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Asian regionalism and RI’s comparative advantage

Jakarta Post, Indonesia

Asian regionalism and RI’s comparative advantage

19 August 2010


By Kiki Verico, Tokyo

Undeniably, we’re heading towards the globalization of world trade. At the same time countries face challenges other than globalization: regionalism and bilateralism. Indonesia simultaneously faces different levels of trade liberalization, whether at the global (World Trade Organization or WTO), regional (ASEAN Free Trade Area or AFTA) or bilateral level (such as with Australia).

The existence of these trade agreements makes world trade relations more complicated. This phenomenon is known as the “spaghetti bowl effect”. There is still hope in dealing with this kind of complexity.

Regional trade agreements such as AFTA allow “discriminative trade liberalization” between members and non-members of ASEAN. However, AFTA also recognizes the “open regionalism principle” that independently allows members to establish trade agreement with non-members.

Theoretically, bilateral trade agreements (BTA) between regional members and non-members will stimulate a “domino effect” to other member countries as no member country wants to be left behind. This is why after Singapore and Thailand effectively negotiated BTAs with non-ASEAN members such as the US and Japan. Other ASEAN members followed suit. This action followed the logic of the “prisoner’s dilemma”.

In the end, competitive trade liberalization forces regional member to negotiate BTAs with non-members. Increasing BTAs in Southeast Asia will drive the original “discriminative principle” out of the region. It means BTAs are indirectly transforming regionalism to be the complement to globalism.

BTAs are not fit for all members. In this case, some regional members must deal with the “hub and spokes” problem. Non-members with advanced economies will gain benefit more than members that are less advanced.

The more advanced a member’s economy, the easier it is to achieve a “win-win solution” with advanced non-member economies. Most ASEAN members are not in a feasible position to create direct BTAs with non-members unless it is done under ASEAN’s umbrella, such as ASEAN+1, ASEAN+3, ASEAN+6 and so on. It is why ASEAN’s open regionalism is a crystal-clear advantage.

Prior to that, Indonesia needs to identify its trade competitiveness by identifying comparative trade advantages. This can be done by combining net export (NX) of the Grubel-Lloyd (G-L) index with the revealed comparative advantage (RCA) index. The most competitive products are those with positive of G-L index (export value higher than its import value) and higher than one for the RCA index.

Based on my calculations using WTO statistics, Indonesia’s greatest comparative advantage is in primary products (agriculture and mining) and labor-intensive industries (such as textiles). Yet RI still has a comparative advantage in medium-high technology industries such as telecommunication equipment production.

Indonesia still has opportunities in electronic data processing, office equipment, and integrated circuit and electronics component production. However, the country faces a negative G-L index & less than of RCA index in chemicals, pharmaceuticals, machinery and transport equipment production.

There are some products where Indonesia competes with other Asian countries. We compete in agricultural products including food with Thailand, Vietnam and India. For textiles, we compete with Thailand, China, Korea and India while for clothing; the competitors are Vietnam and the Philippines. For manufactured products (telecommunication equipment), we compete with Malaysia, Thailand, China, Japan and Korea.

On the other hand, we rely on Japan and India to fulfill our domestic market demand for iron and steel products. As for pharmaceuticals, we depend on India, and for machinery and transport equipment Indonesia relies on Malaysia, Thailand, Philippines, China, Japan and Korea. Indonesia’s automotive product demand is fulfilled by Japan and Korea. As for chemical products, empirically, most of Asian domestic market including Indonesia still depends on external markets outside of Asian region.

In sum, mapping the comparative trade advantages of different products in different countries will help Indonesia to plan its best strategy to cope with the world’s manufactures competition that can be started from the Asian region.

Since market mechanism works naturally, ruled by “natural law” (Francois Quesnay, 1758) and driven by the “invisible hand” (Adam Smith, 1776), it is the role of the government to map out Indonesia’s comparative advantages in more detail. Such a public good is naturally provided by the government, private sector will not develop this kind of information.

Trade comparative advantage mapping will significantly help Indonesia develop its best strategy to take part in future global and regional trade architectures, together with Brazil, Russia, India and China. Let the government plays this important role. We need to be optimistic and think positively for our own bright future.

The writer is a doctoral student at Waseda University, Tokyo and a lecturer at the University of Indonesia.