The benefits and dangers of bilateral FTAs for Indonesia

Alexander C. Chandra, Jakarta

There have been a growing number of bilateral free trade agreements (BFTAs) in recent years. Many such agreements are to be found in the East Asian region, with Singapore and Thailand as two of the most active countries in pursuit of this type of agreement.

Recently, the Association of Southeast Asian Nations (ASEAN) also signed a Comprehensive Economic Partnership Agreement with China during the tenth ASEAN Summit, which was held in Vientiane, Laos. This was the first BFTA signed between a regional grouping and a state in the East Asian region, and was a stepping stone towards the creation of other similar agreements involving ASEAN and other East Asian countries.

Like many of its counterparts in ASEAN, Indonesia is increasingly tempted to emulate this form of foreign economic policy (FEP).

An official from the Coordinating Ministry for the Economy, Jenas Hutagalung, said the Indonesian government is considering the pursuit of BFTAs with eight countries, namely Japan, the U.S., Canada, South Korea, Singapore, China, South Africa and East Timor.

In the assessments of many policy-makers and academics, Indonesia should follow the footsteps of its neighboring countries, such as Singapore, Thailand and, to a lesser extent, Malaysia, who have been very active in pursuing this form of foreign trade policy.

Despite the enthusiasm expressed by policy-makers and members of the academic community in Indonesia towards the pursuit of this form of foreign trade policy, they failed to address a number of issues that have to be assessed prior to embarking on such a trade agreement.

First, the Indonesian government should make sure that any decisions to on BFTAs with the country's major trading partners should not merely be an imitation of the policy pursued by Indonesia's neighboring countries. Close geographical sense does not necessarily mean that Indonesia has the same needs and problems as its neighboring countries.

Second, even if BFTA policy is pursued, the Indonesian government must carefully select the right trade partner. In a case where a BFTA involves a developed country and a poorer country, and given the relatively weak bargaining position of the latter, it is likely that the more developed country will jeopardize the outcome of the negotiation.

Unfortunately, the Indonesian government has decided to agree on the formation of the ASEAN-China Free Trade Area. The flood of goods from China is already on the rise in Indonesia even in the absence of a BFTA between Indonesia (ASEAN) and China. Moreover, the creation of this trade agreement is not very logical given the already excessive number of Indonesian exports to China.

After all, with or without BFTA, China will continue to require economic assistance from Indonesia to meet its industrial needs. Meanwhile, the proposed BFTA between Indonesia and the U.S. would also undermine the position of the Indonesian government in the WTO, particularly on issues related to the environment and intellectual property rights.

It seems likely that the U.S. would want to include issues that have been omitted at the multilateral level in future BFTA talks with Indonesia. The same also applies to other proposed BFTAs, such as those with Japan and South Korea. Indonesia has been experiencing trade surpluses and has no immediate need to accelerate trade liberalization with these two countries.

Thirdly, Indonesian domestic industrial and agricultural sectors are still behind in terms of competitiveness and efficiency, and lack the necessary infrastructure to support all these BFTAs. For example, it is very unlikely that Indonesia will be able to achieve a sustainable level of competitiveness and efficiency in the absence of stable laws and regulations.

In the event that the Indonesian government remains committed to this type of policy, incentives are needed to increase the level of efficiency and competitiveness of the domestic industrial and agricultural sectors. Such incentives, for example, can be made in the tax system as well as reforming labor laws and provincial regulations. In the absence of such domestic reforms, BFTA policy is unlikely to contribute to the development of the Indonesian industrial and agricultural sectors.

Fourth, an insistence upon pursuing a BFTA policy would also create more confusion for customs officials working in border areas. Indonesian customs officials are confused enough about Indonesia's overlapping commitments in AFTA, APEC and the WTO.

Moreover, in contrast to the prediction that free trade will stop smuggling, the confusion generated by such overlapping memberships will actually maintain or increase the level of illegal smuggling. One can imagine how complicated it would be if Indonesia had a different trade agreement with every country in the Asia-Pacific region.

Fifth, an excessive emphasis on BFTA policy will also undermine Indonesia's overall foreign economic policy. Indonesia is already committed to regional economic integration with other Southeast Asian countries under the auspices of the ASEAN Free Trade Agreement (AFTA). The Indonesian government has promised that this regional trade liberalization will be a learning process for Indonesia prior to committing further to other forms of trade liberalization.

Although AFTA has already progressed towards its final stage, this trade liberalization scheme is not yet fully operational (Indonesia, as one of the original member countries, is scheduled to enter the final stage of AFTA by 2008). It would be a much wiser step if the Indonesian government waited until AFTA was fully finalized and produced more concrete results before making further BFTA commitments.

It might be that the best path of all for the Indonesian government to reassess its commitment to pursue free trade. As with the practice of free trade regimes today, BFTAs are nothing more than hidden tools used to secure the privileges and the wealth of multinational corporations and to advance the interests of powerful governments. It is particularly important for the Indonesian government to consult with its domestic constituents and to examine whether this type of trade policy would serve the actual needs and interests of the Indonesian public.

The writer is a researcher of the Institute for Global Justice (IGJ). He can be reached at alex@globaljust.org.