Deasy Pane – The timing could not be more critical. Indonesia's recent trade deals with the EU and Canada come at a moment when renewed Trump-era tariffs threaten one of the country's most vulnerable industries: textiles and garments.
The US absorbs around 40 per cent of Indonesia's exports in this sector, making diversification urgent. Yet, Indonesia's presence in alternative markets remains modest. The EU accounted for around 12 per cent of Indonesia's textiles and garments sector, while the corresponding figure for Canada was less than 3 per cent. Compared to China, Vietnam, and Bangladesh, Indonesia's market share in these destinations is still small, leaving considerable room for expansion if the new agreements are effectively utilised.
This urgency is amplified by the sector's long decline. Once the pride of Indonesia's manufacturing base, the sector accounted for 17 per cent of Indonesia's exports. The sector registered a 4 per cent global market share in the early 1990s. Today, its global market share has dwindled to just 1.5 per cent. At its peak under the Multi-Fibre Arrangement (MFA), a global system that regulated textile and garment exports through quotas since the 1970s, Indonesia benefited from preferential access to global markets. With the termination of the MFA in 2005, global competition intensified. This caused a steady fall in Indonesia's export share. The story of Sritex captures the broader struggles of the industry. Founded in 1966, Sritex was a leading global exporter that subsequently pivoted to domestic sales. After Covid-19, it sought government support before ultimately declaring bankruptcy in October 2024.
Several factors explain the sector's struggles. Rising wages, high energy costs, and persistent logistics bottlenecks have eroded competitiveness. International Labour Organization (ILO) data show that Indonesian wages are around double those in Bangladesh. Energy, which accounts for 24-30 per cent of production costs, is also higher than in Vietnam and Bangladesh, and the sector is excluded from the government's industrial gas subsidy scheme. Dependence on imported inputs adds further pressure and a dilemma: while tariff liberalisation has made them cheaper, it has also exposed upstream producers to greater competition. In addition, temporary trade remedies such as safeguards or anti-dumping measures often raise costs for downstream firms that rely on these inputs, creating unintended effects across the supply chain.
These various factors have affected SMEs and multinationals and left the industry squeezed from all sides. Even before the pandemic, United Nations Industrial Development Organization (UNIDO) data showed a steady decline in textile and garment establishments, with Covid-19 only accelerating closures and job losses. Beyond costs, uncertainty has further weakened competitiveness. Policy flip-flops, recurring wage disputes, and limited investments in technology and machinery have left the sector struggling to keep pace with global change.
The real challenge for Indonesia is whether it can rebuild competitiveness and capture new market niches, or allow more agile competitors to dominate the field.
Other Asian producers offer useful points of comparison. China remains the global giant, supplying around 40 per cent of world demand in 2023, up from 18.4 per cent two decades ago. China demonstrates strong competitiveness across nearly all parts of the textile and garment value chain, from upstream cotton and fibres to downstream apparel. Vietnam has also carved out a strong position with a 5.6 per cent of global market share, up from less than 1 per cent in 2003. It also performs strongly across many subsectors, including silk, cotton, filaments, fibers, and other downstream textile products. By contrast, Indonesia is competitive globally only in a narrower range of products, mainly man-made fibres and apparel.
Table 1: Market share in 2023 (see original document)
Global Trade Alert data suggests that China's dominance in textiles and garments is partly driven by massive government subsidies, which enable firms to scale up production and lower prices. Since 2009, more than 700 interventions, including financial grants and tax-based export incentives, have supported the sector. Vietnam, by contrast, capitalises on its extensive network of free trade agreements and flexible supply chains to secure global buyers. Meanwhile, Bangladesh leverages low labour costs to stay competitive.
Indonesia, however, finds itself stuck in the middle ground. It is too expensive to compete purely on price; yet it is not sufficiently advanced to climb the value chain. Government policies have largely focused on defensive measures, such as shielding local producers from import surges and frequently adjusting import regulations. While combating illegal trade and ensuring fair competition are important, the emphasis on protection has come at the expense of policies that would strengthen long-term competitiveness.
The government needs to shift its focus from protection to competitiveness. This means reducing high energy and logistics costs, investing in technology, focusing on efficiency, and providing a stable and predictable policy environment. Trade policy also has a role to play, expanding market access through FTAs while easing restrictions on critical imported inputs. Interventions should prioritise productivity gains rather than protectionist measures, ensuring that firms are able to compete fairly at home and abroad.
At the same time, the textile and garment industry is a classic "footloose" sector, meaning that production can quickly relocate to places offering lower costs and better profitability. Looking ahead, rising environmental concerns will also reshape global demand. As consumers in advanced economies demand greener and more sustainable clothing, Indonesia could gain an advantage if it shifts towards environmentally friendly production practices.
Despite these challenges, the sector remains vital. It still employs around one-fifth of Indonesia's manufacturing workforce and serves a steady domestic demand base. Global opportunities also remain, as clothing remains a basic necessity. Indonesia is also well-positioned to expand in specific markets, from niche fashion segments to the growing Muslim fashion industry. Yet the sector stands at a crossroads. It risks fading into irrelevance unless structural reforms are pursued. Trump's tariffs are only the latest reminder that external shocks will continue to test the industry. The real challenge for Indonesia is whether it can rebuild competitiveness and capture new market niches, or allow more agile competitors to dominate the field.
[Deasy Pane is a Wang Gungwu Visiting Fellow at ISEAS – Yusof Ishak Institute, an Economist at Indonesia's National Development Planning Agency (BAPPENAS), and a Senior Fellow at the Center for Indonesian Policy Studies (CIPS).]
Source: https://fulcrum.sg/threads-of-opportunity-reviving-indonesias-textile-and-garment-sector