Strategic Trade Policy
Brander and Spencer (1985) introduced the term “strategic trade policy”, which Paul Krugman used in Strategic Trade Policy and the New International Economics (1986).
Brander and Spencer (1985) introduced the term “strategic trade policy”, which Paul Krugman used in Strategic Trade Policy and the New International Economics (1986). The main idea behind it is that a country, on considering its national interest, can intervene in investment and international trade policies.
Unlike ordinary trade policies, a strategic trade policy is often referred to as an industrial policy because it aims to change the industry/economic structure.
Before the World Trade Organization (WTO) was established, Korea and Taiwan were two countries that actively and successfully used industrial policies to change the structure of the economy.
The secret of its success is the discipline in setting the time and sequence of the targeted industries, beginning with light industries such as apparel, semiconductors and shipping, to become a leading producer of information technology products.
The 1995 establishment of the WTO restricted use of export subsidies and the strategic trade policy. However, it did not discourage the use of the industrial policy.
The scoring format also shifted from determining the superiority of the functional aspects of the business environment using the triple helix model, such as human resource development and research and development in higher education. These two things usually begin with improving the business climate and developing the physical infrastructure.
The Indonesian Experience
Indonesia once introduced a blueprint for strategic trade policy. However, its main problem was in its implementation. In the Five-Year Development Plan (Repelita) during the era of former president Soeharto, Indonesia was envisioned as an agribusiness country that produced its own agricultural machinery.
However, two major things affected Indonesia\'s industrial structure. One was the appreciation of the Japanese yen in the mid-1980s, which forced Japan to relocate its industries, especially automotive, to Southeast Asia, including Indonesia.
Second was the commodity bonanza in 2004-2012, which pushed Indonesia to become a leading producer of palm oil. Looking at the latest ISIC 5 data, the share of exports to manufacturing industry is 14.5 percent, while the share of the automotive industry, including spare parts, is 34 percent. However, raw and intermediate material imports remain around 75 percent of total imports.
The problem is that the supply chain of industries that produce inputs for downstream industries have not developed well, due to the high-cost economy caused by complicated licensing, logistics and operational scale.
Consequently, the current account and the trade balance are under pressure, especially when the sources of growth primarily come from domestic sources, such as household consumption.
As a county with a large population, Indonesia needs to strike a balance between exports and domestic orientation. The US-China trade war revealed the weaknesses of Indonesia\'s industrial structure through not only the current account deficit, but also the trade deficit.
To overcome this, it needs to combine improving the industrial structure and growing a surplus under secondary income by increasing the quality of human capital, and growing a current account surplus by developing the so-called New Balis – new tourist destinations outside Bali.
In order to strengthen the structure of industries that require much foreign exchange, the Indonesian government modified the industrial policies that improved the business environment, starting with the development of physical infrastructure and human resources and mastering the supply chain.
Transportation, including the future of private vehicles, is shifting towards automotive technology based on environmentally friendly and renewable energy. As shown in the government regulations on electric vehicles, battery-powered engines will become the center of future growth.
An exponential increase in the use of electric vehicles is projected. At present, electric vehicles accounts for 5 percent of global car sales, and this is forecast to increase to 40 percent in 2030 and 95 percent in 2050.
The recent issuance of the Government Regulation on Electric Cars creates an opportunity to turn the automotive industry into the main engine of future economic growth and exports.
Nickel and cobalt, which are also found in Indonesia, are key elements in the electric vehicle battery industry. The use of biofuels for diesel engines is included in this scenario.
To improve efficiency between engine and weight, as well as vehicle bodies, parts and accessories, it needs to promote the production of composite products based on petrochemicals.
To improve efficiency between engine and weight, as well as vehicle bodies, parts and accessories, it needs to promote the production of composite products based on petrochemicals. The temporary suspension of nickel exports can be seen as a sign of the shift in the strategic trade policy.
Although most of Indonesia\'s nickel is exported to China, the European Union\'s reaction to the temporary suspension of Indonesia\'s nickel export policy is inseparable from the scenario for the global automotive industry. The European Union is bringing this problem to the WTO because this strategic trade policy presents a threat against maintaining its future dominance in the global automotive market.
However, Indonesia also has a national interest in fixing its current account deficit, which is preventing greater economic growth. The US-China trade war has also “broken the eggs”. Many countries in the world are increasingly resorting to strategic trade policies to win a place in the global supply chain.
As in every case of game theory, taking a passive attitude will prevent us from achieving optimal results and winning. Conversely, combining a balanced dose of negotiations and threats will make parties like the European Union and others take into account the consequences of all strategies. This will provide a new Nash equilibrium that will be more beneficial for Indonesia.
ARI KUNCORO Rector, University of Indonesia