FTA with China becoming complicated

Zakki P. Hakim, Jakarta

Local producers of stearic acid, long protected by the government, are now learning the bitter lesson that a free trade deal between ASEAN and China, signed three years ago, is threatening exports to the latter's huge market.

New regulations on food safety announced by China last month will make things even worse, industry experts said.

When the Association of South East Asian Nations signed a free trade deal (FTA) with China in 2001, Indonesian producers of stearic acid demanded the government exclude the commodity from the liberalization plan on fears of competition from producers in China. The government granted the wish and retained a 16 percent import tariff on the commodity. However, since free trade adopts the principle of reciprocity, China has imposed the same tariff on products from Indonesia.

But China, starting Jan. 1 this year, slashed the tariff to 10 percent for products coming from Malaysia, which agreed to include stearic acid in the FTA deal, making the latter's products cheaper than Indonesian products in the Chinese market. (This tariff cut is part of the so-termed early harvest program, which required ASEAN countries and China to start slashing tariffs on agricultural products to 10 percent or lower starting Jan. 1 this year, and zero percent on Jan. 1, 2006. The FTA deal will be fully implemented in 2010).

Stearic acid, which is a derivative of crude palm oil, is used to help bind and thicken lotions and creams, and is also useful for hardening soap and candles. Malaysia and Indonesia are the world's two largest producers of palm oil.

"Chinese buyers are now seriously thinking about deserting us and buying (stearic acid) from Malaysia instead," Indonesian Oleochemical Manufacturers Association (Apolin) chairman Kris Hadisoebroto said over the weekend.

At an assumed price of US$500 per ton, buyers in China would have to pay $30 extra per ton for Indonesian stearic acid than Malaysia's due to the different tariff arrangement.

Kris was worried that Malaysia might eventually take over Indonesia's dominant share in China's fast-growing stearic acid market.

Prior to the new tariff policy, Indonesia controlled up to 80 percent of the acid market in China, with annual exports of 300,000 tons worth US$200 million in the past three years.

"The Malaysians outsmarted us in dealing with China," he said.

Some have regretted the lack of understanding among the local stearic acid industry players on how the free trade deal works, leading them to make erroneous suggestions to government negotiators when the FTA deal with China was being discussed.

"Some people wanted (trade) liberalization, but kept forgetting that the deal would be reciprocal. Some demanded protection, but failed to see that competitors in other countries might seize the opportunity, reducing tariffs and becoming far more competitive," said Thomas Darmawan of the Indonesian Food and Beverages Association (GAPMMI).

Indonesian stearic acid producers will even face more problems, as China has issued 22 new regulations on food safety, seen as a form of nontariff barrier to trade.

Thomas said that China already gave notification of the new rules on Feb. 13 to the World Trade Organization (WTO), to be effective in six months' time.

The new rules include the regulation of hygiene standards for fresh and frozen marine products, fresh tea leaves, cooked and dried meat products, milk powder, concentrated fruit and vegetable juice for the food processing industry, canned fish, and cereal made from oats, wheat, rice and corn.

"We are supposed to open the market both ways, but now the new rules could make it hard for us to penetrate the Chinese market, while our door is open wide for them," Thomas lamented.

Kris hoped the government would negotiate with China to resolve the problem faced by the local stearic acid industry, otherwise the industry would eventually have to start laying off workers.