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Indonesia’s protectionism debate needs more than domestic input



A truck drives past stacks of container at the Tanjung Priok port in Jakarta, Indonesia, 3 August, 2022 (Reuters/Willy Kurniawan).

Authors: Deasy Pane, Bappenas and Arianto Patunru, ANU

The rising interconnectedness of production centres around the world highlights the role of imported intermediate inputs in manufacturing processes. Intermediate inputs are partly finished goods, such as an automotive engine, that help produce a final product, like a car.

Firms from different countries work together to produce final products by building production networks made up of buyers and suppliers. These networks have increased the flow of unfinished goods across economies such that the trade in intermediate goods now surpasses half of total world trade. There are several mechanisms by which imported inputs increase firm performance.

Higher quality intermediate inputs increase the quality of final products, increasing the demand for said products and raising firm profitability. They help reduce production costs because they are often more affordable than domestic inputs of similar quality. Imported inputs also contribute to a more efficient division of labour, increasing the productivity of firms as each node in the production network specialises in producing a single component of the final product.

The experience of Indonesian firms is consistent with this explanation. Importing inputs of greater value and variety has raised the productivity and export capacity of Indonesian manufacturing firms. The main benefits come from access to a broader range of inputs. These benefits are larger when inputs originate from developed countries such as Japan, a country from which Indonesia sources more than 15 per cent of its imported intermediate inputs.

The effects are larger still when imports originate from firms in East Asia. More than 40 per cent of Indonesia’s intermediate inputs are imported from Japan, China, South Korea, Taiwan, Singapore and Hong Kong. Their high-tech electronics, electrical appliance and automotive industries show that participating in regional production networks positively affects productivity.

These findings should inform policymakers in dealing with increasing calls for protectionism and mercantilism — trade strategies that see imports as a threat to the economy. Reducing restrictions on imported intermediate inputs would assist in promoting productivity and export growth.

Protectionism in Indonesia goes up and down. As in other countries, the pandemic has facilitated more protectionist measures. Indonesian President Joko ‘Jokowi’ Widodo wants to increase the local content  or ‘domestic value added’ of Indonesian products and exports. Local content requirements have been promoted and enforced for products including electronics and pharmaceuticals. These policies require manufacturers to obtain local content certificates indicating the percentage of domestic content in their products.

While the majority of inputs in pharmaceutical products are imported and only a few drugs can be domestically produced, the government intends to increase the local content of pharmaceutical products to 55 per cent. One common justification is that Indonesia was able to produce COVID-19 vaccines with 79 per cent of local content.

Presidential Regulation 55/2019 stipulates that the domestic electric vehicle industry is similarly subject to a local content requirement of at least 35 per cent. Jakarta assesses local content based on manufacturer activities such as the production of electric vehicle components, research and development and assembly. Chinese electric vehicle company, SAIC-GM-Wuling, began producing electric vehicles in Indonesia with 40 per cent local content in the middle of this year.

In 2021, the Indonesian government enacted Government Regulation 28/2021, establishing a new legal framework to regulate industry access to imported inputs. It defines thousands of products as ‘intermediate inputs’ that, if imported, can be restricted by Jakarta. Government Regulation 29/2021 provides a more detailed mechanism for export and import approval based on neraca komoditas (commodity balance) — a national database system that tracks production, consumption and trade.

In March 2022, Jokowi issued Presidential Instruction 2/2022, which requires local governments to spend a minimum of 40 per cent of their goods and services expenditure budget on local products from micro-businesses, small enterprises and cooperatives.

While the government claims that such policies increase local production, create jobs and encourage technological transfer from abroad, they may have the opposite effect. These policies raise the cost of…

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Australia’s troubled EU trade deal still second best



Sheep run into a holding pen at a farm near Delegate, in New South Wales, Australia, 19 November 2023 (Photo: Reuters/Peter Hobson).

The proposed trade agreement between Australia and the EU is in trouble due to EU protectionism, particularly in agriculture. This offers lessons for both parties and poses a potential threat to the Asia-Pacific region’s trade diplomacy.

Trouble in the Australia-EU Preferential Trade Agreement

Author: Ken Heydon, LSE

After five years of intense negotiation, the proposed preferential trade agreement (PTA) between Australia and the European Union is in trouble. On 29 October 2023, talks were suspended, with little immediate prospect of resumption. This setback, plus other recent developments in EU preferential trade policy, offer some broad lessons — for both Australia and the region.

Issues and Challenges

The failed negotiation is, in part, a victim of current times. With liberal trade policy in retreat, government-fuelled industrial policy is on the rise, and, according to the Eurobarometer Poll of July 2022, the majority of Europeans now view protectionism positively. The immediate cause of breakdown in the talks was, unsurprisingly, agriculture. This is the sector that, given EU intransigence, was a key factor in the failure of the Doha Development Round of multilateral trade talks.

Implications and Lessons

Australia’s particular concerns during negotiations with Brussels arose from EU resistance to opening up its market to Australian beef and sheepmeat, and protective geographical indications that would restrict the labelling of Australian feta cheese and prosecco. As highlighted by the WTO Trade Policy Review of the EU, the number of products subject to EU ‘geographical indication protection’ continues to rise. Looking ahead, there are still some broad strategic factors that might favour a deal. For the European Union, this includes gaining secure access to Australia’s critical minerals, such as lithium and copper.

Source : Australia’s troubled EU trade deal still second best

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New US–China working groups bridging bilateral gaps



US Treasury Secretary Janet Yellen walks with China's Vice Premier He Lifeng during their meeting at the Diaoyutai State Guesthouse, Beijing, China, 8 July 2023 (Photo: Reuters/Pedro Pardo).

US-China economic and financial working groups established in September 2023 aim to stabilize relations and prevent economic decoupling, addressing trade imbalances and fostering dialogue between the world’s largest economic powers.

US–China Economic and Financial Working Groups

The establishment of the US–China economic and financial working groups in September 2023 marked a significant turning point in the often uneasy relations between Washington and Beijing. In the midst of increasing tensions due to great power rivalry, these working groups have the potential to promote greater stability between the world’s two largest economic superpowers.

Challenging the Notion of ‘Decoupling’

While ‘decoupling’ has become a popular term representing the United States and China’s efforts to separate their economies, the establishment of the working groups challenges this idea to a certain extent. Policymakers on both sides understand the risks associated with complete economic decoupling, as bilateral economic ties are characterized by intrinsic interdependence.

Promising Benefits and Potential Challenges

The working groups, supported by high-level officials from both countries, offer a structured channel for ongoing dialogue. They have the potential to promote trust, transparency, and direct communication while also addressing challenges such as structural trade imbalances and intense rivalry in high-tech competition.

Source : New US–China working groups bridging bilateral gaps

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Rethinking Indonesia’s nickel policies to power economic growth



Workers monitor a nickel smelter in Indonesia, 30 March 2023 (Photo: Ajeng Dinar Ulfiana/File Photo).

Indonesia is a major player in the global nickel market, but may face challenges as the EV battery industry shifts away from nickel-based batteries. Cultivating relationships with the US and EU is crucial.

Author: Cullen Hendrix, PIIE

Calling Indonesia ‘the Saudi Arabia of nickel’, one of the metals underpinning global steel production and ambitions to decarbonise energy and transport systems, would be an insult to Indonesia’s market dominance.

Indonesia’s mines accounted for nearly half of global nickel production in 2022. It has banned raw nickel exports since 2020 as the country pushes to move up global value chains for renewable energy. Indonesia is a G20 member, a developing democracy and has an enormous potential home market for both steel and electric vehicles (EV).

But despite the seeming centrality of nickel to net-zero ambitions, Indonesia may find itself in a situation eerily similar to that of Saudi Arabia and its oil reserves — sitting atop plentiful resources whose value is set to wane as the EV sector booms. The challenge lies in navigating two landscapes, one geopolitical and one chemical.

In a shifting geopolitical environment, Indonesia is attempting to secure a more prominent place in the EV battery supply chain. This involves moving beyond mining ore and benefaction to battery assembly at a time when major EV battery importers like the United States and the European Union (EU) are onshoring battery assembly.

In the United States, these attempts include enticing tax credits in the Inflation Reduction Act (IRA). In Europe, they include government loans via the InvestEU program, independent member-state initiatives and an anti-subsidy investigation into Chinese automakers. The investigation aimed to prevent Chinese EV makers who source nickel from Indonesia from flooding the European market with cheap imports. In both instances, Indonesia’s reliance on Chinese manufacturers and finance in the nickel sector creates vulnerabilities for its EV ambitions.

The second challenge is more fundamental. Indonesia’s nickel reserves and industrial ambitions are at risk of being rendered less valuable by changes in battery chemistry, or the combination of materials and technologies used in the batteries themselves. Nickel is a key component in nickel-manganese-cobalt (NMC) batteries, which currently dominate the market due to advantages in range and power-to-weight. But this dominance may be fleeting.

As with most things EV-related, Tesla is the bellwether. In 2021, Tesla adopted lithium iron phosphate (LFP) batteries, with nearly half of its production models using them by the first quarter of 2022. In August of this year, Tesla CEO Elon Musk announced that the company would be transitioning most of its entry-level vehicles — Model 3 and Model Y — and its shorter-range semi-trucks to using LFP batteries. For a regional hub, Tesla chose to set up shop in neighbouring Malaysia rather than in the nickel giant.

Tesla did not invent or even bring to market the first EVs, but it popularised and democratised them. Its move toward LFP batteries is one major reason that S&P Global forecasts that after 2030 the dominance of NMC batteries will wane in favour of LFP batteries. LFP batteries offer less range and high-end performance. But they are also less prone to catching fire and are made of much more globally abundant and cheaper raw materials. For most EV users, LFP batteries provide more than enough range and power.

This forecast does not include the effects of potentially market-disrupting frontier technologies like sodium-ion and solid-state batteries, upon which Toyota has placed a heavy bet. These technologies would further depress the relative demand for nickel. There will still be a market for NMC batteries in performance-oriented EVs offering pavement-wrinkling torque and acceleration. But the global market in the future may be smaller than the current one – and with technology, disruption is rarely linear. The market may change even more quickly than S&P anticipates

For Indonesia to sustain nickel as an engine for growth and development within these landscapes, its priority should be to cultivate closer relationships with the United States and the EU. These markets and their comparatively affluent consumer bases will drive an appetite for higher-performance, NMC-based EVs. Indonesia’s relationship with the EU is seemingly on track to expand, with shared ambitions to conclude negotiations on a comprehensive Indonesia–EU free trade agreement (FTA) before Indonesia’s 2024 election.

The outlook regarding the United States is less straightforward. In September, Indonesian President Joko Widodo proposed a critical minerals trade agreement with the United States during talks with Vice…

Source : Rethinking Indonesia’s nickel policies to power economic growth

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