BILATERAL FREE TRADE OF INDONESIA-CHINA IN THE ACFTA

(ASEAN-CHINA FREE TRADE AREA) FRAMEWORK: THE

CHALLENGES & OPPORTUNITIES

Subject: International Political Economy (Final Paper)

Lecturer: Mr. Zamroni Salim, Ph.D

Arranged by,
Agreva Tania (016201600069)

Class: French 4
Major/batch: International Relations/20162

President University
Jalan Ki Hajar Dewantara RT. 2 / RW. 4, Jababeka Education Park, Mekarmukti, Cikarang
Utara, Bekasi, Jawa Barat 17550
Telepon: (021) 89109762 Fax: 021 8910 9762
Email: http://www.president.ac.idWeb: http://president.ac.id
I. Introduction
Free Trade Agreement (FTA) is an agreement between a country and another country on
free trade. The formation of various FTAs is a result of trade liberalization that cannot be
avoided by all countries as members of the international community. This is what encourages the
formation of free trade blocks. FTAs can be established on a bilateral basis, for example between
the United States and Singapore, the United States with Chile; Japan with Singapore; As well as
regional areas such as the ASEAN Free Trade Area (AFTA), the North America Free Trade Area
(NAFTA) and the European Union (BKF Kemenkeu, 2012).
The Government of Indonesia ratified the establishment of the FTA together with the
ASEAN member countries for the first time in 2002. In its development, ASEAN FTA
conducted the cooperation of China (ASEAN-China FTA) in 2004, with Korea (ASEAN-Korea
FTA) on In 2007 with India (ASEAN-India FTA), Australia and New Zealand (ASEAN-
Australia-New Zealand FTA), Japan (ASEAN-Japan Comprehensive Economic Partnership) in
2010, etc.
The existence of FTA has positive and negative impacts for ASEAN countries, including
Indonesia. Many companies especially the Small and Medium Micro Enterprises (MSMEs) of
Manufacturing in Indonesia who will face challenges with of FTA especially the ASEAN-China
FTA (ACFTA). ACFTA is an agreement between ASEAN member countries and China to create
free trade area by eliminating or reducing barriers or non-tariff trade barriers, increasing market
access for services, investment rules and regulations, as well as improving aspects of economic
cooperation to boost economic relations of the parties of ACFTA in order to improve the welfare
of ASEAN and China (Kemendag, 2012).
ACFTA made thousands of postal tariffs of manufactured products to zero percent as of
January 1, 2010. With the reduction of tariff, even zero percent, products from countries in the
ASEAN region and China will be easier to enter Indonesia at a cheaper price. On the other hand,
Indonesian products also have the same opportunity to enter markets in ASEAN and China
(Sagoro, 2013).
In this paper, the authors will focus on discussing the ASEAN-China FTA (ACFTA)
especially between Indonesia and China. "How has the development of ACFTA Indonesia-China
from scratch been formed? Who are the loser and the winner in the Indonesian economy? What
are the conflicts that have been existed or may come up?
II. Theoretical Background
Characteristic differences of each country would produce different output both in terms
of quality and quantity. The output referred to in this case relates to the production of a country.
Differences in output owned by each country indirectly requires a country to trade, either by
reason of market expansion, gain resources, gain profit, or acquire a more modern technology.
Trade involving between countries, either two or more commonly referred to as international
trade (Todaro, 1994: 19). In international trade there is an exchange, be it the exchange of goods
or services that pass across borders. The goods that are commonly exchanged are in the form of
raw materials and manufactured goods.
Trade also tends to increase the distribution of income and wealth in both domestic and
international scope. In addition, with the conduct of trade it can help all countries in carrying out
its development efforts through promotion and prioritizing economic sectors that contain
comparative advantageous (Suryanta, 2012: 61). Prioritizing economic sectors that contain
comparative advantage (comparative advantageous) is one of the thinking of David Ricardo, a
British economist in the 19th century. David Ricardo reveals that the state can profit from trade
through so-called specialization and product efficiency. The main point of David Ricardo's idea
of the theory of comparative advantage is that the advantages of trade, especially international
trade, are acquired by the countries involved through specialization and efficiency of products in
the country's favored economic sectors own. This is also explained again by Hecksker and Ohlin
later known as H-O (Coughlin, 2002: 5). Heckscher and Ohlin try to explain some trading
patterns. According to Heckscher and Ohlin, a country will trade with other countries because
the country has a comparative advantage, especially the advantages in the production factor
(Siwi, 2013).

III. Research Questions

3.1 What things have Indonesia gained from ACFTA?
3.2 Who are the loser and the winner in the Indonesian economy?
3.3 What are the challenges and opportunities for Indonesia in ACFTA?
IV. Discussion
4.1 Things Indonesia Have Gained from ACFTA
The total trade value of Indonesia and China reached US $ 36.2 billion (2010) and that
number represents 12.4% of total Indonesian trade. Meanwhile, trade values between
Indonesia and China over the period 2006-2010 recorded an average positive growth of 30%.
Furthermore, the benefits of this agreement are:
a. The opening of agricultural product market access (Chapter 01 until 08 to 0%) from
Indonesia to China in 2004.
b. The opening of Indonesia's export market access to China in 2005 which received an
additional 40% of Normal Track ( 1880 tariff post), which lowered its tariff rate to 0-
5%.
c. The opening of Indonesia's export market access to China in 2007 which received an
additional 20% of Normal Track ( 940 tariff post), which lowered its tariff rate to 0-
5%.
d. In 2010, Indonesia will gain additional export market access to China as a result of the
elimination of all tariff posts in Normal Track China.
e. Up to 2010, Indonesia will eliminate 93.39% of tariff heading (6,683 tariff posts from
total 7,156 tariff posts in the Normal Track), and 100% by 2012 (Sagoro, 2013).

4.2 ACFTA Indonesia-China: The Loser and The Winner in The Indonesian Economy
The Indonesian economy in the ACFTA in the early years of the creation of the
ACFTA did have a surplus. However, since 2009, Indonesia began to deficit with China.
This can be seen from the table below:
 The table above shows that in the period 2005-2009, Indonesia's export growth to
China (7.9% per year) was much lower than the growth of Indonesian imports from China
(17.1% per year). Even in 2009, Indonesia experienced the first deficit of bilateral trade
transactions with China of nearly $ 2 billion. This indicates that the penetration ability of
Chinese products to the Indonesian market is stronger than the penetration ability of
Indonesian products to the Chinese market. In this context, the implementation of trade
cooperation in ACFTA is feared will further strengthen penetration of Chinese products to
Indonesian market (Adam, 2010).
Then, for the following years (after 2009), the deficit economy of Indonesia is more
obvious. This can be seen from the table below (Salidjanova, 2015):

Those two tables show that the number of Indonesian import is higher than the
export to China. It means that China can cover the market in Indonesia. China is the
winner in the Indonesian market because Indonesia pays the higher expenditure for
import than the income of export. About the kind of the imported product, it can be seen
from the table below:
 The most Chinese products in Indonesia are machine and electronic stuff.
Everyone wants to get Chinese product because it is affordable. We can say that Chinese
machine and electronic stuffs make China wins in the Indonesian market.

4.3 The Challenges and Opportunities for Indonesia in ACFTA

4.3.1 The Challenges

First, the increasingly swift Chinese products that flood the Indonesian market
will increase business competition and negatively impact the performance and production
capacity of the non-competitive sectors of the local economy. The number of economic
sectors that cannot compete and close, will encourage the emergence of termination of
employment (PHK). This will have a negative impact on reducing the unemployment
rate. The simulation ever conducted by P2E-LIPI (2008) shows that any decrease in
industrial production capacity by 10% has the potential to encourage unemployment of
500,000 people. It can be imagined how much unemployment would appear if ACFTA
suppressed the industrial production capacity by more than 10%.
Second, the more rampant imported products from China will make Indonesia's
trade balance position deteriorate. Although the statistical records show that Indonesia's
trade balance against China only experienced a deficit in 2009 (see Table 1), but it is
estimated that the deficit figure has been going on for a long time. The argument, before
 2009, imports from China into Bonded Zones are not counted as imported components. If
this figure is included in the BPS import data, it will get a much larger import value.1

4.3.2 The Opportunities

Basically, the opportunity for Indonesia is in the tourism. According to the
UNWTO (United Nations World Tourism Organization), China, US, and Britain are the
biggest contributors of tourists in the world. From 2004 to 2015, the number of Chinese
travelers increased by 25%. Nearly 100 million or 98.2 million tourists from China
spread to various tourist destinations in the world until 2014. Quoted from the South
China Morning Post, the number of Chinese tourists recorded as a nation that spends a lot
of expenditure for tourism.2
Therefore, China is a promising market in tourism sector for countries around
the world, including Indonesia. In 2017, the Ministry of Tourism of Indonesia, targeting
15 million foreign tourists and Greater China as the first market, with about 2.453 million
tourists. Greater China consists of China, Taiwan, and Hong Kong. Indonesia targeted
2.037 million tourists from China, 284,000 from Taiwan, and 132,000 from Hong Kong.
Deputy of Foreign Tourism Marketing of Ministry of Tourism, I Gde Pitana
explained that Greater China as the first sequence and followed by 2.275 million tourists
from Singapore, 2.198 million from Europe and America (red: Europe), 1.816 million
from Australia, and 1.772 million from Malaysia. Greater China tourists visit have
increased rapidly in the past two years. In the previous year, the Chinese market was the
fourth place after Singapore, Malaysia, and Australia.
For that, the government put a large portion budget to build the infrastructure in
the destinations, including airports, seaports, and roads. However, the upgrade of other
tourism facilities and services, and for promotion are still the concern for government. To

1
Adam, Latif dan Siwage Dharma Negara. ASEAN-CHINA FREE TRADE AGREEMENT:
TANTANGAN DAN PELUANG BAGI INDONESIA. Lembaga Ilmu Pengetahuan Indonesia
(LIPI) E-Journal Ed. XXXVI / NO.1 / 2010.
http://ejournal.lipi.go.id/index.php/jmi/article/viewFile/633/425. 28 April 2017.
2
Kurnia, Erika. 2017. Dilema Wisatawan China di Seluruh Dunia.
http://lifestyle.okezone.com/read/2017/01/03/406/1582331/dilema-wisatawan-china-di-seluruh-
dunia.
achieve the tourist arrivals target, all stakeholders have to contribute and work together to
develop the destinations.
Hotel and restaurant businesses are the important things. In an effort to attract more
investment, the government has revised the negative investment list, opening up a
number of business sectors which were previously closed to 100% foreign ownership,
including tourism-related businesses such as restaurants, cafes and bars. The role of the
private sector could be expanded and maximized further still, not only in the development
of tourism facilities, including hotels and restaurants, but in the maintenance of tourist
sites and surrounding areas.
Developing all priority destinations into special economic zones to facilitate
investment is also the plan of government. Already, among the ten destinations, Tanjung
Lesung, Mandalika, Tanjung Kelayang, and Morotai Island are classified as special
tourism economic zones as of March 2016, while the others are classified as national
strategic tourism areas.
Tourism boosting also can be done by developing new tourism strategies, for instance
maximizing the potential of halal tourism, as Malaysia has been doing more actively.
Similarly, Japan, Philippines, and Brazil have started offering Muslim-friendly options
for tourists, such as prayer rooms at major airports and increased restaurants offering
halal food (Battour and Ismail, 2015). As the largest Muslim population country in the
world, Indonesia has significant potential to develop this market both domestically and
internationally. Indonesian could also enhance tourism offerings to the ASEAN
Economic Community, which would also encourage cross-country investment in the
tourism sector among ASEAN countries (OECD, 2017).
V. Conclusion
Indonesia gained so many benefits from the bilateral free trade of Indonesia-China in the
ACFTA (ASEAN-China Free Trade Area), for instance eliminating or reducing barriers or
non-tariff trade barriers, increasing market access for services. However, although Indonesia
has got many benefits, so far, the winner in the Indonesian market is China with its machine
and electronic stuffs. Therefore, Indonesia has both challenges and opportunities in the
ACFTA. The challenges are business competition will increase because swift Chinese products
flooding the Indonesian market and the more rampant imported products from China will make
Indonesia's trade balance position deteriorate. The opportunity is in the tourism sector.
Indonesia targeted Greater China as the main market which is 2.453 million tourists. To
achieve it, all stakeholders have to contribute and work together to foster Indonesias tourism.
Besides, Indonesia also has to think the best plans to foster tourism and realize it.
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