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