WORKING PAPER RECENT ADJUSTMENTS TO INDONESIA S AFTA CEPT SCHEME. Sahat M. Pasaribu and Sjaiful Bahri. March A joint research project on

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1 WORKING PAPER RECENT ADJUSTMENTS TO INDONESIA S AFTA CEPT SCHEME Sahat M. Pasaribu and Sjaiful Bahri March 1998 A joint research project on Linkages Between Indonesia s Agricultural Production, Trade and the Environment funded by the Australian Centre for International Agricultural Research, between CASER (Bogor) CIES (Adelaide) CSIS (Jakarta) RSPAS (ANU, Canberra) Lead institution: CIES University of Adelaide Adelaide SA 5005 Australia Telephone (61 8) Facsimile (61 8) cies@economics.adelaide.edu.au Homepage:

2 CASER/CSIS/CIES/ANU joint research project on policy analysis of linkages between Indonesia's agricultural production, trade and environment Rapid economic growth in Indonesia has been accompanied by significant structural changes, including for its agricultural sector and its unique natural environment. Recently questions have been raised about the impact of Indonesia s agricultural, industrial, trade and environmental policies on sustainable rural development. The nature of interactions between the economic activities of different sectors and the environment are such that an intersectoral, system-wide perspective is essential for assessing them. An international perspective also is needed to assess the impact on Indonesia of major shocks abroad, such as the implementation of the Uruguay Round agreements, APEC initiatives, or reforms in former centrally planned economies. There is increasing pressure on supporters of liberal trade to demonstrate that trade reforms at home or abroad affecting countries such as Indonesia will not add to global environmental problems (e.g., deforestation, reduced biodiversity). Again, this requires system-wide quantitative models of the economy and ecology, because typically there are both positive and negative effects at work, so the sign of the net effects ultimately has to be determined empirically. To begin to address these issues, the Australian Centre for International Agricultural Research (ACIAR) has generously provided funds for a collaborative 3-year project (to mid- 1999) involving the University of Adelaide s Centre for International Economic Studies (CIES) as the lead institution, Bogor s Centre for Agro-Socioeconomic Research (CASER) which is affiliated with the Ministry of Agriculture, Jakarta s independent Centre for Strategic and International Studies (CSIS), and the Economics Division of the Research School of Pacific and Asian Studies (RSPAS) at the Australian National University in Canberra. Being based on Indonesia with its rich diversity of environmental resources (and on which there are relatively good data) and its rapid economic growth, the project could also serve as a prototype for similar studies of other developing countries in Southeast Asia and elsewhere. The key objective of the project is to assess the production, consumption, trade, income distributional, regional, environmental, and welfare effects of structural and policy changes at home and abroad particularly as they will or could affect Indonesia s agricultural sector over the next 5-10 years. Among other things, the analysis will focus both on the effects of economic changes on the environment, and on the impacts on Indonesia s agricultural production and trade of resource and environmental policy changes. The implications of regional and multilateral trade liberalization initiatives and Indonesia s ongoing unilateral trade reforms will be analysed, along with other potential domestic policy changes and significant external shocks such as the entry of China and Taiwan into the World Trade Organization. The analysis will draw on and adapt computable general equilibrium (CGE) models such as the national INDOGEM Model (built as part of an earlier ACIAR project) and the global GTAP Model. The project is being undertaken in close collaboration with the Indonesian Ministry of Agriculture and ministries involved in trade, planning, and the environment. A Research Advisory Committee has been established to encourage close collaboration of representatives from those and other ministries.

3 ACIAR INDONESIA RESEARCH PROJECT WORKING PAPER RECENT ADJUSTMENTS TO INDONESIA S AFTA CEPT SCHEME Sahat M. Pasaribu and Sjaiful Bahri Center for Agro Socioeconomic Research (CASER) Agency for Agricultural Research and Development Bogor Indonesia Ph: (62 251) Fax: (62 251) caser@calrec.wasantara.net.id March 1998 Paper presented at the Third Workshop of the ACIAR Indonesia Research Project on Agriculture, Trade and the Environment, Adelaide, Australia, February ii

4 SUMMARY Trade liberalisation in ASEAN is gradually increasing as the regional market prepares to face an era of economic globalisation. All quantitative restrictions and non tariff barriers are scheduled to be eliminated and ASEAN member countries are expected to maintain all tradeable commodities tariffs at 0 to 5% by Adjustments made to all commodities listed in the UAP of CEPT Scheme are necessary to increase intra-asean trade. Moreover, the adjustments are aimed at improving product efficiency. Some of Indonesia's highly sensitive commodities (wheat, soybean, garlic and cloves) have been excluded from the protective marketing arrangements. Intra-ASEAN trade could encourage regional investment and utilise resources more efficiently within the region. The region's highly competitive economies should be able to achieve mutual benefits among the ASEAN countries from the trade liberalisation efforts. iii

5 RECENT ADJUSTMENTS TO INDONESIA'S AFTA CEPT SCHEME Sahat M. Pasaribu and Sjaiful Bahri Introduction Trade liberalisation in now approaching. ASEAN's free trade (AFTA through CEPT Scheme) shall be effective in It is also announced that in 2010 the Asia and Pacific countries (APEC agreement) should open their respective markets for free trade, as well as the GATT/WTO framework on global economy in Indonesia is practically involved in these agreements and should be well prepared entering the world market. The establishment of AFTA would stimulate economic development in the region. This agreement through market accesibility would encourage foreign investment into the ASEAN member countries. Agricultural sector play an important role in such trade agenda. Shifting in international free trade requests a higher standard of competition among the tradeable agricultural products. The highly competitive products should encourage quality improvements and decrease domestic production costs. Trade liberalisation in one hand, is a challenge, while in another, this economic globalisation is an opportunity to enter regional markets. The question now is whether many concerned involved in this activity have ability to capture such options (Rasahan, 1997). Once the domestic actors disregard this business, other countries will happily take the place and meet the market. Unless the potential commodities have competitive advantage, the opportunity to compete in the regional market will disappear and in turn Indonesia will only be a big market for other countries. Therefore, agricultural product development is necessary to be well prepared in a straight forward direction to enter every single possibilities in the regional markets. Any opportunities in the articles of rules and regulations of the agreement might be taken and should not be ignored for the benefit of domestic market (Pasaribu, 1997). In this regard, adjustment made to the implementation of the CEPT Scheme will be account as opportunities in the preparation of agricultural products development entering global market. This effort is more important in the current economy crisis in Indonesia. The 1

6 economy and monetary crisis has been touching the agricultural sector. Recovery from this economic situation is very difficult and could be a bit longer than expected. Therefore, the available strengths and the existing options should be well organised to gradually improve agricultural development in the country. Intra Regional Trade As agreed, ASEAN member countries should consider tariff reduction for all tradeable commodities (maintained at 0-5% by 2003). All quantitative restrictions and non tariff barriers will be eliminated. By the year 2003, the ASEAN member countries will have common effective tariffs and will harmonise the region's global trade. This agreement is also expected to strengthen the economic power of the region to maintain political stability and to face the global economy wave of the world market. The latest data reported on intra regional trade indicate that during the first half of 1997 almost all of the member countries experienced a high export growth as compared to the same period in 1996 (Table 1). The countries experiencing higher growth rate are Malaysia (52.5%), Thailand (28.9%), and Philippines (16.6%). In absolute terms, Malaysia earned the highest growth (US $ 4.35 billion), Thailand (US $ 0.83 billion), and Indonesia (US $ 0.23 billion). Unfortunately, Singapore experienced a negative growth rate of 16.6% (US $ 3 billion). For Indonesia, this could be a quite promising figures before the economy crisis started. In July 1997, Indonesia began to observe the weaken of local currency within strong world currencies, such as US dollar. The monetary crisis has been lasting up until today and probably the country and the people would suffer in a longer period. Currently the government is seeking suitable formula selected from limited available monetary policies to reduce the pain (to increase Rupiah value) and in turn to maintain economic and political stability in the country's 200 million people. 2

7 Table 1. Intra-ASEAN export of CEPT products by country (US$ million) Country 1996 Jan-Jun 1997 Jan-Jun Growth (absolute term) Growth rate (%) Brunei Darussalam Indonesia Malaysia Philippines Singapore Thailand , , , , , , , , , , , (2,298.1) (16.62) ASEAN 29, , , Source: ASEAN Secretariat, To have more information on the commodities traded, Table 2 lists the intra- ASEAN export of CEPT products. Fats and oils, vegetables products and prepared foodstuffs are among the promising growth rate (in absolute term) during the first half of 1997 as compared to the first six month of 1996 (respectively, 82.48%, 54.90%, and 42.92%). 3

8 Table 2. Intra-ASEAN export of CEPT products by sector (US$ millions) Chapter Description 1996 Jan-Jun 1997 Jan-Jun Growth (absolute term) Growth rate (%) Contribution to growth (%) Live Animal Vegetable Products Fats and Oils Prepared Foodstuffs Mineral Products Chemicals Plastics Hides and Leather Wood and Wood articles Pulp and paper Footware Stone/Cement/Ceramics Gems Base metal and Metal articles Machinery and Electrical Appliances Vehicles Optical, precision & musical instruments Arms Msicellaneous Manufactured articles Antiques and works of art Other , , , , , , , , , (125.2) (98.2) (14.21) (11.70) (3.77) (2.96) All 29, , , Source: ASEAN Secretariat, On the ASEAN trading partner, it is interesting to consider figures shown in Table 3. As earlier described, ASEAN countries are also opened to other interested countries. The ASEAN major trading partner countries are the US, Japan, and the EU. For the first half of 1996 and similarly in 1997, the major ASEAN export markets remained unchanged, i.e., to US (17.9% to 12.9%); to EU (15.4% to 12.9%) and to Japan (12.7% to 12.6%) of total ASEAN export, respectively from the first half of 1996 to the same period in The trade performance of Indonesia was not quite satisfied. Indonesia suffers a trade deficit with other countries as shown by the figures during the first half of 1996 and the same period in 1997, eventhough the value of import from Indonesia increased. 4

9 Table 3. ASEAN major trading partners for Jan-Jun 1996 and Jan-Jun 1997 (US$ millions) Country ASEAN's export to ASEAN's import from Proportion of export (%) Proportion of import (%) A. Dialogue Partners US Japan EU Australia Canada New Zealand Korea PR China India Russia 27, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , B. Rest of the World 30, , , , EXTRA-ASEAN (A+B) 116, , , , C. INTRA-ASEAN Brunei Darussalam Indonesia Lao PDR Malaysia Myanmar Philippines Singapore Thailand Vietnam 36, , , , , , , , , , , , , , , , , , , , , , , , , , Total (A + B + C) 153, , , , Source: ASEAN Secretariat, An interesting condition might be carefully observed as the figures on ASEAN exports to China has a significant increase (US $ 1.9 billion or 65%) and to India (US $ 0.55 billion or 33.8%). In contrary, exports to Russia has substantially decresed by around US $ 2.24 billion (84.1%). At the same time, ASEAN has also reduced its imports from Russia. Total decreased to a potential market like Russia should be further investigate so that economic relationship could be improved on the basis of mutual benefits for both countries. Inclusion of Indonesia's Commodities on UAP The unprocessed agricultural products (UAP) have been classified into three 5

10 commodity lists: (a) immediate inclusion list, (b) temporary exclusion list, and (c) sensitive list. The latter requests special mechanism and has been divided into two groups: sensitive and highly sensitive groups. In 1995, clove, garlic, wheat, soybean, coffee, tea, edible oil, and roots and tubers were among the sensitive products listed in UAP. Rice and sugar were listed in the highly sensitive products (Table 4 and 5). Currently, the highly sensitive products remain the same, while the sensitive products had been adjusted properly to accomodate various suggestions and to adopt flexibility in its trade. Previously, many people were doubtfully in the implementation of CEPT Scheme of Indonesia's commodities on UAP due to production inefficiency of some agricultural commodities compared to those of other ASEAN countries (Erwidodo, et.al., 1997). Moreover, Indonesia submit more commodities in the sensitive category list and also apply high rate of tariff (bound rate as in the GATT/WTO agreement). This is not something expected by other ASEAN countries from Indonesia. However, after some discussions and adjustment on economy situation, the list of the products has been reduced and transfer to the inclusion list. Now, the list of sensitive group become shorter but rice and sugar are remain unchanged in the highly sensitive group. The tariff lines of the products have been reduced significantly from 20 in 1995 to only 11 items in 1998 (Table 5 and Table 6). 6

11 Table 4. Sensitive list of Indonesia's unprocessed agricultural products, October 1995 No. 2/4 Digit 6/9 Digit Description of goods Edible vegetables and certain roots and tubers Dried vegetables, whole, cut, sliced, broken or in powder, but not further prepared - Other vegetables: mixtures of vegetables - Garlic Coffee, tea, mate and spices Cloves (whole fruit, cloves and steams) - Cloves Cereals Wheat and meslin - Durun wheat - Seeds for sowing - Other Other: - Wheat - Other Wheat or meslin flour Rice flour Other products of the milling industry Flours and meals of soybean Oil seeds and oleaginous, miscellaneous grains; seeds and fruit; industrial or medicinal plants; straw and fodder Soybeans, whether or not broken - Yellow Garlic Cloves Source : Erwidodo, et.al.,

12 Table 5. Highly Sensitive list of Indonesia's unprocessed agricultural products, October 1995 No. 2/4 Digit 6/9 Digit Description of goods Rice - Rice in the husk (paddy of rough) - Pulut (glutinous rice) - Others Husked (Brown) Rice Pulut (glutinous husked rice) Other husked rice Milled Rice Pulut (glutinous, semi or wholly melled) Other semi or wholly milled rice, polished/not - Broken rice - Pulut (glutinous rice) - Others - Other - Refined white - Packed for retail sale Sugar for pharmaceutical industry - Other refined white sugar - Other refined brown sugar - Others sugar Sugars and sugar confectionery Cane or beet sugar and chemicaly pure sucrose in solid form - Raw sugar non containing added flavouring of colouring matter - Cane sugar Beet sugar (non flavour or colour) - Other - Containing added flavouring or colouring matter - Raw sugar - Refined white - Packed for retail sale - Other - Refined brown - Other Source : Erwidodo, et.al., 1997 Out of the 23 tariff lines, there are 11 tariff lines included in the highly sensitive of UAP, while the other 12 tariff lines are included in the category of sensitive list (Table 6). The number of tariff lines of Indonesia included in the 1998 CEPT Package are respectively 6675, 517, 23, and 45 for inclusion, temporary exclusion, sensitive, and 8

13 general exception lists (Table 7). Further adjustment should be made to implement part of the structural change of economy in Indonesia. Therefore, the newly government policy related to AFTA's tariff reduction (issued on November 3, 1997) of some of the BULOG's marketing arrangements and included in the CEPT Scheme has been launched with the scenarios shown in Table 8. The impact of this policy, is that the products could be transferred into the temporary exclusion list or immediate inclusion list of UAP. The issuance of this policy had been made following the international market request within the framework of current policies on by economic reformation. This is clearly in effect taken into account the impact of the currency devaluation. With such arrangements, BULOG will only organise the availability of rice (buy/stock, sell/market operation). However, sugar is still under the BULOG's arrangements. The acceleration of tariff reduction for those commodities, in one hand, has been pushed the implementation of the CEPT Scheme. This is good for Indonesia to keep activities well prepared approaching the year

14 Table 6. Sensitive and highly sensitive list No. HS Code Description Sensitive: Garlic Cloves Wheat Flour Soybean Highly Sensitive: Rice Sugar Fresh Dried (whole, cut, sliced, broken or in powder) Fruit Other Durum wheat seeds Durum wheat other than seeds Wheat other than Durum wheat Wheat of meslin flour Rice flour Other cereal flour Yellow Flour and meal of soybeans Rice in the husk Husked (brown) rice Milled rice Broken rice Raw, No Flavour/Color Cane sugar Beet sugar Other than raw With flavour/color Other Refined white sugar packed for retail Refined white sugar for phamaceutical purpose Refined white for other purpose Other than refined white Source: ASEAN Secretariat,

15 Table 7. The 1998 CEPT Package Country Inclusion Temporary exclusion Sensitive General exception Total Brunei Indonesia Malaysia Philippines Singapore Thailand Vietnam Laos Myanmar n.a Total Percentage Sources: ASEAN Secretariat, Note : As of 10 February 1998 n.a. = not available Table 8. Tariff reduction for Indonesia's garlic, wheat and soybean Commodity HS Code Before the policy After the policy Garlic Wheat Soybean (dried) Source : Departemen Pertanian, It is also interesting to note that clove had also been taken from the arrangement of BPPC. The market power is expected to run the marketing process of clove in Indonesia in the future. Concluding Remarks Adjustment on the commodities listed in the UAP is very important to increase intra-asean trade transactions. This adjustment is also directed to improve products 11

16 efficiency. Tariff reduction on some commodities listed in sensitive group will accelerate the implementation of AFTA. Similar products could be found in the region's markets and in this respect, the product competitiveness will determine its market performance. ASEAN countries should increase trade interactions within the region as a way to overcome the devaluation of respective currencies. Intra-ASEAN trade should be developed and expanded as prices of tradeable products remained competitive. Necessary actions may be taken to establish appropriate payments arrangements. Intra-ASEAN trade could encourage regional investment and optimally utilise resources within the region. Simultaneous currency depreciation has been accelerate the implementation of trade liberalisation in the region. Competitiveness of the region's economies should be directed to achieve mutual benefits among the countries. 12

17 References ASEAN Secretariat Report of the Seventh Meeting of the Coordinating Committee on CEPT Scheme for AFTA (CCCA). Jakarat, December Annex 19. ASEAN Secretariat. Jakarta. ASEAN Secretariat The Eight Meeting of the Coordinating Committee on the Implementation of the CEPT Scheme for AFTA. Jakarta February ASEAN Secretariat Information Paper. Agenda Item 10, Document 8. Trade Values. ASEAN Secretariat. Jakarta. ASEAN Secretariat The Eight Meeting of the Coordinating Committee on the Implementation of the CEPT Scheme for AFTA. Jakarta February ASEAN Secretariat Information Paper. Agenda Item 4, Document 4. Implementation of 1998 CEPT Package. ASEAN Secretariat. Jakarta. Departemen Pertanian Perkembangan UAPs Dalam Rangka CEPT-AFTA. Bahan Rapat, 21 Januari Biro Kerjasama Luar Negeri, Departemen Pertanian. Jakarta. Erwidodo, I Wayan Rusastra, Hermanto, dan Agus Pakpahan Ketahanan Pangan Dalam Era Pasar Bebas. Dalam A. Suryana dkk. (Penyunting): Membangun Kemandirian dan Daya Saing Pertanian Nasional Dalam Menghadapi Era Industrialisasi dan Perdagangan Bebas. Prosiding Konferensi Nasional XII PERHEPI. Perhimpunan Ekonomi Pertanian Nasional. Jakarta. pp Pasaribu, Sahat Situasi Perdagangan Komoditas Pertanian Indonesia di Pasar Regional. Agro-Ekonomika: XXVII(2) Oktober PERHEPI. Jakarta. pp Rasahan, C.A Kesiapan Sektor Pertanian Menghadapi Era Perdagangan Bebas. Agro-Ekonomika: XXVII(2) Oktober PERHEPI. Jakarta. pp FILE:C:\Workshop\Recent 13