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APINDO Position Paper on Indonesia-European Union (EU) Comprehensive Economic Partnership Asosiasi Pengusaha Indonesia (APINDO) Acknowledgment We would like to express our appreciation and gratitude to
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APINDO Position Paper on Indonesia-European Union (EU) Comprehensive Economic Partnership Asosiasi Pengusaha Indonesia (APINDO) Acknowledgment We would like to express our appreciation and gratitude to below contributors on our Focus Group Discussion (FGD) series which had been held in March until April 2014 for their valuable inputs that have been useful in accomplishing this position paper. Ady Surya (APIKI), Amin Ahmad Balbaid (HIMSATAKI), Andi W. Setianto (Bakrie Sumatera Plantation), Arif Budiraharja (Bank BJB Syariah), Ayu Hannisfa (ALI), Bambang Suboko (GAPPINDO), Binsar Marpaung (APRISINDO), Boby Satya (Pandu Logistics), Colosewoko (GPPI), D. Edison W. Sinaga (PT. Waskita Karya (Persero) Tbk), Delima Hasri Azahari (GPPI), Didien Junaedy (GIPI), Djoko Priyanto (Korindo Group), Dwi Hendratno Heru (PT. Garuda Indonesia (Persero) Tbk), Efi Fitria (APKINDO), Ernovian G. Ismi (API), Fadhil Hasan (GAPKI), Hardy Benry (GAPENSI), Hardy Tanuwijaya (Bank BCA), Harrison Silaen (PT. Dan Liris), Herman Prayudi (APHI), IBP Angga Antagia (ISD), Imam Subali (APJATI), Irawan Kadarman (APKI), Iswardeni Deni (PT. Pan Brothers), John N. Palinggi (ARDIN), Justin Siregar (AIKI), Kusno Erudi (ATC), Liana Bratasida (APKI), M. Kirom (AEKI), Marthias Pardede (AKSINDO), Moekti P. Soejachmoen (Mandiri Research Institute/Bank Mandiri), Mulyadi (AEKI), Niko Saripson Simamora (PT. Geospecialist), Palar Sutojo (GAPKI), Palupi Candra (PT. Cantika Puspa Pesona), Peter van Dijk (Sinar Mas Group), Petra Retnani Dewi(ASPPI), Rapolo H (PT. Smart Tbk), Ricky Suryadinata (Wilmar Group), Rudi Kurniawan (PT. Dan Liris), Sandra (APHI), Santri Satria (Bahar and Partners), Sindra Wijaya (PT. Bumi Tangerang Mesindotama), Sinta Sirait (APINDO), Sri Sulasmi (PT. Pan Brothers), Tati Ramlie (PT. Mangul Jaya/APRISINDO), Theo Kumaat (ALFI), Thomas Dharmawan (AP5I), Tina (APKINDO), Vincent Gowan (PT.Musim Mas/APOLIN), Wahyuni Bahar (APINDO), Wilson Andrew (PT. HM. Sampoerna Tbk), Yos Adiguna Ginting (APINDO). 1 Dewan Redaksi Pelindung Pembina Pemimpin Redaksi : Sofjan Wanandi : Chris Kanter Suryadi Sasmita Anthony Hilman : P. Agung Pambudhi Tim Negosiasi APINDO bagi Perundingan CEPA Indonesia-Uni Eropa : Shinta W. Kamdani (Ketua) Sinta Sirait Yos Adiguna Ginting Wahyuni Bahar Tim Penyusun : 2 Maya Safira (Project Manager) Riandy Laksono (Lead Economist) M. Rizqy Anandhika (Economist) Sehat Dinati Simamora (Junior Economist) Nuning Rahayu (Project Assistant) Editor Layout/Design : Communication Division : Chandra K. Putra Disclaimer The content of APINDO position papers is the sole responsibility of the author(s) and can in no way be taken to reflect the views of Indonesia Employers Association (APINDO) or its partner institutions. APINDO position papers are preliminary documents posted on the APINDO website (www.apindo.or.id) and widely circulated to stimulate discussion and critical comment. F O R E W O R D Indonesia faces two global challenges that will orient its position in international economic policy: a relatively weak global demand, causing the sluggishness of global market for trade and decline the commodity price; and the end of easy money era that will deteriorate Indonesia s FDI performance. Such conditions push Indonesia to be more competitive at the global level, which urge policy makers need to consider a rather pro-active trade policy, such as free trade agreement (FTA) or comprehensive economic partnership agreement (CEPA) as it offers tariff elimination and non-tariff barriers relaxation. As an official partner of Government of Indonesia, APINDO holds a credential position representing the private sectors to actively assist the government in forming effective economic policies. This policy recommendation sets down a grand mechanism on how to optimize the benefit and minimize the potential adjustment cost coming from proposed Indonesia-EU CEPA on the perspective of business communities. This paper looks into several relevant aspects, such as tariff, non-tariff measures, services, investment, trade defense, agriculture subsidy, public procurement, IPR, and competition law. It provides suggestion not only on how liberal the Indonesia should be opened up to EU, bit also in what aspects Indonesia might push the EU s trade policy to be more accommodative and less-restrictive in the pursuit of mutually beneficial Indonesia-EU CEPA. 3 Overall, we convey our appreciation to APINDO s staff and team who has successfully delivered this position paper and we would like to thank all of associations and companies, which have been contributed in FGD series. We hope our position paper will contribute a significant input in moving forward the Indonesia-EU CEPA negotiations. Sofjan Wanandi General Chairman Indonesian Employers Association(APINDO) Chris Kanter Vice Chairman Indonesian Employers Association(APINDO) APINDO Position Paper on Indonesia-European Union (EU) Comprehensive Economic Partnership Asosiasi Pengusaha Indonesia (APINDO) Key Messages 4» Given global economic challenges, financial uncertainty and lower domestic economic growth and overall performance, Indonesia is currently at the right moment to improve trade and investment performance.» APINDO supports the conclusion of CEPA with the EU, since it will explore new market opportunities for business, attract more FDI to Indonesia, and help Indonesia to move up its competitive edge in the region.» APINDO calls for import duties elimination in the EU, especially on Indonesia s key and potential exports, and on other commodities that still have tariff peaks and tariff escalation problem, such as cigarettes, cocoa products, fisheries products, TPT, palm oil products, and other agricultureprocessed products.» APINDO emphasizes the need to tackle non-tariff barriers in the EU, through: (i) regulatory convergence, (ii) intensive and effective capacity building, (iii) improvement of Indonesia s EQI, (iv) policy transparency, and (v) socialization program.» Negotiation on services sectors must be put under the context of: (i) expansion opportunity to the EU, (ii) attracting the presence of high quality services providers to support industrial growth, and (iii) facilitating movement of skilled labor.» APINDO stresses the need to create a fair and competitive Indonesia-EU CEPA, through strengthening of trade defense system, proper enforcement of intellectual property and competition law, as well as commitment on a non-distortive agriculture policy.» APINDO suggests the creation of high-impact cooperation and capacity building programs that are architected under the ambition to support business sector in facing tougher competition, as well as to promote the capacity of policy makers in performing necessary regulatory reform and in enforcing elements critical for a fair and competitive CEPA. A. The Contexts Indonesia is currently grappling with two major global challenges that will alter the way Indonesia pursues international economic policy. Firstly, the relatively weak global demand due to economic growth slowdown in major emerging countries, e.g. China and India, as well as stalling recovery in advanced economies, i.e. European and The United States (US). It has contributed to the sluggishness of global market for trade and crucially has triggered major international commodity price to decline significantly. As other countries try to become more creative and work even harder to maintain their share in a shrinking global trade market, conventional and less-active trade policy will then no longer be reliable in boosting country s trade performance. Secondly, the end of easy money era as The Fed has begun to normalize the monetary policy in US (quantitative easing tapering). The Fed s plan to phase out quantitative easing policy has caused enormous uncertainty in the global financial market and created significant pressure for developing countries, especially the fragile one like Indonesia. Since the announcement of the Fed tapering, significant amount of money has flown out from emerging market, towards other countries with safer financial instrument, i.e. advanced economies. As a result, especially in fragile-small-open economies including Indonesia, currency becomes significantly depreciated, current account deficit widens, and consequently the economic growth becomes slower. Moreover, the end of quantitative easing policy is expected to bring increased interest rate in US and other developed countries, meaning that investing in developing and/or riskier countries is now becoming less interesting than before. As investors worldwide have become more cautious in investing their money, the FDI performance in many developing countries including Indonesia is likely to be affected also, especially with regards to foreign investment which comes from advanced economies. Therefore, concrete policy measures are very critical to keep boosting country s FDI performance, especially the measures which focus to regain investor confidence, such as investment protection, liberalization, and incentives. 5 At the domestic level, as Indonesia aims to move up the ladder to become high-income country, there is an increasing need to shift Indonesia s development strategy from consumption and domestic market orientation towards a policy strategy that focus more on productivity, innovation, and have greater orientation to compete in the global market. To be more competitive at the global level, policy makers need to consider a rather pro-active trade policy, such as free trade agreement (FTA) or comprehensive economic partnership agreement (CEPA) as it offers tariff elimination and non-tariff barriers relaxation which translates to: (i) cheaper input, i.e. raw material and capital goods, for domestic industry, as well as (ii) better market access for Indonesia s export. This will eventually boost industrial development and export competitiveness in Indonesia. Situated at these contexts, APINDO and Indonesia s private sector in general view that there s no reason to be hesitant and even resistant to any FTA/CEPA negotiation, as it constitutes a significant part for Indonesia s attempt towards high-income country, and more importantly will help Indonesia to sail through the rough times like nowadays. The issues then should be on how to make the best deal out of FTA/CEPA negotiation, which in one hand can significantly improve investment opportunities and market access for Indonesia s key and potential exports, while on the other hand ensure a level playing field for domestic industries in order to be able to compete in a tougher business environment. B. Why Indonesia Should Expedite the EU CEPA Negotiation? Business Perspectives Given global economic challenges, financial uncertainty and lower domestic economic growth and overall performance, Indonesia is currently at the right moment to improve trade and investment performance. EU is a key strategic trade and investment partner for Indonesia. It represents one of the largest export destinations for Indonesian goods and is the second largest source of Foreign Direct Investment after Singapore for Indonesia over the period of January September Therefore, strengthening Indonesia-EU economic and business relations through an Indonesia-EU CEPA is an essential policy step to be seriously taken into consideration. 6 In term of business perspective, Indonesia-EU CEPA is essential for many reasons. Firstly, considering the fact that global demand is still relatively weak, Indonesia-EU CEPA is therefore an effective mechanism to explore and create new market opportunities for business. Moreover, because the EU s consumer are relatively more sophisticated and demanding than that of other countries and EU s investment are mostly located in value-added and industrial sectors, thus the EU CEPA can be potentially used to move Indonesia s business towards higher value-added production and services. Secondly, since getting fresh liquidity/capital has now been harder following the monetary tightening in US, certain policy measures are needed to better attract foreign investment, especially which comes from advanced economies. In this context, Indonesia-EU CEPA is essential to improve EU s FDI in Indonesia. Furthermore, as Indonesia has announced its plan to terminate all of its Bilateral Investment Treaties (BITs), including with the EU s partners, the Indonesia-EU CEPA, especially through the investment chapter, is therefore the only way for Indonesia to better protect EU s investment and provide EU s investors with certain arbitration mechanism. Thirdly, Indonesia-EU CEPA offers significant tariff reduction which is critical to boost competitiveness of Indonesia s products and further anticipate the loss of competitiveness associated with the graduation of Indonesia s key exports within the GSP scheme. Based on the newly-reformed GSP scheme, since 1 January 2014, as much as 85 Indonesia s products listed under the HS code, including live animal and animal product (excluding fisheries), animal or vegetable oils-fats-and wax (including palm oil), as well as chemicals other than organic and inorganic chemicals will no longer be benefitting from GSP tariff reduction/elimination. As Indonesia continues to emerge as a fast-growing developing economies and aspires to become one of high-income countries in 2030, Indonesia then will gradually be excluded from EU s GSP scheme. Situated in this context, negotiating CEPA with the EU is a very urgent policy task to do, otherwise Indonesia will lose significant market share in EU for its key commodities. Furthermore, without any preferential concession with the EU, it will be harder for Indonesia to compete with much cheaper products originating from major competitor countries which still enjoy full benefit of EU s GSP scheme, such as Pakistan, Bangladesh, and African, Caribbean, and Pacific (ACP) countries. Fourthly, as the ASEAN Economic Community 2015 which characterized by minimal barriers on economic activity in the region are being fully implemented, Indonesia is naturally forced to compete with its ASEAN neighbors to be the most competitive production base amongst all. If Indonesia succeeds in comprehensively liberalizing its market and giving best incentives for EU companies, Indonesia will then be able to move up its competitive edge over the ASEAN neighbors, thus will be able to enhance trade and investment performance. On the contrary, if Indonesia fails to conclude CEPA with the EU, then Indonesia will lose trade and investment enhancement momentum because EU will prefer to invest to other ASEAN countries (especially which already have CEPA with the EU) and Indonesia will have to import from other ASEAN countries when there s a demand for the EU products. In this case, the investment performance will not be improving, and trade deficit will likely to widen. Fifthly, stringent standard and technical barriers in EU have to date restrained the Indonesia s export performance. By not moving forward with the EU CEPA, the impediment to trade will still remain, thereby trade volume will always be sub-optimal and no further economic enhancement could be created. Yet, under Indonesia-EU CEPA negotiation, there s a greater opportunity for any EU s standards, technical regulation or non-tariff barriers in general to be further streamlined and especially harmonized with the suitable existing standards in Indonesia, thus reducing the compliance cost for private sector and improve market access. Therefore, it is best to have more optimistic view on any barriers and challenges embedded in Indonesia-EU trade relation in order to further transform it into negotiation stance. 7 The prolonged lack of a comprehensive EU-Indonesia trade and investment agreement is costing business from monetary, employment and growth perspectives. APINDO strongly believes that a policy and regulatory breakthrough should be made possible, so that Indonesia can benefit with a carefully thought overand selective liberalized trade and investment regime. Increased political commitments to immediately re-commence CEPA negotiations is what we crucially needed in order to expanding the Indonesia-EU trade and investment relationship. C. APINDO Position on Indonesia-EU CEPA Negotiation C.1. Position on Trade in Goods Tariff In term of trade in goods negotiation, especially with regard to tariff reduction modality, APINDO is fine with 7 years period of implementation (with flexibility up to 10 years for sensitive products) as proposed in the scoping paper. What matter the most is product coverage and the depth of tariff liberalization. In-depth sectoral/industrial studies and intensive consultation with business communities should be conducted in order to determine the inclusion, sensitive, and exclusion list. The basic principle is to have balanced framework between protecting national interest and boosting industrial and trade competitiveness. As an attempt to improve Indonesia s export competitiveness in EU market, APINDO calls for import duties (tariff) elimination in EU, especially on Indonesia s key and potential exports, and on other commodities that still have tariff peaks and tariff escalation problems as well. This includes, but not limited to: tobacco, cocoa, fisheries products, TPT & footwear, palm oil and other agriculture products. APINDO argues that Indonesia-EU CEPA must be strategically used as a mean to: (i) boost export competitiveness of Indonesia s main product; (ii) develop export capacity of Indonesia s potential products; (iii) encourage higher value-added export; as well as (iv) attract more FDI from export-oriented companies. 8 Indonesia is forced to specialize in lower value-added export in agriculture, textile, garment, and footwear sectors, in part because of the EU imposing higher import duties on final products rather than on semiand/or unfinished products. Around 63% of Indonesia s tobacco export to the EU is unmanufactured one, as the EU applies higher rate for manufactured tobacco than the raw one. This is also true for footwear export whereby Indonesia s exporters are incentivized to export the unfinished footwear rather than the final one. As the development of downstream/value-added industries is an essential component constituting Indonesia s aspiration toward high-income countries, there needs to be a stronger commitment from the EU to support industrial-upgrading agenda in Indonesia particularly by resolving tariff escalation problem. APINDO also stresses the importance to go beyond what we currently have now, and see through what we aspire to achieve in the future. In other words, we must think about our potential in future global trade, instead of judging on what we only have at the moment. For instance, export of fruit-based juice and chocolate bar to the EU is not yet competitive currently, because the EU s import tariff rate for cocoa products as well as more-processed agriculture products is still relatively high 1. However, if we set the right incentive, particularly by calling for import duties elimination in the EU for those kind of products, it will better attract the export-oriented and higher-value added companies as there s now more feasible price structure to produce in and exporting to the EU from Indonesia. Therefore, APINDO believes that resolving tariff escalation as well as calling for import duties elimination for Indonesia s potential export will upgrade export capacity of and bring more FDI to Indonesia. In addition, as a mean to promote domestic industry s competitiveness, APINDO encourages the Government of Indonesia (GoI) not to be hesitant in eliminating import duties (tariff) that are applicable for raw material and capital goods imported from the EU. This includes, but not limited to imported textile, garment, and footwear material as well as machineries. For Indonesia-EU CEPA to be wide-reaching, it needs to keep the Ru
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