indonesia–china trade in acfta: mapping of...

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INDONESIA–CHINA TRADE IN ACFTA: MAPPING OF COMPETITIVENESS AND SPECIALIZATION

INDONESIA–CHINA TRADE IN ACFTA: MAPPING OF COMPETITIVENESS AND SPECIALIZATIONSPECIALIZATION

Advancing Indonesia’s Civil Society in Trade and Investment

Climate (ACTIVE) Programme

ACTIVE WORKING PAPER NO.1/2013

INDONESIA–CHINA TRADE IN ACFTA: MAPPING OF COMPETITIVENESS AND SPECIALIZATION


Climate (ACTIVE) Programme

APINDO-ACTIVE working papers are issued in joint cooperation

between Indonesia Employer Association (APINDO) and


(ACTIVE), a project co-funded by the European Union. ACTIVE project aims

to strengthen APINDO’s policy making advocacy capabilities in preparing

the business environment and to empower national competitiveness in

facing global integration.

For more information, please contact ACTIVE Project Manager, telephone

+6221-8378-0824 or visit www.apindo.or.id where copies are available

in pdf format. The authors may be contacted at [email protected] or

[email protected].

Further information about ACTIVE project can be accessed at:

www.apindo.or.id/index.php/trade-a-investment/active-project/tentang-

active-project.

ACKNOWLEDGEMENT

The contents of APINDO-ACTIVE working papers are the sole

responsibility of the author(s) and can in no way be taken to

reflect the views of Indonesia Employer Association (APINDO)

or its partner institutions. APINDO-ACTIVE working papers are

preliminary documents posted on the APINDO website (www.

apindo.or.id) and widely circulated to stimulate discussion and

critical comment.

Disclaimer

2

APINDO-EU Active Project Team Members:

Tiarma Fitriani P. (Project Manager)Fandi Achmad (Economist)Rosa Situmorang (Economist)Daniel P. Purba (Public Affairs & Media Officer)

After the full implementation of ACFTA on January 1, 2010, zero

tariffs have been imposed on 6,682 tariff posts in 17 sectors.

Zero tariffs make even bigger trade deficit compared to 2011 for

Indonesia. ACFTA also impacts the growth of industries and restructures

the supply chain network in the region. Experience with ACFTA is strongly

influencing public perception about the responsiveness of the government

to improve trade and investment environment in order to be prepared for

more open trade and investment.

The closer integration puts Indonesia in a severe competition because

China’s products are cheaper and substitutive to Indonesia’s products. Hence,

Indonesia should also be aware of its competitiveness and specialization

in trade with China to survive in the ACFTA.

This study maps the changing pattern of trade competitiveness and

specialization between Indonesia and China. This map shows products

in which Indonesia is more specialized in bilateral trade with China. In

addition, when a country has competitiveness in producing goods relatively

to the average ability of the world, it does not necessarily mean it has

specialization in bilateral trade. Therefore country to country analysis

should be considered in making trade policies for the next international

trade agreements.

We would like to thank Rosa Situmorang and Fandi Achmad for conducting

this study. We also like to appraise the contribution of Advancing Indonesia’s

Civil Society in Trade and Investment (ACTIVE) program which address the

lack of capacity in APINDO to analyze, evaluate and advocate adequately

the Indonesian business sector’s interests in many free trade agreements.

After all, we believe that the findings in this study will give great insight

for policy makers and our social partners. We hope it will generate useful

discussions and give significant contribution to Indonesia’s development.

Sofjan Wanandi Chris Kanter

General Chairman Vice ChairmanIndonesia Employer Association (APINDO) Indonesia Employer Association (APINDO)

FOrE WOrD

3

4

Abstract I 6

Overview ASEAN–China Free Trade Area I 7

Indonesia-China Trade: Facts and Figures I 13

Methodology I 19

Data I 19

Trade Competitiveness I 19

Trade Specialization I 24

Mapping: Indonesia–China Trade Commodities I 25

Analysis of Indonesia-China Trade Competitiveness and

Specialization I 27

Recommendation I 32

References I 33

Appendix I 35

Figure 1.1 Indonesia’s Free Trade Agreement through ASEAN

Figure 1.2 Historical Lines of ASEAN-China Free Trade Area

Figure 1.3 Approaches to Establish ASEAN-China Free Trade Area

Figure 1.4 Types of Wholly Obtained Product in Rules of Origin

Figure 1.5 Commitments to Open Up Services

Figure 2.1 Indonesia-China Trade Growth 2007-2011

Figure 2.2 Indonesia-China Export-Import 2007-2011

Figure 2.3 Indonesia’s Largest Export Value to China

Figure 2.4 Indonesia’s Largest Import Value from China

Figure 2.5 Indonesia’s Import Pattern from China 2001-2011

Figure 2.6 Indonesia’s Export Pattern to China 2001-2011

Figure 3.1 The Evolution of Trade Competitiveness Measurement

Figure 3.2 Mapping of Trade Competitiveness and Specialization of

ASEAN-China Free Trade Area

CONTENTS

FIGUrES

5

Table 1.1 Schedules of Tariff Reduction in ASEAN-China Free Trade

Agreement

Table 3.1 Comparison of Six Comparative Advantage Measurement

Table A3.1 Products with Export Growth Above 400% p.a. of 2007-

2011 calculation

Table A3.2 Products with China as Main Market for Indonesia’s Export

Figure 4.1 Indonesia’s Trade Distance Indexes against China (Top 10

Specialized Commodities)

Figure 4.2 China’s Trade Distance Indexes against Indonesia (Top 10

Specialized Commodities)

Figure 4.3 Indonesia-China Trade Commodities Mapping 2004

Figure 4.4 Indonesia-China Trade Commodities Mapping 2011

Figure A2.1 Indonesia’s Trade on Section TTA 2011

Figure A2.2 Indonesia’s Trade of TTA and Cotton 2001-2011

Figure A2.3 Share of Cotton Commodities 2011

Figure A3.1 Export Share Based on the Distribution of Export Growth

(2011)

Figure A3.2 Share of Export to China Based on the Distribution of

Export Growth (2011)

TABLES

6

ABSTr ACT

ASEAN- China Free Trade Area (ACFTA) opens opportunities for

Indonesia to gain benefit from non- tariff barriers on several

products. There are some competitive areas in which Indonesia

has comparative advantage in the world trade. However, in the context

of bilateral trade, the relative specialization between Indonesia and China

more precisely determines the trade opportunities. This paper presents

commodities competitiveness and specialization mapping of Indonesia-

China trade. Competitiveness represents the comparative advantage of

a country on certain commodities in the world trade and specialization

explains the relative difference of comparative advantage within two

countries in bilateral trade. The map explains Indonesia’s areas of

specialization and the sectors which need attention.

Keywords: ACFTA, FTA, Specialization, Competitiveness.

Indonesia grows many regional trade agreements through ASEAN in recent years.

As a part of the ASEAN, Indonesia has several free trade agreements with China, Korea,

Japan, India, Australia, New Zealand, and 9 members of ASEAN itself. The increasing

tendency to form trade agreements deserves special attention, particularly in regard to

the advantages and disadvantages. Therefore, every free trade agreements have to be

examined and directed to prioritize Indonesia’s interest.

FigurE 1.1 indoneSia’S free Trade agreemenT Through aSean

One of default in these agreements is when Indonesia did not prepare yet for ASEAN –

China Free Trade Area (ACFTA). ASEAN-China Free Trade Area (ACFTA) is an agreement

between countries members of ASEAN with China to create a free trade area by eliminating

or reducing tariff or non-tariff barriers to trade in goods, increasing market access to

services, reforming rules and regulations of investment to improve the welfare of ASEAN

countries and China. ACFTA provides opportunities to increase export from Indonesia.

Ibrahim (2010) found that Indonesia obtained a net trade creation amounted to 2%

and total export growth increased by 1.8%. However, the commodity structure of China

and the non-competing behavior of ASEAN countries including Indonesia (tends to be

complement) caused China is relatively easier to penetrate export to the ASEAN market

than ASEAN itself (Ibrahim et al, 2010).

Despite several disadvantages, there are some reasons why ACFTA becomes important.

Jian (2003) has pointed out why Southeast Asia would maintain its strategic advantage

in its relations with Northeast Asian countries, particularly China. Firstly, it provides a

key strategic infl uence for both parties. For China, in particular, ASEAN is an important

regional forum to counter the US infl uence. Secondly, ASEAN and China have strategically

important geo-political reason, as most of world trade must pass through ASEAN and China.

Thirdly, ASEAN and China have also perceived the growing population of Southeast Asia

as a potential market to penetrate. Therefore, the deepening of economic integration is

seen as crucial by leaders of both regions.

OVERVIEW ASEAN–CHINA FREE TRADE AREA

8 Indonesia-China Trade in ACFTA: Mapping of Competitiveness and Specialization

ACFTA has built up by its long story. The formation of ACFTA can be traced back to Chinese

Premier Li Peng’s visit to Bangkok in 1989 when he stated four principles in establishing,

restoring, and developing relations with all ASEAN countries. These were: (1) peaceful

coexistence despite differences in social and political systems, (2) anti-hegemonic ideology,

i.e. China will not seek to be a hegemony power nor will it interfere in the domestic affairs

of ASEAN countries, (3) further development of economic relations and (4) continuing

support of regional cooperation and initiatives from ASEAN (Baviera, 1999). Since then,

there have been signifi cant milestone in China – ASEAN economic cooperation.

Economic cooperation opened up in the year 1991. Qian Qinchen, Chinese Foreign Minister,

attended the opening of ASEAN Ministerial Meeting in Kuala Lumpur on July 1991. He

showed China’s interest to cooperate with ASEAN. It is responded positively by agreement

to establish two joint committees - Joint Committee on Scientifi c and Technological

Cooperation and Joint Committee on Economic and Trade Cooperation (ACJETC). These

committees were formally established in September 1993 when Dato’ Ajit Singh, ASEAN

Secretary General, visited Beijing. During the talks on economic and trade cooperation,

ACJETC mainly exchanged views on international and regional economic issues and

discussed how to put forward bilateral trade and investment cooperation.

FigurE 1.2 hiSTorical lineS aSean–china free Trade area

Mapping of Competitiveness and Specialization 9

In December 1997, a document of Good Neighborliness and Good Mutual Trust was

established as the framework of ASEAN-China relations. It gave priority to economic

relations and trade with the principle of comparative advantages and mutual benefi t.

It also encouraged the cooperation in the areas of resources, technology, market, banking,

information, human resources, development and investment.

As real steps on economic cooperation in ASEAN, China respectively signed framework

documents on bilateral trade cooperation with Thailand and Malaysia and signed joint

statements on future cooperation with Viet Nam and Brunei in 1997. Moreover, China had

already signed all bilateral trade cooperation documents with each ASEAN countries

by the end of 2000. All of this bilateral trade cooperation encouraged ASEAN and China

to begin negotiations to set up a free trade area at The 7th ASEAN Summit in Brunei.

ASEAN-China economic cooperation progressed to a new stage in November 2002 by the

signing of Framework Agreement on Comprehensive Economic Cooperation between

ASEAN and China. It was signed by Premier Zhu Rongji and the leaders of the ASEAN

countries. Based on the agreement, the ASEAN-China Free Trade Area should cover trade

in goods, trade in services, investment, and economic cooperation with trade in goods as

the core. It included the setting rules of origin, and disciplines on anti-dumping measures,

countervailing measures, safeguards, and dispute settlement mechanism, as guarantee

methods to smooth the running of trade exchange between ASEAN and China. For areas

of economic cooperation, it encouraged to focus in 5 priority sectors, including agriculture,

information and communications technology, human resources development, investment,

Mekong River basin development and can be extended to other areas. Overall, this

agreement laid the foundations for the ASEAN – China Free Trade Area.

Through Framework Agreement on Comprehensive Economic

Cooperation, China and ASEAN countries agreed to negotiate

in within 10 years. Negotiation was directed through several

approaches in order to strengthen and enhance economic

cooperation. These approaches will be outlined into

regulations as guidance for ASEAN – China Free Trade Area.

In January 2004, ASEAN – China Free Trade Area was initially

implemented under the early harvest of agreement on trade

in goods of the Framework Agreement on Comprehensive

Economic Cooperation. Early harvest program aimed to

accelerate tariff reduction and elimination in agricultural

products as the fi rst major step in realizing free trade area.

Then, In July 2005, the tariff reduction plan was offi cially

launched. This tariff reduction plan consisted of 5 tracks

including early harvest program.

FigurE 1.3 approacheS To eSTaBliSh aSean–china

free Trade area


In January 2004, ASEAN – China Free Trade Area was initially implemented under

the early harvest of agreement on trade in goods of the Framework Agreement on

Comprehensive Economic Cooperation. Early harvest program aimed to accelerate tariff

reduction and elimination in agricultural products as the first major step in realizing free

trade area. Then, In July 2005, the tariff reduction plan was officially launched. This

tariff reduction plan consisted of 5 tracks including early harvest program.

Track Indonesia’s Products* rules

Early

Harvest

Program

8 (HS 2 Digit)

Products with applied MFN tariff rates higher than 15% should reduce

not more than 10 % by January 1, 2004, not more than 5% by January

1, 2005, and 0% by January 1, 2006

Products with applied MFN tariff rates between 5% and 15% should

reduce not more than 5 % by January 1, 2004 and 0% by January 1, 2005

Products with applied MFN tariff rates lower than 5% should reduce to

0% by January 1, 2004

Normal

Track I

1880 (HS 6 Digit) By July 1, 2005, should reduce tariff at 0% - 5% for at least 40% tariffs

line placed in the normal track

2820 (HS 6 Digit) By January 1, 2007, should reduce tariff at 0% - 5% for at least 60%

tariffs line placed in the normal track

6683 (HS 6 Digit) By January 1, 2010, should eliminate all tariffs for tariffs line placed in

the normal track

Normal

Track II

263 (HS 6 Digit) Flexibility to have tariffs of some tariff line under normal track I, not

exceeding 150 tariff lines and eliminated by January 1, 2012

Sensitive

Track304 (HS 6 Digit)

Sensitive track placed for 400 tariff lines at the HS 6-digit level and

10% of the total import for Indonesia. Value is based on 2001 trade

statistics

MFN tariff rates for products placed in the Sensitive track shall be

reduced to 20% by January 1, 2012

Tariff rates shall be subsequently reduced to 0%-5% by January 1,

2018

Highly

Sensitive

Track

47 (HS 6 Digit)

Tariff placed in the highly sensitive track should be not more than

40% of the total number of tariff lines in the Sensitive Track or 100

tariff lines at the HS 6-digit level

MFN tariff rates for products placed in the Highly Sensitive Track shall

be reduced not more than 50% by 1 January 2015 for ASEAN 6 +

China and January 1, 2018 for newer ASEAN member

TablE 1.1 ScheduleS of Tariff reducTion in aSean- china free Trade area

Source: Agreement on Comprehensive Economic Co-operation between the Association of South East Asian

Nations and the People’s Republic of China Document. * Ministry of Trade of Indonesia


Beside tariff reduction, there are other

regulations to support trade between ASEAN-

China. One of the regulations gets concern

from trader is the rule of origin. The products

imported by a trader should be deemed to

be originating and eligible for preferential

concessions if they conform to the origin

requirements. Rules of origin divided products

to wholly obtained product and not wholly

obtained product. For not wholly obtained

products, it can be traded if they fulfill

minimum 40% of its content originates

from any party (ACFTA member countries)

or if the total value of the materials produce

originating from outside of the territory of a

Party (i.e. non-ACFTA) does not exceed 60% of

the FOB value of the product. In the free trade

area, rules of origin discourage aggregate trade

fl ows and encourage trade in intermediate

goods (Estevadeordal and Suominen, 2005).

Thus, Indonesia has to respond to it carefully.

Besides trade in goods, ACFTA also look at the

opportunity of trade in services. ASEAN and

China agreed to liberalize trade in services

with substantial sectors coverage. In this case,

Indonesia committed to open up new market in 10 services area while China opened

5 services area (Directorate General of International Trade Cooperation of Indonesia,

2010). Trade in services is boosted through progressive elimination of substantially all

discrimination between countries, except for measures permitted under Article V(l)(b) of

the WTO General Agreement on Trade in Services (GATS). The exceptions are only for the

purposes to: (1) protect public morals, (2) protect human, animal, and plant life, (3) secure

compliance with laws or regulations which are not inconsistent with the provisions of this

agreement, and (4) safeguard balance of payment.

Services play a major role in all modern economies. Indeed, it would be hard for any

economic activities to run without services such as telecommunications, banking and

freight logistics. Then, an effi cient services sector is critical for trade in goods and economic

growth. Furthermore, promoting greater trade in services through open markets and

non-discriminatory treatment can lead to higher employment levels, higher incomes and

higher standards of living through jobs creation in this fi eld.

FigurE 1.4 TYpeS of whollY oBTained producT in ruleS of origin


The opening of certain services sectors can create competition and provide consumers

with access to a broader range of services. It also brings out a greater depth of expertise

from domestic and overseas. In addition, openness in services influences long run growth

performance. Mattoo, et al (2001) estimated that countries with fully open telecom and

financial services sectors grow up to 1.5 percentage points faster than others (Mattoo et

al, 2006). Indonesia openness in services seems to grab this opportunity.

Ultimately, the establishment of ASEAN-China Free Trade Area would welcome an economy

area with USD 1.9 billion consumers which are 27.8% of total consumer in the world. It

also produces over USD 9.4 trillion of GDP (13.56% of world GDP) and USD 6.05 trillion of

total volume of trades, 16.8% of total volume of trade in the world (2011)1. ASEAN-China

Free Trade Area would be one of the most populous free trade area of the world, and the

largest free trade area formed by developing countries.

COMMITMENT TO OPEN UP SErvICESINDONESIA CHINA

1. Business Services (Computer Related Services, Real

Estate Services, Market Research, Management

Consulting)

2. Construction and engineering related services

3. Environmental Services

4. Transport Services

5. Recreational, Cultural and Sporting Services

6. Tourism and travel related services

7. Educational services

8. Telecommunication services

9. Health-related and social services

10. Energy services

1. Business Services (Computer Related Services,

Real Estate Ser vices, Market Research,

Management Consulting)

2. Construction and engineering related services

3. Environmental Services

4. Transport Services

5. Recreational, Cultural and Sporting Services

Source: Directorate General of International Trade Cooperation, Ministry of Trade of Indonesia

FigurE 1.5 commiTmenT To open up ServiceS

1 Calculation based on World Bank data. Data is in 2011. Data is accessed in 2012.


2 The growth rate is based on the calculation of International Trade Centre, the computation formula of the growth rate over fi ve years is the following: ( ((∑

) ∑

) )

Where is the value of the i-th year in current US Dollar. More information about the calculation can be accessed in the web www.trademap.org.

The full implementation of ACFTA on January 1, 2010 has abolished the tariffs on 6,683

posts in 17 sectors. This free trade was established to strengthen trade partnership

between China and ASEAN countries by creating a wider space for both parties to

expand their trade. In 2011, Indonesia’s export value to China reached USD 22.94 million

and the import value reached USD 26.21 million. The trade volume had been fl ared for

more than ten times within the last decade, while in the last fi ve years Indonesia’s import

value has grown 29% p.a. and export grew 22% p.a2.

ACFTA successfully jacked up the trade volume between two countries. The trend of

Indonesia-China trade shows an ascending trade value, especially steeper in the last fi ve

years (Figure 2.2). In fact, the diminishing of trade barriers (which actually have started

gradually since 2005) has given a big hit in Indonesia’s trade balance. The free tariffs have

blown-in a huge amount of commodities from China. The products infl ow grew more

rapidly than the outfl ow causing defi cit trade balance records for Indonesia since 2008.

In 2010, when the ACFTA was fully implemented, the defi cit was over USD 4 billion. The

export capacity of China was supported by the investment climate and infrastructure

inDonesia-CHina traDe: FaCts anD FigUres

FigurE 2.1 indoneSia-china Trade growTh 2007-2011

Source: International Trade Centre, based on calculation of UN COMTRADE


which boosted up the industrialization. In 2011, the industrial production growth rate3 of

China was 13.90%, while Indonesia was left far behind by 4.10%. The gap of industrial

production growth also refl ects Indonesia’s lack of capacity to enter the FTA with China.

The downstream industries were not supported by upstream industries and still relied on

imported capital goods and raw materials.

FigurE 2.2 indoneSia-china exporT-imporT 2007-2011


Mineral fuels, oil and distillation products became the largest Indonesia’s chapter of export

commodities4 to China, with the volume of export in 2011 reached USD 8,923 million

(Figure 2.3), followed by animals/vegetable oils, ores, rubber, and organic chemicals. The

export value of those fi ve chapters was more than 80% of Indonesia’s total export to

China. The main mineral export commodity was coal (included bituminous coal) with the

value of USD 6,007 million or 67% of total exported mineral products. The export of coal

had grown very fast within the last fi ve years with the annual growth between 2007-2011

more than 80% p.a.

Among the ten largest chapters of export commodities, ores, slag and ash grew the fastest

within 2007-2011 with 46% p.a. The largest value of exported ore was nickel (41.1%),

aluminum (27.1%), copper (16.7%) and iron ore (10.4%). Iron ore was the fastest growing

ore commodity with the annual export growth rate in 2007-2011 up to 80% p.a.

3 Industrial production rate is the annual percentage increase in industrial production, including manufacturing, mining, and production (data from Central Intelligence Agency United States’ World Fact Book, https://www.cia.gov/library/publications/the-world-factbook/).

4 Chapter of Commodities is a group of commodities which is classifi ed based on 2 digits Harmonized System (HS) by World Custom Organization.


FigurE 2.3 indoneSia’S largeST exporT value To china


On import side (Figure 2.4), machinery and electrical equipment were the largest

commodities in 2011 with the value for both commodities remarkably exceeding USD 10

billion. The largest value of imported products in the chapter of machinery was portable

digital computers (USD 1,113 million) and the largest value of imported electrical equipment

was telephone (for cellular networks mobile telephones/ for other wireless) with the value

of USD 1,000 million.

There are some highlights on the data of Indonesia’s import from China. First, the third

largest import value in 2011, iron and steel, showed a deceleration in 2007-2011 of 1% p.a.

The decline of iron and steel import value was in accordance with the revision of import

regulation which was enforced to control the import of iron and steel5.

5 The Ministry of Trade has issued several regulations to restrict the import of iron and steel by requiring the importers to have a surveyor report documents (Regulation No. 21/M-DAG/PER/6/2009). The Regulation No. 21 then had been revised by Regulation No. 8/2009, this new regulation required all importers of iron and steel to register as producer importers (or registered importers) and to do a technical verifi cation at the loading por


In the other hand, the import of cotton had the highest growth among the ten largest

import chapters of commodities. Indonesia has been a net importer of cotton since the

growing national demand of cotton was not supported by the national production. So

far, up to 99% of domestic demand for cotton has been fulfi lled by import. The estimated

volume of domestic cotton produced was only 33,000 tons per year, whereas the domestic

demand was up to 700,000-800,000 tons per year6. As the main cotton producer which

produces 29% of world cotton (based on statistics from US Department of Agriculture)7,

Indonesia’s domestic demand from grew rapidly. Indonesia’s dependence on imported

cotton brought Indonesia to uncompetitive position in its textile products. But interestingly,

out of the dependence on imported cotton, chapter cotton itself has been the fi fth largest

export to the world in section textile and textile articles8 with the value of USD 811 million

in 2011. This fact indicated some possible situations in domestic cotton industry. First, it

might show the intra industry product specialization and the second, it might indicate

the unmatched demand and supply of cotton between the upstream and downstream

industry in Indonesia, see [APPENDIX 2].

FigurE 2.4 indoneSia’S largeST imporT value from china


6 Indonesia’s main suppliers of cotton were US, Brazil, and Australia (http://industri.kontan.co.id/news/walau-harga-naik-industri-tekstil-tetap-genjot-impor-kapas--1).

7 The data can be retrieved from Nationmaster (Nationmaster is a vast compilation of data from such sources as the CIA World Factbook, UN, and OECD). It can be accessed through the website www.nationmaster.com.

8 The section textile and textile articles based on HS 2012 contents 14 chapters of commodities in textile and textile articles industries.


FigurE 2.5 indoneSia’S imporT paTTern from china 2001-2011


9 The term SECTION is based on the Harmonized System 2012 which classifi ed 97 chapters of commodities into 22 sections.

Over years, Indonesia and China have expanded the bilateral trade between both countries.

The trade pattern has also changed. Figure 2.5 and fi gure 2.6 show the Import and export

pattern of Indonesia-China over the period 2001-2011. The chapters of commodities

presented here are classifi ed by the term of sections9. With the rapid technology development

in China within last decade, the pattern of Indonesia’s import from China had also been

switched. In early 2000s, machinery and electrical equipment was not main import

commodity from China. Fantastically, in ten years the share of machinery and electrical

equipment in total import sharply grew three times bigger and dominated the import

value. At the same time, the share of chemical and mineral products gradually shrank.

As the switch of the import pattern from mineral products to high-tech commodity, the

export pattern of Indonesia to China also changed. As mentioned before, the mineral

products became the largest Indonesia’s export to China with the share of more than half

of Indonesia’s total export to China. Animal/vegetables oil share also grew more than two

times in ten years. The main commodity in this category is palm oil with the value of

USD 2,080 million in 2011 and 25% growth p.a. in the last fi ve years. On the other hand,

the share of pulp and paper declined incisively.


FigurE 2.6 indoneSia’S exporT paTTern To china 2001-2011



METHODOLOGY

DATA

This research aims to map trade competitiveness and specialization between Indonesia

and China before and after ACFTA. It also tries to examine the changing pattern

of competitiveness and specialization between the two countries. Therefore, trade

competitiveness and trade specialization become two main variables in this research. Details

of these variables including the development are explained below. Trade competitiveness

is proxied by Normalized Index (NI) while trade specialization is proxied by Trade Distance

Index (TDI).

Data on export and import, the basic variables to calculate normalized index (NI) and

trade distance index (TDI), is published by International Trade Centre (ITC)10. Internationally,

traded products are classifi ed according to some international standards of classifi cation

such as the Standard International Trade Classifi cation (SITC), the Harmonized Commodity

Description and Coding System (HS) and the Broad Economic Categories (BEC). This research

uses HS 201211. This research focuses to examine the year 2004 and 2011 to compare trade

competitiveness and specialization before and after ACFTA.

These trade data are based on the Harmonized System (HS) 2-digit level of aggregation,

which consists of 97 classifi cations (from HS 01 to HS 99 with HS 77 and 98 being empty as

“reserved for possible future use”). In this case, those classifi cations are called chapter. See

[APPENDIX 1] for the description of HS 2-digit codes. Furthermore, HS can be elaborated

to be approximately 5000 article/product descriptions that appear as headings and

subheadings and grouped in 21 sections.

TrADE COMPETITIvENESS

The Evolution of Trade Competitiveness Measurement

The term trade competitiveness is widely used but has a lot of interpretation. OECD defi nes

trade competitiveness as a measurement of a country’s advantage or disadvantage in

selling its products in international markets. In the micro level, competitiveness pertains

to the ability and performance of a fi rm, sub-sector or country to sell and supply goods

and services in a given market, in relation to the ability and performance of other fi rms,

sub-sectors or countries in the same market12.

10 Based on United Nations Commodity Trade Statistics Database (UNCOMTRADE) calculation (link: www.intracen.org). 11 The Harmonized Commodity Description and Coding System (HS) of tariff nomenclature is an internationally standardized

system of names and numbers for classifying traded products developed and maintained by the World Customs Organization (WCO).

12 Defi nition from OECD Economic Outlook 2012. It is used as competitiveness indicator defi nition.


Assessing trade competitiveness was started by Liesner (1958). Liesner proposed Index

of relative Export Performance (rEP). It is used as a proxy for comparative costs in

an effort to assess the effects of an entry into the European Common Market on British

industry. The equation is as showed below:

Where X represents exports, i is a country, j is a commodity (or industry), and n is a set of

countries (e.g. the world). Since it has a lot of weakness on the application, comprehensive

measurement is evolved.

A more advanced measure of trade competitiveness was later on presented by Balassa

(1965), popularly known as the Balassa Index (BI). Alternatively, as the actual export fl ows

‘reveal’ the country’s strong sectors, it is also known as Revealed Comparative Advantage

(RCA). The equation for BI is following:

Where X represents exports value, i is a country, j is a commodity, t is a set of commodities

and n is a set of countries.

BI is based on observed trade patterns. It measures a country’s export of a commodity

in relation to its total exports and to the corresponding export performance of a set

of countries. If BI>1, then a comparative advantage is revealed, the commodity can be

considered as competitive. The higher value of BI means country is more competitive

FigurE 3.1 The evoluTion of Trade compeTiTiveneSS meaSuremenT


to sell the products. However, BI got a lot of critics of its limit to compare with other

countries. For example, the value of BI in mineral oils is 500 in Indonesia while it is 100

in machinery. It means Indonesia is more competitive to sell mineral oils than machinery

to the world. But, we cannot state that Japan more competitive to sell mineral oils than

Indonesia when their BI value at 600. The higher Japan’s BI value in mineral oils can be

caused by the decreasing of total export of all products in Japan despite there are nothing

changes in the production or selling of Japan’s mineral oil. Furthermore, using exports to

measure comparative advantage, in view of the increasing importance of intra-industry

trade may lead to erroneous conclusion13. Therefore, import has to be included.

Lafay Index (LI) in 1992 tried to solve it by inserting import and GDP to the equation. It

takes account of both exports and imports and is therefore more suitable for a country with

intra-industry trade. Lafay Index gives weight to each product based on its contribution

according to the respective importance in trade. It is also controlling the distortions due

to the macroeconomic factors with the GDP variable (Alessandrini et al, 2007). Lafay Index

is shown by following equation:

Where X represents exports value, M represent imports value, i is a country, j is a commodity,

Y is GDP and t is a set of commodities. It is considered to have a comparative advantage

(disadvantage) in a given commodity when the LI’s value exceeds (is less than) zero. Yet, LI

does not measure trade competitiveness with respect to other countries, but with respect

to total trade of a given country. Moreover, there is suggestion to accommodate different

value of export share since sum of LI for all sectors will be zero.

Solution for the importance of export share in specific product is raised by Proudman and

Redding (1998). They use cross section mean to fix mean of BI, called Weighted Index

(WI). WI adopts a measurement in which an economy’s export share in given sector is

evaluated relative to its average export share in all sectors. WI’s equation as follows:

BI represents value of Balassa Index, i is a country, j is a commodity, and n is a set of

countries. By construction, the mean value of WI is constant and equal to one, which

enables to compare over time and over country. But, WI does not overcome the problem

of asymmetry. It values ranging from zero to infinity. Another problem with the WI, also LI

and BI, is that its value is asymmetric; it varies from one to infinity for products in which a

country has a revealed comparative advantage, but only from zero to one for commodities

with a comparative disadvantage.

13 Intra-industry trade means the trade exchange is occurred in similar products belonging to the same industry, where the same types of goods or services are both imported and exported.

∑

(

) (

∑ ( )

∑ ( )

)


Dalum et al (1998) proposed a revealed symmetric comparative advantage (RSCA) through

Symmetric Index (SI) to alleviate the problem of asymmetric as follows:

Where BI represents value of Balassa Index, i is a country, j is a commodity. The SI value

ranges from minus one to plus one and is equal to zero at the comparative-advantage-

neutral point ( ). Hence, it is called symmetric. The SI measure preserves most of

distribution characteristics of the original BI, and it can be considered a more elegant

substitute of BI. Nevertheless, the “forced” symmetric may obscure BI’s dynamic, especially

when it is expressed by a change of the symmetric itself. Its reduced asymmetry does

not imply normality. Benedictictis and Tamberi (2001) found that only with low level of

disaggregation level it will possible to have normal distributed residuals14.

Other solution for asymmetric problem is using Additive Index (AI) by Hoen and Oosterhaven

(2006). It is also well known as additive revealed comparative advantage. It identifi es the

sectors in which an economy has a comparative advantage, and to track changes over

time. Unlike the BI index, it is symmetric. The AI is defi ned as the difference of two shares:

The share of a country’s total exports of the commodity of interest in its total exports and

the export share of set of countries exports to its total exports. The equation as follows:

Where X represents exports value, i is a country, j is a commodity, t is a set of commodities

and n is a set of countries. The fi rst term is the share of good j in the exports of country

i, while the second term is the share of good i in the exports of countries group. It takes

a value between –1 and +1. Country has a revealed comparative advantage if the value

exceeds zero, vice versa.

However, the comparability in cross-country analysis is in doubt: the sum of AI values with

respect to a given sector is not stable in the cross country analysis, thus leads to variant

mean value. Furthermore, although its empirical distribution is bell-shaped and the mean

value is centered and constant, it does not follow normality due to far too high kurtosis15.

None of alternative measurements above have satisfactorily overcome all of its shortcomings.

Then, Yu et al (2009) try to develop Normalized revealed Comparative Advantage or

Normalized Index (NI) in 2009. The NI calculates the degree of deviation of a country’s

actual export from its comparative-advantage-neutral level in terms of its relative scale

14Benedictictis and Tamberi used SITC to exercise distribution of error. At 2 digits, only 4 out of 13 cases are rejected while 3 digits only 3 pass the normality test. At 4 digits level none pass.

15High kurtosis makes assumption of normality is biased and rejected to include in the modeling analysis (Hoen and Oosterhaven, 2006)


16It was presented by Ullah, et al (2011) in 6th Annual London Business Research Conference.

with respect to the world export market and thus provides a proper indication of the

underlying comparative advantage. It features include its symmetrical distribution and

independence from the number of countries and sectors. Therefore, the value can be

used as comparable score among commodity, time, or country. The NI can be expressed

as follows:

Where:

Xij : Export of country i in commodity j

Xi : Export of country i in all commodities

Xw : World export in all commodities

Xwj : World export in commodity j

NI : Normalized Index

Values of NI is between -0,25 to +0,25. According to the equation, NI > 0 or NI < 0 indicates

that country’s actual export of commodity j is higher or lower than its comparative-

advantage-neutral level. Thus, NI > 0 means commodity is comparative advantage, on the

other hand NI < 0 means commodity is comparative disadvantage. The greater (or the

lower) the NI value is, the stronger the comparative advantage (or disadvantage) would be.

Besides its comparability, one of the advantages of NI is the sum of NI is stable and equal

zero. It explains well the condition if a country gains comparative advantage in one sector,

then the country loses comparative advantage in other sectors; and if one country gains

comparative advantage in a sector, then other countries lose comparative advantage in that

sector. Furthermore, NI is neither affected by the level of sectors aggregation nor by the

choice of reference group of countries, while the AI has attached this problem. However,

NI is sensitive to commodity classifi cation in which case more disaggregated classifi cation

might show different result than that of a less disaggregated ones16.

The Selection of revealed Comparative Advantage Index as Trade Competitiveness

Measurement

Each one of the revealed comparative advantage indexes above has advantages and

disadvantages. Thus, it should be important to have knowledge on the property of indices

and properly use them. Sanidas and Shin (2010) exercised six indicators i.e. BI, LI, WI, SI,

AI, and NI to fi nd the best one. The fi ndings are summarized below:

(

)

(

)


Based on the properties and comparability, NI seems a best indicator to measure trade

competitiveness even though it cannot fill normality requirements. NI can compare

cross sector and country with over time. In addition, NI has more favorable features than

the others, especially its stable mean across space and time, and independence from

aggregation level that can be very helpful in analyzing trade competitiveness. Therefore,

this research uses value of NI as a proxy of trade competitiveness17.

TrADE SPECIALIZATION

Another important variable to assess the importance of bilateral or regional trade is trade

specialization. Trade specialization is different with trade competitiveness. Since trade

competitiveness measures the ability of country to sell commodities in the set of countries,

trade specialization is more to how different commodities sold between countries in the

bilateral or multilateral trade. How different commodities sold is translated to be “distance”

in this research. Therefore, trade distance index is used to measure trade specialization.

Trade distance index is measured by cross-country difference between the average shares

across time of a particular sector in total exports. This difference is called “distance”. Normally,

it adds up distances calculated from all sectors to get overall sectors distance measure

for total export. The equation is following:

PrOPErTIES BI LI WI SI AI NI

Comparative advantage neutral point 1 0 1 0 0 0

Sum over sectors - 0 - - 0 0

Sum over countries - - - - - 0

Independence from aggregation level X X X X √ √

Independence from reference group of countries X X X X X √

Symmetry X X X √ √ √

Normality X X X X X X

COMPArABILITY BI LI WI SI AI NI

Cross-sector X X X X X √

Cross-country X X √ X √ √

Over-time X √ X X √ √

TablE 3.1 compariSon of Six comparaTive advanTage meaSuremenT

Source: Sanidas and Shin (2010)

Source: Sanidas and Shin (2010)

17Sanidas and Shin (2010) also used OLS Galtonian regression to assess how similar or dissimilar the distributions of revealed comparative advantages at two different points of time are to each other, hence the stability, or convergence/divergence of the trade specialization patterns. They found that SI seems to have the closest distribution to normality, although the normality is not always guaranteed (Laursen, 1998).


This paper is simplified it. It only analyzes the trade specialization between two countries

in commodities level, thus do not need to sum distance of export share. In addition, it

also do not use average shares across time since it only uses data from last available year

in 2011. The new equation as follows:

eint

stands for the share of sector n in total export of country i at time t while ejnt stands

for the share of sector n in total export of country j at time t. the value of TDI can be

positive and negative. Thus, TDIij > 0 means commodity is specialized for country i, on

the other hand TDIij < 0 means commodity is specialized for country j. The greater (or

the lower) the TDIij value is, the stronger (weakened) the specialization of those countries

in commodity. In this case, trade distance index is used only to analyze on bilateral trade

between two countries at a time per each commodity. As a result, the value of trade

distance index shows the strength of its specialization.

MAPPING: INDONESIA – CHINA TrADE COMMODITIES

This mapping focuses on Indonesia and China as trade partners using combination of

two main variables into map. They are stuck into two lines, horizontal and vertical line.

Horizontal line shows value of normalized index while vertical line shows value of trade

distance index. This map combines trade competitiveness of a country with its specialization

on bilateral trade in a given commodity. Since NI > 0 means commodity is comparative

advantage (has trade competitiveness) and NI < 0 means commodity is comparative

disadvantage (does not have trade competitiveness), the midpoint value for horizontal

line is zero. Moreover, the midpoint for vertical line is also zero. If TDI > 0, this commodity

is highly specialized for Indonesia rather than China while TDI < 0 means commodity is

less specialized for Indonesia than China. Then, it identifies four regions in the mapping

of Indonesia – China Trade Commodities.

Quadrant Supreme shows Indonesia has ability to sell commodities relative to the average

ability of the world. At the same time, Indonesia is also relatively more specialized in the

bilateral trade with China. It means China does not yet have a more competitiveness in

these commodities relative to Indonesia.

∑

∑

∑


FigurE 3.2 mapping of Trade compeTiTiveneSS and SpecializaTion of aSean – china free Trade area

The upper left quadrant shows Indonesia has competitiveness to sell the commodities

relative to the average ability of the world. Nevertheless, Indonesia is more specialized

in exporting these commodities relatively than china in bilateral trade between the two

countries. The name Irrational refers to the fact that Indonesia still can be specialized

exporter relative to China despite its competitiveness in the world trade. It indicates that

China is less concerned relative to Indonesia on these commodities.

Quadrant Inferior shows the commodities where Indonesia does not have competitiveness

relative to the ability of the world and is also not specialized in bilateral trade with China.

Therefore, this is not an area where Indonesia should focus its export.

The last quadrant is rivalry which shows Indonesia has competitiveness relative to the

average ability of the world. But, Indonesia is relatively less specialized in bilateral trade

with China. It indicates both of Indonesia and China have competitiveness on these

commodities in the world trade. This can be a threat because with more concern on

these, China is able to penetrate Indonesian market and gain the market share Indonesia

in the world. Therefore, Indonesia should encourage the industry in these commodities

to be more competitive.


ANALYSIS OF INDONESIA-CHINA TRADE COMPETITIVENESS AND SPECIALIZATION

Free trade creates more opportunity for each country to expand its economy and

reach its maximum productivity stage. Since every country is endowed with different

resources, the repealed tariff barriers will free the countries to fulfi ll their needs by

importing the products which their domestic industries are not able to produce. Essentially, a

free trade aims to open the market which in turn will encourage each country to specialize

in their production. The specialization is established as a result of comparative advantage

where a country can produce a product more effi cient than others. The specialization can

be inter or intra industries18.

As mentioned before, Trade Distance Index measures the distance and direction between

two countries. Thus, in the case of Indonesia and China, ACFTA has been expected to create

the specialization distance between Indonesia and China. The increase of absolute value

of the trade specialization index indicates the increase of the specialization capacity of

Indonesia against China in a certain commodity.

Figure 4.1 shows the top 10 chapters which are Indonesia’s specialization. Among the top

10 specialized chapters, the index of mineral fuel had increased most rapidly from 2004

to 2011 as well as animal and vegetable oil products. It indicates Indonesia has been

more specialized in those both chapters against China, relatively compared with trade

performance in 2004. The increase of those both chapters was driven by the escalation

of China’s demand for coal and Crude Palm Oil (CPO) which are China’s favorite import

commodities from Indonesia. Another chapter which had been more specialized was

rubber and articles of rubber. However, the Trade Distance Index of wood and paper has

decreased, which means the trade correlation with China for those two chapters were

getting closer to be substitutive. On the other hand, Figure 4.2 shows China’s specialization

against Indonesia. The fi gure shows the absolute value of the Trade Distance Index which

in parallel move up for two main chapters, machinery and electrical equipment. In addition,

as we can see in the fi gure, furniture and boats also have been increasingly specialized.

The comparison of Trade Distance Index between 2004 (before the implementation of FTA)

and 2011 (after the full implementation of FTA) shows that FTA has encouraged the trade

specialization of both countries. In fact, both countries might have same ability to produce

certain goods which makes them competitive on those products in the worldwide trade.

This condition then not necessarily blots out the possibility of trade between them as they

might have different relative effi ciency. FTA is expected to provide the products which

cannot be supplied by domestic production, which eventually results a greater variety

18In earlier theories of trade, the production of a good should concentrate in regions which have a comparative advantage in making a certain good and inversely they must import the goods in which they do not have a comparative advantage. However, the later trade theories stated that regions do not need to specialize in order to trade, instead similar countries can be trade because they produce different varieties of a good (Laurin, 2008).


FigurE 4.1 indoneSia’S Trade diSTance indexeS againST china (Top 10 Specialized commodiTieS)

FigurE 4.2 indoneSia’S Trade diSTance indexeS againST china (Top 10 Specialized commodiTieS)

of goods in lower price. However, in some situation the free flow of import dispatches

domestic products, especially while the comparative advantage of that product is possessed

by the partner country.


Comparative advantage of a country on a world stage can be measured by Normalized

Index (NI), while the advantage of a country against another country in bilateral relationship

can be measured by the Trade Distance Index. Thus, NI measures the competitiveness of a

country in the world and Trade Distance Index measures the specialization between the two

countries. By plotting Normalized Index against Trade Distance Index, we may see whether a

traded commodity between the two countries actually substitutes the domestic products or

complements the domestic needs. Figure 4.5 shows the mapping of Indonesia-China trade

commodities on the competitiveness against specialization in 2011. As a comparison, the

mapping of year 2004 is showed in Figure 4.4. The term commodities here are explained

as the chapters of commodities (2-digits HS). The commodities with specifi c characteristic

of Supreme, Irrational, Inferior, and Rivalry are those which are plotted outside the area of

-0.0002 ≤ NI ≤ 0.0002 and -0.02 TDI ≤ 0.02.19 Thus, there were 11 intense character chapters

plotted for year 2004 and 9 chapters plotted for year 2011.

In 2004, there were 6 supreme chapters: mineral fuel, animal/vegetable oil, wood, rubber,

ores and paper. However in 2011, wood and paper were no longer intense supreme chapters

due to the decrease of Indonesia’s relative specialization to China on these chapters. As

explained before, chapter mineral fuel and animal/vegetable oil has been Indonesia’s most

major export commodities to China since years.

On Quadrant Inferior, there are chapter electronic equipment, chapter machinery, and chapter

optical, technical and medical apparatus. In 2004, chapter toys, games and sport requisites

was considered as inferior, but with the decrease of China’s relative specialization to Indonesia

on this chapter, it was less inferior. This is also a sign of improvement in Indonesia’s toys

industry in answering the growing demand of toys to be more innovative20. On the other

hand, chapter furniture arose on 2011 as an intense inferior chapter. The rise of China’s

furniture was in accordance with the decline of Indonesia’s competitiveness due to the high

production and distribution cost, such as shipping cost and extortions in exporting process21.

Quadrant 4, which explains the rivalry commodities, is occupied by knitted articles/accessories

of apparels. Though Indonesia has a comparative advantage of this chapter in the world

trade, compared with China, Indonesia is signifi cantly less specialized. It also indicates China

has been more effi cient in this industry, while Indonesia actually has a potential. If Indonesia

does not improve its competitiveness, China’s commodities may then substitute domestic

products, which eventually will kill the domestic industry. In the long term, it may also seize

Indonesia’s market share in the world and shift this chapter to Quadrant 3.

19 This normative decision is in regards of the plot distance from the 0 midpoint. Since the distance indicates the strength of characteristic of the commodities, the more a commodity is distanced from the midpoint, the more intense the characteristic. The distance is computed by Pythagoras theorem: characteristic of the commodities, the more a commodity is distanced from the midpoint, the more intense the characteristic. characteristic of the commodities, the more a commodity is distanced from the midpoint, the more intense the characteristic.

where CI is Character Intensity of chapter j. To see the commodities with most intense character, the analysis would focus on chapters with CIj > 0.02, which are scattered on the area of -0.0002 ≤ NI ≤ 0.0002 and -0.02 ≤ TDI ≤ 0.02.

20 Toys industry is a creative based industry which requires consistent innovation (source: http://peluangusaha.kontan.co.id/news/modal-kreatif-bisnis-mainan-edukatif/2012/08/29). However there is still a big space in domestic industry to expand its business, one of the obstacles in this industry is technology (source: http://www.kabar24.com/index.php/industri-mainan-domestik-belum-digarap-maksimal/).

21 http://news.liputan6.com/read/118762/vietnam-saingan-produk-mebel-indonesia


FigurE 4.3 indoneSia-china Trade commodiTieS mapping 2004

Trade Competitiveness


Trad

e C

om

pet

itiv

enes

sTr

ade

Co

mp

etit

iven

ess


FigurE 4.4 indoneSia-china Trade commodiTieS mapping 2004



Trad

e C

om

pet

itiv

enes

sTr

ade

Co

mp

etit

iven

ess

A country involves in international trade to fulfill the needs which

cannot be supplied by its own domestic production. Therefore

international trade should not dim the existing domestic

industries. In global trade, specialization gives a country the advantage

to gain the benefit of trade liberalization. Each country has different

resources which leads to different ability and efficiency in producing

goods. To get mutual gains, a country should specialize in producing the

goods it does best and import goods that its partners are able to supply

at lower cost. Therefore, the government should have a competitiveness

map of tradable goods as the basis in making policies which focus on

the specialized product.

In Indonesia-China bilateral trade, mineral fuel, animal/vegetables fat,

rubber and ores are examples of sectors which have been prioritized

and specialized by Indonesia. On the other hand, Indonesia imports

high-tech commodities (such as machinery and electronics) from China.

Both countries will have mutual gains if they have different competitive

commodities. However, there are some sectors which cannot meet that

sufficient condition. In this case, the specialization will go to the more

efficient country.

An example of this case is chapter knitted articles of apparel and

accessories where both Indonesia and China has competitiveness in

the world trade. Being more specialized, China puts more pressure on

our competitiveness in this sector. It should become a concern for the

government otherwise Indonesia will lose its competitiveness in the

long term, especially with the zero tariff policy allowing commodities

to flow freely into domestic market.

Trade competitiveness and specialization map shows another important

findings. Although, a country has competitiveness in producing goods

relatively to the average ability of the world, it does not necessarily mean

it has specialization in bilateral trade. Therefore, trade policies should

be based on country to country analysis. Learning from the ACFTA,

government needs to have clear policies to improve our competitiveness

in rivalry commodities.

rECOMMENDATION

32

33

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35

APPENDIX 1

CODE CHAPTEr

Section 1: Live animals; animal products

01 Live animals

02 Meat and edible meat offal

03 Fish, crustaceans, molluscs, aquatic invertebrates nes

04 Dairy products, eggs, honey, edible animal product nes

05 Products of animal origin, nes

Section 2: vegetable products

06 Live trees, plants, bulbs, roots, cut flowers etc

07 Edible vegetables and certain roots and tubers

08 Edible fruit, nuts, peel of citrus fruit, melons

09 Coffee, tea, mate and spices

10 Cereals

11 Milling products, malt, starches, inulin, wheat gluten

12 Oil seed, oleagic fruits, grain, seed, fruit, etc, nes

13 Lac, gums, resins, vegetable saps and extracts nes

14 Vegetable plaiting materials, vegetable products nes

Section 3: Animal,vegetable fats and oils, cleavage products, etc

15 Animal,vegetable fats and oils, cleavage products, etc

Section 4: Prepared foodstuffs; beverages, spirits and vinegar; tobacco and manufactured tobacco

substitutes

16 Meat, fish and seafood food preparations nes

17 Sugars and sugar confectionery

18 Cocoa and cocoa preparations

19 Cereal, flour, starch, milk preparations and products

20 Vegetable, fruit, nut, etc food preparations

21 Miscellaneous edible preparations

22 Beverages, spirits and vinegar

23 Residues, wastes of food industry, animal fodder

24 Tobacco and manufactured tobacco substitutes

HarmonizeD CommoDity DesCription anD CoDing system (Hs) 2012–2 Digit

Section 5: Mineral products

25 Salt, sulphur, earth, stone, plaster, lime and cement

26 Ores, slag and ash

27 Mineral fuels, oils, distillation products, etc

Section 6: Products of the chemical or allied industries

28 Inorganic chemicals, precious metal compound, isotopes

29 Organic chemicals

30 Pharmaceutical products

CODE CHAPTEr

31 Fertilizers

32 Tanning, dyeing extracts, tannins, derivs,pigments etc

33 Essential oils, perfumes, cosmetics, toileteries

34 Soaps, lubricants, waxes, candles, modelling pastes

35 Albuminoids, modified starches, glues, enzymes

36 Explosives, pyrotechnics, matches, pyrophorics, etc

37 Photographic or cinematographic goods

38 Miscellaneous chemical products

Section 7: Plastics and articles thereof; rubber and articles thereof

39 Plastics and articles thereof

40 Rubber and articles thereof

Section 8: raw hides and skins, leather, furskins, and articles thereof; saddlery and harness; travel

goods, handbags, and similar containers; articles of animal gut (except silk-worm gut)

41 Raw hides and skins (other than furskins) and leather

42 Articles of leather, animal gut, harness, travel goods

43 Furskins and artificial fur, manufactures thereof

Section 9: Wood and articles of wood; wood charcoal; cork and articles of cork; manufactures of

straw, of esparto, or of other plaiting materials; basketware and wickerwork

44 Wood and articles of wood, wood charcoal

45 Cork and articles of cork

46 Manufactures of plaiting material, basketwork, etc.

Section 10: Pulp of wood or of other fibrous cellulosic material; recovered (waste and scrap) paper of

paperboard; paper and paperboard and articles thereof

47 Pulp of wood, fibrous cellulosic material, waste etc

48 Paper and paperboard, articles of pulp, paper and board

49 Printed books, newspapers, pictures etc

36

Section 11: Textiles and textile products

50 Silk

51 Wool, animal hair, horsehair yarn and fabric thereof

52 Cotton

53 Vegetable textile fibres nes, paper yarn, woven fabric

54 Manmade filaments

55 Manmade staple fibres

56 Wadding, felt, nonwovens, yarns, twine, cordage, etc

57 Carpets and other textile floor coverings

58 Special woven or tufted fabric, lace, tapestry etc

59 Impregnated, coated or laminated textile fabric

60 Knitted or crocheted fabric

61 Articles of apparel, accessories, knit or crochet

62 Articles of apparel, accessories, not knit or crochet

63 Other made textile articles, sets, worn clothing etc

CODE CHAPTErSection 12: Footwear, headgear, umbrellas, sun umbrellas, walking-sticks, seat-sticks, whips, riding-

crops and parts thereof; prepared feathers and articles made thereof; article flowers; articles of

human hair

64 Footwear, gaiters and the like, parts thereof

65 Headgear and parts thereof

66 Umbrellas, walking-sticks, seat-sticks, whips, etc

67 Bird skin, feathers, artificial flowers, human hair

Section 13: Articles of stone, plaster, cement, asbestos, mica or similar materials; ceramic products;

glass and glassware

68 Stone, plaster, cement, asbestos, mica, etc articles

69 Ceramic products

70 Glass and glassware

Section 14: Pearls, precious stones, metals, coins, etc

71 Pearls, precious stones, metals, coins, etc

Section 15: Base metals and articles of base metal

72 Iron and steel

73 Articles of iron or steel

74 Copper and articles thereof

75 Nickel and articles thereof

76 Aluminium and articles thereof

37

38

78 Lead and articles thereof

79 Zinc and articles thereof

80 Tin and articles thereof

81 Other base metals, cermets, articles thereof

82 Tools, implements, cutlery, etc of base metal

83 Miscellaneous articles of base metal

Section 16: Machinery and mechanical appliances; electrical equipment; parts thereof; sound

recorders and reproducers, television image and sound recorders and reproducers, and parts and

accessories of such articles

84 Machinery, nuclear reactors, boilers, etc

85 Electrical, electronic equipment

Section 17: vehicles, aircraft, vessels, and associated transport equipment

86 Railway, tramway locomotives, rolling stock, equipment

87 Vehicles other than railway, tramway

88 Aircraft, spacecraft, and parts thereof

89 Ships, boats and other floating structures

Section 18: Optical, photographic, cinematographic, measuring, checking, precision, medical or

surgical instruments and apparatus; clocks and watches; musical instruments; parts and accessories

thereof

90 Optical, photo, technical, medical, etc apparatus

91 Clocks and watches and parts thereof

92 Musical instruments, parts and accessories

CODE CHAPTEr

Section 19: Arms and ammunition; parts and accessories thereof

93 Arms and ammunition, parts and accessories thereof

Section 20: Miscellaneous manufactured articles

94 Furniture, lighting, signs, prefabricated buildings

95 Toys, games, sports requisites

96 Miscellaneous manufactured articles

Section 21: Works or art, collectors’ pieces and antiques; miscellaneous

97 Works of art, collectors pieces and antiques

Section 22: Commodities not elsewhere specified

99 Commodities not elsewhere specified

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APPENDIX 2

importeD Cotton: Helping or Killing?

FigurE a2.1 indoneSia’S Trade on SecTion TTa 2011


Harmonized System classification categorized 14 chapters of commodities into section

Textile and Textile Articles (TTA), including the chapter cotton. As the main material of a

lot of textile articles, TTA dependence on cotton is very significant, thus the pattern of

cotton in trade significantly influences the ability of producing textile articles. Among those

14 chapters, cotton had been the first largest import meanwhile it is also the fifth largest

export of Indonesia in section TTA. This fact is very interesting and explicitly indicates an

intra-industry specialization in cotton. The question is: Is this a good or bad sign?

In 2009-2011 Indonesia’s volume of trade on TTA was significantly increasing. At the

same time, the import value of cotton was also increasing. In Figure A2.2, we can see

the movement of imported cotton is parallel with the movement of TTA total import. It

indicates cotton import significantly drives TTA total import. However, cotton, as a material

of textile articles, also boosted the TTA total export.

FigurE a2.2 indoneSia’S Trade of TTa and coTTon 2001-2011


If we look deeper into the chapter of cotton commodities, there are specifi c intra-industry

variations in cotton. In the six digits HS, cotton is divided into 132 commodities, from non-

carded cotton to yarn and fabrics. Due to Indonesia’s low capacity in cotton plantation22,

the highest spending in cotton import was for non-carded cotton, which valued USD

1,786 million or more than 50% of total spending for cotton import. On the other hand,

the income from chapter cotton was from intermediate products of cotton which are

variations of cotton yarn and fabrics23. Among the 132 commodities of cotton, there are

50 commodities where Indonesia still gained surplus, 72 commodities were defi cit and 10

non-traded commodities. Non-carded cotton, as the raw material of cotton contributed

76% of the sum of negative trade balance on the 72 defi cit commodities (Figure A2.3).

Referring to these facts Indonesia actually gained the value added by importing the raw

material of cotton and processing it to be intermediate products. Moreover, 70% of the

yarn produced from non-carded cotton is allocated to fulfi ll the domestic demand and

30% is then exported.24 Thus, it is actually more convenience for Indonesia to be more

focused in cotton-processing and importing raw cotton rather than spending much energy

in expanding the utilization of cotton plantation.

22 Besides the low utilization of land, weather became one big threat for domestic industry to grow cotton. Since cotton only needs water in the planting period and dry weather in harvest period, the high rainfall and uncertainty of weather change in Indonesia hinder the maximization of the plantation.

23 The highest value of import came from code 520524 in HS classifi cation (Cotton yarn,>/=85%, single, combed, 192.31 >dtex>/=125, not put up), which valued USD 69 million.

24 Statement from Ade Sudrajat Chairman of Indonesian Textile Association 2011 (source: http://industri.kontan.co.id/news/walau-harga-naik-industri-tekstil-tetap-genjot-impor-kapas--1).

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FigurE a2.3 Share of coTTon commodiTieS 2011


41

42

APPENDIX 3

After examining Indonesia’s competitiveness and specialization, new potential export

products can be identified more easily. These are the products which are not

exported in big amount right now, but grow rapidly. Potential products are also

those which are demanded by China as the primary market. Boosting up the production

and export of these new potential products will give Indonesia great advantage in bilateral

trade with China.

Depending only on the most competitive and specialized products in the long term can

cause volatility in the economy. Not only the scarcity of resources such as mineral oil, but

also the slower adjustment to trend of demand in the world will harm these sectors. In

addition, the successful development of new potential products can increase the total

number of exports and create trade surplus for Indonesia. Therefore, identifying new

potential products is important.

MENA is a good example of how dependence on competitive and specialized products can

lead to the volatility in economy. With an estimated $740 billion of planned investment

into energy projects over the next five years, oil will continue to be amongst the largest

and most important export industries in MENA. However, crude oil, the current largest

export sector of MENA, will see only moderate growth of 1.8% annually over the same

period. Both trends demonstrate the instability of oil trade in the longer term but short-

term oil trade is no less tenuous.

The most significant problems are unemployment and lack of competitiveness. The

MENA region suffers from the highest levels of unemployment in the world, with the IMF

estimating figures at around 25%. This, coupled with insufficient investment into non-oil

sectors, means that many industries in MENA have become uncompetitive and lacklustre.

Regarding to this, governments within the MENA region have recognized the importance

of investments into non-oil industries to reduce unemployment and create a basis for

more stable and sustainable economic growth. It has been reported that Egypt is prepared

to offer four public private partnership infrastructure projects worth $3 billion in 2013,

while Saudi Arabia is currently putting big investment into state-backed infrastructural

developments aiming to improve MENA’s health and social services.

In Indonesia-China bilateral trade, there are 75 products that have export growth above

neW potential proDUCts in inDonesia-CHina Bilateral traDe

43

100%. From the 75 products, 43 products grew between 100%-200% and 20 products

between 201%-300%. Meanwhile few products grew even higher. For growth between

301%-400%, there are only 6 products while only 4 products in range between 401%-

500%. The highest export growth, more than 500%, is seen in 2 products. It shows that

the higher multiplier effect is implied only on few products.

Based on figure A3.1, most products with high export growth have low of export share.

Two products with export growth above 500% - natural polymers and petroleum jelly -

have only 0,0065% export share. Products with export growth ranged from 301%-400%

have the smallest export share. For instance, non-alcoholic beverage has only 0,0003%

export share while its export growth is 380%. Furthermore, by sum calculation, products

with export growth between 100%-200% and 201%-300% have bigger export shares at

0,59% and 0,23%. However, it may due to the amount of products in these categories. The

export share of 75 products with export growth above 100% is only 0,87%. This is very

small compared to other products with export growth less than 100%.

FigurE a3.1 exporT Share BaSed on The diSTriBuTion of exporT growTh (2011)

Source: Trademap, own calculation

Based on Table A3.1, natural polymer has the highest export growth at 522% p.a. of

2007-2011 calculation, followed by petroleum jelly at 501% p.a. of 2007-2011 calculation.

There are at least 6 products which have growth above 400%. It means the export value

of those products will be more than quadrupled next year.

No PrODUCT GrOWTH (%)

1 Natural polymers & modified natural polymers nes, in primary forms 522

2 Petroleum jelly; mineral waxes & similar products 501

3 Rags, scrap twine, crodage, rope 450

4 Aluminum wire 446

5 Cocoa shells, husks, skins and other cocoa waste 418

6 Bed, table, toilet and kitchen linens 409

Products can also be seen as potential if the main market for the products is China. In a

situation where China becomes the main market of certain products, there are two possible

indications: Indonesia’s products are not so competitive that demand only comes from

China or only China wants these products in the world. In any case, Indonesia should grab

the opportunity while improving its competitiveness.

Figure A3.2 compares Indonesia’s export to China with its export to the world or we can call

it share of export to china. The average calculation is well accepted because the deviation

of this comparison data is small. The average share of export to China shows that China

became the main market for Indonesia’s products which grew above 100% in export but

not for the products which grew between 301%-400%. Furthermore, the comparison also

shows that there is a product which is only imported by China.

TablE a3.1 producTS wiTh exporT growTh aBove 400% p.a. of 2007-2011 calculaTion

Source: Trademap

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No PrODUCTSHArE OF EXPOrT TO

CHINA (%)

1 Hoop-wood; split poles; piles, pickets, stakes; chip-wood 100

2 Swede, mangold, fodder root, hay, lucerne (alfalfa), clover etc. 96

3 Waste, parings and scrap, of plastics 92

4 Rags, scrap twine, crodage, rope 88

5 Cocoa shells, husks, skins and other cocoa waste 83

6 Artificial graphite; colloidal or semi-colloidal graphite 74

7 Photographic chemicals 70

8 Synthetic organic or inorganic tanning substances; tanning preps; enzy 55

9 Aldehyde; cyclic polymer of aldehyde; paraformaldehyde 51

TablE a3.2 producTS wiTh china aS main markeT for indoneSia’S exporT


FigurE a3.2 Share of exporT To china BaSed on The diSTriBuTion of exporT growTh (2011)


Table A3.2 shows that China became the main market for 9 Indonesia’s export products.

An important highlight is for hoop-wood in which case China is its only market. Indonesia

should focus its production and export in the products that show high share of export

to China and higher export growth.

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In order to identify its new potential export products, Indonesia needs to examine which

of its export products have small export share with the highest export growth and the

biggest share of export to China. These are the products that are exported in small

amount to China despite China’s high and sustainable demand. According to the criterions

above, there are four potential products to be focused on by Indonesia. They are natural

polymers, rags, hoop-wood, and cocoa waste.

Natural polymers show the highest export growth in Indonesia-China bilateral trade.

Although its share of export to China is not as high as other products, the export share

remains low at 0,0019%. China may be not the main market for this product, but the

highest export growth indicates the increasing potential demand from China. Another

potential product, rags, also shows high export growth at 450%. Its share of export to

china is high at 88% while its export share at 0,024%. Rags becomes one of the potential

products since the major demand comes from China with high growth. Its small export

share means room of expansion for Indonesia.

Hoop-wood is a special case. China becomes the only market for Indonesia’s hoop wood

product. Its export growth is not as high as other products, meanwhile the export share

is low. The fact that China is the only importer of this product should be an incentive for

Indonesia to boost production and export to China. These three products have not been

Indonesia’s main export commodity to China simply because Indonesia has not seen their

potential and focused on boosting up the production and export.

Cocoa waste faces different problems. Cocoa waste has high export growth at 418%

and share of export to china at 83% while its export share only 0,0047%. Although most

demand of cocoa waste comes from China, the small value of export share indicates that

cocoa waste is not yet a priority export product to China.

According to Indonesian Cocoa Board (ICB), there are several barriers to improve this

product. One of them is global warming. Global warming caused unpredictable weather

in different regions in Indonesia. Bad weather in Indonesia has decreased the production

of production of cocoa and cocoa waste dramatically. Another problem is that Indonesia’s

cocoa waste cannot compete with Ghana and the Ivory Coast. With high productivity in

cocoa and cocoa waste production, those two countries are the largest cocoa exporter and

dominate the global market. On the other hand, Indonesian cocoa farmers also face financial

issues. Cocoa farmers-market intermediaries-cocoa exporter transactions are primarily

conducted on a ‘cash and carry’ basis which requires access to sufficient working capital.

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indonesia–china trade in acfta: mapping of...

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