Indonesia, Japan agreement a boon for our economy

Wednesday, August 21, 2007 Vincent Lingga, The Jakarta Post, Jakarta

Japan will cut to zero import tariffs on almost 90 percent of Indonesian export commodities under the Economic Partnership Agreement (EPA) that President Susilo Bambang Yudhoyono and Prime Minister Shinzo Abe are scheduled to sign today (Monday).

What a great concession for improving Indonesia's access to the Japanese market.
But the sweeping, deep import tariff cuts -- however crucial they are for expanding Indonesia's share of the Japanese market -- are not the most important program under the EPA.

It is instead the technical cooperation in institutional-capacity building in the private and public sectors that is most strategically vital for Indonesia. Without adequate institutional capacity to meet Japan's quality standards for services and goods, Indonesia will simply be unable to tap the wider trade opportunities to be generated under the EPA framework.

Japan will give technical assistance, through a manufacturing industry development center, to Indonesian manufacturers to meet international quality standards, thereby enabling them to become part of the global supply chain.

Certainly, automobiles and auto parts and components, electrical and electronic goods should be among the categories accorded top priority in the technical cooperation, given their extensive backward and forward linkages and the stage of development they have achieved in Indonesia.

Leading Japanese automakers such as Toyota, Honda, Suzuki and Daihatsu are well positioned to make Indonesia their production bases for some major components designed for the markets of the Association of Southeast Asian Nations (ASEAN).

These production bases can then be linked with their production units in other ASEAN countries such as Thailand, Malaysia or the Philippines through a brand-to-brand complemental scheme.
Similar intercompany linkages and brand-to-brand complemental programs can be implemented with motorcycles, electrical and electronic goods.

Japan will also provide technical assistance to help Indonesian certification agencies as well as companies meet Japanese industrial standards in agricultural, forestry and fisheries products.
Within the sphere of international trade, non-tariff barriers such as quality standards, including safety and hygienic requirements, could become major hurdles to Indonesian exports if companies are not capable of meeting the quality standards imposed by importing countries.

Also greatly beneficial is the technical cooperation in developing Indonesian training systems for healthcare workers, sailors and workers in tourism-related businesses such as hotels and restaurants.

Technical assistance for Indonesian certification of vocational skills and greater opportunities for internships at Japanese companies will help Indonesian workers gain access to the Japanese market.

Obviously, the EPA also includes measures to improve the investment climate and to expedite business licensing procedures, even though these programs are already in various stages of implementation as part of the overall economic reform to woo foreign investment.

The right focus of the EPA will make it effective in deepening and expanding bilateral economic cooperation. Japan has always been important for Indonesia as the source of investment, capital goods, basic industrial inputs and official aid.

Japan absorbs more than 20 percent of Indonesian exports and supplies 13 percent of Indonesian imports, and has been the single largest foreign investor and provider of development aid to Indonesia.

However, the bulk of Indonesian exports to Japan have always been low value added commodities such as oil and gas and other resource-based commodities such as forestry products, minerals and coal.

The institutional capacity building program under the EPA will help Indonesia upgrade its manufacturing industries to produce higher value added goods for export to Japan and other countries.

Indonesia also has always been important for Japan as a major supplier of natural resources such as oil and natural gas and wood, and as the largest country in ASEAN and given its strategic position on the Malacca Strait, Indonesia also is vital for Japan's geopolitical interests.

At the end of the day, though, the EPA is simply a document that still needs to be translated into well-focused concrete programs by the governments and private sectors of both Japan and Indonesia.

Japanese investors are no different from other foreign businesspeople. The EPA will not prompt Japanese investors to put their money into Indonesia unless some basic preconditions are met.
Indonesia must make significant, steady progress in the long-awaited reforms of the tax and customs services, business licensing and labor regulations, and improvements in basic infrastructure.