Bill Guerin – A year ago Indonesia's debut into the free-trade era took place when it opened its markets to the ASEAN Free Trade Area (AFTA).
The landmark event, on January 1, 2002, was notable mainly for the silence of the government that had preceded the move, and the apathy of the people and business community. Public ignorance of AFTA prevailed.
One year on, the six founding members of the Association of Southeast Asian Nations reiterated their commitment to opening up their national economies when, on January 1 this year, they cut their tariff barriers on major products to between zero and 5 percent. The five other countries are Brunei, Malaysia, Singapore, the Philippines and Thailand.
The six signatories of AFTA had agreed in 1992 to reduce tariff barriers to these levels by 2008 but the timetable was moved forward to this year in response to the rapid introduction of free-trade initiatives around the globe. The newer ASEAN member states, Vietnam, Cambodia, Laos and Myanmar, have been given longer to ready themselves and will come on board some time between 2006 and 2010.
In Indonesia labor organizations and members of the Indonesian Business Association (Apindo) have joined forces and are threatening a general strike if the recent fuel, power and telephone tariff hikes are not withdrawn. They contend that hundreds of businesses will fold, and hundreds of thousands more will be thrown out of work if these rises go through. The anti-AFTA elements see the hikes, and those still in the pipeline, simply as proof that the government is more concerned about the country's global position than the welfare of its people.
Some schools of thought put this demonstrable anger and despair down to a lack of "socialization" by the government. They note that there is little public awareness of the importance of AFTA and the government is said to have failed to communicate with the public on the theoretical opportunities AFTA offered Indonesia.
Former president Suharto championed the cause of AFTA from the outset. From the time of the first ASEAN summit in 1976 he was its strongest protagonist. Domestic political stability at home and the country's business conglomerates sustained Suharto's grand vision of economic development or otherwise, gradually geared up to expand their horizons.
After Suharto fell from power in 1998, his successors have lost a lot of the respect and kudos for Indonesia that came with the rapid enlargement of ASEAN in the past few years.
A new collective leadership marks the end of Indonesia's dominant role under Suharto and the dearth of publicity about AFTA in Indonesia has allowed domestic free-trade critics trying to protect their industries to steal the moral high ground. Hardly surprisingly, opposition to free trade has come from business and labor groups.
The increased levels of competition spawned by AFTA opens the door to bankruptcy for inefficient companies that have been hiding behind protectionist barriers.
The recent threat of terrorism may do more than mutual economic interests to speed up progress toward common goals in a regional body that came into being almost unannounced. Indonesia, however, has little, if any, prestige left.
After the terror attacks of September 11, 2001, the United States, the region's largest trading partner, and the West generally began to pay much more attention to Southeast Asia. Washington courted President Megawati Sukarnoputri, as the leader of the world's most populous Muslim nation, but it took the tragedy of Kuta Beach to bring Indonesia into the fight against terrorism.
Prevarication cost Megawati, and thus Indonesia, their long-held leadership in ASEAN and the chance to speak from that position of power when negotiating with their ASEAN neighbors.
Malaysia, Singapore, the Philippines, and even Thailand gained US and regional respect for their harsh actions against alleged terrorist organizations operating in their territories.
Minister of Industry and Trade Rini M S Soewandi has been consistent in her belief that AFTA is a great opportunity for Indonesian industries to boost their competitiveness and efficiency on order to win against the tight competition in a group of countries that produce similar products.
Indonesia by January last year had already cut import tariffs on more than 90 percent of the 7,137 products in the AFTA inclusion list to 5 percent or lower. Tariffs on the remaining 69 products, mostly chemical and plastic products, were kept above 5 percent but these were reduced to 5 percent or lower on January 1 this year.
Rini, as onetime chief executive officer of Indonesia's biggest auto maker, Astra International, has been unable to secure similar protection for the Indonesian automotive industry as that granted to Malaysia. Kuala Lumpur has won protection for its national car, the Proton, against imported vehicles until 2005.
Some sectors have been looking forward to AFTA. Anthony Sunarjo, chairman of the Indonesian Pharmaceutical Association (GP Farmasi Indonesia) points out that Indonesian pharmaceuticals are the cheapest in Asia after India's and China's, so his members will certainly be able to compete on the ASEAN market.
He worries, however, that other ASEAN member countries will seek to bar Indonesian pharmaceutical products from entering their markets by setting up various non-tariff barriers, including imposing complicated requirements for Indonesian drug producers to register their products in their respective countries.
For Indonesians imported goods will no longer carry the high price tags they had in the past and lower prices and a wider range of product choice should benefit the public in the long run. However, other, more domestic obstacles seem likely to negate such theoretical benefits.
Thomas Darmawan, chairman of the Indonesian Food and Beverages Association (GAPMI) voiced concerns over the numerous levies imposed by regional governments and the widespread practice of extortion by local officials. These factors, he said, had led to price increases of local food products that will make it harder to compete with cheaper imported food products from AFTA.
He also said that, aside from these levies, local players also had to pay high transport costs in order to secure their business, which also contributed to raising the price of local food products.
However, Indah Suksmaningsih, chairwoman of the Indonesian Consumer Foundation (YLKI), says that while the AFTA scheme outlines in detail the benefit of free trade for corporations across the region, it has singularly failed to address the importance of consumer protection.
"Where do consumers go to complain about defective goods from Malaysia, for example?" she asked, adding that AFTA will be beneficial to the public only if the freedom of trade is balanced by a fair disputes settlement system for consumers.
Another important objective, more pressing for Indonesia than the other five countries, is to lure foreign investment into the region. The free flow of production goods among ASEAN countries should tempt foreign enterprises wanting to set up a global production base.
The increasing competition from the might of China, especially since its entrance into the World Trade Organization, and the ensuing billions of dollars in investment it gained, has concentrated the minds of ASEAN member governments.
They see the pressing need to succeed in selling the regional market bloc, with a population of more than 500 million, as a more attractive, alternative manufacturing base to China. Collectively, ASEAN stands a better chance of competing against China than if its members were to try to compete individually.
The United States is focusing on bilateral agreements with ASEAN members rather than a multilateral agreement, and thus compromising ASEAN's commitment to regional integration.
Though the largest market among the six founding member countries with almost 210 million people, Indonesia's lack of strong leadership has taken its toll. The government has yet to come up with any semblance of a strategy for industries to make the most of the benefits and opportunities offered by AFTA; hence its poor cooperation with the Indonesian Chamber of Commerce and Industry (Kadin), which is a staunch critic of AFTA.
The ministers concerned will not only need to drive hard bargains in negotiations to determine common standards and mechanisms between members, but will be intellectually challenged to create an investment climate conducive for foreign and domestic investors.
Inefficient domestic industries need to be brought into line with neighboring competitors in terms of cost, production and distribution.
Caving in to pressure from industrialists demanding protection will not only weaken Indonesia's economic prospects within the region but would have a knock on effect leaving ASEAN industries uncompetitive internationally, and ASEAN of little relevance to the economic interests of the people of the member states.
If they succeed in bringing in new investment, this will upgrade industries, improve the skills of the workforce and stimulate economic activity in general. It would also strengthen ASEAN's bargaining position to negotiate free-trade agreements (FTAs) with other regions and could push more ASEAN members to break rank and conclude deals with other countries individually, as Singapore has done.
Singapore has long been impatient with the slow progress toward the regional trade grouping and, in the aftermath of the 1997 economic crisis, has signed FTAs with Japan, Australia, and, more recently, the United States.
The focus was to promote the region as an open, stable and low-cost manufacturing center with an integrated market of more than 500 million consumers.
That may no longer be the game plan. Economists say the lack of enforcement mechanisms has allowed Malaysia, Indonesia and the Philippines to take advantage of the rules and temporarily announce higher tariffs on goods to protect key domestic sectors.
Such protectionism weakens the momentum for regionwide free trade in Southeast Asia and appears to confirm the new target is a much larger free-trade area – between ASEAN and China – that may be in place as early as 2015.