RI needs to specialize to survive ASEAN-China FTA: Mari

Leaders of the Association of Southeast Asian Nations (ASEAN) member countries and China on Monday signed a historic free trade agreement (FTA) in Vientiane, Laos, that will pave the way for creating the world's biggest free trade zone covering nearly two billion people. Despite the potential benefits, local industry players have expressed concerns on whether or not they can compete with China's more efficient industries. The Jakarta Post's Zakki P. Hakim on Thursday talked to Minister of Trade Mari E. Pangestu, who has just returned from the Vientiane ASEAN Summit.

Question: What are the chances for Indonesia in survive competition with China under the newly signed free trade agreement?

Answer: Even without a free trade area, Indonesian low-end consumer products, such as clothing and toys, have already faced difficulties in competing against Chinese goods, because our import duties have been quite low.

But let's look on the bright side of this newly signed free trade agreement.

The FTA is a good opportunity for Indonesia. Under the early harvest program (an early liberalization program for several groups of goods started early this year) between ASEAN and China, we have started to slash tariffs for groups of mostly agricultural products.

There was (initially) a problem because Malaysia got lower entry duties than us for its crude palm oil derivative product of stearic acid. We managed to get the same treatment starting next year.

The next step will be to remove non-tariff barriers such as the Chinese quota on palm oil products.

We will fight to get into the China market.

In order to do that, however, we have to identify which products have the potential to win in competition against Chinese products.

Now, we are talking about goods not included in the early harvest program.

The goods include almost all manufacturing products such as electronics, automotive goods and textiles, whose tariffs will be slashed gradually starting next year until fully liberalized by 2010.

We must monitor these products, as well as maintaining good communications with the local industries.

In some industries, we have already imposed lower tariffs but many others still have high import duties. Therefore, we will intensify dialog with the private sector in identifying which products should get our attention.

There will be an exclusion list for certain merchandise, however, they will also become subject to gradual tariff reductions after an agreed period.

Facing the FTA is not a matter of whether we are ready or not. The question is, when will we be ready? The answer depends on the results of our assessment together with the private sector.

What are the advantages of the FTA for Indonesia?

We can and must take full advantage of the increasing tendency of East Asia to become a regional production center where China is the core. China becomes the center due to its big exports and big domestic market.

Indonesia, however, could become an alternative supply source or become a complement to China.

The bottom line is we must take part in the production network. After all, this is the spirit of ASEAN Economic Community and ASEAN-China Free Trade Area.

Eventually, all countries will move towards developing specializations or expertise in producing certain goods.

Each market, each country, would be segmented based on its production expertise or specialization.

We will then develop specialized production and logistical technologies and eventually cut costs of transportation and communications in the region.

It would be like outsourcing between countries.

However, according to some research papers, Indonesia has not been very involved in the regional production center of goods, which manufactures among others things electronics, automotive goods and machinery.

We can and should specialize in those sectors.

For example, we know that we have potential in electronics. Electronics export growth is the highest among the country's non- oil and gas exports. It is our future industry.

Industry players doubt that we could win in competition against China, especially in competing against China's cheaper and more productive workers. How do you see this?

It is a fact we have to accept.

Thus, having the FTA, China gives us an earlier start and time to overcome our problems. This is preferential treatment that other countries outside ASEAN have yet to enjoy.

As time is limited, we might not be able to outmaneuver China's massive manufacturing scale and high productivity.

Therefore, one solution is to develop distinctive expertise.

Are you sure that our industry can develop the expertise, instead of collapsing?

Well, let's look at history. When Australia and New Zealand signed CER (Closer Economic Relations) agreement more than a decade ago, people said that New Zealand's industry would certainly collapse.

On the contrary, New Zealand specialized in certain sectors where it was strong and up graded the industry before eventually penetrated specific niche segments. New Zealand industries apparently survived.

The same story also took place in the early years of European Union.

Liberalization is a process, which of course we have to anticipate and the government will facilitate. However, the key is fresh investment.

In which sector should we specialize?

Most of our natural-based goods have potential. As for our manufacturing products, it varies between sectors.

For example our textiles are very competitive, especially our synthetic yarns and fabrics, but lack of new investment in the past few years has hampered the sector's productivity.

In the textile and clothing industry we must no longer play in the low end products, as China already maintains a stranglehold in that segment.

We have to enter medium end market, which means that we must be more concerned about designs and brands, which will deliver higher added value.