Time for Indonesia to Pursue Vietnam in the Face of Trade War

Writer: Sorta Tobing

Editor: Sorta Tobing

8/8/2019, 17.05 WIB

The trade war escalation could be an opportunity for Indonesia to seize the Chinese market in the US. Vietnam’s success in doing so is worth emulating.

Telaah - Indonesia vs Vietnam
123RF.com/Sezer Ozger
Trade war between the US and China poses challenges for Indonesia. Vietnam's success in taking over the Chinese market is worth emulating.

The trade war initiated by the US President Donald Trump complicates the world economy. The agreement with China never materialized. Meanwhile, he is also on track to win the war before the US election on November 5.

According to investment company Goldman Sachs, there is a low possibility for the two countries to reach an agreement. Washington and Beijing still insist on defending the interests of their respective countries.

“We previously assumed Trump would make a deal to further benefit the prospect of his re-election in 2020,” wrote Goldman Sachs, as quoted by CNN, Wednesday (8/7). “But, we are now unsure that this is his view.”

When the two global economic giants fight one another, other countries get the impacts. World Bank in June stated that economic growth in the East Asia and Pacific regions weakened from 6.3 percent last year to 5.9 percent in 2019 and 2020 due to trade war.

It is the first figure below six percent since the financial crisis hit the region in 1997-1998. Indonesia is predicted to experience stagnation or unchanged growth compared to last year. The figure is 5.2 percent.

Statistics Indonesia (BPS) earlier this week also released economic growth figures that were not too encouraging. Growth in the second quarter of 2019 reached 5.05 percent on an annual basis, slowing compared to 5.27 percent in the same period in the previous year. The following Databoks chart shows the growth rate was the lowest in the last two years.

BPS Chief Suhariyanto said the current economy is mostly driven by household consumption, which grew 5.17 percent. Meanwhile, investment and gross fixed capital formation (PMTB) only grew 5.01 percent, and exports fell 1.84 percent.

Household consumption contributed 55 percent to the national Gross Domestic Product (GDP). The Databoks chart shows consumption growth of 5.17 percent was the highest in the last 21 quarters. The current biggest public expenditures are food, transportation, and communications.

The gross fixed capital formation slowed down as investment in capital goods for vehicle types declined 0.04 percent due to the weakening car sales figures by 10 percent on an annual basis, even though the gross fixed capital formation actually grew 8.01 percent in the same period last year.

Meanwhile, exports fell as global economic weakened due to the US and China trade wars. Therefore, Suhariyanto said the government must address many things to boost economic growth, such as legal certainty and simplification of regulations. “They should also watch out for global economic challenges,” he said.

The Trouble of Seizing the Chinese Market

The Indonesian Employers Association (Apindo) Deputy Chairman Shinta Widjaja Kamdani said the escalation of the US-China trade war would hurt the Indonesian economy. Moreover, Indonesia has strong economic relations with China in terms of trade and investment.

Trump's plan to increase tariffs on Chinese products entering his country by 10 percent will be a burden to the Indonesian economy. “Exports to China are down. There is a greater decline, which is the investment from that country,” she told Katadata.co.id.

In terms of trade with the US, Shinta predicts an increase in exports and trade. “But, the increase will not be able to cover our trade deficit with China,” she said.

As indirect impacts, Indonesia's trade deficit will increase and the amount of foreign exchange in the country to guarantee trade will decrease. Furthermore, there is also exchange rate fluctuation.

So, is there a chance for Indonesia to take over the access of Chinese products to the US?

According to Shinta, it is impossible to do so since most of the Chinese products subjected to Trump’s trade tariffs are the supply chain for the US manufacturing industry. “Unfortunately, the structure of our trade with the US does not have many of such products,” she said. In addition, Indonesia’s products are not as efficient as India and Vietnam.

The second problem is related to production capacity. Most exporters are already producing under full capacity. “In order to export more than now and enjoy the Chinese market share in the US, we need more investment to open a new plant,” Shinta said.

The problem is that investment cannot be done in a short time. It takes at least 6-12 months to expand the plant and more than one year to build a completely new plant.

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