Posted by: mel | January 13, 2010

Indonesia Wants China Pact Revised

Jakarta Asks Asean to Seek a Delay in Part of Its Free-Trade Agreement With Beijing Due to Worries About Competition

Wall Street Journal | By TOM WRIGHT and YAYU YUNIAR | Economy | Jakarta | 13 January 2010

Indonesia is hoping to renegotiate a free-trade pact between Southeast Asia and China that took effect this month amid concerns from local business about what they call unfair competition from low-cost Chinese imports.

Indonesia’s government has sent a letter to the Association of Southeast Asian Nations, or Asean, to ask for a one-year delay, until January 2011, in imposing zero tariffs on a number of goods, including textiles, steel and chemicals, to give local businesses more time to adjust, said Muhdori, a spokesman for the industry ministry.

“We want to slow down the pace of this agreement so we are ready domestically,” he said.

Some Indonesian business leaders complain the government failed to consult them in the process of negotiating the free-trade agreement. Many sectors are already reeling from competition with low-cost Chinese clothes, toys and electronic goods, which are often smuggled into Indonesia, and opening the borders will further hurt local business, said Sofjan Wanandi, chairman of the Indonesian Employers Association. “We’re totally unable to compete and we’ll have to close our factories,” he said.

During 2008, two-way trade between China and the 10-member Asean totaled $193 billion.

Under the free- trade deal signed in 2004, tariffs on China-Asean trade declined in stages to an average of 5% last year. On Jan. 1 this year, they dropped to zero on about 90% of their trade. Under a separate agreement, meanwhile, most tariffs on trade between six of Asean’s economies — Indonesia, Thailand, Singapore, the Philippines, Malaysia and Brunei — also fell to zero at the start of 2010.

The Asean-China deal was billed by both sides as creating the third-largest free-trade area in the world after the European Union’s single market and the North American Free Trade Area.

European Pressphoto Agency - An Indonesian vendor displays Chinese-made toys.

An Asean endorsement of Indonesia’s request for a one-year delay in treaty terms now in effect is extremely unlikely, as that would need to be agreed to by all 10 member governments. The regional organization has promoted the free-trade agreement and closer links with China as boosting Southeast Asia. Surin Pitsuwan, the body’s secretary-general, is quoted on its Web site as saying China’s growth and expanding investment are “energizing the region and… providing Asean with an expanding diversified market in an environment of slowing growth in its traditional partners.”

China would need to agree with any request for delaying treaty implementation, and that seems highly unlikely. On Tuesday, an official of the Chinese foreign ministry said no request for suspending an implementation date has been received. The ministry referred questions to the ministry of commerce, which didn’t respond Tuesday.

The People’s Daily newspaper last week quoted Yi Xiaozhun, vice-minister of commerce, as saying worries like those of Indonesian manufacturers are “understandable. But the free-trade agreement is mutually beneficial… with full consideration of economic development levels and market capacities of both sides, the free-trade agreement will advance the regional economic integrity by eliminating barriers of trade and investment.”

Southeast Asia’s trade with China has risen sixfold in the past decade. While the region exports agricultural products and natural resources to China, most countries import Chinese manufactured goods that have a higher total value than Asean’s exports. In 2008, the last year for which statistics are available, Asean had a trade deficit with China of $21.5 billion.

In the region — and especially among nations such as Indonesia, the Philippines and Thailand, there is fear of unbridled competition with China’s bigger and more-efficient manufacturing base. Even within Southeast Asia, which has been working on its own free-trade area since the early 1990s, nations remain wary of throwing open their borders to trade, especially for strategic agricultural products such as rice, adequate supplies of which are seen as key to national security.

To counter these concerns, the free-trade deal allowed for China and Southeast Asian nations to temporarily exclude items that add up to 10% of the value of their total imports from the new zero tariffs by putting those products on a “sensitive list,” with barriers coming down gradually over the next few years.

Some nations like Singapore, a rich, open economy and a major exporter of high-tech products, have few items on the list. But countries that compete directly with China to export lower-end manufactured products, such as Indonesia, the Philippines and Thailand, have excluded hundreds of items each.

In Indonesia, some businesses say they weren’t adequately consulted over what products should go on the exclusion lists.

Thousands of Indonesian workers staged a rally last week in Bandung, a large city on Java and a textile-production center, to ask the government to postpone the free-trade pact, local media reported.

Ade Sudradjat, deputy chairman of the Indonesian Textile Association, said around 271 textile and garment companies have gone bankrupt in the past two years as imports from China increased. Indonesia, he said, has lagged China in building infrastructure and implementing business-friendly policies, such as preferential lending rates from state-owned banks, making it hard to compete.

Trade Minister Mari Elka Pangestu said last week that Indonesia would stick by its “international commitments” but had set up a special government body to look into concerns raised by business. A trade ministry spokeswoman declined to confirm whether the government had asked Asean for a postponement of the free-trade pact for some goods.

“I don’t know why they are complaining only now,” Rodolfo Severino, a former Asean secretary-general, said about the Indonesian request for changes.

Mr. Severino, who now heads the Asean Studies Center at the Institute of Southeast Asian Studies in Singapore, said that large nontariff barriers to trade in the region will continue to protect some domestic industries despite the free-trade agreement. These include cumbersome customs procedures, labeling requirements and product specifications that stanch the flow of trade, he said.

—Sue Feng in Beijing contributed to this article.

Write to Tom Wright at tom.wright@wsj.com and Yayu Yuniar at yayu.yuniar@wsj.com

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