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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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Fixing fragmentation in the settlement of international trade disputes



Fragmentation in global trade due to the lack of development in multilateral trade rules at the WTO has led to an increase in FTAs. The Appellate Body impasse has further exacerbated fragmentation, requiring a multilateral approach for reform.

Fragmentation in Global Trade

Fragmentation in global trade is not new. With the slow development of multilateral trade rules at the World Trade Organization (WTO), governments have turned to free trade agreements (FTAs). As of 2023, almost 600 bilateral and regional trade agreements have been notified to the WTO, leading to growing fragmentation in trade rules, business activities, and international relations. But until recently, trade dispute settlements have predominantly remained within the WTO.

Challenges with WTO Dispute Settlement

The demise of the Appellate Body increased fragmentation in both the interpretation and enforcement of trade law. A small number of WTO Members created the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) as a temporary solution, but in its current form, it cannot properly address fragmentation. Since its creation in 2020, the MPIA has only attracted 26 parties, and its rulings have not been consistent with previous decisions made by the Appellate Body, rendering WTO case law increasingly fragmented.

The Path Forward for Global Trade

Maintaining the integrity and predictability of the global trading system while reducing fragmentation requires restoring the WTO’s authority. At the 12th WTO Ministerial Conference in 2022, governments agreed to re-establish a functional dispute settlement system by 2024. Reaching a consensus will be difficult, and negotiations will take time. A critical mass-based, open plurilateral approach provides a viable alternative way to reform the appellate mechanism, as WTO Members are committed to reforming the dispute settlement system.

Source : Fixing fragmentation in the settlement of international trade disputes

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WTO ministerial trading in low expectations and high stakes



The WTO’s 13th Ministerial Conference is set to focus on e-commerce transparency, investment facilitation, and admitting new members. However, progress may be hindered by disputes, especially regarding fisheries subsidies.

The World Trade Organisation’s 13th Ministerial Conference

The World Trade Organisation’s (WTO) 13th Ministerial Conference is set to take place in Abu Dhabi on 26–29 February, with expectations of deals on electronic commerce transparency, investment facilitation for development, and the admission of Timor Leste and the Comoros as WTO members. Despite these positive developments, the expectations are relatively modest compared to promises made at the 12th Ministerial Conference, which included addressing fisheries subsidies and restoring a fully functioning dispute settlement mechanism by 2024.

Challenges in Dispute Settlement and Agricultural Trade Reform

However, challenges remain, especially in the deadlock of dispute settlement since December 2019 due to a US veto on the appointment of Appellate Body judges. Progress in restoring the dispute settlement mechanism has stalled, and discord continues regarding India’s grain stockholding policy as a potential illegal subsidy. Restoring a fully functioning dispute settlement mechanism hinges on addressing US concerns about perceived bias against trade remedies in relation to China’s state subsidies.

Geopolitical Tensions and the Future of Trade Relations

The likelihood of reaching agreements amid geopolitical tensions between Western democracies and China appears slim, with issues surrounding subsidies and global supply chains causing rifts in trade relations. As nations focus on self-reliance within the global value chain, opportunities for trading face obstacles. Advocacy for open markets and addressing protectionist sentiments remains crucial for fostering resilience to external shocks and promoting economic growth.

Source : WTO ministerial trading in low expectations and high stakes

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Getting Vietnam’s economic growth back on track



Vietnam’s economy grew 8% in 2022 but slowed in 2023 due to falling exports and delays in public investments. The economy’s future depends on structural reforms and reducing dependency on foreign investment.

Vietnam’s Economic Roller Coaster

After emerging from COVID-19 with an 8 per cent annual growth rate, Vietnam’s economy took a downturn in the first half of 2023. The drop was attributed to falling exports due to monetary tightening in developed countries and a slow post-pandemic recovery in China.

Trade Performance and Monetary Policy

Exports were down 12 per cent on-year, with the industrial production index showing negative growth early in 2023 but ended with an increase of approximately 1 per cent for the year. Monetary policy was loosened throughout the year, with bank credit growing by 13.5 per cent overall and 1.7 per cent in the last 20 days of 2023.

Challenges and Prospects

Vietnam’s economy suffered from delayed public investments, electricity shortages, and a declining domestic private sector in the last two years. Looking ahead to 2024, economic growth is expected to be in the range of 5.5–6 per cent, but the country faces uncertainties due to geopolitical tensions and global economic conditions.

Source : Getting Vietnam’s economic growth back on track

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