The danger of bilateral Free Trade Agreements for Indonesia

The danger of bilateral Free Trade Agreements 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.