Indonesia-EU trade set to increase after enlargement

Indonesia-EU trade set to increase after enlargement

Abdul Khalik, Jakarta

The enlargement of the European Union (EU) could boost trade
between Indonesia and the region but Indonesia needed to improve
products and promotion to make the most of the enlargement,
analysts said.

With the enlargement, the EU will become the world's second
largest economy after the United States, with a market size of
455 million people and a combined GDP of US$10 trillion.

According to the EU's 2002 data, the economic block took 53.9
percent of the world's imports while absorbing 72.7 percent of
agricultural imports from the less developed countries (LDCs).

National Agency for Export Development (BPEN) head Diah
Maulida projected a 20 percent increase in the EU's demand for
goods after enlargement but warned Indonesia would face tough
competition from other countries to get a share of this increase.

"The enlargement will be positive to Indonesia, mostly because
demands from this expanded (EU) will increase by at least 20
percent. But we must be prepared to face competition from
countries such as China, Thailand, and Malaysia," Diah told The
Jakarta Post.

Trade between the EU and Indonesia has been declining in
recent years but it remains an important trade partner for
Indonesia along with the U.S. and Japan. With a 14% share in
Indonesia's total trade the EU ranks second after Japan.

The EU is the second largest importer of Indonesian products
after Japan and the third largest exporter to Indonesia after
Japan and the U.S.

Government data shows trade between the EU and Indonesia
totaled US$12.8 billion, $11.8 billion and $11.6 billion in 2000,
2001 and 2002 respectively, with Indonesia maintaining a steady
surplus -- at $4.5 billion, $3.7 billion and $4 billion from the
years 2000 to 2002.

Head of the Trade Section at the Delegation of the European
Commission to Indonesia Raffaele Quarto said the 10 new members
of the EU, which have an average $6,000 per capita annual income,
were growing three times faster than existing EU members. They
would significantly add to the EU's potential as a market, he
said.

Quarto said with the enlargement, countries such as Indonesia
would find it easier to access European markets thanks to the
uniformity of tariffs, regulations, procedures and standards.

"Now, Indonesian businessmen marketing their products have to
deal with each country's different regulations. After the
enlargement, they need only to deal with one state and one set of
regulations." Through this single state Indonesians could
distribute their products to (EU) members, Quarto told the Post.

However, Indonesian Employers' Association head Sofyan Wanandi
warned the uniformity of regulations meant Indonesia had to
export high-quality products in order to be accepted by new EU
members.

"I agree that trade between the two economies will increase
due to an expanded market and easier access. However, we can't
take advantage of this opportunity unless we improve the quality
of our products. Once the 10 countries join the EU, they will
demand high-quality products as the old EU members do now,"
Sofyan told the Post.

Another factor that is likely to boost trade between Indonesia
and EU after enlargement is the requirement for the 10 new
members to cut their tariffs to current EU levels.

According to Quarto, tariffs on manufacturing products in the
10 new members now average 9 percent, as against the 4 percent
levels of EU old members.

"Steel products in Poland have a 10.3 percent tariff, while
the EU requires a maximum of 1.7 percent. The Czech Republic has
a 7.1 percent tariff on cars and trucks, while the EU expects a
4.6 percent tariff," Quarto said.

The EU also planned to reduce support for its agricultural
sector within five years, a move that would allow cheaper
agricultural products from Indonesia to compete with local
European products, he said.

"We realize that support to farmers can distort trade. We will
lessen the subsidies gradually within five years. The EU's
agriculture will concentrate on high-quality products, such as
cheese and wine, while we will import other products from
outside," Quarto said.

The chairman of economic think-tank Institute for the
Development of the Economy and Finance (Indef), Bustanul Arifin,
agreed the enlargement would increase trade between Indonesia and
the EU. However, he warned old EU members might boost trade with
new members at the expense of their current trading partners,
such as Indonesia.

Quarto dismissed this speculation, saying the old EU members
had increased their trade and investment with new members during
the last 10 years in preparation for the enlargement without a
significant impact on their trade with Indonesia.

Several analysts have expressed concern about the possible
phase-out of bilateral trade agreements between Indonesia and new
EU members, as the EU requires the termination of all such
agreements if they don't comply with its regulations. They argue
this might create at least a temporary decrease in trade.

Quarto acknowledged all existing bilateral trade agreements
signed by new EU members would have to be renegotiated to comply
with the rules.

"As far as I know, only two or three countries, including
Poland, have said they would renegotiate (existing) agreements
within the EU regulatory framework. But (the framework) covers
only a limited set of products. The potential losses from this
renegotiation will be balanced out by many more gains in other
areas," he said.

Trade between Indonesia and EU new members, although
negligible compared to trade with the EU-15, has been increasing
steadily during the past few years. Its export-import value
reached $323.8 million in 2002, up from $238 million in 2001, and
$227 in 2000, with Indonesia maintaining a surplus.

Among the 10 new members, Poland is the largest trading
partner for Indonesia, followed by Hungary and the Czech
Republic.

Quarto said the enlargement meant Indonesia would get higher
quotas for many products, such as textiles.

Diah, Quarto, Sofyan, and Bustanul all agreed Indonesia's
success in seizing opportunities from the enlargement depended on
its ability to produce cheaper, higher quality products and to
boost marketing efforts.

Diah said the BPEN together with industry and trade attaches
at Indonesian embassies in Europe would help local businesses
promote their products in the region.

RI's top exports to Europe in 2002

Commodity Value Share

(US$1 million)

1. Miscellaneous manufactured articles 4,051 33.0
2. Manufactured goods by materials 2,065 16.8
3. Machinery and transport equipment 2,058 16.7
4. Crude materials, inedible, except fuels 1,301 10.6
5. Animal, vegetable oils, fat, waxes 965 7.9
6. Food and live animals 806 6.6
7. Mineral fuels, lubricants and rel. materials 598 4.9