Towards a free trade nation

Towards a free trade nation

The following is an excerpt from a paper by Ali Wardhana
presented at the seminar of "Indonesia and the World at the
Beginning of the 21st Century" jointly organized by The Jakarta
Post and the Centre for Strategic and International Studies on
Oct. 17 in Jakarta in connection with the 50th anniversary of
Indonesia's independence. This is the first of two articles.

JAKARTA (JP): Indonesia began the process of securing the
gains from integration with the global economy a long time ago.
For twenty five years, for example, we have had an open capital
account. The lack of exchange controls meant that we could
benefit from the growing and increasingly sophisticated
international capital markets. The results are reflected in the
booming foreign direct investment figures, and in the more recent
inflows of foreign funds into our stock exchange.

Integration with the world economy accelerated in the mid-
1980s, when we took actions to open our domestic market to
international competition, and to encourage firms here to compete
in export markets. By and large, these actions were independent
of international trade or investment agreements. We reduced
tariffs, non-tariff barriers, and investment restrictions
unilaterally and voluntarily because doing so was in our
interest; because we recognized the benefits of free trade and
investment for our economy.

We were driven especially by the need to diversify our
exports. At that time we were heavily dependent on oil and gas,
which made up over three-fourths of our foreign exchange revenue.
The success of the effort is apparent. In 1984 exports of
manufactures amounted to less than US$2 billion and accounted for
less than 8 percent of total exports. By 1994 less than one-
quarter of our foreign exchange came from oil and gas.
Manufactured exports had risen to over $20 billion and accounted
for more than half the total value of exports.

Along with the boom in manufactured exports, the structure of
our economy underwent a transformation. In 1983 manufacturing
accounted for just 13 percent of GDP, while mining accounted for
21 percent and agriculture for 23 percent. By 1994,
manufacturing's share had risen to 24 percent, while mining's
share had fallen to 8 percent and agriculture's share to 17
percent. Less than half of labor force is currently employed in
agriculture, a major milestone in development. As a result of
this progress, Indonesia is well on its way to becoming a newly
industrialized nation.

Although Indonesia began the journey towards free and open
trade and investment long before the Bogor Declaration or the
Uruguay Round, and will continue on this journey with or without
progress on international agreements, building through
international agreements has many advantages.

One advantage is that it is obviously better for us, and
easier, if other economies move toward free trade and investment
at the same time as us. As the Economist magazine recently noted,
"thinking of free trade as a concession to others, rather than a
boon for one's own citizens, is a cardinal error of trade
diplomacy." Nonetheless, getting together with like-minded
economies to discuss ways to lower trade barriers simultaneously
magnifies the gains for all concerned.

Also, important, regional agreements can be especially helpful
in our efforts to cooperate to counter some of the risks
associated with the global economy. We believe that like-minded
countries that trade intensively with each other can cooperate to
reduce the instabilities that can emerge.

For all these reasons, we are committed to the progress of
APEC and AFTA, as well as the WTO. Since it is so timely, with
the Osaka meetings coming up soon, let me turn to APEC.

The decision taken at last November's APEC meeting in Bogor to
realize free and open trade and investment in the Asia-Pacific no
later than the year 2020 was potentially the most far-reaching of
all recent international economic agreements. Although the
various rounds of the GATT involved more nations than APEC and
made major gains in reducing trade barriers, the GATT never had
the goal of establishing free trade and was not much concerned
with investment. If the Bogor vision can be translated into
reality, and in particular if concrete and meaningful measures
can be agreed upon for moving toward free trade and investment
well in advance of the twenty-five year deadline, APEC will live
up to its historic potential. Initiating this process will be the
challenge for next month's APEC Economic Leaders meeting at
Osaka.

Not only must we make progress on the steps we will take to
implement the Bogor Declaration; we must do so while maintaining
consistency with the fundamental APEC principle of "open
regionalism." The Bogor Declaration explicitly rejects the notion
of creating an inward-looking trading bloc, and asserts that
barriers will be reduced not just among APEC members "but also
between APEC economies and non-APEC economies."

Encouraging the principle of "open regionalism" is important
for Indonesia, as some of our major export markets are in Europe
and North America. Adherence to this principle helps limit the
trade diverting tendencies of regional trade blocs, such as the
EU and NAFTA. Maintaining "open regionalism" encourages others
not to build exclusionary trade blocs.

Indonesia's commitment to an open world trading system can be
seen from the non-discriminatory way that we have been lowering
our own tariffs. We have adhered to the most favored nation
principle in all our deregulation packages. Within AFTA, we have
supported the creation of a free trade area, rather than a
customs union or a common market so that there is no risk of
AFTA's becoming inward looking, with a common external tariff to
keep out goods from the rest of the world. In line with this, our
most recent deregulation package generally followed the AFTA
schedule, but made the benefits of tariff reductions available to
all, members of AFTA and non-members alike. We will continue to
urge other APEC members to reduce their trade and investment
barriers in a way that supports the world trading system.

Not all of the issues that APEC must eventually resolve can be
settled next month at Osaka. However, Indonesia will seek
substantial progress in order to live up to the visions of the
two previous APEC Leaders meetings -- at Seattle and Bogor -- and
to prevent APEC from losing its momentum.

Indonesia can also support the APEC process by living up to
the principles embodied in our existing international agreements.
We cannot resort to the easy -- but costly -- policies of
increasing barriers to import competition when we have, or want,
an industry that is not efficient by world standards. On the
other hand, our commitment to free and open trade and investment
may require special attention to policies that help small and
medium businesses, including small retailers, adjust to
international competition.

Our commitment to a fair world trading system also means that
we cannot subsidize our exports. Consequently, we cannot counter
high costs caused by inefficiency at the firm level or due to
government red tape. This will force us to push ahead with
deregulation, to reduce the number of bureaucratic hurdles that a
business faces in establishing itself and in its day-to-day
operations. But it also means that we will have to do a better
job in carrying out those functions that government must perform.

The growth of a rules-based world trading system also prevents
us from being inward looking with respect to investment. World
Trade Organization rules restrict "trade related investment
measures". Under these rules, for example, we are committed to
eliminate domestic content requirements. This will again mean
that we will not be able to rely on administrative solutions that
encourage inefficiency. Rather than telling investors what they
must buy and from whom, we will have to make our products
sufficiently attractive that firms will want to buy them. In
fact, we know that firms such as shoe exporters are constantly
seeking local suppliers of their inputs; this, without government
pressure.

Sometimes they are constrained by the costs and quality of
some local supplies. We believe that domestic suppliers will
increase their efficiency and their quality as protection
disappears. But again, government must also stop burdening these
suppliers with extra costs in the form of unnecessary regulations
and in the form of delays and costs in obtaining tax and tariff
rebates, for example.

The growing mutual commitments within APEC will lead us toward
more open policies on foreign investment. The vision of a region
open to investment flows will eventually mean that our procedures
for approving foreign investment will have to be transparent. The
rules will have to be clear and open for all to examine. In fact,
we will probably find ourselves considering the implications of
growing competition for foreign investment, and the actions of a
number of other developing countries in removing the hurdle of
approval for all, or at least for broad classes of foreign
investment.