Trade war and political turmoil in Indonesia

Salamuddin Daeng
Indonesia Political Economy Association (Asosiasi Ekonomi Politik Indonesia – “AEPI”) Economic Observer

IO – “Indonesia has lost its ability to prepare for external trade wars, while nationally, the government has lost momentum for political consolidation, because of the divide in politics that has been taking place in our country.” 

The trade wars between USA and China will result in various negative impacts on our country’s political and economic landscape: 

Trade war will further aggravate the trade deficit in Indonesia. This is because Indonesia is not involved in the trade war, and will allows the market to be flooded with imported goods. 

The trade war will further weaken global economic growth. This weakening will impact on the decrease of commodity prices, while Indonesia is fully dependent on commodity exports. 

The trade war will widen the trade deficit between China and Indonesia. It is known that China dominates the import of various goods to Indonesia, while Indonesia is dependent on the export of commodities to China. When the price of commodities is falling, then revenues from Indonesian exports will also decrease, while imports cannot be avoided. 

The trade war will cut the trade surplus between Indonesia and US, even though, so far, Indonesia has been enjoying a trade surplus with that country. In the future, the surplus momentum will be even narrower. 

Other countries which will become a target of Indonesian exports will also limit their own markets. Therefore, Indonesia will lose a lot of export markets. It is because many of Indonesia’s partners are facing this problem and react with protectionist regulations. 

The trade war will push the emergence of increasing subsidy policies in developed and developing countries, while Indonesia lacks the ability to run subsidy policies, because of State Budget problems. As a result, Indonesia’s economic competitiveness will further weaken. In the future, many national industries will end up bankrupt. 

The trade war will directly impact Indonesia’s State Budget, supported by tax revenues from commodities sector, namely oil, palm oil, coal, etc., as their prices continue to spiral downward in the Indonesian marketplace. 

The trade war will further tighten global liquidity and interest rates will keep increasing, while Indonesia is very dependent on debt in finance markets. As a result, pressure on the State Budget will be very severe due to the difficulty of securing new debt and an increasing burden of debt interest payments. 

The trade war will not only trigger bleeding in our government Finances, but will also make the Private sector in Indonesia suffer. They’ll lose a lot of commodities export markets while debt in the private sector keeps on piling up. In the future, many private sector firms will be forced to declare bankruptcy or sell their companies at bargain prices. 

The trade war will weaken Indonesia’s economic growth. It means the Gross Domestic Product (GDP) will fall, tax revenues will dry up, and the deficit will yawn. This condition could push the State Budget deficit to exceed the limit set by State Financial Law; the implication of this could result in the impeachment of the current president by the Parliament (DPR). 

The trade war will further trigger political turmoil in Indonesia. It will cause the world to distrust the Indonesian government and arouse the people’s distrust. This condition is exacerbated by Indonesia’s political turmoil post-2019 elections, and will further increase political tension in Indonesia. Many problems and the growing divide in Indonesia’s political power as a result of the 2019 elections will spur the emergence of people’s resistance to the government, which continuously exerts hard pressure on Indonesian political movements.