Friday, January 01, 2010

Free trade with China: Are we ready?

Well, if you ask palm oil producers, they have very strong position in the vegetable oil market, including in China. Indonesia is the largest producer and exporter of crude palm oil (CPO) in the world, followed by Malaysia. If you ask whether the downstream of CPO such as oleochemicals are ready to compete, you might get mixed signals. Some would say, we're ready to compete in the fatty acid and fatty alcohol market or margarine. But don't go further, let's say, to lipgloss or lip balms.

If we ask coal producers, they would say "yes" to the free trade. It is true that China is also a key exporter of coal, but Indonesia is the largest net exporter of thermal coal in the world. With relatively cheap cost and huge margins, Indonesian coal producers won't be affected by a free trade agreement (FTA).
Iron, copper, and nickel, bauxite ore producers might also give similar answer. While Indonesia is not the biggest player in all of these products, China is the biggest importers of all of them. Indonesia is better positioned in these products.
But don't ask the iron and steel producers, which usually consume iron ore, nickel and ore in their manufacturing process. They will say, "no, we're not ready. Please postpone the free trade agreement with China. Indonesian market will be flooded with Chinese products." Textile and pharmaceuticals will also say "not ready". Machineries? Well, BIG NO. Electronics? "In a big doubts." Automotive: "Also in big doubts."
China is the fourth largest market for Indonesian products (non-oil and gas) in the period of January-June 2009 with US$3.7 billion, behind Japan (US$5 billion), US (US$4.83 billion), and Singapore (US$3.9 billion). Soon, China might takeover Singapore and then US to be the second largest export destination for Indonesia.
China is already the biggest exporter to Indonesian market with US$5.9 billion in first half 2009, bigger than Japan (US$4.3 billion) or US (US$3.2 billion). So, in the first half 2009, China reported trade surplus of US$2.2 billion with Indonesia.
Worse, China's contribution to Indonesia's export market stays at 8% since 2003, while China's market share in Indonesia's import doubled from 8% in June 2003 to 14% in June 2008 and then 17% in June 2009. Trade deficit with China reached its historic high last year (for non-oil and gas) with US$7.2 billion. 
So, with the FTA with China-Asean, Indonesia is banking on its "natural wealths", gifts from Heaven, with limited added value. Processing industries? They will be at the losing end of the process. Some friends in the manufacturing sector said "Indonesia will experience significant deindustrialization if the FTA with China enters its full swing." 
Indonesia, a market of 250 million consumers, is huge for processed and manufactured goods, including consumer products. Unfortunately, in the past few years, government did nothing to improve the processing industry, especially because the banking sector chose to support the primary sector only, such as mineral ores, coal, and palm oil. Indonesia will increasingly rely on processed materials such as iron and steel, machineries, electronics, appliances, etc.
Raw materials dominated Indonesia's export by almost 60%, while 70% of imported goods are higher value added stuffs like machineries, organic chemicals, steel and articles, plastics, automotive and parts, etc. Where are we going to?
How about the banking system?
Mulyaman Hadad, deputy governor of Bank Indonesia, said central bank will start to implement the monetary policy transmission through interest rates and revitalization of banking industry in 2010.
Banking system failed to boost industrial sector as shown by lower portion of loans to the sector (16.6%) in 2009 compared to services (24%) while processing industry makes up 26% of Indonesia's GDP.
Banking system has to improve long-term financing sources in order to reduce funding mismatch with processing industries. Else, the country would only become a market for Chinese manufactured goods and will not be able to add values to its natural-resources.
Ferdy Hasiman & Teguh Hidayat contributed to this article. (Taken from




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