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US-CHINA TRADE WAR: VIETNAM MIGHT GET APPLE, BUT INDONESIA CAN GET A BITE OF THE ACTION, TOO

2019-08-01 16:12:41

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US-CHINA TRADE WAR: VIETNAM MIGHT GET APPLE, BUT INDONESIA CAN GET A BITE OF THE ACTION, TOO

 

 

A miner at the Tarahan coal port in Lampung province, Indonesia. The US-China trade war could hit Indonesia’s raw goods exports. Photo: Reuters

 

 

Uncertainty drives dramatic shifts in the global economy, and investors and economists certainly cannot predict with any certainty what the US-China trade war may mean for the rest of the us. But it is precisely this unknown that will decide the winners and losers of the battle for economic supremacy, and Indonesia should take advantage.

 

Trade wars start when a country adopts a protectionist approach, imposing import tariffs to protect domestic industries and open jobs. Such a move generally encourages local producer prices to drop, making them more competitive against import markets. But it also slows growth in those countries involved, and globally, it can lead to inefficiency in the allocation of resources.

 
Reducing the US’ trade deficit to stoke domestic production is what motivated US President Donald Trump’s decision to adopt a protectionist approach – increasing tariffs on steel and aluminium imports and on automotives from Europe, as well as goods from China. Trump has so far slapped 25 per cent on a number of imported Chinese goods, amounting to about US$300 billion. China, for its part, has applied new tariffs on US imports worth US$60 billion.
 
 
 
 
Some companies with production lines in China, such as Apple, are expected to leave the country in search of more profitable markets, such as Vietnam. 
 
 
 
The immediate consequences have been Chinese imports in the US falling 8.5 per cent in May 2019, compared to the same period last year. In China, exports – especially to the US – are predicted to record similar declines. Some companies with production lines in China, such as Apple, are expected to leave the country in search of more profitable markets, such as Vietnam. And global growth is now expected to weaken by about 0.5 per cent by 2020 to 2.6 per cent – the weakest since the 2008 global financial crisis.
 
 
But while the consequences for the US of the trade war are likely to be by-design, other countries will be left to figure out how best to respond and adapt.
 
 
At first glance, Vietnam and Mexico look to be the main beneficiaries of the trade war. Mexico tends to be close to America and has bilateral trade relations with Washington, while Vietnam has become a potential substitute for manufactured products previously imported from China (it also has received a generalised system of preferences facility that helps with the exporting of goods to the US).

 

For Indonesia, the future will demand some innovative, outward-looking economic policy decisions.

 

 

A palm oil plantation in Medan, Indonesia. The slowdown of Asia’s largest economic power and one of Indonesia’s foremost trade partners promises to reduce foreign investment and impact raw goods exports such as palm oil, wood, rubber and coal. Photo: AFP

 

 

Firstly, investors are not looking towards developing Asian countries such as Indonesia to supplement China’s decline. The first three months of 2019 saw a sharp fall in Indonesia’s foreign direct investment, from US$10.5 billion at the end of December 2018 to US$5.4 billion at the end of March this year. Secondly, the slowdown of Asia’s largest economic power and one of Indonesia’s foremost trade partners only promises to reduce foreign investment further and impact raw goods exports such as palm oil, wood, rubber and coal. And lastly, Indonesia’s existing trade ties with the US – commodity goods, not manufacturing – are not affected by US tariffs.

 

RETHINK NEEDED

 

So to take advantage, Indonesia needs to rethink its offering.

 

There are several strategies that the government in Jakarta can take to come out of this trade war better off.

 

Indonesia should be pursuing regional trade cooperation agreements with other countries. The negative effects of US trade protectionism and China’s slowdown could be offset through pacts that secure import-export volumes between Asia’s developing nations.

 

Just look to the European Union’s deals with Mexico and Japan, which either reduced or ended tariffs on almost all goods.