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Indonesia and South Korea in critical phase over trade pact

Publication Date : 24-02-2014


Indonesia and South Korea are entering the most critical phase of their trade negotiations this week when the two countries may either make or break an agreement that will help strengthen bilateral trade amounting to US$100 billion by 2020.

As officials meet in Seoul from February 25 to 28, Indonesia aims to see a “win-win” economic partnership agreement between both countries, according to Deputy Trade Minister Bayu Krisnamurthi.

“For Indonesia, that [win-win agreement] means to draw Korean investment. Thereby, what we want to hear from Korea is a solution to accommodate that specific interest,” he told The Jakarta Post.

Since the first round of negotiations in July 2012, Indonesia has made it clear that it targets higher Korean investment from the trade deal, known as the comprehensive economic partnership agreement (CEPA).

Officials and business players in Jakarta predict that Indonesia will not gain much from greater market access to South Korea, whose trade activities contribute greatly to its economy. South Korea’s exports of goods and services represent more than half the country’s economic output, supported by rapid development of industries from the 1960s onward, partly thanks to high import tariffs charged on foreign goods.

The CEPA is expected to further liberalize trade between Indonesia and South Korea by offering duty cuts on 1,051 tariff lines outside those covered by the free trade pact under the Association of Southeast Asian Nations (Asean) - South Korea framework. More than 90 per cent of the lines put under sensitive and highly sensitive lists under the ASEAN-Korea trade pact are industrial goods, while the rest are agricultural, fishery and pharmaceutical products.

Duty reduction that Indonesia still seeks from South Korea covers $150 million in exports, while a similar cut that South Korea demands from Indonesia affects $530 million in its outbound shipments.

Bilateral trade between Indonesia and Korea was valued at $21.1 billion in January-November last year, down by 13.86 per cent from a year earlier.

Indonesia’s exports, which mainly comprise liquefied natural gas, bituminous coal, crude oil, natural rubber and copper ore, slumped by 24.5 per cent to $10.5 billion over the period, while imports, largely made up of diesel, gasoline, textiles, steel and synthetic rubber, rose by 0.09 per cent to $10.61 billion.

In terms of trade in industrial goods, Indonesia lags far behind South Korea, known worldwide for its cutting-edge technological innovations. Exports of manufactured goods from Indonesia to Korea surged by 11.5 per cent from 2007 to 2012, while imports rose by one-third over the same period, according to the latest data from the Industry Ministry.

As imports of industrial goods expanded more rapidly than exports, Indonesia booked a ballooning deficit in its trade with South Korea from $160.63 million in 2007 to $4.57 billion in 2012.

Indonesia is now more cautious in sealing a free trade pact with its trading partners as it has learned quite a lot from its previous trade agreement with China under the ASEAN framework. The agreement has repeatedly been blamed by local business players as the cause of the widening annual trade deficits that Indonesia runs with China since it took effect in 2010.

The snail-paced realization of investment promised by China to address the imbalance cannot improve the situation.

In a recent meeting, Indonesia agreed to tariff cuts for goods on the condition that there would be concrete investment from Korea. The offer came up after a deadlock in the six rounds of negotiations late last year when Korea said that the government could not set an investment commitment as it would be left up to the private sector. It could encourage its business players to invest in Indonesia, but it could not specifically stipulate in the terms of the deal.

Indonesian Employers Association (Apindo) deputy chairwoman Shinta Widjaja Kamdani said that Indonesia’s offer for conditional tariff reductions in exchange for investment demonstrated its goodwill to progress the trade talks.

“The gap to bridge is still wide and there should be a breakthrough. Without that, it will be difficult to advance,” said Shinta, who represents business players in giving advice for the talks.

“Indonesia has shown its flexibility to adjust its position. Now it will be Korea’s turn,” she added.

Actually, South Korea’s investment in Southeast Asia’s biggest economy has increased significantly in recent years and last year hit a record high of $2.21 billion. But Indonesia is eyeing more investment to strengthen its manufacturing industry, particularly in electronics, petrochemicals, automotive components and machinery. The government believes this can be achieved through a real framework for investment commitment under the CEPA.

Industry Minister MS Hidayat said that despite current obstacles in negotiations, Indonesia would still maintain its aspiration to attain a “win-win” deal and expected it could be signed before May.

“We want to prioritize substance over ceremony. If we still cannot reach an agreement over principal issues, then it will be fine to delay it,” he said.


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