Clash of the Titans: US-China Trade War Impacts on Indonesia
September 9th, 2019
A Glimpse of the Trade War
Over the past years, the US and China, have charge tariffs worth of billion dollars to one another’s products. The heating tension between the two economic titans arises since the US President, Donald Trump, long accused China of unfair trading practices and intellectual property theft. While on the opposite side, China perceives the US as if they purposefully restrain its economic growth. Although difficult, negotiations are ongoing between the two through several meetings. Even so, by the time this article is finished, the US has imposed tariffs on more than $360 billion of Chinese products while China retaliates with tariffs on more than $110 billion of US products. On the US side, the ‘special’ tariffs towards China are intended to pressure US companies to move their manufacturing base back to the states from China and thus, create jobs for Americans while reducing the nation’s trade deficit with China. On China’s side, they have a grand vision to become the most powerful economic empire in the world by 2025. For that purpose, they are willing to compete.
The big question remains, who will win this Trade War? Some observers state that Southeast Asian (SEA) countries are potential winners of the trade war as companies have begun shifting their manufacturing activities out of China. Their main argument is that trade diversion and inflow of foreign investments as a result of the trade war will give more benefits to ASEAN countries. Economically, SEA is an integral part of the global value-chain of production in which the economic superpowers occupy central positions. Mostly, Southeast Asian countries are needed as they are the main sources of raw materials and cheap labor for both the US and China’s manufacturing.
Some give counter-argument, Southeast Asia may not be completely ready to take over a great number of manufacturing activities from the US and China because multinational companies are increasingly concerned with poor infrastructure and logistics networks in certain SEA countries. This obviously will increase operational costs by foreign parties should they are to invest there. It is also relatively difficult to drastically improve production capacity in the short-run in SEA countries like Vietnam that is already operating near its maximum capacity. For Southeast Asian countries to obtain the benefits from the trade war, they need to invest heavily in infrastructure and production capacity, improve labor productivity through training programs or movement of skilled labor within ASEAN, and create a favorable business environment to attract investors for the long-run.
Impacts on Indonesia
The trade war between the US and China is affecting the global trade balance, including Indonesia. For Indonesia, China and the US are the two of its main trade partners and trade war has put pressure on the ability to achieve Indonesia’s desired growth target. As there are always two sides to any events, the impacts could be divided into two as well which are positive and negative. To examine the impacts, let’s focus on our own Indonesia.
Positive Impacts
- Enter the US Market Opportunity
As the trade war goes on, many commodities that are imported from China have been unable to compete in the US market. President Joko Widodo saw this opportunity to fill in the US market needs for certain commodities. For example, China used to export garment and textile products to the US. Now that they are at trade war, Indonesians could fill in the role as the main exporter for garment and textile products to the US by first increasing our production capacity and capability. Moreover, Indonesia must improve its labor competencies in order to pursue this opportunity.
Aside from potential friction with China, the idea of supplying the US is making sense. It will grow our economy by taking advantage of trade war momentum. From the ashes, we shall rise. But first, domestic companies need to step up their game to embrace the opportunity to penetrate new markets. Here are several data that companies may need should they decide to go with exporting:
- US goods imports from Indonesia totaled $20.9 billion in 2018, up 3.3% ($660 million) from 2017, and up 32.1% from 2008.
- The US top import categories in 2018 were knit apparel ($2.3 billion), woven apparel ($2.2 billion), rubber ($1.8 billion), footwear ($1.5 billion), and mineral fuels ($1.3 billion).
- Total imports by the US for agricultural products from Indonesia totaled $3.4 billion in 2018 and is the 9th largest supplier of US agricultural imports. Leading categories include tropical oils ($1.1 billion), rubber & allied products ($932 million), cocoa paste & cocoa butter ($363 million), unroasted coffee ($290 million), and spices ($171 million).
- US imports of services from Indonesia were an estimated $1.1 billion in 2017 (latest data available), 18.3% ($176 million) more than 2016, and 108% greater than 2007 levels. Leading services imports from Indonesia to the US were in the travel, technical and other services, and financial services sectors.
Make your move.
2. Industry and Investment Relocations
Trade war creates opportunities for other countries through industry and investment relocations. A report by the ASEAN+3 Macroeconomic Research Office (AMRO) suggested the Southeast Asia region has become the main destination for industry and investment relocations from China. To capitalize on the situation, Indonesia needs to focus on improving the investment climate to attract more investors. The benefits of the industry and investment relocations to Indonesia are creating jobs opportunity for the Indonesians, having the opportunity to get transfers of technology, and contributing to Indonesia’s economic growth.
From the benefits stated above, I would love to give bold marks on the opportunity to get transfers of technology. Both the US and China have benefited from the advancement of technology more than any country in the world. With the US being the technological leader of the world, China is closing in behind them as they are doing intensive study on US technology. Maybe a little bit of controversy will come out if I say that China has proactively acquired US technology in both ethical and nonethical ways. Please google T-Mobile vs Huawei case for more info on this topic.
Indonesia could also benefit itself from industry and investment relocations since the transfers of technology will eventually occur. At that point, we just have to capitalize on the transfers in an ethical and productive manner with an orientation to advance our equipment, capabilities, and technological knowledge. The goal remains to achieve the nation’s greater good. The way is by improving the investment climate.
Negative Impacts
1. Cheap Products Hit from China
Indonesia is in the path of inviting investments. One of the sectors is the infrastructure development that becomes the priority of the current government to pursue a low number of disparities in the country. For the sake of infrastructure development, Indonesia will be needing a great number of steel-based products. Below is the data for the largest steel-producing countries in the world:
In 2017, World Steel’s data mentioned that China produced 50.3% of the world’s steel supply. In 2018, China produced 1% more from last year becoming 51.3%. The tariff imposed on steel from China to the US has lower its competitiveness in the US market resulting in an over-supply problem. To solve said problem, China must find other countries as the market to channel the steel products, the sweet destination is to Indonesia.
On one hand, the increasing number of infrastructure projects in Indonesia might become a savior for China in keeping its steel business profitable. On the other hand, we have the advantage of being supplied with cheaper Chinese steel products. In a large quantity, imports from China for steel products might become a challenge for local steel manufacturers. While China has the advantage of being able to sell their products cheaper as the production will be subsidized by its government, our local steel manufacturers are at risk. Therefore, the Indonesian government needs to anticipate this long-run implication through regulations to prevent flooding imports from China and simultaneously develop local manufacturers’ capabilities.
2. Cheap Products Hit from the US
To the Western side, we need the US to cover our soybean’s deficit. Based on the data from export.gov, Indonesia is the world’s second-largest consumer of soybeans for direct human consumption. Tempe and tofu makers are the largest soybean consumers in Indonesia, accounting for nearly 90 percent of total domestic soybean consumption. Tempe and tofu manufacturers prefer US soybeans for texture and quality reasons. According to previous data, Indonesia is estimated to import 2.7 Million Metric Tons of soybeans in 2017/2018 and the number is expected to grow continually to 3.37 Million Metric Tons in 2018/2019.
The issue is identical to the previous case that the conflicting country could help Indonesia in satisfying its needs for certain commodities. But then, it also becomes a threat to the locals as soybean harvesters in Indonesia meet tough foreign competitors. To shield the locals against this, the Indonesian government once again needs to limit the imports through regulations and simultaneously develop local manufacturers’ capabilities.
Conclusion
- Trade war may have negative impacts on Indonesia in terms of the threat of flooding imports, but some positives come out from it as there are opportunities waiting to be exploited for the benefit of our nation.
- Indonesia could gain many benefits from the trade war between the US and China for its own greater good by emphasizing heavily in infrastructure and production capacity enhancement, improving labor productivity through training programs or movement of skilled labor within ASEAN, and create a favorable business environment to attract investors for the long-run.
- On top of that, to guard against the negative impacts, Indonesia needs to establish regulations to ensure that the domestic industry still has a chance against potential flooding products from abroad. This way, Indonesia will grow even stronger after the trade war.
References:
- A Quick Guide to the US-China Trade War. Retrieved from https://www.bbc.com/news/business-45899310
- Key Dates in the US-China Trade War. Retrieved from https://www.reuters.com/article/us-usa-trade-china-timeline/timeline-key-dates-in-the-us-china-trade-war-idUSKCN1VQ24Y
- Export.gov’s Indonesia Country Commercial Guide (Agriculture). Retrieved from https://www.export.gov/article?id=Indonesia-Agriculture
- Is Southeast Asia Winning the US-China Trade War? Not So Fast. Retrieved from https://thediplomat.com/2019/09/is-southeast-asia-winning-the-us-china-trade-war-not-so-fast/
- Jokowi Asks Indonesia Take Opportunities in US-China Trade War. Retrieved from https://en.tempo.co/read/1214032/jokowi-asks-indonesia-take-opportunities-in-us-china-trade-war
- Office of the United States Trade Representative’s data. Retrieved from https://ustr.gov/countries-regions/southeast-asia-pacific/indonesia#targetText=U.S.%20total%20exports%20of%20agricultural,dairy%20products%20(%24166%20million)
