Unbalanced power in trade

Posted on July 4, 2011

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Maxine Carr and Indah Suksmaningsih, Jakarta | Fri, 07/01/2011 8:00 AM

The EU and ASEAN states have been discussing the possibility of signing a Free Trade Agreement since 2007. Thankfully, the Indonesian government has decided that another one to two years is needed to fully investigate the effects of the FTA before signing.

The FTA is part of a Comprehensive Economic Partnership Agreement (CEPA), which the Indonesia-EU Vision Group has recommended for the Indonesian and EU governments to soon start negotiations on. The recent Vision Group recommendations have stated that the “ambitious” agreement would eliminate 95 percent of tariffs on 95 percent of trade value over a nine-year period.

Among the recommendations are decreasing key tariffs on both sides by up to 95 percent, standardization and certification of Indonesian products to EU standards and creating sustainable trade in palm oil and cocoa. While ASEAN states are hoping to gain additional market access in the EU, the agreement is expected to have a much bigger impact in strengthening business opportunities for European transnational corporations in the region.

Currently, the trade of goods between EU and Indonesia amounts to ¤20 billion (US$28.96 billion) per year. In addition, more than 700 companies from European countries have investments in Indonesia valued at ¤50 billion, supplying more than 500,000 jobs in various industries, including pharmaceutical, banking and manufacturing. Because of this European penetration in the Indonesian economy, the government must prioritize to protect the Indonesian people.

It is hard to calculate the impact on services. The EU promises to help Indonesia in capacity building as part of increasing the market access. But “capacity building” can be seen as just a sweetener. Indonesia needs to fundamentally restructure first. In the Indonesia-EU Comprehensive Economic Partnership Agreement, services are dubbed “Doha Plus”, meaning that trade in services could be left in a dangerously vulnerable position, as these rules on services will be more liberal than already existing WTO rules.

The Vision Group has recommended that the level of ambition in Intellectual Property Rights (IPR) as regard to Geographical Indications (GI) protection should be high. The CEPA will require GI protection should go beyond Trade-Related Aspects of Intellectual Property Rights (TRIPs) obligations for foodstuffs and provide for extension of the protection at least to TRIPs article 23 level (referred to as TRIPs+). Similar to the proposed rules on services, the rules on IPR will therefore be Doha Plus.

The EU has never talked about how it would reduce its spending on subsidies on agriculture. How will Indonesia be able to compete with the EU if it continues to cushion its agriculture industry? This could easily be a source of market failure for Indonesia and therefore should become a topic of high importance for discussion during the negotiation process.

EU procedures require that all ASEAN countries sign a Partnership Cooperation Agreement, containing a commitment to human rights, as a prerequisite to an FTA. PCAs ensure that other factors, such as human rights and the environment are protected when trading. This looks as if Indonesia can benefit out of the PCA which was signed in 2009. However, by looking at the agreement carefully we can see the EU’s true interest in the PCA.

Despite articles in the PCA to protect human rights in Indonesia, build infrastructure and better the health system, we can see that the EU’s real interest is in trade and investment. Only articles discussing trade and investment use the words “must” and “has to” whereas all other articles use the words “may” and “can”. Therefore, only articles discussing trade and investment can be enforced.

Section IV of the PCA titled Cooperation on Trade and Investment discusses Sanitary and Phytosanitary Issues, Technical Barriers to Trade, Intellectual Property Rights, Trade Facilitation, Customs Cooperation, Investment, Competition Policy and Services. There is no section on agriculture. By not discussing agriculture in this section, there is no binding agreement to protect Indonesia’s agriculture sector, as only Section IV uses binding words such as “shall” and “must”.

Agriculture is only discussed in Section V, titled Cooperation in Other Sectors. For Indonesia, agriculture is not “another sector”, but is the most important sector which needs to be protected.

Therefore, the Indonesian government must assert its bargaining power during discussions of the EU-Indonesian FTA. If Indonesia is going to benefit, the FTA must contain enforceable benefits for its people. Indonesia has to better its standards to meet the demands of the EU. But the Indonesian government does not assert itself to protect Indonesian workers.

The gradual phasing out of tariffs gives Indonesian businesses some time to adapt to the changes. But inevitably, some businesses will prove unable to compete in the new market. Some businesses will be forced to close and unemployment will then follow in the short term, visible and politically sensitive.

We know that FTAs are inherently unequal. The richer and stronger economy, which can afford to subsidize its national economy and produce cheaper goods and services, will win. It is always poorer countries who lose out. FTAs that are not based on fair trade rules generally produce winners and losers. The majority of Indonesia’s people are still poor and many people live below the standard of living. These people ultimately become of victims of free trade.

Working out the costs and benefits from implementing freer trade is complicated. While losses are often immediate and visible, benefits may not be readily apparent and require policy adjustments to take hold. Political leaders have to provide leadership not only in signing FTAs but even more in following up with prompt structural changes.

Currently, the EU-Indonesia Vision Group, established in 2010 by President Susilo Bambang Yudhoyono and EU Commission President Jose Manuel Barroso, comprises only business practitioners, government apparatus and scholars who work together to come up with recommendations on policies to reduce stumbling blocks in bilateral trade. Indeed, there is a platform for NGO consultation.

The writers work for the Institute for Global Justice, Jakarta.

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