Significance of May 23 deregulation

Significance of May 23 deregulation

The government introduced yesterday a new deregulation package. Noted economist Hadi Soesastro takes a close look at this.

JAKARTA (JP): The May 23 deregulation package has five main components. The more significant measures are in the reduction of both tariff and non-tariff barriers to trade. They have been awaited since the last major trade deregulation in 1991.

Before the package was announced there was some concern that following an active deregulation drive from 1986, the country had entered into a period of "deregulation fatigue" in the field of trade. This had appeared to be the case over the past few years. The question had even been asked as to whether this trend, if it continued, would hurt the credibility of Indonesia's commitments to trade liberalization made in the contexts of AFTA and GATT/WTO and its leadership in crafting the APEC Bogor Declaration towards free and open trade in the Asia Pacific region.

The significant of the May 23 deregulation package in the field of trade is two-fold. First, as distinct from earlier trade liberalization measures, this package clearly spells out a schedule for tariff reductions covering the period from now until the year 2003, coinciding with the completion of AFTA. Of importance here is the "programming" of the tariff reduction. This programmed liberalization, as compared to the previously piecemeal liberalization measures, will in theory provide greater certainty to the business community.

The hypothesis on the importance of the "sequencing" of liberalization -- from the real sector to the financial sector -- appears to be at work. It is, after all, apt because banks in Indonesia have been somewhat at a loss, particularly from 1992 on, to determine which projects should be financed and which ones should not be undertaken.

In spite of the above, perhaps particular sectors do need greater precision in the scheduling of their tariff reductions. As shown in the table below, the program proposes a reduction of tariffs to between 0 and 5 percent to be undertaken within five years for items with tariff rates currently of 20 percent or less, but without specifying the size of the annual cuts. Similarly, tariffs of 25 percent or more will be brought down to 20 percent or less within three years and further down to 10 percent or less within eight years without a specification of the annual tariff cuts. Perhaps the business community would be well advised to further consult with the government on the implementation of this liberalization program.

This tariff cutting program affects about 64 percent of the total of 9,393 tariff items, many of which are already within the 0 to 5 percent tariff category. The tariff cuts for a number of items, such as textile products and some plastic products, will be less drastic than the above general formula. This formula also will not be applied to a number of items which are still considered "sensitive" items, namely some agricultural products, automotive products, chemical products and metal products. It was announced, however, that by the 2003 the tariffs applied to these products will be no higher than 10 percent. This suggests that these tariffs will not be reduced to 10 percent until the year 2003 or one or two years prior to this target date and that they will be maintained at their presently high rates until then.

In line with Indonesia's commitment under the GATT/WTO tariff, surcharges will also be reduced or eliminated by this deregulation package. However, surcharges are still maintained in principle and will be applied to a number of new items (iron, steel and some metal products) which no longer will be under an import licensing scheme.

The further significance of this programmed tariff reduction is that it gives credibility to Indonesia's unilateral trade liberalization commitments under the Uruguay Round (GATT/WTO). With this deregulation Indonesia should notify the WTO that it is unilaterally reducing the level of tariff binding from 40 percent to 30 percent now, further to 20 percent by 1998 and to 10 percent by 2003. This is a clear demonstration of Indonesia's willingness to accelerate its GATT/WTO commitment.

Indonesia should capitalize on this not only to improve its access to international markets but to contribute -- however minimally -- to the strengthening of the multilateral trading system. Indonesia should also encourage other APEC members to make a similar move towards accelerating, deepening, and broadening of their GATT/WTO commitments with the objective of achieving the APEC goal of free and open trade in the region.

This May 23 trade liberalization program also implies multi- lateralizing of Indonesia's AFTA preferences, although not entirely, so a number of tariff items will still be 10 percent or less by 2003. However, the tariff differentials between its AFTA and non-AFTA trade will be reduced to 5 percent or less. It is, thus, only a matter of time before the total multi-lateralizing of the AFTA preferences will happen.

Having said all this, it is important to note that this deregulation package is important not because it enhances Indonesia's international image, but because, essentially, any trade deregulation will mainly benefit the Indonesian economy itself.

Unilateral liberalization is good for the country that is doing it. Often times, because of reluctance to do so or because of concern about "free riding", countries prefer to engage in bilateral or regional trade negotiations. This is an inferior option.

In the APEC context it is well recognized that an APEC regional trade negotiation exercise to promote APEC liberalization is not feasible. Hence, the pragmatic option is to promote a kind of "concerted, coordinated or collective unilateral liberalization scheme". Indonesia's deregulation of May 23 demonstrates that this is a viable option.

The gains to the Indonesian economy from this trade liberalization will certainly not be distributed evenly across different industries, enterprises or groups. It is likely that industries relying on protection, and even the large conglomerates, may fall victim to this liberalization program if they cannot make the necessary adjustments within the indicated schedule of tariff reductions. However, one should recognize that the large number of medium scale and smaller companies that are to become the real backbone of the Indonesian economy are most likely to benefit from it. They are the silent, hard-working, majority in the economy. They will become the winners in the game -- and they certainly deserve it.

The writer is Executive Director of the Jakarta-based Centre for Strategic and International Studies.