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.