Behind the Trade War

KOMPAS/IWAN SETIYAWAN

The central plant platform of Pertamina Upstream Oilfield Offshore North West Java (PHE ONWJ) off the Karawang-Indramayu coast on the Java Sea, Tuesday (22/7/2014).

From January-May 2018, only in March did Indonesia managed to book a trade surplus. In May, the trade deficit reached US$1.52 billion. In fact, exports in May reached a record $16.12 billion, a 12.47 percent increase year on year (yoy). However, imports jumped to $17.65 billion, up 28.12 percent yoy.

Logically, in the midst of the fall in the rupiah exchange rate, the growth of imports should naturally be lower. In fact, on the contrary, the rupiah depreciation was partly triggered by the continued increase of imports.

All types of imports rose in May 2018. Oil and gas imports rose 57.17 percent to $2.82 billion  yoy, while  non-oil and gas imports increased by 23.77 percent to $14.83 billion yoy. The anomaly occurs because most of the country’s imports comprise basic necessities.

The increase in oil and gas and non-oil and gas imports cannot be separated from the effort to stabilize prices during Ramadhan and Idul Fitri. The surge in oil and gas imports is a consequence of the country’s energy dependency on petroleum-based fuel (BBM).

Unfortunately, Indonesia is a net importer of BBM. Pertamina would have to raise oil reserves in order to guarantee the fuel availability at all public fuel stations. As a result, in May 2018, crude oil imports rose 20.92 percent yoy, while processed oil fuel rose 17 percent yoy and gas imports rose 6.62 percent yoy.

Meanwhile, in terms of usage, imports were still dominated by raw materials and auxiliary materials. However, the record growth occurred in imports of consumer goods. Over the past four years, the imports of consumer goods increased by an average of 8.6 percent yoy, while raw materials rose only 1.3 percent yoy. Likewise, in  May 2018, imports of consumer goods rose by 34 percent, raw materials increased by 24.55 percent, and capital goods rose by 43.40 percent, all on an annual basis.

Many people are often fooled and consider the increase in imports as good news for economic activities. Especially, if the rise occurs in imports of raw materials and capital goods. Of course there should be a more detailed study on the classification of goods and their utilization. During January-May 2018, the largest import value was recorded by machine and mechanical machinery, which grew by 31.97 percent, meanwhile imports of machinery and electrical equipment rose 28.16 percent, steel by 39 percent, vehicles by 29.11 percent, and cereals increased by 29.4 percent yoy.

KOMPAS/IWAN SETIYAWAN

A worker oversees a metal melting furnace at a PT Krakatau Posco production facility at the Krakatau Steel Industrial Estate in Cilegon, Banten, Wednesday (26/11/2014). This steel factory has a production capacity of 3 million tons per year.

Of the five major imported products, raw materials and capital materials increased sharply. However, it occurs when there is a sign of deindustrialization. The increased capital goods imports did not entirely go to the industrial sector, but to meet the acceleration of infrastructure projects. In fact, if infrastructure projects are prepared with careful planning and road maps, it will certainly be able to spur industrialization.

At least, with various incentives, it can attract investment in industries that support infrastructure in the country. The government may consider setting the minimum local content or component of infrastructure projects between 60 percent and 70 percent. Thus, it can save foreign exchange reserves and help spur the economic growth and creation of employment opportunities.

Challenges

The country’s trade balance will continue to be under pressure amid the potential of a US-China trade war. Indonesia will be certainly affected because the country is a raw material supplier for both the US and China. In addition, China will certainly need to find life jackets for its export products. Moreover, China has deliberately devalued its currency. Of course, it is one of strategies to keep its export products remain competitive to win the market competition.

Indonesia should closely watch China\'s imports, because, during January-May 2018, China\'s imports of $18.36 billion have already accounted for 27.87 percent of total imports, exceeding the combined imports from ASEAN, which represents only 20.41 percent of the total imports.

Kompas/Totok Wijayanto

Enny Sri Hartati

The pressure on Indonesia\'s trade balance is quite complex. However, behind the calamity, there is always a window of opportunity. The key is to take advantage of the sharp depreciation of the rupiah exchange rate and use the momentum to improve trade balance. Indonesia should also take a serious effort to perform structural transformation. Indonesia not only needs to encourage import substitution industry but also promote the downstream industry to be able to reduce dependence on commodity exports.

The main target is to attract direct investment to the country’s industrial sector, not just portfolio investment. It is also important to ensure the implementation and consistency of investment policies and incentives to investors.

The move can begin with the shifting of focus to certain priority industries that have high competitiveness in global markets.

Enny Sri Hartati, Executive Director of the Institute for Development of Economics and Finance