CHAPTER I
INTRODUCTION
A. Background
Free trade is an inevitable phenomenon at the present moment. Since David Ricardo, an English economist, postulates the theory of comparative advantage in 19th century, there has been considerable transformation in international trade values. Comparative advantage was subsequently polished by Paul L.Samuelson, who was silently anointed as the Founding Father of free trade community in 1947 General Agreement on Tariffs and Trade. He once remarked that the principle of comparative advantage was the only big idea that economics had produced that was both true and surprising. Subsequently, comparative advantage was regarded as a fundamental pillar World Trade Organization (WTO) in 1994. In writer’s opinion, without the theory of comparative advantage, many States will not even bother to participate in WTO. This is evidenced by the fact hitherto there is country in this world which is not affiliated with any free trade agreement, both in WTO membership or free trade agreement.
In relation to the development of international trade, Association of Southeast Asian Nations (ASEAN) held the 12th Summit in January 2007 which envisages the ASEAN member States commitment to establish free trade area in 2015. This commitment was manifested in ASEAN Economic Community (AEC) blueprint. ASEAN vision in that blueprint is liberalization and transformation of ASEAN market into a region with free trade movement of goods, services, investment, skilled labor, and freer flow of capital.
Indonesia, as a member State of ASEAN also undertook the commitment to liberalize its market in that Summit. The obstacles of such membership are, including but not limited to, Indonesia’s industrial competitiveness, legal framework and bureaucracy which, in writer’s view, not sufficient to compete with other States in AEC. This condition is exacerbated by global financial crisis which devastates many States economy foundation, including Indonesia. Few immediate impacts of global financial crisis are drastic rate of unemployment, decrease in tax and customs. These impacts are due to the slowing down of export as well economy.
The other problem is internal preparation, which includes mental attitude of local industries, regulations, bureaucracy and human resources. Investors are complaining on uncertain legal policies, complicated industrial and business permit as well as numerous unrecorded fees they have to pay to corrupt bureaucrats. These complaints are merely the tip of the iceberg. The crux of the problem is that Indonesia is not willing to liberalize its market by loosening its protectionist policies, particularly when it comes to industries which deal with public interests. This problem is so fundamental since it is a compromise between Indonesia economy ideology embodied in article 33 of Indonesia Constitution (UUD 1945). Indonesia economy ideology as stated in Article 33 has the nuance of socialist ideology. Socialist system focuses on government role in the management of natural resources with public interest. If Indonesia undertake the commitment in AEC 2015, many parties are concerned with the dilution of Indonesia economy ideology.
In this paper, writer will focus his analysis on free trade philosophy, practical benefits of free trade, comparison between free trade and protectionist policy as well as reformation on Government, States Corporation (BUMN) and private entities Tripartite. This analysis will address economy problems in Indonesia, particularly on the issue of how to construct sustainable economy development in Indonesia.
B. Problems to Address.
1. How can free trade address Indonesia economy dilemmas, particularly in moment global financial crisis?
2. Are Tripartite Government, BUMN and private entities still relevant with Indonesia current economy development and how to adapt into international trade trend?
3. What is the proper political, economy and legal strategy of Indonesia in AEC so that Indonesia gain proportional benefits from its participation?
C. Purposes and Benefits of Research
1. Common Purpose
This paper is aims to analyze the benefits and harms of free trade and protectionism as well the relevance of tripartite. In particular, writer will address what Indonesia political, economy and legal strategy should be in AEC.
2. Specific Purposes
Based on the above mentioned common goal, there are three specific goals of this paper:
a. To explain the concept of free trade and protectionism as well the comparison between the both.
b. To lay down Indonesia fundamental economy dilemmas as well as analyzing how to gain benefits out of free trade in addressing some economy issues, particularly in global financial crisis.
c. To explain the relevance of tripartite in international trade trend currently and how to reinforce economy competitiveness of local industries as well as reformation policies needed for tripartite.
d. To provide recommendation for Indonesia with regards to what is the proper political, economy and legal strategy in AEC.
3. Benefits of the Research
Benefits of this research are as follows:
1. To provide recommendation for Indonesia government, particularly to Trade Department in conceptualizing the political, economy and legal strategy in AEC.
2. To provide research materials for academicians and common folks concerning the issue of free trade, its benefits and how to utilize it in times of global financial crisis.
CHAPTER II
RELATED LITERATURES
Writer uses several literatures in this paper, including:
1. Teaching materials of WTO in NYU compiled and written by J.H.H Weiler, with the title “International and Regional Trade Law: The Law of World Trade Organization, Unit I: Syntax and Grammar of International Trade Law.”
This journal comprehensively describes the historical perspective of free trade, its development, its philosophy and comparative advantage concept as well the proponent and opponent’s arguments on free trade concept. Comparative advantage theory underpins the economic case for free trade. Comparative advantage states that how countries can gain from trading with each other even if one of them is more efficient (it has an absolute advantage) in every sort of economic activity. Comparative advantage is about identifying which activities a country (or firm or individual) is most efficient at doing.
Moreover, this journal also describes the stage of economic integration, which consists of free trade, a customs union, a common market, an economic union and complete economic integration. In a free-trade area, tariffs (and quantitative restrictions) between the participating countries are abolished, but each country retains its own tariffs against nonmembers. Establishing a customs union involves, besides the suppression of discrimination in the field of commodity movements within the union, the equalization of tariffs in trade with nonmember countries. A higher form of economic integration is attained in a common market, where mot only trade restrictions but also restrictions on factor movements are abolished. An economic union, as distinct from a common market, combines the suppression of restrictions on commodity and factor movements with some degree of harmonization of national economic policies, in order to remove discrimination that was due to disparities in these policies. Finally, total economic integration presupposes the unification of monetary, fiscal, social, and countercyclical policies and requires the setting-up of a supra-national authority whose decisions are binding for the member states.
2. Jeff Vaux’s journal titled “The Case Against Free Trade.”
This journal describes in general arguments of opponent of free trade. The central of the argument is that free trade assumes the existence of equal playing field, while in reality there is no such equal playing field. First, each country has different market values and standards, hence free trace cannot be applied universally. Second, free trade causes children exploitation as workers in many unsafe factories.
3. David Vogel’s journal titled “The Case for Free Trade.”
This journal describes arguments of proponent of free trade, whose central argument is that free trade is a wealth creation concept. It is capable of escalating efficiency and eventually States’ economy.
4. Declan Hayes’s book titled “The Deregulation and Revitalization of Japanese Economy.”
This book describes Japanese economy policies liberalizing its market in 1990s, hence escalating its market efficiency. Hayes describes how inefficient Japanese market was in the past due to long chain of food distribution from producers to consumers. Hayes also came into conclusion because his observation tells him that the Japanese manage their farms individually, hence rice production for example is quantitatively small and that is a spendthrift. When Japan liberalized its market, the concept of economic of scale drastically alters the efficiency by enlarging the production capacity in one period of harvesting rice.
CHAPTER III
RESEARCH METHODOLOGY
The methodology of this research is a literature methodology. This type of research in its nature is a descriptive research, in its structure a prescriptive research, in its purpose a problem solution, in its implementation a problem focused research, and in its discipline a mono-disciplinary research.
The types of data used are secondary, consisting of primary, secondary and tertiary legal materials, as follows:
a. Primary legal materials, specifically legal documents which are legally binding such as valid and applicable Indonesian laws and international legal instruments;
b. Secondary legal materials, that is, legal documents relevant and related to primary sources to facilitate the analysis, understanding and elaborating primary legal materials, such as theories advanced by scholars, or contained in books, the internet, scientific articles, newspapers, and journals;
c. Tertiary legal materials, or legal documents that provide further clarification, accounts and explanations on primary and secondary legal sources, such as encyclopedias or dictionaries.
As for data collection tools, in addition to the study of the available documents, the researcher interviewed resource relevant scholars to enrich the data gathered. The methodology in data analyses uses a qualitative analysis approach, resulting in a report that is analytical in nature.
CHAPTER IV
ANALYSIS
A. Free Trade Concept
Free Trade is an interchange of commodities across political boundaries without restrictions such as tariffs, quotas, or foreign exchange controls. This economic policy contrasts with protectionist policies which use trade restrictions to protect or stimulate domestic industries. The most fundamental pillar of free trade is the concept of comparative advantage which is introduced by David Ricardo (subsequently reinforced by Paul L. Samuelson). In writer’s opinion, this theory allures many States to participate in WTO, though there are some arguments against free trade.
1. Comparative Advantage
This theory shows how countries can gain from trading with each other even if one of them is more efficient (it has an absolute advantage) in every sort of economic activity. Comparative advantage is about identifying which activities a country (or firm or individual) is most efficient at doing. To see how this theory works imagine two countries, A and B. Each country has 1,000 workers and can make two goods, computers and cars. A’s economy is far more productive than B’s. To make a car, A needs two workers, compared with B’s four. To make a computer, A uses 10 workers, compared with B’s 100. If there is no trade, and in each country half the workers are in each industry, A produces 250 cars and 50 computers and B produces 125 cars and 5 computers. What if the two countries specialise? Although A makes both cars and computers more efficiently than B (it has an absolute advantage), it has a bigger edge in computer making. So it now devotes most of its resources to that industry, employing 700 workers to make computers and only 300 to make cars. This raises computer output to 70 and cuts car reduction to 150. B switches entirely to cars, turning out 250. World output of both goods has risen. Both countries can consume more of both if they trade, but at what price? Neither will want to import what it could make more cheaply at home. So A will want at least 5 cars per computer, and B will not give up more than 25 cars per computer. Suppose the terms of trade are fixed at 12 cars per computer and 120 cars are exchanged for 10 computers. Then A ends up with 270 cars and 60 computers, and B with 130 cars and 10 computers. Both are better off than they would be if they did not trade. This is true even though A has an absolute advantage in making both computers and cars. The reason is that each country has a different comparative advantage. A’s edge is greater in computers than in cars. B, although a costlier producer in both industries, is a less expensive maker of cars. If each country specialises in products in which it has a comparative advantage, both will gain from trade.
In essence, the theory of comparative advantage says that it pays countries to trade because they are different. It is impossible for a country to have no comparative advantage in anything. It may be the least efficient at everything, but it will still have a comparative advantage in the industry in which it is relatively least bad.
2. Stages of Economic Integration
In everyday usage the word “integration” denotes the bringing together of parts into a whole. In the economic literature the term “economic integration” does not have such a clear cut meaning. In interpreting this meaning, Weiler puts great focus on the distinction between integration and cooperation. The difference is qualitative as well as quantitative. Whereas cooperation includes actions aimed at lessening discrimination, the process of economic integration comprises measures that entail the suppression of some forms of discrimination. For example, international agreements on trade policies belong to the area of international cooperation, while the removal of trade barriers is an act of economic integration. Distinguishing between cooperation and integration, “writers” put the main characteristics of the latter, the abolition of discrimination within an area, into clearer focus and give the concept definite meaning without unnecessarily diluting it by the inclusion of diverse actions in the field of international cooperation
Economic integration, as defined here, can take several forms that represent varying degrees of integration. These are a free-trade area, a customs union, a common market, an economic union, and complete economic integration. In a free-trade area, tariffs (and quantitative restrictions) between the participating countries are abolished, but each country retains its own tariffs against nonmembers. Free trade flaw is that it may cause trade distortion. Therefore the idea of establishing a customs union is needed. Establishing a customs union involves, besides the suppression of discrimination in the field of commodity movements within the union, the equalization of tariffs in trade with nonmember countries. A higher form of economic integration is attained in a common market, where mot only trade restrictions but also restrictions on factor movements are abolished. An economic union, as distinct from a common market, combines the suppression of restrictions on commodity and factor movements with some degree of harmonization of national economic policies, in order to remove discrimination that was due to disparities in these policies. Finally, total economic integration presupposes the unification of monetary, fiscal, social, and countercyclical policies and requires the setting-up of a supra-national authority whose decisions are binding for the member states.
B. Arguments of Proponent and Opponent of Free Trade
1. Argument of Proponent of Free Trade
One of the most notable scholars who adhere to free trade concept is David Vogel. First, as explained in the previous paragraph, every State participating in free trade will absolutely gain benefits from such activity. The proponent of free trade promises that a State joining free trade will definitely be richer, though the proponent does not promise such State to be rich.
Second, States joining free trade will be more efficient in its course of production. A tariff is essentially a tax on consumption. It raises the prices of imported goods and services. When tariffs are reduced or eliminated, consumers benefit by being able to purchase goods produced in other countries more cheaply. This in turn forces domestic producers to be more efficient in order to remain competitive again benefiting consumers. Consider how inferior American cars would now be if the American automobile industry had not been forced to compete with the less expensive, better quality cars made in Japan during the 1970s. How much poorer Japanese consumers would be if Japan tried to be self-sufficient in food, instead of exporting automobiles and electronics to the United States and importing fruits and vegetables grown on more efficient American farms?
Trade restrictions impose considerable costs on consumers. In 1990 U.S. tariffs and other import restrictions cost American consumers about $70 billion by adding to the price of imported goods. Since 1990 the United States has entered into trade agreements that have substantially lowered the costs of many imported products. The increase in foreign competition in turn has made it more difficult for American firms to raise their prices, thus helping reduce inflation. By contrast, in 2000 food prices were 34 percent higher in the European Union (EU) and 134 percent higher in Japan than in the United States largely because the EU and Japan had higher tariffs on imported food.
In addition, trade makes it possible for businesses to choose from a wider variety of inputs (materials used to make goods) than would be possible if they relied solely on domestic suppliers. The freedom of firms to choose from an array of inputs improves efficiency, promotes innovation in technology and management, encourages the transfer of technology, and otherwise enhances the growth of productivity.
The benefits of free trade can be seen clearly in the case of the United States. In recent decades, the United States has become increasingly integrated into the global economy. As both U.S. and foreign trade barriers have declined, exports and imports have grown substantially. Heritage Foundation Fellow Daniel Mitchell argued this persuasively in The American Enterprise in 2000. From 1980 to 1998, U.S. exports increased from $272 billion to $934 billion, Mitchell argued, while imports grew from $292 billion to $1,100 billion. During the 1990s, a period when U.S. links with the global economy were more extensive than ever before, the United States had among the fastest growth rates of any major industrial nation.
The positive effects of trade on economic growth are confirmed by numerous studies. According to one study reported on by Mitchell, during the 1970s and 1980s, developing open economies (those with relatively free trade), such as Chile and South Korea, grew on average by 4.5 percent, while closed economies (those with restrictive trade policies), such as India and Cuba, grew by only 0.7 percent. A statistical study of 70 nations found that a 10 percent increase in tariffs on capital goods (goods that are used in the production of other goods) would cause the gross domestic product (GDP; the total value of all goods and services produced within a country) to grow by 0.2 percent less each year. An analysis of 93 countries revealed a close link between open economies and rates of productivity. Another statistical study, based on 123 nations, found that every percentage-point increase in total imports and exports leads to a 0.34 percent increase in per capita income (income per person). Over a period of years, small differences in economic growth such as these have a large impact on living standards.
The last three decades have seen a significant improvement in living standards for hundreds of millions of people. Without exception, the countries in which living standards have improved most rapidly have substantially reduced trade barriers and increased their exports. Since 1970 Asia’s “four little tigers”, Hong Kong, South Korea, Taiwan, and Singapore, have been transformed from impoverished areas into some of the world’s richest areas. Many of their citizens now enjoy living standards comparable to those of the United States and Europe. Not coincidentally, these four entities are among the 20 largest traders in the world
The positive impact of international trade on economic growth can be dramatically seen in China. From 1978 to 1998, China’s total imports and exports grew from $21 billion to $324 billion. During this same period, the country’s per capita income increased by more than 8 percent per year, helping raise some 200 million people out of absolute poverty. By contrast, India’s economic growth has been significantly reduced by the persistence of high tariffs and restrictions on foreign investment. Africa, the only continent whose citizens have experienced an absolute decline in living standards in recent decades, is also the region least involved in international trade. Economists point to many causes for Africa’s relatively poor economic growth, such as inadequate infrastructure, government corruption, and low levels of education, but most agree that international trade is vital to turning around the economic decline.
2. Argument of Opponent of Free Trade
One of the most notable scholars who disprove free trade concept is Jeff Faux. The central of this argument is that free trade will only benefit States assuming that there is an equal playing field. In reality, there is no such equal playing field.
First, different nations have different values. Regulating trade helps protect the standards that we set in our own domestic markets. For example, in order to protect public health, the United States government requires that food sold in our stores be fresh and clean, that toys be safe, and that products only be made in factories that do not pollute the environment. To protect workers from being exploited by business, the government sets minimum wages, defends the right of employees to bargain collectively through unions, and prohibits people from employing young children. To protect business, the government enforces commercial contracts and protects corporate trademarks and patents. This balance of protections for consumers, workers, and business has helped make America the world’s most successful economy.
Meeting labor and environmental standards often adds to the cost of production. Therefore, if businesses could lower their costs by not meeting the standards, they might make more profit and lower the price of their products. Yet most people in the United States believe it is worth protecting workers and our air and water, even if that makes goods and services produced in America more expensive. However consumers are economics creatures, therefore purchasing the least expensive items. This causes many products generated in U.S. with high standard of environmental and human rights protection, which are expensive, lose market. Consequently, many of US workers lose their jobs.
However, different nations have different values. Governments in many countries, especially those that are not democracies, often do not protect workers or the environment. The prices of goods imported from such nations will tend to be cheaper than goods produced in the United States. In that case, consumers who usually look for the lowest prices will buy foreign goods in preference to products made in the United States. As a result, U.S. workers will lose their jobs.
This is not a problem in markets for imports that the United States cannot produce much of here, such as bananas, coffee, or tea. It does become important for imported goods that compete against goods made in America, such as automobiles, clothing, or cameras. Placing tariffs on such imports adds to their price, thus making it easier for goods produced under U.S. standards to compete with imports.
Recent treaties signed by the U.S. government, under both Democratic and Republican administrations, have encouraged this shift of production from the United States to areas of the world with low standards. These include the North American Free Trade Agreement (NAFTA) with Mexico and Canada and the treaty establishing the World Trade Organization (WTO) with 135 different nations.
These treaties are often called free trade agreements because the nations that signed them agree to reduce tariffs and quotas. Unfortunately, they also create new, unequal standards for the global economy by protecting business but not labor or the environment. For example, the WTO forbids a citizen of Mexico to copy a compact disc made in the United States without paying a fee to the U.S. Company that sells the compact disc. However, the WTO allows a U.S. company in Mexico to make compact discs in ways that pollute the air and water and treat workers unfairly.
Second, free trade has also encouraged the use of child labor. The International Labor Organization (ILO), an agency of the United Nations (UN), estimated in 1998 that there were at least 250 million children from the ages of 5 and 14 working for wages. Researchers at the University of Veracruz in Mexico recently reported that child workers there are exposed to dangerous chemicals, carry heavy loads, and do not get enough nutritious food to eat.
There are about two million child workers in Brazil. Many work 10 hours a day producing sisal for rugs, rope, and handbags sold in the United States. According to a report in 2000 in the Washington Post, “The sharp blades and processing machines used in the fields have left many children and their parents with punctured eyeballs, missing fingers and amputated arms.”
C. Tripartite Government, BUMN and Private Entities
1. Does Free Trade Contradict the Principle Embodied in Article 33(2) and (3) of UUD 1945?
Indonesia economy ideology is cooperation ideology. The main feature of this ideology is that important natural resources which concern public interest should be regulated and managed by the government. Two of the paragraphs within Article 33 UUD 1945 is the basis for the establishment of BUMN such Water Corporation (PAM), Electrical Corporation (PLN), and Oil and Gas Corporation (PERTAMINA).
Writer opines that in the early days of Indonesia’s independence, two of these paragraphs serve very important function of protecting Indonesia’s interests since as a newly independent State, Indonesia does not have proper and adequate economy structure. Every available natural resource must be secured as soon as possible before any private corporation took over the proprietorship. Therefore, many private corporations were nationalized, those include Dutch’s owned corporations which owned important natural resources (water, electricity and oil and gas). Control over these natural resources are important in those early days as Indonesia did not possess anything at hand, including reserve, fiscal, tax, national reserve for foods, oil and gas to run the economy of the country. At the present moment, circumstances have changed, it is reasonable that Indonesia has sufficient reserves in place after 63 years of independence. In addition, economy structure is sufficiently developed, unlike the early days of independence. Therefore, the principle contained in Article 33 (2) and (3) UUD 1945 should be compromised so that Indonesia is capable of adapting itself into international trend of economy and trade.
Many parties disprove liberalization of Indonesia’s market since it is against the economy principle embodied in Article 33 (2) and (3) UUD 1945. Writer differs on this point. If careful examination is conducted upon Indonesia’s constitution, it actually implies market liberalization in the context of free trade. Article 34 UUD 1945 stipulates “National economy is instituted with… efficiency, fairness…independence and self reliance.” The words “efficiency” and “self reliance” are two key words for concluding that Indonesia’s constitution implies market liberalization. The reason why Article 33 (2) and (3) implying protectionism and Article 33 (4) implying market liberalization were drafted that way is due to chronological structure. UUD 1945 understands that Indonesia needed protectionism in the early days since society economy needs were highly dependent on government’s management on natural resources. Only in the year of 2002 when economy necessity has shifted that the fourth paragraph was included in the fourth amendment of UUD 1945. In 2000, economy values have changed, hence market liberalization was included as one of the most fundamental pillars in Article 33 UUD 1945.
2. “Spoiled” BUMN
BUMN is a corporation which is wholly or partially owned by State by means of direct investment from separated national budget. This definition connotes the interest of State in the business course of BUMN. Logical consequence of this connotation is numerous government interventions in business decisions BUMN made, while in reality BUMN assumes a legal status under Indonesia law (Limited Liability Corporation). Some argue that BUMN’s primary function should be administering public interest, while benefits can be gained once the primary function is successfully accomplished and in the event that benefits purpose does not defeat the primary function. In writer’s view, this argument is not properly established from two observational standpoints, legalist and economy wise.
First, article 2 (1) Law Concerning BUMN which regulates the purpose of BUMN establishment prioritizes benefits purpose (b) above public interest (c). This is evidenced by the structure of the law which places b first before c.
Second, a benefit is the key feature of administering public interest so that public interest is well served. Benefits dictate efficiency and competition. Since corporations are economic creatures, which aim for benefits, they will employ economic principles and calculations. Economic principle advocates efficiency and competition which to produce the best and cheapest products so that those corporations can win competition and gain benefits. To achieve this, corporations will optimize all factors of productions, including raw materials, marketing, production process and transportation cost, in the most efficient fashion. Natural resources such as gas, oil, water and mining materials are not wasted because those corporations have to compete against other corporations. These corporations tend to prioritize consumers’ satisfaction as consumers are the relevant parties in benefits calculation.
The case study for the above proposition is TOTAL, a water company in France. Subsequent to France’s privatization on its water, TOTAL Company took over France’s government management and ownership on water. TOTAL employed very sophisticated technology so that the water produced has even higher standard than that imposed by World Health Organization (WHO). Although there are some complaints to the rather expensive price of the water, writer opines that this problem can be addressed by government intervention. For instance, market diversification, where TOTAL is obliged to produce water with less quality and cheaper than that of previous one. This policy is also consistent with corporations’ principle which is to identify and satisfy the market. In reality, consumers of cheap and less good water are much more in quantity than those consumers of expensive of good water. TOTAL will still gain a big market share by this policy. In short, market liberalization does not automatically bring in all harms which outweigh the benefits of liberalization.
Several reasons why writer asserts that BUMN are “spoiled”:
• Government protects BUMN by means of regulation. The most obvious example is the practice of government guarantee whereby State national budget (APBN) is used to guarantee loans of BUMN from other private entities. Consequently, large portion of the loans are inefficiently utilized. It is a common secret that BUMN is not effective and efficient. This is evidenced by numerous media publications on imprudent PERTAMINA business decisions, corruption cases in PERTAMINA, fraudulent large crude oil tender and ineffective oil distribution from PERTAMINA which has recently caused public unrest for oil rarity.
• Government grants considerable tax incentives to BUMN. In the recent global crisis phenomenon, government granted Rp 12.5 trillion to BUMN.
• BUMN’s assets cannot be confiscated for purpose of indemnity which is caused of breach of contract or bankruptcy proceedings. Consequently, when BUMN fails to pay its debt or obligation to third parties, there is no available legal channel for those parties to claim for indemnity or damage.
3. Harmful Impacts of Government Policies “Spoiling” BUMN
The immediate harmful impact of government protectionist policies is that no investors would want to invest his capital in industrial sectors which concern public interest; hence there is no transfer of technology and know-how. Industries which concern public interest such as oil, gas and electricity are typical industries craving for technologies since its production efficiency highly depends on the quality of technology. For instance, the efficiency of oil extraction depends on how much oil can be extracted in a short length of time and how fast and well can raw oils be transformed into ready-to-use oil. Government protectionist policies will kill investments enthusiasm, particularly during global financial crisis. This is unwise since Indonesia lacks capital and technology. In addition, it is of common knowledge among businessmen that investment in Indonesia is not safe due to uncertain legal policies and protectionist attitude towards local industries.
D. Benefits of Indonesia’s Participation in AEC, Particularly in Global Financial Crisis
In global financial crisis, economy activities generally slow down. This instigates low investment interest drastically. Numerous world class corporations such as Nike, Toyota and Starbucks companies have to shut down many factories in other countries. Writer opines that Indonesia’s participation in AEC is one the answers of economic crisis it is facing, especially in times of global financial crisis. In this part of paper, writer will explain his opinion and analysis on AEC policies, benefits of AEC’s membership and the harms of Indonesia’s position not participating in AEC.
1. AEC Policies
AEC policies are basically consistent with WTO discipline. The political and legalist rationale for this assertion is that all member States of ASEAN are member States of WTO; therefore if AEC policies are not consistent with WTO discipline, all ASEAN member States can be sued before Dispute Settlement Unite in WTO for their breach of international agreement.
AEC blueprint paragraph 8 stipulates that the AEC envisages the following key characteristics: (a) single market and production base, (b) a highly competitive economic region, (c) a region of equitable economic development, and (d) a region fully integrated into the global economy. These characteristics are inter-related and mutually reinforcing. Four of these integration processes in ASEAN are similar to those of WTO discipline. For instance, in point (a), paragraph of the blueprint explains further that the five primary elements of point (a) single market and production base are: (1) free flow of goods, (2) free flow of service, (3) freer flow of capital, (4) free flow of investment, (5) free flow of skilled labor. Concrete policy each member State has to take in realizing these five elements are elimination of trade restrictions, devising Rules of Origin, trade facilitation, customs integration and establishment of ASEAN Single Window.
2. Concerns on Harmful Impacts of Free Trade to Indonesia
Many parties are concerned with Indonesia’s lack to participate in AEC since Indonesia is simply not mature enough. Those lacks are: (1) uncertain legal policies, (2) competitiveness of local industries, (3) human resources readiness, and (4) bureaucracy maturity, particularly its corrupt behavior in permit application and illegal taxation. Professor Hikmahanto Juwana expressed that if Indonesia joins AEC, all big companies will allocate their factories in other countries such as Vietnam whose policies are very friendly to investors. Big companies used to establish factories in Indonesia because the factor of production (raw materials) can only be found or the cheapest in Indonesia, even when they are not content with Indonesia’s government policies. In addition, Indonesia is a big market for selling their products. If Indonesia liberalize its market, all these companies can still enjoy all the above mentioned benefits even if they allocate all their factories in Vietnam since free trade commitment obliges Indonesia to eliminate all trade restrictions. The impacts of these big companies shifting their course of production to Vietnam are huge rate of unemployment, the bankruptcy of many “related” industrial sectors, such as transportation for workers, foods and accommodation in the area around the factories. The other concern is that local industries which are in direct competition with these big companies will not be able to survive the competition against those big companies since they have much better technology and human resources.
In addition, Indonesia does not have skilled and trained scholars in the field of free trade or WTO discipline, which means that where dispute arises in AEC DSU, Indonesia will most likely lose. This is not unprecedented and in fact Indonesia has experienced “nightmare” for international dispute such as Sipadan and Ligitan dispute before the International Court of Justice (ICJ). The ICJ in that case unequivocally voted 14 to 1 for Malaysia and consequently Indonesia lost two of its islands. Worst of all, Indonesia hired American and French lawyers with millions of US dollars fee.
Moreover, permit application in Indonesia is infamous for its extremely complicated procedures. Although article 1 (1) Indonesia Laws No.25 year 2007 concerning Investment has mandated one stop service of business permit institution, hitherto the concept has not been implemented comprehensively.
3. Benefits of Indonesia’s Participation in AEC
Free trade concept, similar to EU customs union, is to consolidate economy power within the region. This means that States with disadvantaged economy power will be enhanced by powerful States within the free trade institution. This is evidence by strong motivation driving Eastern European States like Bulgaria, Romania and Turkey to join EU. If Indonesia participates in AEC, Indonesia’s economy power will also be enhanced by more economically powerful States such as Singapore, the Philippines and Malaysia. Concrete example of this assertion is within the context of tariff concession negotiation and policy making in WTO against non-member States of AEC. The primary reason why US and EU are two of the States benefiting the most from WTO is because they have the strongest bargaining power against all States in the world. Uruguay Round and Doha Round are the most obvious experiment ground for this huge bargaining power. During the negotiation, States will strive to reduce tariffs on exported products where those States have absolute advantage. On the contrary, State will strive to maintain or even increase tariffs of imported products where they do not have absolute advantage. With such infinitely small economy power, Indonesia absolutely does not have any bargaining power against those economically powerful States to propose, let alone dictate its desire on certain tariffs. If Indonesia joins AEC, hence, AEC will represent the interest of Indonesia during the negotiation in WTO as one economy entity. This will definitely enlarges Indonesia’s bargaining power.
In addition, if Indonesia refuses to participate in AEC, other AEC members will most likely have sentiments against Indonesia. In business, the principle of “If you are not my ally, then you are my foe” dominates the market. If Indonesia is not an ally to ASEAN members, it must be foe for AEC members. This explanation is best described by the following analogy. Hypothetically, Indonesia is the main or sole producer of palm oil and Malaysia and the Philippines are the only market for palm oil products. Prior to establishment of AEC, Malaysia imposes 10% tariff on palm oil products, while the Philippines imposes 20%. Indonesia approaches the Philippines and negotiates for 15 % tariff for palm oil. If the Philippines reject this proposal, Indonesia can easily sell the whole products to Malaysia which offer better tariff. Imagine if both Malaysia and the Philippines belong to one economy blog. Both of them will dictate 20% tariff and Indonesia cannot do anything about such policy since palm oil market is only in Malaysia and the Philippines. If Indonesia does not want to sell these products with 20% tariff, then those products will rot and go wasteful.
E. An Analysis to GATT and WTO Principle to Protect Indonesia Agriculture Interest
Indonesia is well known as agricultural country, whose economy power revolves around agricultural activities. Writer opines that there are legal arguments Indonesia can employ to protect its agricultural interest if Indonesia participates in AEC. Since AEC has to adopt WTO principle consistently, analysis to WTO and GATT principle is relevant to analysis of AEC principle. In a nutshell, the argument is that WTO is very lenient in agricultural policy compliance with GATT.
First, article 3 of Agreement on Subsidies and Countervailing Measures stipulates that “Except as provided in the Agreement on Agriculture, the following subsidies, within the meaning of Article 1, shall be prohibited.” This provision indicates privilege for agricultural industry where a specific convention is drafted to protect agriculture interest of WTO member States.
Second, Article XXXVI GATT stipulates that States which are very dependent on agriculture industries are permitted to employ protectionist measures to stabilize and improve world trade condition, including the said State agriculture sustainability.
CHAPTER V
CLOSING
Conclusion and Recommentation
From the above explanation, there are several conclusions established:
1. Comparative advantage is the most fundamental pillar of WTO and free trade arrangements in general. This concept is postulated by David Ricardo, which is subsequently reinforced by Paul L. Samuelson, the noble prize winner for economy category in 1970 and the greatest economist in the 20th century. Both economists agree that theory of comparative advantage says that it pays countries to trade because they are different. It is impossible for a country to have no comparative advantage in anything. It may be the least efficient at everything, but it will still have a comparative advantage in the industry in which it is relatively least bad. Particularly in global financial crisis where investors are very reluctant to conduct investments (they have to close down many factories in fact), Indonesia should liberalize its market to seduce new and fresh investments. Indonesia core economic problem is the lack of capital, technology and know, all of which are the advantage gained from liberalizing its market.
2. Tripartite concept is protectionist in nature; hence it is not relevant any longer with Indonesia’s economic needs at the present date. Most importantly, protectionist policies are repugnant to many investors. Most parties’ concern on how liberalization of market is not consistent with economy ideology envisaged in Article 33 (2) and (3) UUD 1945 is also improper since Article 33 (4) UUD 1945 as the result of 2002 amendment advocates free trade as the relevant economy policies nowadays.
3. Indonesia needs to strategize its political, economy and legal position with regards to AEC membership. First, Indonesia needs to make a position joining AEC. Indonesia needs to conduct thorough reformation on human resources trained in free trade and WTO discipline. Second, Indonesia has to consider its revoking protectionist measures for BUMN and consider privatization for those sectors with minimum regulation to protect public interest.
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