Bill Guerin, Jakarta – While the news this week that the European Union, the US and Canada are to end the current textile quota system to meet a World Trade Organization ruling is a severe blow to Indonesia's textile industry, it also has the potential to clear up a distorted production system that has led to a flourishing and shady trade in the quotas themselves.
Though Industry and Trade Minister Rini M Soewandi has lobbied trade ministers in the three markets, the system will end by the close of 2004, leaving Indonesia at the mercy of international competition. The country's total textile production is valued at more than $US15 billion, although export revenues have declined steadily over the past few years, from around $8.4 billion in 2000 to $6.8 billion last year.
The sector, which employs around 1.5 million people, has been hard hit by soaring operating costs, earlier reductions in textile quotas and weakening purchasing power in the US and Europe, which, with Japan, account for about 45 percent of Indonesia's textile exports. Non-quota countries in the Middle East, Latin America and Africa take the remainder of Indonesia's export volume. The US is the most exclusive and demanding market by far for Indonesian textile producers, but it rewards those who succeed with high prices for high-quality garments, provided they can obtain quotas and factor the cost into the selling price.
In addition to fuel price hikes, the industry has also had to cope with higher minimum wages imposed by the government, an electricity price hike, higher import duties for imported raw materials and heavier taxation burdens. The regional textile industry as a whole faces crucial obstacles to becoming competitive and efficient. Among the diverse problems are labor, high tariffs and duties and government regulations, which have retarded development of the industry.
But Indonesia also faces the problem of blatant trading of textile exports and product quotas by brokers, which present exporters with an added hurdle to be dealt with, one that inflates the industry's operating costs while distorting the supply chain. The practice has also raised allegations by opposition politicians of favoritism toward well-connected textile companies. Some estimates put the broker-controlled transactions at 60 percent of government-allocated quotas.
The quotas were originally fixed and could not be changed. However, in January 2001 former trade minister, Luhut B Pandjaitan, issued a decree empowering the government to reallocate unused fixed quotas to companies that could use them. The idea was that Indonesia would thus be able to fulfill its entire national production allocation under WTO rules.
Never mind that the simple laws of supply and demand had already ensured that any part of a quota not realized would usually be sold off to another party. The name of the company that sells the unrealized quota is used on the export documents to avoid detection. Exporters call this "under the name of shipment", but the practice makes it difficult for the government to pin down the culprits as company sales records at the Ministry of Industry and Trade appear in order and the quotas are fully realized.
In any case, the result of Pandjaitan's decree was that savvy brokers learned that they could snap up the unused quotas from companies not fulfilling them and sell them to companies with textile products to get rid of. This has since led to a bewildering but lucrative market in quotas, with even a "season" for quota distribution when a mad scramble for quotas by producers and brokers ensues.
Quotas are now frequently sold at around $30 for every dozen export items, compared with the more average $5 to $8 at which they were previously sold. Industry sources say many of the quotas are in fact sold to companies in other countries. Only garment quotas have any significant value, depending on the type of product and how much it is sought after in the market. The higher the value, the higher the quota price.
In 2001, fixed quotas equivalent to millions of garments were returned by 152 genuine textile exporters as they were unable to realize the mandatory half of their quotas. This, said the Indonesian Textile Association (API), was ample proof that many exporters, including some without the necessary production facilities, had overstated their production capabilities simply to get the prized quotas.
The scale of the problem is still alarming. By May 2002, for example, when in a normal year more than three quarters of the country's annual export quota of trousers and jeans should still have been available, 70 percent had already been taken up. Though this equated in quota value to some 190,000,000 million pairs of jeans, there had been no corresponding boost in output from the producers. This prompted the API to call for an independent audit of quota management by the Ministry of Industry and Trade, complaining they were unable to trace the total quotas allocated by the government and their holders.
API, condemning the government's lack of transparency in distributing export quotas, said it was even prepared to pay for a costly audit by Pricewaterhouse Coopers to get to the bottom of the situation. Amid claims by opposition legislators that companies with a close relationship with the current administration make up the bulk of quota holders, API urged the government to come clean and publicize the name of 21 quota-holders, which the ministry had said ended up with the quotas.
The original decree has since been modified by Soewandi in a vain effort to clear up matters although the problem is still alarming for the textile companies. Those failing to fully use up their fixed quotas face reduction in their next year's quotas. There is also a maze-like series of temporary, flexibility, growth or shift specification quotas. Exporters can transfer their fixed quotas to other exporters in pursuit of a larger export share in value or volume, but must first obtain approval from the Minister of Industry and Trade.
In addition to quota constraints, textile producers have raw material issues to contend with. Jakarta has several times asked for, and failed to get, special treatment from the US on account of Indonesia's position as the largest importer of American cotton. It imports 30 percent of the total 500,000-ton cotton imports for raw materials, worth $1 billion, from the US every year. Australia accounts for another 40 percent of the cotton imports.
The trade relationships over textiles are tetchy at times. US textiles and apparel exports to Indonesia are not significant, around $17 million a year at best, but the US textile industry and its supporters in Congress were irked last year when Jakarta temporarily banned all textiles and apparel imports. This was in response to a flood of imports from China but was a violation of WTO rules. US manufacturers charged that Indonesia had high tariff rates, arbitrary customs valuations, add-on taxes, excessive paperwork and customs delays that have limited US textile exports.
The EU projects an increase in the global market for textiles and garments to around $400 billion in 2005 from $350 billion this year once the quota system has ended. Much will depend on the quality of products, rather than the price.
API believes that the local textile industry must improve its competitiveness to succeed in this growing market, and to do this, it needs the government to improve the investment climate.
On the sidelines of a recent Association of Southeast Asian Nations (ASEAN) business and investment summit, API's chief of international relations, Sunjoto Tanudjaja, said that only 20 percent or so of textile exports would be affected by the quota elimination. He pointed out that the government must quickly finalize the long awaited new investment law, amend the labor law, accelerate tax reforms and take other measures to improve the unfavorable business climate.
The problems may be even more multi-dimensional than APO admits, however. In addition to the need to produce quality products, textile exports are exposed to external volatility, such as the sluggish global economy. Now that China is in the WTO it is likely to be Indonesia's strongest competitor in Western markets.
The US and the EU have also been implementing standards needed to promote better market protection though product standardization that will come into effect by 2005. Rules issued by markets there have become a major source of concern for the Indonesian industry.
The implementation of WTO standards is yet another hurdle. More challenges lie ahead for Indonesia with human rights issues, labor concerns and environmental protection being put on the agenda.
Last year's implementation of the standards of Worldwide Responsible Apparel Production (WRAP) by the US essentially means that textiles from Indonesia and other Asian countries should be produced by exporters with licenses issued by human rights and labor certifying agencies. Further regulations to follow include compliance with safety at the workplace and other non-tariff barriers.
Industry analysts believe that other forms of trade barriers will be created to replace the quota system of the main importing countries. As Benny Benyamin, director of Amico Group, explains: "Every month there is now a new form of vendor compliance involving visits to the factories to ensure they fulfill requirements in respect of wages, health insurance, environmental issues etc."
Thus, notwithstanding the encouraging figures for January to September, when exports reached $6.3 billion against the target of $7 billion, the textile industry's target of around 9 percent growth in annual production seems somewhat misplaced.