Trade Wars, and what it means for Indonesia

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Irawan Ronodipuro
INDEPENDENT OBSERVER

IO – The tit-for-tat trade row between the United States and China is causing panic in equity markets and boardrooms around the world. The Trump administration’s most recent protectionist move, which was announced on Tuesday, saw Washington impose 25 percent tariffs on more than 1,300 imported goods like aircraft parts, flat-screen televisions, medical devices and batteries. On Wednesday China retaliated by announcing additional tariffs with 25 percent levies on major U.S. exports such as soy and automobiles, affecting around US$50 billion of American products annually.

Contrary to Trump’s tweets and tirades about China’s unfair trading practices—which, in many ways are true—this trade battle produces few winners. Punitive tariffs inevitably hurt consumers, workers and companies from both countries.

But the damage does not stop there, especially if the tit-for-tat spirals into a fully-blown trade war: if more and more products are placed behind protectionist walls, other countries, especially in Asia, there will be a serious disruption to supply chains; exporters of basic commodities and intermediate goods to China used in producing exportables will invariably suffer, as will their employees.

While this is very bad news, there is a silver lining, of sorts. Despite the gloom now overlooking the trade sector, there will be opportunities for smart policymakers to make China’s loss their own economies’ gain.

The Jokowi administration should take notice the American and European multinational corporations that once viewed China as the premier export platform in labor-intensive industries such as electronics, footwear and apparel will now be looking to intensify efforts to set up business in alternative low-wage economies. Japanese and Korean conglomerates, as well, which started to hedge their bets even before Trump took office due to increasing costs of production in China, have already started the process of placing more investment capital in emerging markets, especially in Southeast Asia.

One of the main beneficiaries of this transition so far has been Vietnam. Why? Hanoi’s policy mandarins understand while their economy’s low-cost labor and high labor productivity are attractive for foreign investors, they also need to provide a competitive business environment which, for the most part, they have successfully created.
If Indonesia is to benefit from the coming wave of foreign direct investment moving away from China, Jokowi and his economics advisors should learn some hard-earned lessons from their counterparts in Hanoi.

A little bit of history would be instructive. Not long after the U.S. lifted its trade embargo with Vietnam in 1994, almost 20 years after the fall of Saigon to communist forces, the old guard in Hanoi believed the time was ripe for an economic boom. Foreign investors waxed eloquent about Vietnam’s potential to reap a demographic dividend.

Yet as has happened many times in emerging markets, bad policies followed the narrative about demographics. Poor macroeconomic policies, endemic corruption, investor-unfriendly regulatory regimes and a weak judiciary with little or no protection for investors against predatory behavior eventually took its toll. Vietnam went from being the region’s hottest frontier market to pariah.

After years of subpar economic performance, Hanoi finally learned from its mistakes. Policymakers finally understood that to maintain investor confidence and attract capital, there has to be a ‘win-win’ mentality. Economic fundamentals are important, but unless CEOs feel their corporations are being fairly treated by a host country, they will simply place their money elsewhere.

Here in Jakarta, the Jokowi administration needs to understand that it is not enough to say ‘our doors are open’ to the international investment community. Hence our focus in this issue of the Indonesian Observor, where we highlight the government’s plans to seek large foreign investors for infrastructure development while, at the same time, it becomes increasingly mired in a senseless battle with Freeport McMoRan, the country’s largest mining investor and a touchstone for the view on Indonesia’s handling of multinational corporations.

Jokowi should understand that practically no foreign investor doing business in Indonesia approves of how his administration is handling the Freeport case. And after Freeport laying off 7,000 workers recently due to the pain inflicted by the government, the ball is now firmly in Jokowi’s court. (Irawan Ronodipuro)