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How Indonesia has Shown up India – A Contrasting Trade Story of G20 Economies | May 2020

How Indonesia has Shown up India – A Contrasting Trade Story of G20 Economies

 

Sunday, July 5, will represent a huge day in economic relations between Australia and Indonesia. Businesses should mark it in their calendars now as the day a free trade deal between the two countries will officially begin.

New opportunities for goods, services, education, investment and capacity development will emerge under what is officially known as the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA). What has not been previously feasible may well change for businesses in both countries.

It will allow two economies – near neighbours, both G20 members and with a combined population more than 290 million – to build on the $12 billion of annual bilateral trade. It will also build on the opportunities that have come from the Australia-New Zealand-ASEAN FTA.

There is certainly considerable room for growth. Australia in 2018 was Indonesia’s 13th largest export destination taking 1.6% of its merchandise exports. In turn, Australia in 2018 was Indonesia’s 8th largest import source supplying 3.1% of its merchandise imports.

From July 5, Australia will remove all its remaining tariffs on Indonesian goods. Indonesia will allow 99% of Australia’s goods exports by value to enter duty-free. Indonesia has also undertaken to guarantee import permits for a range of agricultural produce including live cattle, frozen beef, feed grains and citrus products.

Australian investors in key sectors like university education, work place training, tourism, mining services, energy, telecommunications, wastewater management and transport will also be able to take significant majority stakes in Indonesian businesses.

The new trade agreement reflects many years of tough negotiation, patience, pragmatism, leadership and political courage. A bilateral trade agreement always seemed close and it always seemed far away.

Negotiations for a bilateral trade agreement first began in Jakarta in September 2012. Some 11 negotiating rounds followed. There were many significant contributors.

At the end of the day, it was President Widodo, Prime Minister Morrison and Trade Ministers Birmingham and Suparmanto who got the agreement finalized and ratified by both economies. President Widodo in particular deserves considerable credit for ensuring the draft agreement kept moving through Indonesia’s complex ratification processes when an easier political option may have been to press the pause button.

Business groups in the two economies were able to build close relationships during the drawn-out negotiations and played a strong confidence-building role in ensuring the respective governments delivered a comprehensive agreement.

It is to be hoped that Delhi takes a close look at what Jakarta and Canberra have been able to achieve with this new bilateral trade agreement. It may well find some useful learnings.

India, another G20 economy, has failed in recent years to deliver a number of new trade agreements. Its unfinished negotiating business includes trade agreements with the European Union, Australia and New Zealand.

It also walked away from the negotiating table for RCEP (ASEAN + Australia, China, India, Japan, Korea and New Zealand) although the remaining participants would welcome its return to the table ahead of this year’s planned signing of the mega trade agreement.

In addition, India has also failed to conclude an FTA with the European Free Trade Association whose membership consists of Iceland, Liechtenstein, Norway and Switzerland. A 17th negotiating round was held in 2017.

The European Union and Australia have both tried very hard to conclude comprehensive bilateral trade agreements with India. The election of Prime Minister Modi in 2014 promised much.

Negotiators from the EU and India met 12 times between 2007 and 2013. A host of technical meetings were also held. Negotiations stalled in 2013 due to a mismatch of ambition levels between the two sides – in other words India wanted considerably more in terms of IT and worker access to the EU than it was prepared to give for EU automobiles, alcohol and telecommunications goods to its own market.

The European Union remains committed to working to what it describes as an ambitious, comprehensive and balanced agreement with India that responds to each side’s key interests and which can be described as win-win.

A trade agreement between the EU and India would bring together 1.85 billion people. It would also facilitate growth on current goods and services trade of some $US120 billion a year.

In the case of Australia, there were some nine rounds of negotiation for a bilateral Comprehensive Economic Cooperation Agreement between 2011 and 2015. The last round was held in September 2015.

Negotiations also stalled for largely the same reasons that the EU-India bilateral negotiations had stalled some two years earlier. A mismatch of ambition levels, this time in key a sector like agriculture.

A trade agreement between Australia and India would bring together more than 1.36 billion people. It would also facilitate growth on current annual goods and services trade of more than $A30 billion.

Trade between the two economies has grown significantly in recent years – up from $13 billion in 2007 to $30 billion in 2018.

In the absence of being able to conclude negotiations for a bilateral trade agreement, Australia has continued to seek to boost relations between the two economies by adopting a India Economic Strategy which incorporates ambitious visions for bilateral trade and investment.

India’s inability to conclude key trade agreements is largely bureaucratic and political in nature. It can be expected to continue so long as much of its manufacturing and agricultural industry is heavily sheltered behind significant protective and bureaucratic barriers. It also reduces the pressure for new infrastructure and logistics facilities that a more competitive and vibrant trade environment would bring.

This will not only impact its performance in export markets but will also have a significant impact on the cost of goods and services within its own domestic market.

Regrettably, this can be expected over time to be a significant loss for India and its ability to grow in a more competitive environment that will allow it to successfully trade in key global markets.

Perhaps a few telephone calls between Prime Minister Modi and President Widodo would help India fully understand the courage and leadership that is sometimes required to deliver new and important economic opportunities.

 

ABOUT THE AUTHOR

Russell Scoular
Chairman
Chatto Creek Advisory

Russell Scoular is Chairman of Chatto Creek Advisory, a Melbourne-based trade advisory and government engagement consultancy. He spent 32 years with Ford Motor Company in senior roles in New Zealand, Australia and China. This included five years as Regional Director of Government Affairs for Asia Pacific. He is a Master of Public Policy graduate from Monash University and a Senior Fellow at the Asian Trade Centre in Singapore.

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