only the natural development of the steadily deepening economic ties between the 10 ASEAN countries and China, as evidenced by the expansion of their commodity trade from merely US$40 billion in 2000 to $120 billion in 2005 and $192 billion in 2008. Indonesia-China trade itself has more than tripled from $8.7 billion in 2004 to $26.8 billion in 2008.
The agreement has been designed to broaden their economic relations through the lowering of trade and investment barriers and joint technical and economic cooperation projects. Certainly, the agreement will entail short-term costs in the form of worker displacement as a result of the rationalization of a number of manufacturing industries caused by the similarity in industrial structures in ASEAN and China. But the broad, final goal of the pact is to create a 1.7 billion-person-strong consumer market.
Some industries in Indonesia and other ASEAN countries may have to make adjustments to meet the new landscape of competition brought about by the trade agreement, but many other manufacturers, especially those based on natural resources, will benefit greatly.
Certainly, China’s manufacturers have several advantages of serving a 1.3 billion person consumer market that has grown by 10 percent a year over the past decade and provided them with large economies of scale. They also have better infrastructures that help develop highly integrated supply chains.
But the rationale is that an expanding Chinese economy also opens many opportunities for ASEAN countries because many companies in China procure materials, parts and components from ASEAN.
After all, by its very definition, trade is always a two-way street.
The problem, though, is that the government and the Indonesian Chamber of Commerce and Industry (Kadin) had not made adequate preparations to take great benefits from the free trade implementation.
But it is not too late now for making concerted efforts to gear up manufacturing companies for the free trade agreement. The government and Kadin must cooperate in identifying which manufacturing industries should be helped to strengthen their competitiveness and which ones should be phased out and replaced with new lines with stronger competitive advantages.
The agreement still allows for member countries to postpone the implementation of free trade arrangements in particular industries which are feared to undergo massive disruption. But at the end of the day as China grows into an ever bigger market, Indonesia needs to link up extensively with the supply-chains in ASEAN and China. But this will only be possible if Indonesia’s logistics, notorious for its barriers, becomes more efficient.
Industrial companies cannot manufacture goods without the inputs they need and in case of China many of its manufacturers still rely on imported materials and parts and components.
This is the business opportunity that Indonesian manufacturing companies, with the right support from the government, can seize through the free trade arrangements.