Between Two Giants: Indonesia's Economy in the Balance

President Joko Widodo must navigate the economic demands of rival
regional partnerships alongside finding the best outcome for Indonesia.
(EPA Photo/Rungroj Yongrit)

Jakarta. Indonesia has found itself positioned between two economic
frameworks, facing a choice that could shape the future of the region.

Two competing free trade frameworks in the Asia Pacific region — the
Trans Pacific Partnership (TPP) and the Regional Comprehensive Economic
Partnership (RCEP) — have each come under strenuous review by regional
powers.

The RCEP has been described in a statement by the Association of
Southeast Asian Nations (Asean) as “a modern, comprehensive,
high-quality and mutually beneficial economic partnership agreement
establishing an open trade and investment environment in the region to
facilitate the expansion of regional trade and investment and contribute
to global economic growth and development.”

Negotiations on the RCEP were formally launched in November 2012 by the
10 Asean member states, along with key regional partners China, Japan,
South Korea, India, Australia and New Zealand.

The TPP, meanwhile, has been described by the Office of the United
States Trade Representative describes as an “agreement that will enhance
trade and investment among the TPP partner countries, promote
innovation, economic growth and development, and support the creation
and retention of jobs.”

Thus far, four nations have signed on to the TPP: Brunei, Chile, New
Zealand and Singapore. A further eight countries are currently in the
negotiation stage, including the United States, Australia, Canada,
Japan, Malaysia, Mexico, Peru and Vietnam.

On Wednesday, Indonesian foreign ministry officials reaffirmed the
country’s current stance of non-participation in TPP negotiations.

Agus Syarip Hidayat, a researcher with the Economic Research Center at
the Indonesian Institute of Sciences (LIPI) views the TPP as a check
against the growth of China’s influence in the Asia Pacific region
through institutions like the RCEP, saying that “the US has strong
concerns over the emergence of China as the second largest economy in
the world.”

“Promoting the TPP without inviting China into negotiations is a soft
scenario to repress China’s influence in the region,” Agus added.

Indonesia currently enjoys favorable economic relations with both China
and the United States, particularly in the field of foreign direct
investment opportunities.

According to data from the Indonesia Investment Coordinating Board
(BKPM), China ranked 10th out of 58 on the list of foreign direct
investors in Indonesia during the January to March 2015 period, with
realized investments coming in at $75.1 million. The United States
meanwhile ranks 5th, with realized investments of $292.1 million during
the same period.

In total, the RCEP region would encompass over 3 billion people, and
maintain a combined GDP of $17 trillion.

The TPP represents a market of 792 million people, with a combined GDP
of $28.1 trillion.

Asean centrality: RCEP

As a framework sign by all 10 Asean states, the RCEP may be the most
appealing option for national leaders intent on securing regional
stability and security.

“The RCEP is good for not only Indonesia, but Asean as a whole. Asean
centrality will be retained under the RCEP, which is necessary to
support the Asean Economic Community that will take effect at the end of
2015,” Agus said.

Only four Asean member states have formally entered negotiations on the TPP.

Lili Yan Ing, an economist at the Economic Research Institute for Asean
and East (ERIA) highlighted the different incentives influencing
decisions to join either economic institution, saying: “One of the
objectives of RCEP is to improve Asean’s position as a production base
in East Asia, while the main reason for joining TPP is to get broader
export market access to the US, particularly for Vietnam.”

Experts further note that the RCEP provides signatory states with a more
reasonable scheme of liberalization than the TPP.

“The RCEP acknowledges that participating economies have different
stages of development. It could provide special treatments and
exceptions for member countries that need more preparation and
adjustments in the given time period,” said Agus on Wednesday.

A shift towards the RCEP would be in line with Indonesian President Joko
Widodo’s pivot towards China as a regional ally.

“Over the years, relations between China and Indonesia have grown
rapidly. We would like to see this momentum maintained and strengthened
throughout President Joko Widodo’s term,” a representative from the
Chinese Embassy in Jakarta said on Wednesday.

“China and Indonesia can work together to correspond their respective
strategies and expand practical cooperation accordingly,” added the
representative, highlighting the compatibility of the Chinese’s new Silk
Road initiative and President Joko’s vision of Indonesia as a global
maritime fulcrum.

Since assuming office in October last year, Joko has visited Beijing
twice. Joko has yet to visit the United States.

Yet, despite incentives to join in the RCEP as a regional framework,
political obstacles could complicate international efforts.

Chinese relations with Asean member states Vietnam and the Philippines
exploded in recent months, as renewed territorial claims in the South
China Sea revived tensions in the region.

In an article on regional security published in the East Asia Forum
recently, David Huang, an associate research fellow at the Institute of
European and American Studies in Academia Sinica, noted that “while one
may contend that high economic interdependence could be enough to
prevent accidental conflicts, it is no panacea for regional instability.”

“High economic interdependence did not prevent World War I and II,”
Huang added.

Heightened tensions in the South China Sea could result in a greater
shift towards the United States on behalf of individual member states of
Asean.

Three of the four Asean member states who have signed the TPP also hold
claims to territories in the South China Sea, including Brunei, Malaysia
and Vietnam. The Philippines, also a claimant in the dispute, has in the
past expressed its interest in joining negotiations on the partnership.

Reward, and risks

Speaking on the role of the RCEP in the Southeast Asia region, the
representative from the Chinese Embassy noted: “The RCEP helps promote
further economic cooperation and regional integration. The RCEP is both
mutually beneficial and inclusive.”

“It’s high time to enhance cooperation in the areas of trade,
investment, as well as people-to-people exchanges, so as to bring more
tangible benefits to our two peoples.”

Eria’s Ing also spoke on benefits to Indonesia, saying “Indonesia could
benefit from the RCEP if Indonesia could attract investment and make
herself as a base of regional production networks,” she added on Wednesday.

Agus of LIPI concurred, stating: “The future trend of development will
rely on Asian growth, not the US, not Europe. A strengthening of
relations between Asean and China will be beneficial for both parties.”

Despite the renewed drive for Indonesia to take part in international
economic frameworks, national leaders must remain cautious in contending
with the harmful impacts of trade liberalization.

A 2012 report by the US Agency for International Development and the
Support for Economic Analysis Development in Indonesia program found
that the Asean–China Free Trade Agreement of 2010 had detrimental
impacts to certain sectors of the Indonesian economy, producing
“substantial customs revenue losses because of participation in the
agreement.”

The agreement also affected Indonesia’s competitiveness within the
region, resulting in “China [gaining] the most at the expense of
Indonesia in the Thailand market, by $55.4 million.”

Addressing the issue of increased competition, Agus recommended that the
Indonesian government must first take greater steps towards improving
local conditions before liberalizing trade.

“The main challenge is how to improve our business environment, to
attract investors particularly in the sectors that will be liberalized,
particularly medicine. We must look into developing regional protection
networks,” Agus said.

Improvements in infrastructure, however, must also work towards
establishing equitable conditions for the local workforce.

Initiatives like the TPP and other free trade agreements have come under
fire from the United Nations, due to concerns about the potential to
disrupt the protection of human rights.

A statement released by the United Nations Office of the High
Commissioner for Human Rights on June 2nd said that “there is a
legitimate concern that both bilateral and multilateral investment
treaties might aggravate the problem of extreme poverty, jeopardize fair
and efficient foreign debt renegotiation, and affect the rights of
indigenous peoples, minorities, persons with disabilities, older
persons, and other persons leaving in vulnerable situations.”

Speaking on the challenge of development gaps and inequity in relation
to establishing regional economic cooperation, Ing noted “Singapore’s
income per capita is 64 times of that of Myanmar. This makes integration
tough, particularly in terms of skilled labor mobility, opening up
services sectors and investment.”

“It should be kept in mind that globalization in any kind of forms would
have to be submissive to national domestic objectives, and not the other
way around,” she added.