US-China trade war: Vietnam might get Apple, but Indonesia can get a bite of the action, too
- Countries like Vietnam stand to benefit as companies like Apple leave China for more profitable markets
- But for Indonesia to benefit, some innovative, outward-looking policy decisions will be needed
Trade wars start when a country adopts a protectionist approach, imposing import tariffs to protect domestic industries and open jobs. Such a move generally encourages local producer prices to drop, making them more competitive against import markets. But it also slows growth in those countries involved, and globally, it can lead to inefficiency in the allocation of resources.
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But while the consequences for the US of the trade war are likely to be by-design, other countries will be left to figure out how best to respond and adapt.
For Indonesia, the future will demand some innovative, outward-looking economic policy decisions.
Firstly, investors are not looking towards developing Asian countries such as Indonesia to supplement China’s decline. The first three months of 2019 saw a sharp fall in Indonesia’s foreign direct investment, from US$10.5 billion at the end of December 2018 to US$5.4 billion at the end of March this year. Secondly, the slowdown of Asia’s largest economic power and one of Indonesia’s foremost trade partners only promises to reduce foreign investment further and impact raw goods exports such as palm oil, wood, rubber and coal. And lastly, Indonesia’s existing trade ties with the US – commodity goods, not manufacturing – are not affected by US tariffs.
RETHINK NEEDED
So to take advantage, Indonesia needs to rethink its offering.
There are several strategies that the government in Jakarta can take to come out of this trade war better off.
Indonesia should be pursuing regional trade cooperation agreements with other countries. The negative effects of US trade protectionism and China’s slowdown could be offset through pacts that secure import-export volumes between Asia’s developing nations.
Jakarta also needs to maintain foreign capital inflows and keep its exchange rate stable. Bank of Indonesia predicts the country’s balance of payments will continue to strengthen as long as its supported by increased foreign capital inflows and a reduction in the current account deficit – currently around 2.5 to 3 per cent of GDP. In February, the country recorded a trade balance surplus of US$0.33 billion. In the same month, the central bank recorded a non-resident capital inflow of US$6.3 billion.
Finally, Indonesia’s government needs to encourage more export manufacturing industries.
These companies need a sufficient base of production so they can fill the gap left by Chinese products.
So while there is much to ponder about the US-China trade war, there is one thing that is certain for Indonesia, and that is it is up to Indonesians to take advantage of the fallout.
Muhammad Zulfikar Rakhmat is a lecturer at the Islamic University of Indonesia and research associate at the Institute for Development of Economics and Finance in Jakarta