Indonesia is mulling exemptions of import tariffs on raw materials and intermediary goods for trading partners with which it has no free trade agreement (FTA), in a bid to boost its manufacturing industry and attract more investment.
The preferential arrangement will be given to both local and foreign companies that operate within the country and source at least 40 percent of their materials for finished goods locally, according to Trade Ministry director general for international trade cooperation Bachrul Chairi.
“We hope this will facilitate production here so it will generate big multiplier effects by increasing added value to our manufactured goods and create jobs,” Bachrul told reporters on Tuesday after a meeting at the Office of the Coordinating Economic Minister.
The incentives, set to impact manufacturing output both for local use and exports, might be put in place in the third quarter of this year and the government was preparing two government regulations to implement them, he added.
Indonesia has struggled with de-industrialization in the past decade, marked by the low contribution of its manufacturing industry to its gross domestic product (GDP) and stagnation in labor absorption.
It has also applied a policy of gradually cutting import duties on a unilateral basis since the 1980s, resulting in lower tariffs compared to other developing countries. Indonesia’s current average import levy is 6.8 percent, much more modest than Brazil (13.7 percent), India (13 percent) and China (9.6 percent).
The combination of these factors, in addition to other issues, such as poor infrastructure and insufficient energy supply to feed its industry, has made industrial firms largely reliant on imports of raw materials and intermediary goods, apart from capital goods.
Overseas purchases of raw materials and intermediary goods represented 75.45 percent of overall imports in the first quarter of this year with a value of US$27.69 billion, according to the Central Statistics Agency. Imports of capital goods, which support direct investment, account for 17.63 percent with a value of $6.47 billion.
A sizeable amount of these production inputs, such as pharmaceutical, chemical, petrochemical and machinery, also come from non-FTA partners.
Indonesia has sealed a number of trade agreements with major partners, either through bilateral plans, such as the Indonesia-Pakistan preferential trade agreement, the Indonesia-Japan Economic Partnership Agreement (IJ-EPA) and regional frameworks, including ASEAN with China, South Korea, Japan, Australia and New Zealand.
It is readying itself to begin negotiations with a few partners, such as the EU, and resume talks with several countries, including South Korea and Chile.
However, due to the weaknesses of its industrial sector, Indonesia has received less benefit from these agreements as indicated by its lack of integration into the regional as well as global production network.
Investment Coordinating Board (BKPM) chief Franky Sibarani said that as Indonesia was competing with other countries to attract investment, the measure was seen as a way to boost its competitiveness to generate flows of investment.
“Basically we want to open bigger spaces for investment by taking into account priority sectors and champion regions,” he said.