Linda Yulisman, Jakarta – Indonesia is gearing up for further trade liberalization as reflected by ambitious efforts to negotiate a number of trade deals with partners, but a lack of competitive edge in its exports and capacity to sell will prevent the country from enjoying the maximum benefits of increased market access, experts say.
Exports have already doubled over a span of just five years to US$200 billion in 2011, but up to present, the biggest shares are still commodities, some of which Indonesia is the world's largest producer of, such as coal and palm oil, instead of manufactured goods.
"Free trade agreements will certainly boost exports, but we should be aware that most of our exports are raw materials and energy sources, which are unfortunately the most competitive export items," said Hendri Saparini, an economist at the economics, trade and industry research institute Econit.
The heavy reliance on commodities has dragged down the nation's exports as, among others, prices tumble amid weaker overseas demand during the protracted global crisis.
Indonesia's exports plunged to $190.04 billion last year, down 6.61 percent from the previous year, whereas imports, on the other hand, perked up to $191.67 billion, up 8.2 percent. This caused the country's first-ever annual trade deficit of $1.65 billion.
The deficits are even more discouraging in the trade of manufactured goods, as imports expanded higher than exports, industrial statistics suggests. Indonesia ran a deficit of $12.25 billion with China from January-October last year on the back of imports of electronics and telecommunication devices.
Indonesia has sealed free trade deals with Japan bilaterally and has made similar pacts with China and Korea together with other members of the Association of Southeast Asia Nations (ASEAN). The statistics show that Indonesia has yet to reap the benefits of the free trade deals.
"We still export goods with limited added value, such as textiles and electronics, but in contrast, import products of high added value, like machinery and airplanes," said Agus Tjahajana, Industry Ministry's director general for international trade cooperation.
Industrial players said mostly industrial sectors were not ready to fight in the global market, or even face the tougher battle with imports in the buoyant domestic market, caused by the ease in trade barriers, particularly the removal of import duty.
Only a few truly reap the expected benefits, such as the garment, textile and footwear industries, which have been long touted as having higher manufacturing competitiveness due to cheap labor costs.
Garment and textile makers have seen a considerable rise in exports to Japan and Korea since the implementation of the Indonesia-Japan Economic Partnership Agreement (IJEPA) and the ASEAN-Korea Free Trade Agreement (AKFTA), according to Indonesian Textile Association (API) chairman Ade Sudrajat.
"However, it's much more because our products do not compete head-to-head with their manufacturers. When it comes to China, we lose because their production is much more efficient, allowing them to sell their output at lower prices," Ade said.
Challenges are growing as worker's wages have significantly surged in the past several years, while other factors supporting production like energy costs are on the rise, according to Indonesian Employers Association (Apindo) chairman Sofjan Wanandi.
"Our industries, particularly the labor intensive ones, are increasingly losing competitiveness, but on the other hand, we have yet to prepare the industry that processes natural resources. We must seek a way out by thinking about other products we can export," Sofjan said.
Before the Asian financial crisis of 1997-1998, Indonesia's industry performed well, and even outshone other sectors of the economy. However, declining domestic demand and a worsening business environment following the crisis, lead Indonesia's manufacturing industry to remain in limbo, unlike other Asian peers that recovered rather quickly after the crisis.
Along with the poorer performance of the manufacturing industry, exporters shifted away from manufactured goods to commodities. While commodities made up 40 percent of total exports in the 2000s, they now account for 65 percent of exports.
In its recent report "Picking up the Pace: Reviving Growth in Indonesia's Manufacturing Sector", the World Bank points out the striking prevalence in the Indonesian manufacturing sector of what it calls "missing middle": A large proportion of small firms, defined as having between 5 and 19 employees, and a comparatively small number of middle-sized firms, defined as having between 20 and 100 employees, moving up from small into large ones.
"This condition explains why we are now importing a huge amount of raw material and intermediary goods," said Faisal Basri, an economist from the University of Indonesia.
As an example, he cited the automotive industry, which had seen imports climb as the sector grew considerably, in line with a strong domestic demand for two- and four-wheelers.
Institute for Development of Economic and Finance economist Enny Sri Hartati said that the low competitiveness of domestic industries could also stem from the structure of Indonesia's market, which in the past had been characterized by oligopoly and in certain cases, monopoly.
"When the free trade agreements came into effect, our local players that had long benefitted from the market structure were shocked because they suddenly had to face open competition," Enny said.
However, learning from how the ASEAN-China free trade agreement had affected the local industry, Indonesian stakeholders should prepare before negotiating similar pacts apart from enhancing the competitiveness of exports, she added.
"Boosting competitiveness is important for manufacturers to thrive amid tighter global competition, and the simple way is to decrease the prices of our products," Enny said.