US-China trade war cools down: What’s in it for Indonesia?

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(photo/illustration: IO/Team)

IO, Jakarta – Trade tensions between the United States (US) and China have cooled down a little. This is because US President Donald Trump and China President Xi Jinping met informally amid the G20 Conference held in Osaka, Japan.

US President Donald Trump said that negotiations have gone well and will return to their original track. He further stated that he does not hold any hostility against China, and he hopes for better relations between the two countries. He stated that the meeting will generate a fair and historic trade agree­ment.

The US and China agreed to discuss the issue of trade tensions recently. The US finally agreed to not implement new tariffs on Chinese exports. The dispute between these two massive economic powers has caused billions of US dollars in lost revenues for companies in both countries, disturbed production and global supplies, and disrupted global markets.

Simply for background information, we need to note that the US-China trade wars started when Trump was upset with the fact that his country’s trade balance with China constantly recorded deficits. He then decided to implement protections, which he considered to be the correct step to get the US out of a trap of trade deficits. Trade wars were began. On 22 January 2018, the US raised the entry tariff of solar panels and washing machine imports at 30% and 20%, respectively. Afterwards, China retaliated against the US by raising entry tariffs for import products from the US fourfold. The US retaliated in turn with a five-fold entry tariff import raise. Trade war tensions continued to increase in May last year after the US increased entry tariffs for Chinese products again by USD 200 billion, or from 10% to 25%, because it considered China to have obstructed trade war negotiations. 

Impact on Indonesia
Now that trade wars have cooled down between the two countries, what impacts do they have for Indonesia? According to the Institute for Development of Economics and Finance (Indef) Economist Bhima Yudhistira, the result of Trump and Xi’s Summit in G20 is actually only the restart of the trade negotiations that were totally stuck before. In other words, the calm will be temporary, because more detailed tariff negotiations remain tough. Both the US and China have their own unnegotiable stances. We can say that there is still a huge risk of another trade war occurring at any time, especially since Trump is also using the trade war issue to gain votes in the upcoming 2020 US Elections.

According to Bhima, the cooling down of trade wars can become an opportunity for Indonesia to encourage exporters to realize long-term sales contracts. Earlier, many contracts were suspended to see how the G20 Summit turns out. If there are positive signs, long-term exports can increase. Indonesia can also encourage the relocation of industries from China and the US to Indonesia. “Industries such as textiles, footwear, gloves, and electronics have the prospect of getting attracted to Indonesia,” Bhima said.

Unfortunately, Bhima admitted, this condition might not improve Indonesia’s trade balance yet, due to an acute deficiency Indonesia suffers: petroleum and natural gas deficits. Oil needs continue to increase, while supply obtained from lifting continues to decrease. Our dependence on imported petroleum fuel makes it difficult for us to significantly reduce our trade deficits.

Meanwhile, Center of Reform on Economics (CORE) Indonesia’s Executive Director Mohammad Faisal said that the cooling down or ceasefire of trade wars means that entry tariffs will not increase – but they will also not return to their initial levels. This means that pressure towards global trade and economic growth will not continue to rise. Indonesia is greatly affected by the trade wars, as it is difficult for our exports to enter destination countries involved in it. To make it worse, there are excess exports from outer countries, especially from China. We might potentially continue to face this issue in the future. Temporary cease of trade wars does not mean that exports become easier instantly, but we still face huge challenges. Imports have also slowed down and goods that cannot be exported to Europe will be marketed to countries with large markets such as Indonesia. This is a pressure against our trade performance that we still need to face in the future.

At the same time, trade wars also cause other effects, especially in investments: several industries are being relocated from China. The biggest destinations for this move so far are Vietnam and several other Southeast Asia countries, such as Thailand, Cambodia, Indonesia, and Malaysia. This means that we still have opportunities to benefit from this industrial relocation in the future.

Even though entry tariffs have not risen, there are still other pressures our exports. The trend is to continue protectionism, meaning that it is still hard for our products to enter America. Several other countries also copied America’s policy of increasing entry tariffs. For example, India also increased theirs and the entry tariffs of Indonesia’s palm oil, affecting our exports of this commodity there. The Philippines also has a strong trade balance deficit, especially with Indonesia.

Other than trade war issues, Indonesia also faces other pressures against its exports, such as environmental issues causing Indonesia’s palm oil exports to Europe to become limited. At the same time, several export opportunities to America might remain in constant evaluation under special facilities such as GSP (Generalized System of Preference). These pressures on our exports make it even harder for us to increase them.

“If it is hard for our exports to increase while we cannot control imports; it will be hard for us to cover our trade deficits. In other words, we will still be exposed to trade deficit issues in the future, unless the new Government or cabinet makes breakthroughs for organizing domestic manufacturing industries more properly, making fundamental domestic transformations to resolve this issue and improve our trade performance. Furthermore, we need to seek unusual export opportunities to countries that we traditionally do not seek to sell to, such as to the Middle East, Central Asia, Africa and Latin American countries. We need to explore such opportunities,” Faisal said.

Rizal E. Halim, University of Indonesia Economic Observer, notes that trade wars cause many Chinese products to be unacceptable in America, and this has the advantage of allowing Indonesia to export replacement products. On the other hand, now more Chinese products originally aimed for the American market are flooding Southeast Asian countries, including Indonesia, thus pumping our imports.

In terms of exports, no increase of entry tariffs will naturally be ideal. However, this would also mean that imported products that are more competitive than domestic products would take over from these domestic products. In other to avoid this, we must be able to select which strategic industries that we need to protect, and even protect them by using measures such as regulated in the General Agreement on Tariffs and Trade (GATT).

Rizal also stated that the cooling down of trade wars does not mean that Indonesia’s exports will automatically improve, because our exports are inextricably linked with things such as product and service competitiveness level, national economic efficiency, production efficiency, quality standards, etc. Meanwhile, within the past 5 years, our exports have been less than stellar. Trade balance deficits occurred because our products are neither excellent nor competitive, our industries’ production efficiency is low, our government policies are not supportive, and our market expansion is not optimal. These are the reasons we cannot improve our export performance properly.

Our trade balance deficit will decline if we can optimize our production, improve our industrial competitiveness, and secure the Government’s political support through appropriate regulations. For example, we might create rules that would help us improve our horticultural products and horticultural industrial production efficiency for exports, so that we can rival Thailand’s globally-renowned products.

Fuad Bawazier, Senior Economist, said that the US-China trade wars should not be viewed simplistically, as they are actually a battle for global supremacy. America as a superpower is now getting afraid that China will surpass it. This is entirely possible, because China has many advantages from the globalization of world economy, especially capital and currency reserve, and technology gained from Western countries. This allows China to become a global-scale producer of reliable and affordable goods. With this capital, China strengthens its military and political powers. 40 years after US President Richard Nixon’s visit in 1971, China finally obtained extensive access to Western technology. In the early days of globalization, Western powers, especially America and England, thought that China will be a huge market for their products with its large number of citizens. The tables are unexpectedly turned: China did not become a consumer of the West; instead, it has become a producer and it is the West that is China’s consumer.

Let’s take the Huawei case as an example. It has become the foremost communications business by developing 5G technology. The impact is so great, that it even shocked President Trump. He has frequently stated that his treatment of China is something that American presidents before him should have done, and now he must bear the burden of trying to stave off China’s superiority. “Otherwise, supremacy will be moved. This trade war is just the tip of the iceberg: what is underneath is a struggle for supremacy between these two races. Therefore, this will be a long, drawn-out battle. We must be aware that in mid-1990’s, the greatest countries in the world were known as “G7” countries: Canada, France, Germany, Italy, Japan, Great Britain, and the United States. They controlled nearly 47% of the world’s GDP. Meanwhile, the next biggest group of countries, the “E7” of Russia, China, India, Mexico, Brazil, Indonesia, and Turkey controlled only 22% of global GDP. Now the tables are turned: G7’s global GDP percentage has fallen from 47% to 31%, while E7’s percentage has increased to 36% of global GDP. The dominant power has shifted. This means that the productivity level, per capita income, and welfare level of E7 countries have increased and that of G7 countries have decreased. This is an unstoppable trend, yet America is clearly making the attempt,” Fuad said.

Both America and China are hurt in the trade wars. America was hit badly because it is a major technology supplier to China, but China was hit even worse from having exported to America at 4-5 times the amount it imports from that Western country. Therefore, the economic growth of these two countries has definitely decreased. Such a fall in growth is very dangerous for China, which requires a large amount of economic growth due to the high concentration of poor citizens in the country. China’s current growth rate has now fallen to 6.3%. America’s growth has also started to decrease; therefore, it will not increase interest rates any longer. America increased the dollar interest rate before, because it was enjoying good economic growth, but now it has stopped doing that because its own economic growth is stunted.

“Indonesia is among the countries which have least use for trade wars, because China preferred to avoid tariff increase to America by transferring its production to Vietnam,” Fuad said.

Stagnant Economic Growth
As trade wars are temporary in nature, Bhima stated that Indonesia’s economic growth is expected to stay in the 5% range. “Our consumption remains slow, while the recovery of export commodity prices also cannot be hoped for much in Semester 2. Meanwhile, after the Elections, Government spending is most likely going to be restricted, in order to limit State Budget deficits. Consequently, Indonesia’s economy will likely slow down,” he said.

Faisal thinks that the role of international trade in Indonesia’s economic growth is not as big as its contribution to our neighboring countries, such as Malaysia, Vietnam, Thailand, or Singapore. Indonesia is a huge country whose economy is mostly supported by domestic trade, making contributions from export-import trading to its economic growth less meaningful. The effect of global events, including trade wars or trade war ceasefires, is felt domestically. It just does not mean that the effect will be immediately felt, nor would it be immediately cause huge positive or negative impact. “Core Indonesia predicts that economic growth will be more or less the same as that of the previous year at 5.17%, but closer to the 5.1% range. In other words, we predict that our economic growth will decrease, but not significantly, or hover in a 5.1%-5.2% range,” he said.

One of the causes of this condition is trade deficits on top of the current global condition. The ceasefire would only temporarily reduce pressures on our trade, as the internal and fundamental causes of our trade deficits are not yet resolved. Such causes include the need to reorganize the manufacturing industry to improve exports, to reduce dependency on imports. We need to ensure that our efforts to encourage exports are not always followed with a greater increase of imports. This is what we must do in order to increase the contribution to the economy to approach 5.1%. On the other hand, Core Indonesia expects that contribution of fundamentals to trade will not be much bigger from that of the previous year. Trade deficits in the past year were minus USD 8.6 billion, while this year it is predicted that deficits will still occur, but at a much smaller amount, at about minus USD 7 billion.

Rizal stated that as long as domestic productivity is not improved, our exports will remain under pressure, and it will affect trade balance. This will in turn affect economic growth, because exports-imports is a significant – even if not primary – contributor to economic growth. “I doubt that our economic growth can be optimal if there are no comprehensive policies made to encourage the growth of strategic sectors such as trade and industry. Without such comprehensive policies, our economic growth will not be higher than 5%. It might even fall below that,” he said.

With the cooling down of trade wars, Fuad still sees no good impact to Indonesia’s exports. Since the trade wars, Indonesia’s economy remained under pressure. For example, Indonesia’s current transaction deficits continue to increase, and trade balance is also in deficit. Indonesia’s economic growth remains under pressure because we cannot make use of trade wars. In fact, it is Vietnam that can benefit from them. Trade wars may decrease, but only temporarily. They will rise again, because both Chinese and American economies are down. The question is: “Who makes best use of this trade war now?”  (Dessy Aipipidely, Ekawati)