Johannes Nugroho: What Should Indonesia Do on US-China Trade War?

As the United States and China are locked in a trade spat, Indonesia looks set to be dragged into what may escalate into a global trade war. (Reuters Photo/Darren Whiteside)

By : Johannes Nugroho | on 12:27 PM July 09, 2018
Category : Opinion, Commentary, Featured

As the United States and China, the world's two largest economies, are locked in a trade spat through mutual slapping of tariffs, Indonesia looks set to be dragged into what may escalate into a global trade war. In a bid to address the trade surplus of around $9 billion enjoyed by Indonesia against the US, President Donald Trump reportedly wants to revoke the special tariffs his country applies for Indonesian products, especially textiles.

The move is bound to be detrimental to our economy. What can the Indonesian government do to defend the country's trade interests and minimize the damage a global trade war is poised to do to our exports?

Despite not ruling out retaliatory tariffs, the Indonesian Trade Minister Enggartiasto Lukita said he would first prioritize trade diplomacy. "We need to lobby [the US government]. We already have sent letters to the USTR [United States Trade Representative] and the US Embassy here."

By contrast, those in the textile industry want to see a more militant approach. Ade Sudrajat, chairman of the Indonesian Textile Association (API), told the Jakarta Globe: "If [a higher tariff] is imposed, it will be a huge obstacle for the textile industry, so it must be countered. If we keep quiet, then we become the losers." He suggested that Indonesia could use its sizeable imports of US agricultural produce as a bargaining chip.

But how realistic would threatening the US with jacking up tariffs for its agricultural exports to Indonesia? Given that China already tried the same thing with its huge imports of soy beans and sorghum from the US, and failed to elicit favorable response, the likelihood of Indonesia’s success in so doing is negligible.

China was the US' single largest importer of soybeans before the spat, followed by Indonesia, with one-third of all soybeans grown in the US destined for its shores. US soybeans export to China is worth $12 billion annually, 60 per cent of its agricultural exports to China.

American soybeans have also for years dominated Indonesia's market, making up about 70 per cent of national consumption, with the rest coming from Brazil, Uruguay and Canada. Since soybeans are the main ingredient in national staples such as tempeh and tofu ─ traditionally an important source of protein for the majority of Indonesians ─ imposing a high import duty on the commodity would naturally result in price hikes for its derivative products.

While price hikes are universally unpopular both in Indonesia and China, the latter's government at least does not have to contend with elections as the former. With the national legislative and presidential elections coming up next year in Indonesia, the government will without fail try to curb inflation, especially for daily staples, as best as it can.

Intransigence may also see further complications. Even if both China and Indonesia boycotted American soybeans and diverted their purchase from alternative countries like Brazil, the question remains whether the new source-countries could cope with the sudden surge in demand, further threatening instability in the global price for soybeans.

As inspiring as China’s ongoing tit-for-tat tariff spat with the US may be for Indonesia’s nationalists, it remains an unrealistic option for the country to take, if we take into account our long-term trade interests and our own economic sustainability.

Yet doing nothing or to be seen so would also spell trouble for the government and is not an option. It is safe to say that the majority of Indonesians would be averse to seeing the country powerless in the face of such a trade assault by the US.

Fortunately, there are at least two avenues of efforts which are readily available to the government: First, our independent diplomatic endeavour to lobby and negotiate with the US government must continue at all levels.

Since President Joko "Jokowi" Widodo designated the country's "economic diplomacy" as paramount in the pursuit of our foreign policy, the current trade tension will be testing ground for the metier of Indonesia's Ministry of Foreign Affairs to coordinate action with the Ministry of Trade to find a compromise with the US over trade issues.

Second, Indonesia should also pursue a multilateral effort through Asean to maximize our trade diplomacy with the US.

The current US-China trade showdown is estimated to result in a cascading effect throughout Asia as goods made in China, electronics for instance, often incorporate components manufactured elsewhere on the continent, notably in Southeast Asia — Thailand, Vietnam and Malaysia. A full-blown trade war between the world’s two biggest economies may also see global trade traffic decimated, affecting port cities like Singapore.

In short, it is difficult to imagine a scenario in which the other Asean members could insulate themselves totally from the fallout of a trade war between the US and China. Hence it would make sense that Asean as the region’s trading bloc take a unified stance to protect its members and regional trade as a whole.

The upcoming 50th Asean Economic Ministers' Meeting in late August in Singapore will be an ideal forum in which Indonesia can push for a unified stance by Asean on the region's trade issues with the US.

While it is hard to foresee if the ongoing "trade war" will be short-lived or otherwise, the Indonesian government must be prepared for any eventuality. It may be impossible to avoid all its adverse effects but minimizing them is our only option.

Johannes Nugroho is a writer from Surabaya. He can be contacted at johannes@nonacris.com and on Twitter @Johannes_nos.

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