Indonesia Should Seriously Consider Delaying Free Trade With China

By Simon Sinaga

When 2010 began, free trade with China came to full effect. The free trade agreement is nothing new; Indonesia - along with nine member countries of ASEAN (Association of Southeast Asian Nations) - inked its free-trade deal with China 10 years ago.

But Indonesian businesses now have come to their senses and realize that their backyard is now fair game for a lot of low-priced Chinese products. A top executive with national social security provider PT Jamsostek suggested that Indonesian manufacturers - including producers of textiles, steel, clothing, processed leather goods, furniture, inorganic chemicals, and energy-saving lamps - would be forced to lay off two million workers because they won't be able to compete with their Chinese rivals. The Indonesian Employers' Association went as far as predicting a loss of 7.5 million jobs. Many local industries say that Indonesia has to delay free trade or they might have to shut down eventually.

Some analysts disagree, suggesting that these fears might be exaggerated. Their argument include a reminder that ASEAN economies trade more with both Japan and the EU than with China. ASEAN also has the US, South Korea, Australia, and India as major trading partners.

Top government officials are apparently split over whether Indonesia should delay and renegotiate the agreement. The argument in favor of renegotiation and delay comes mostly from the Ministry of Industry and local industries, which fear that they will have to lay off millions of workers or shut down their operations because they simply cannot compete with low-priced Chinese imports. The ideas for going ahead with the agreement - largely from the Trade Ministry, Foreign Ministry, and several large exporters - are that China offers a large market potential for Indonesian raw materials and the agreement would entice Chinese investment into Indonesia.

However, Indonesian businesspeople whose livelihood depends heavily on domestic markets point out that they already face insurmountable competition from cheap Chinese items. With freer trade, they note, they will lose an even bigger chunk of the domestic market to Chinese products than they already have lost.

For many local industries, increasing efficiency remains far-fetched. They have been hampered by infrastructure bottleneck, particularly a lack of electricity, transportation system, and roads. So far, the government has not come up with needed solutions, not to mention that local industries have to deal regularly with costly red tape.

The other reason for the call to delay free trade originates in China itself, which intentionally has kept its currency's value low against the US dollar, the main trading currency in the Asia-Pacific region. Nobel economics laureate Paul Krugman wrote in a New York Times article that China "drains much-needed demand away from a depressed world economy" by holding down its own currency. He argued that this Chinese mercantilism justifies protectionist measures.

The outcry from local industries that they will have to slash millions of jobs, or shut down factories is legitimate. Unless there is a level playing field, free trade with China will only create a market dictatorship by the strong over the weak.

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