Weighing the costs and benefits of joining TPP for Indonesia

Southeast Asia’s biggest economy is eyeing the US-led Trans-Pacific Partnership (TPP) trade deal, already signed by a dozen countries, including Australia.

Before coming to a decision, policymakers in Indonesia must measure the benefits of joining (or not) through careful studies, discussions and judgement.

Fear of missing out

Indonesian Trade Minister Thomas Lembong said if Indonesia does not join, it will miss out on TPP benefits and trail behind TPP-member countries, especially Vietnam and Malaysia.

But there are concerns back home that joining TPP will threaten Indonesian producers and flood the local market with imports. Indonesia is already facing a trade deficit. Some worry that having cheap imported goods from TPP members in Indonesia’s market, in addition to strict market regulations for members may exacerbate this problem.

Indonesian President Joko Widodo met President Obama and expressed his interest for Indonesia to join the Trans-Pacific Partnership. Reuters/Jonathan Ernst

People are also wary of how the TPP will benefit corporations from developed economies over struggling developing countries, with the mechanism for foreign companies to sue governments.

Weighing the TPP

The current 12 TPP members (Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States, and Vietnam) accounts for 40% of world economy, US$ 295 billion of global income, and a potential gain of US$1.9 trillion.

We should examine the overall benefit of having access to markets of these countries and measure it to the potential losses that may come from increased competition and market regulation.

TPP members are spread across the Asia-Pacific region, which is geographically favourable for Indonesia.

It has two of Indonesia’s major trading partners - United States and Japan - where the trade balance between the two countries has always been a surplus.

TPP’s reduction in 18,000 tariff and other non-tariff barriers opens up market access for member countries. This includes tariffs for textiles and apparel, one of Indonesia’s main export products to the US.

The agreement may also benefit members by providing regulations that promises clearer and fairer trade practice.

Under the TPP, Small Medium Enterprises (SMEs) receive support to export their products to overseas markets. The TPP will also increase cooperation between different actors in the production and supply chain, a string of activities that bring goods into the consumers' hands. The deal will help raw material producers like farmers connect with manufacturers and traders.

The TPP is expected to help reduce poverty and improve human development through support to small producers.

Aside from the potential benefits of greater market access by being a member of the TPP, Indonesia should also consider the cost of not joining.

A 2013 study by the Asian Development Bank Institute shows non-member countries including Indonesia can experience economic losses, by being less competitive from members in the same competing markets.

For example, not joining the partnership means Indonesia would be less competitive than TPP members Malaysia and Vietnam, also large producers and exporters of textiles.

Nevertheless, market access and tariff reductions are not the only areas that we have to consider in deciding to join.

The TPP covers the so-called “21st century issues” - such as intellectual property (IP) protection, investment assurance, movement of people, rules of origin, environmental protection, and labour standard. Experts in Indonesia must look into how the TPP will affect Indonesia’s growing digital industry and e-commerce, as well as the movement of people between member countries.

Lastly, we should also consider whether joining the TPP will give a substantial difference from existing trade agreements that Indonesia already has with some of the TPP members. For example, currently Indonesia is already part of the ASEAN Free Trade Agreement (AFTA) with Malaysia, Singapore, and Brunei. We also have the ASEAN Australia New Zealand FTA (AANZFTA).

Finding a middle ground

Indonesia has a lot of homework to do. It still faces the rapidly growing and modernised global market. Criticism certainly can guide us to act carefully, but we also need to be aware of the global opportunity and the risk of missing out when we are excluded from a strategic partnership.

Indonesia should make its decision based on a comprehensive study of all aspects of the TPP to gain the full benefit of the agreement and be prepared for all its challenges.

Additionally, to compete in a globalised economy, Indonesia must improve its infrastructure – especially roads and ports for transportation of goods and power plants to provide energy for manufacturing. Its institutions and human resources should also be improved.

Any trade agreements have some degree of flexibility. We should not be stuck in the dichotomy of join or not to join. But we should find a middle ground of joining at certain rate of conditions.