Growth, Export & Its Challenges
Amidst the conclusion of the long-awaited 12th WTO Ministerial Conference held between 7 and 12 June 2022 in Geneva, skepticism still lingers surrounding whether international trade will recover anytime soon - going back to what it was before the trade war. The combination of direct and indirect impacts of the trade war and the spread of Covid-19 have already wreaked havoc on international trade and even the biggest winners of globalization have questioned the notion of a Global Value Chain (GVC). More worrying in recent months is the invasion of Russia into Ukraine and the inability of the UN, WTO, G7, G20, and other groups of countries to help settle the issue. All this has become grimly worse due to a global trend spearheaded by the Trump Administration: trade coercion.
Racing to the Bottom?
Co-coordinated by the Asia Society Policy Institute and the Perth USAsia Centre in December 2021, twelve reputable trade experts from 10 countries launched a report on the increased use of trade coercion in the pursuance of non-trade objectives. The report clarifies that trade coercion involves “the arbitrary application of trade measures – such as quotas, anti-dumping measures and/or sanitary and phyto-sanitary barriers – with the deliberate intent of economically harming a trade partner.”1 As such, trade coercion differs from other restrictive trade measures taken to address a legitimate trade concern or provides protection to the domestic industry. Trade coercion is meant to impose economic burdens resulting in political pressure on a targeted country due to a broader diplomatic disagreement or bilateral skirmish. It has become common that country A takes trade action against country B for reasons that has nothing to do with trade. Understandably, the most adversely affected faction is businesses and developing countries which do not have enough economic muscles to deal with the trade coercion targeted towards them.
The global economy has evolved tremendously fast since the report was released. President Joko Widodo reminded his fellow countrymen of 10 countries that may soon go bankrupt as their economies could not sustain the test of a combination of factors. From trade war which has caused great disruptions in global values chains, wide use of trade coercion, impacts of climate change, Covid-19, and food scarcity, to economic mismanagement and bad governance. In response, the Indonesian government calls for the nation to be more vigilant by focusing more on Indonesia’s own potential, limiting imports, tasking the State-Owned Enterprises (SOEs) to play a bigger economic role, and assisting SMEs by way of buying more of their products instead of importing from other countries. All this is meant to keep economic growth positive at a time when it is increasingly difficult to enter foreign markets.
It is well understood that there are four sources of growth: domestic consumption, investment, public procurement, and export. While there are differing views on the most ideal combination of these sources, experts generally agree that to have sustained growth, a country cannot rely only on two or three sources of growth. In fact, our modern history suggests that only a few countries managed to survive by closing their doors and focusing only on domestic consumption, government investment, and public procurement, thus limiting exports and banning imports. However, such a development model comes at a cost: regime oppression, excessive exploitation of natural resources, and an autocratic system of government, amongst others. Then how could a country keep exporting—the fourth source of growth—at a time when global trade has become more fragmented, where countries rise barriers to foreign trade, and where major countries adopt trade coercion against others to get things across?
The report mentioned earlier proposes 10 policy options for governments to consider in response to trade coercion. These options are categorized into three levels: national, like-minded coalition, and WTO-level responses. However, due to the worsening global economy and international trade in the foreseeable future, Indonesia should look into the most practical policy option to respond to the multi-faceted challenges; that is, diversify trade relationships based on risk assessment.
Sectors or products which are highly dependent on trade with a limited number of partners are the most vulnerable to trade coercion. They can be easily and effectively targeted by coercive trade practices and are likely to suffer greater economic harm when it occurs. Therefore, diversifying trade relationships is the single—if not the most—effective defense against trade coercion.
The report suggests two actions the government should take in the context of diversifying trade relations. First, identify which sectors, on both the export and import sides, have highly concentrated trade relationships, particularly those where political risk is present. And second, prioritize resources towards assisting those at-risk sectors to develop more diverse trade relations. This can be achieved through trade promotion activities, advancing trade negotiations, and maximizing trade agreements (Free Trade Agreements/FTAs and Comprehensive Economic Partnership Agreements/CEPAs) to which Indonesia is a party. In parallel, some domestic policies need to be advanced as well to help firms expand into new markets and grab new opportunities. These include the promotion of digital tools, making information on FTAs and CEPAs widely available, provision of assistance to fully utilize those trade agreements, and better facilitation of exports and imports.
This is not to profess the narrative of “export is good, import is bad.” In the context of maximizing trade agreements to boost exports and earn foreign revenue in support of growth, one should be willing to import from the party or parties to such trade agreements. However, Indonesia should be able to manage imports in a way that would not breach or be perceived as breaching the agreements. Hence, Indonesia still has the ability to discourage imports through a more holistic, concerted government campaign in which all ministries as well as government institutions both at the central and regional levels, SOEs, academicians, and local businesses—big and small—work in unison (not in silos) to develop a culture of “Buy Indonesia” - focusing on Indonesian goods and services having good quality at a reasonable price. It is not about being a "good or bad player"; it is more about becoming a “smarter player.”
We should not let all the challenges described above out-smart Indonesia. Data from the Bank of Indonesia suggests that most exports of manufacturing products from Q-1 2021 to Q-1 2022 performed relatively well. Adding to this, domestic consumption has been improving, SMEs are thriving as they switched to online platforms, and Covid-19 has been fairly under control at least until June 2022. While the risks of higher inflation and global financial crisis cannot be ruled out as world prices of energy and food commodities are on the rise, Indonesia should get serious to capitalize on FTAs and CEPAs to meet its foreign trade objectives.
Written by Iman Pambagyo