As Trade War Bites, Indonesia Chases Deals to Push Exports

(Bloomberg) -- Indonesia is going all out to strike trade pacts with about a dozen countries and blocs as the U.S.-China trade war hurts its shipments and threatens to worsen a current-account deficit.

The country on Monday signed a free trade pact with Australia that has been in the works for years, and is close to clinching deals with Iran, Turkey and the European Union, according to officials. It’s also pushing for a China-backed 16-nation Regional Comprehensive Economic Partnership, or RCEP, to ensure greater access for its goods and services, they said.

The urgency to seal as many trade pacts as possible stems from the need to reverse a slump in exports in the past three months, which sent the nation’s trade deficit to a record last year. While an aggressive tightening by the central bank helped the rupiah rebound from a two-decade low and a dovish rate outlook from the U.S. Federal Reserve drew foreign investors back, risks loom from a prolonged U.S.-China trade war.

As Trade War Bites, Indonesia Chases Deals to Push Exports

“Indonesia’s current trade policy is very proactive in looking for market access in various parts of the world, whether the traditional markets or the non-traditional ones such as in Africa and Latin America,” said Ni Made Ayu Marthini, trade ministry’s bilateral negotiations director. “That’s because the trade talks will give better preference to Indonesian products.”

Through the signing of the Indonesia-Australia Comprehensive Economic Partnership Agreement, exports will increase to Australia as shipments of some commodities from the Southeast Asian country will no longer attract an import duty, said Susiwijono Moegiarso, secretary at the Coordinating Ministry for Economic Affairs. The pact is likely to come into force once the parliaments in both the countries ratify it, Indonesia’s Trade Minister Enggartiasto Lukita said.

Besides simplifying export procedures and ensuring efficient logistics, the government is leaning on diplomacy to secure preferential tariffs, access to non-traditional market and cheaper export financing, Moegiarso said.

Here’s a look at major trade pacts pursued by Indonesia

  • Indonesia-Australia Comprehensive Economic Partnership
  • Indonesia-Mozambique Preferential Trade Agreement 
  • Indonesia-Tunisia Preferential Trade Agreement
  • ASEAN Trade in Services Agreement (ATISA)
  • Amendment to ASEAN Japan CEPA (Investment and Services)
  • Indonesia-Turkey Preferential Trade Agreement
  • Indonesia-Iran Preferential Trade Agreement
  • Indonesia-South Korea Comprehensive Economic Partnership Agreement
  • Regional Comprehensive Economic Partnership

Indonesia’s current account deficit swelled to the highest in four years in 2018 after the trade gap reached a record amid the U.S-China trade war. That prompted the government to raise taxes on imports of some goods and delay projects worth $25 billion.

Indonesia’s Current Account Deficit Widens to Four-Year High

“If Indonesia is unable to solve the current-account deficit issue, it will always be prone to global shocks as investors will reallocate their portfolio from emerging markets in a flight to safety,” said Febrio N. Kacaribu, an economist with the University of Indonesia’s Institute for Economic and Social Research. The deficit should be narrowed to “around 2.5 percent of GDP in order to address market sentiments.”

Here are some key steps announced to increase exports

  • Integrate top seven port hubs and industrial zones to facilitate easy flow of trade
  • Scrapping surveyor requirement for exports of commodities such as oil, minerals, coal
  • Extended tax exemption, with conditions, for exporters of natural resources
  • Temporary suspension of palm oil export levies
  • To cut natural rubber exports to bolster global prices
  • Expansion of palm oil biodiesel program to absorb excess supplies and boost prices

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