THE IMPACT OF ASEAN CHINA FREE TRADE AREA ON INDONESIAN’S EXPORT TO CHINA PERIOD 1997-2011

MUSTIKA, MARDHATILLAH (2013) THE IMPACT OF ASEAN CHINA FREE TRADE AREA ON INDONESIAN’S EXPORT TO CHINA PERIOD 1997-2011. Diploma thesis, Universitas Andalas.

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Abstract

We can’t avoid the effect of globalization today. Globalization is a process between individual and country have interdependent and impact to another. Globalization is also impacting on the economy as well every country can trade without barriers in capital flow, goods and services. Economic globalization makes domestic products in international markets opened and the domestic product will compete with any products from other countries, then the product from global market enter to domestic market and it causes the international trade. International trade is a relationship of economic activity cross countries by exchange process of goods or services on the basis mutual beneficial. The factors affect the trade such as: ’ geographical countries, the limitation ability of the country for producing goods and services and excess of domestic products that need the new market to sell the products, different price give the benefit and increase national income, different factors of production and different ability in science and technology on cultivate the economic resources, different culture, climate, and labor, different taste of the society, and communication and transportation are available. The international trade causes developing the open economic system in our country. Where, the open economic system is the theory to permit the connection between one country and another country with no trade barriers. So, the export and import would exist in the country of international trade. Export is the total of goods and services sold by one country to another, include goods, insurances, and services in the certain year (Sasandara, 2005). Export and import are the key factors to stimulate the economic growth, because it will expand the consumption capacity, increase output, and give access to enter to the international market, so the products can used by the other countries that need high cost to produce it. Positive in export is the important component in international trade because country will get benefit and national income will increase, and it will makes total output and economic growth rate increase. Beside that, export also helps all of country to develop their developments by using promotions and affirmation in economy sectors, such as factors of production or employment. Exports play an important role in economic growth, especially for developing countries such as Indonesia. Export can be rise economic growth in one side, but also can worse the other side (Karimi, 1987). Nowadays, Indonesia signed many free trade agreements with other countries whether it is a bilateral or multilateral free trade agreement, such as with South Korea (2007), Japan (2007), Australia and New Zealand (2009), India (2009), and China (2010). And all of agreements can give positive impacts and negative impacts to our economy (Yuniarti, 2007) The current topic is ACFTA (ASEAN-China Free Trade Area), and Indonesia as the member of ASEAN, should follow this agreement. Many media discuss it, and they give posiitive and negative responses. But, the society give more negative responses than positive because public assume ACFTA increase the unemployment and make the domestic products lose competitiveness with the China’s products. ASEAN consists of states in the different levels of development and different economic structures. The implication of free trade agreement with China is different for each members of ASEAN. With reducing of trade barriers, it would provide more favorable access for ASEAN exporters to the China’s market. This makes Indonesia and Malaysia as an exporter of palm oil as well as Thailand and Singapore as food producers and exporter, will receive a major potential benefits of the ACFTA. The strengthening of economic cooperation also could increase Chinese investment in ASEAN countries because the rising wage in China. That’s agreement could benefit the poorest members of ASEAN, such as Laos, Cambodia and Myanmar. ACFTA is one example of economic integration is done by Indonesia as a merger. According to Tinbergen, economic integration is the creation of the international economic structure more freely by eliminating all restrictions (barriers) are made to the workings of free trade and by introducing all forms of cooperation and unification. Economic integration, as the purpose of its creation, to reduce trade barriers and other barriers between one country to the others. Thus, economic integration will develop market and trade, causing a decline in prices (due to reduced tariff), improving the competitiveness between trading partners through cost-lower cost with greater economies of scale. For some settings of economic integration, the end goal is a single market in those markets where there is free flow of goods, services, capital and labor, and the alignment of economic and monetary policy between countries / regions (USITC Publication, 2010: 24). Economic integration occur discriminatory treatment between member states with countries outside the trading member, so as to give effect to the creation and diversion effects of the member countries (Salvatore, 1997). Krugman (1991) introduced the notion that natural trading bloc based on a geographical approach that can provide efficiency and improve the welfare of its members. With the integration of economic, expected the trade traffic between geographically contiguous areas larger than the area that is geographically far apart. The high traffic flow of trade can be proved by the amount of imported goods from China, Singapore and other ASEAN countries to Indonesia. With the economic cooperation is expected to be created the strengths of economic integration of member economies. So that member countries are expected to have bargaining power with countries that have been developed. According to Jacob Viner, custom union contains elements of free trade and a greater element of protection. Establishment of custom union has positive and negative effects in term of welfare implications. Trade creation is the positive effect. It occurs when some domestic products in a members of the customs union country / non-member countries outside of being replaced by cheaper imports from other members. Trade creation purposed to improve the welfare of member countries as it leads to the specialization of production and improve the welfare of the countries that are not member states because of the increased revenue in a member country will impact on other countries where there is an increase in imports. On the other hand, trade diversion is the negative effect. It refers to the replacements of low cost imports from non-member countries by the higher cost imports from member nations. It occurs because non-members set higher tariffs than members of the custom union. The impacts of trade diversion are lowers welfare because of shifting production from efficient production to less efficient production and distanced product from the comparative advantage patterns. ACFTA is the third largest free trade after the European Union and the North American Free Trade Agreement (NAFTA). On the agreement, ACFTA decrease the tax tariff for import goods from 90.0 percent become 0 percent. The cheap goods from China would flood the state of our country, thus increasing available cheap goods, and from the expense side, it will give the benefit to poor people, because they can fulfill their needs with the lower price. But, Todaro and Smith (2008,[59]) said that increasing the ability of poor people consume goods and services is not evidence that successful reduce poverty . As this will improve primary and secondary needs of the poor, so the number of poor will be seen to decline in terms of expenditure due to poor ability to consume goods and services increased under this free trade. The poor tend to be more consumptive compared to a dispossessed people, so they will consume more and it will reduce the proportion of savings from their income. They will difficult if the economic crisis happen. In term of revenue side, we will look at the difficulties of industries whose their products compete with China’s products. The implementation of ACFTA will simply closed the industries and Small and Medium Enterprises (SMEs) on our country when the local entrepreneurs unready to compete (Erik Hariyona, 2010). Many observers predict that the products that the export increased after the enactment of the ACFTA is a group of agricultural products include palm oil, coffee and rubber while the product is predicted to be negatively affected by the garment sector, foods, electronics, steel / iron and horticultural products. China has the superiority that make products from China is cheaper than the products produced from our country. From the technical side, China is ahead in the 12 factors of business competition, except for the efficiency factor of the market for goods and services. China wins hands down in the bureaucratic system of rapid factor-right (rather than corruption and the slow pace of public services in Indonesia), infrastructure (compare in Indonesia that the road was super bad, bad money handling at the port and stealth), economic stability, business innovation, efficiency of labor and market size (so they can achieve economies of scale). China applies the strategy of “Reverse Engineering”, so it can reduce the Research and Development (R&D), and they can produce variety of goods in short time. Reverse Engineering is a remake activity of existing products using the same parts, materials, and way of making as the original product. In other words imitate. China also provide free tax policy during the 3 first years for the joint venture company, 13.5% subsidy from local government in the form of tax refund, a bank loan only 3.0% / year, and many supporting industries so China do not need to import industrial goods. The Yuan is pegged to the USD clearly makes the price of Chinese exports become very cheap. In terms of human-social side, China has a family networking. Clan and the name is an opportunity for cooperation and greater confidence. Chinese businesses can reduce marketing costs as they use it to promote networking. China also invests in big scale in education sector. In 1998, 3.4 million students entered the university. After graduated, they came back and build their country. That’s why China’s company like Lenovo could buy IBM Thinkpad, Huawei threatens Cisco and Ericsson, Haier pursue GR, Whirlpool and Maytag. Although wage labor in China is almost the same as in Indonesia, but China’s laborers work more efficiently (China ranked 32, Indonesia at 75 from 133 countries). Productivity of China’s workers rise 6.0% /year (1978-2003). In China, 1 product need 1 labor, but Indonesia it needs 3 labors. Bricklayer in China was a true mason, while in Indonesia they are unemployed farmers. With so many superiority that owned by China, their industry would not get trouble to compete with industry in Indonesia because they already have a concept that is organized very well. The China’s government is very concerned on the SMEs in the country so they can absorb a lot of labor and reduce unemployment. It can be seen from the level of unemployment in China since the year 2000 -2010 in a reasonable scale that is below 4.3%. While in Indonesia, there are still many fundamental problems, one of them is unemployment. It may occur due to the high unemployment rate of change of labor force that is not balance with the jobs that can accommodate a labor force that is ready to work. Based on the data from Central Bureau of Statistic show the population of Indonesia has increased from year to year, starting in 2000-2010. This increasing was also followed by a rise in unemployment from 2000 at 6.08% and in 2010 of 7.1%. It express jobs can not absorb the increase in the number of people and cause the number of unemployed also rise. In developed countries, unemployment is usually between 2.0 until 3.0%, this is called natural rate of unemployment. Natural rate of unemployment is a natural rate of unemployment and can’t be removed. If the highest unemployment rate 2.0 until 3.0% that means that the economy in a state is useful of labor (full employment) (Sukirno, 2008). With the enactment of ACFTA, it will bother the domestic market, especially for SMEs are still not able to compete with China's products in terms of price, quality and others. Coupled with the habits of our society who prefer to use a product from abroad compared to country due to lack of product in the sense of nationalism, cause products of SMEs will be shifted to the critical points of purchasing power. Moreover, China export their products by dumping on the market penetration of alternative world, including in Indonesia after their main demand such as Europe and the United States dropped sharply due to global economic crisis as disclosed in the Harian Pikiran Rakyat (October 8, 2009). This phenomenon will push the domestic entrepreneurs change from producer into importer of any trader. They thought it’s better to import than to produce the product because when they produce products, it will lose competitiveness, import products easier than self-produced and cheaper cost of production. From the phenomenon above, I was interested in conducting research for knowing “The Impact of ASEAN China Free Trade Area on Indonesian’s export to China period 1997- 2011” as the topic of this thesis.

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