Friday, July 3, 2020

Indonesia’s PPE export ban backfires

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By 16 June 2020, Indonesia had recorded 39,294 cases of COVID-19, second only to Singapore in Southeast Asia. Indonesia’s death toll tops the region with 2198 lives lost. The government has drawn a lot of criticism for its slow response to the pandemic — from the lack of testing to ineffective physical distancing measures. The fear of the infection spreading has also shaped economic policies, including trade.

In early March 2020, the Indonesian Bureau of Statistics reported that Indonesian exports of surgical masks were 75 times higher year-on-year, mostly to China, Singapore and Hong Kong. The news sparked controversy in Indonesia as the prices of face masks and antiseptics soared following hoarding and a general lack of supply.

In response, on 17 March the government issued an export ban on 10 commodities, including antiseptics, personal protective equipment (PPE) and raw materials to make surgical masks. The ban was initially set to expire on 30 June. A week later, it was expanded to include ethyl alcohol, the raw material for antiseptics, totalling 14 tariff lines worth almost US$200 million in 2018.

These measures were introduced to combat potential scarcity in Indonesia’s domestic markets. But they are problematic because they interfere with global value chains. One of the reasons behind Indonesia’s comparatively good PPE industry is its ability to import raw materials. In 2018 Indonesia imported more than US$892 million of polypropylene, one of the materials needed to produce PPE. By engaging in this value chain Indonesia has been able to export vast numbers of PPE.

Export bans will not only block Indonesia’s potential for further growth but also negatively affect Indonesia’s trade partners’ capacity to produce raw materials.

On 1 April, the export ban regulation was relaxed into export licensing. This was likely a result of a G20 meeting in late March, where members agreed to support trade and global supply chains. It is also possible that the change was because the Indonesian producers had commitments with their buyers. Other measures to ensure the availability of essential commodities needed to deal with COVID-19 also followed. Between late March and late April, the Indonesian government issued a series of tariff eliminations, special permits and import relaxations.

Globalisation has always been marketed as a means to increase productivity. Comparative advantage leads countries to specialise in production, so international trade benefits all parties and boosts growth. Instead of preventing trade, Indonesia should promote it. Measures that make importing easier, such as import relaxation and tariff reduction, are appropriate. Pursuing further international collaboration, like the recent essential goods agreement between New Zealand and Singapore, could also help.

The Indonesian government does not rely on export bans to increase capacity — instead it facilitates the importation of materials to produce COVID-19 related goods. These measures support firms in expanding their production capacity, helping to combat scarcity. Other institutions such as the Investment Coordinating Board (BKPM) and the Ministry of Health have been pushing for regulatory relaxations to keep local production growing instead of solely relying on trade.

But challenges remain. Relaxing standards for COVID-19 related goods increases the number of suppliers but it could lead to firms distributing low quality goods to consumers, as found in the Netherlands, Spain and Turkey. Capital constraints and technical challenges prevent many smaller textile firms from repurposing their production. Central and local governments are still struggling with red tape and uncoordinated procurement to distribute PPE across the region. Such poor coordination also adds confusion to firms’ production decisions, especially given the existence of export licensing.

Information also needs to be transparent and accessible to everyone. The helicopter view of Indonesia’s central government needs to be supplemented by information from local government and volunteers in the field. Community initiatives are emerging in response to COVID-19, which the government can follow up. Understanding supply chains will help firms make decisions on technical requirements, production and potential capacity increases. The government can also help firms — especially smaller ones — to make the capital requirements for production more accessible.

With better information on supply chains, the central…

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