Balancing between Powers: Thing One and Thing Two

By Dioputra Ilham | 27 Mar 2017
Economy | 0 Participant(s) | 0 Response(s) | 967 Views

By Nina Aliya, Monika Febiola, and Alif Suhada Nibra

 

“‘I call this game fun-in-a-box,’
said the cat.
‘in this box are two things
I will show to you now.
you will like these two things,’
said the cat with a bow.

‘I will pick up the hook.
you will see something new.
two things. And I call them
Thing One and Thing Two.
These Things will not bite you.
they want to have fun.’
Then, out of the box
came Thing Two and Thing One!”

 

— The Cat in the Hat

Dr. Seuss (1957)

 

In the classic Dr. Seuss tale, the Cat in the Hat brought in a box, a large red box emitting suspicious sounding ruckus, to Sally and Conrad’s house. Popping out of the box were two curious identical creatures that wreaked mischief around the house, aptly named Thing One and Thing Two. Indonesia is currently being offered its own personal Thing One and Thing Two with the Trans Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP). It should be no wonder that the offer is being treated warily as it is hard to predict exactly if Indonesia is ready to cope with the potential chaos brought about by either one of the two “imps”. The question that stands as of now is which deal should Indonesia take? Or even perhaps, may it actually be wiser to pack them both up in their boxes and send them away?

 

“We’re going to stop the ridiculous trade deals that have taken everybody out of our country and taken companies out of our country, and it’s going to be reversed,” was only one of  Donald Trump’s many characteristically blunt remarks. This time, he was showing his extreme scepticism towards the Trans Pacific Partnership. But what exactly is the TPP that the United States opted to back out of it? Before we can answer that question, it is important to be familiar with the term itself. Initially known as Pacific 4, the TPP is a joint trade agreement between countries bordering the Pacific Ocean and accounting for roughly 40% of the world’s GDP: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States (until 23 January 2017), and Vietnam officially finalised on 4 February 2016. The objections of the agreement are to completely eliminate tariff and nontariff trade barriers on goods, services, and agriculture. Equally important aims are labour protection, environmental safeguards, as well as the establishment of intellectual property rights through Investor-State Dispute Settlement (ISDS) which enable companies or investors to sue states over discriminatory acts and protect their property rights against uncompensated seizure by the government, differing it from most trade agreements.

 

Even though the United States’ withdrawal from the agreement was deemed a crippling loss by the member countries, the Australian trade minister is welcoming China and Indonesia to join the TPP as a replacement for the giant actor. Indonesia’s Foreign Minister, Retno Marsudi, stated that the countries would continue to negotiate to prevent the downfall of the agreement, but it is crystal clear that the United States’ withdrawal has certainly created great doubts for the Indonesian government, considering the initial reason for Indonesia’s excitement towards the agreement was the involvement of the US. As for now, the agreement cannot yet be ratified and the member countries are currently experiencing great disadvantage without being able to achieve any of its rather lofty goals. For instance, Vietnam’s textile exports to the US are declining as the tariff on exports are no longer at 0 percent. However, the chairman of the Chambers of Commerce and Industry (KADIN) of Indonesia, Rosan Roeslani, saw the ‘failure’ of TPP in a positive light. He emphasised the possibility of forming a bilateral economic partnership with the United States and a chance to increase Indonesia’s competitivity vis-à-vis its neighbors, such as Vietnam and Malaysia, in exporting products to the US.

    

As uncertainties revolving the TPP and United States’ abrupt halt from pivoting towards the rise of Asian markets, the Regional-Comprehensive Economic Partnership (RCEP) emerges to fill in the gap. Formally launched in November 2012 at the ASEAN Summit in Cambodia, the agreement consists of the 10 ASEAN countries, China, India, South Korea, New Zealand, as well as two TPP signatories, Japan and Australia, which in total account for roughly 30% of the Global GDP and cover almost half of the world’s population, making it the largest Free Trade Agreement (FTA) in the world outside the World Trade Organization (WTO) by the time it is finalised. It aims to improve the quality of trade, deepen regional integration, and enhance cooperation between pacific-rim countries by eliminating tariff barriers and simplifying the rules governing preferential trade in goods. Lately, it also focuses on non-trade issues similar to the TPP’s, particularly investor-state dispute settlement and intellectual property rights. The 16th Regional RCEP Trade Negotiating Committee (TNC) meetings were held from 2 to 10 December 2016 in Tangerang, Indonesia, discussing market access of three issues of trade in goods, trade in service and investment, intellectual property rights, competition, e-commerce, and legal terms. “In my view, we have to conclude the RCEP negotiations by 2017. We cannot afford to drag the negotiations further at a time when the global trade outlook continues to be bleak, coupled with rising protectionism in both advanced and developing countries,” stated the Minister of Trade Enggartiasto Lukita in his opening speech. The latest negotiations were held held in Kobe, Japan, from February 27 to March 3, the first negotiation in the year and the first since the United States announced their withdrawal from the TPP.

 

Despite the promises it harbours, Indonesia’s involvement with this agreement is still under scrutiny amidst the existence of Asean Economic Community (AEC), a single regional market which envisages to integrate ASEAN into the global economy. Indonesia has to assess their own strengths and weaknesses in order to be well-equipped as RCEP has defined a complex set of rules to govern free trade, requiring a few readjustments of domestic laws and policies. Indonesia’s leverage on the agreement must also be reinforced considering the fact that Indonesia acts as the lead negotiator for ASEAN and gains to play a more significant role in the RCEP than the TPP.  In accordance, there is an urgent need for a thorough cost and benefits analysis for the overall impacts of RCEP to Indonesia as the Ministry of Trade is pushing to complete all the negotiations pertaining to RCEP before the end of 2017.                                                 

However, before Indonesia commits to either agreements, its own economic requirements must first be taken into account. Determining an appropriate list of Indonesia’s economic needs would most probably produce a lengthy document with indecipherable facts and figures, thus it would be wiser to note a historically significant concept called the Trilogy of Development. During the New Order, the Indonesian government under Soeharto’s regime conceptualised a development policy consisting of three main elements; national stability (stabilitas nasional), the equalization of development (pemerataan pembangunan), and economic growth (pertumbuhan ekonomi). Despite the controversial nature of Soeharto’s rule, his principles for development carry a solid scheme that is worth reconsidering when mulling over Indonesia’s economic needs in the face of numerous prospective trade deals on the table, including the TPP and RCEP.

Primarily, national stability is key to maintaining any form of economic reforms which was why President Soeharto took pains to ensure some semblance of it. It seems safe to say that with no major regional conflicts, three relatively successful democratic elections since the tumultuous political reformations of 1998, rather well-established judicial, legislative, and executive branches as well as a diverse political landscape, the fifth most-populous nation is somewhat well-off. Indonesia should aim to assert this stability by picking and choosing carefully particular trade agreements in which it will be a party to as well as noting that national stability does not merely constitute calm waters, but also a solid hold upon its own sovereignty. By no means must any trade deal impinge upon its national jurisdiction, be it from highly involved investors, industries or other states.

The equalization of development is also critical for Indonesia whose economic growth has mainly been enjoyed by 20 percent of its population while the remaining 80 percent still feels left behind. Indonesia is still in a state where 10 percent of its population owns 77 percent of the nation’s wealth, and this rising disparity is perpetuated by the fact that most economic development has mainly been centered on Java, the economic and political powerhouse. In terms of foreign and domestic direct investments, the Indonesia Investment Coordinating Board (BKPM) stated that investments towards Java accounts for 56.7 percent of direct investments. Along with education and fiscal policies, Indonesia is in dire need of comprehensive infrastructure improvements. Inequality is an urgent issue that needs to be resolved as it has long-term consequences towards the third facet of development—growth. The rising disparities across the archipelago state will also prove to hamper Indonesia’s economic resilience in the face of rising global uncertainties such as the volatile Trump administration in the United States of America as well as China’s expected economic slowdown. Any trade deal struck up by Indonesia should very well account for the needs of other islands.

It is obvious that the aim of any trade deal is to augment national economic growth. In 2016, Indonesia’s 5 percent growth rate may be the highest among other emerging market economies; however, it still has a long way to go if it wants to reassert itself as a potent economic force in the regional and global arena. Currently, Indonesia’s bureaucracy and infrastructure is hindering further expansion as companies may spend 50 percent more on logistics in Indonesia than in Thailand and about 100 percent more on logistics in Malaysia. Thus, any trade deal ratified by Indonesia should help cut out the obstacles that may be stifling growth. It must be noted that though growth is important, economic prosperity for a state cannot be measured by it alone, which is why in the Trilogy of Development, growth is a tertiary need. In the face of potential trade deals, growth is not the sole aim. As a state, Indonesia cannot trade in the concrete needs of its people for a place amongst the economic hotshots of the world, and thus, implementing or removing any policies should be done with the utmost care.

 

These two colossal multinational trade agreements, however, will have a significant impact on Indonesia and its purpose in conducting state affairs. With these major impacts in mind, the Indonesian  government should adhere to the economic requirements of Indonesia itself regardless of which agreement it chooses to indulge in. National stability, equalisation of development, and economic growth should be Indonesia’s benchmark, goals, and main considerations when ratifying an agreement. The TPP may potentially benefit Indonesia by removing trade barriers between participating countries thus boosting trade exports and lowering the price of imports from other participating countries. However, the TPP also stands to do more harm than good. Under the ISDS, foreign investors are given the right and power to sue national governments and take them to international arbitration if new regulations are made or old ones changed in such a way that is detrimental to the investors’ interests. This is especially problematic to Indonesia whose national agenda under President Joko “Jokowi” Widodo’s rule is to put the needs and interests of its nationals at the forefront, not that of foreign investors.

On the other hand, Hendrajit, a researcher at the Global Future Institute (GFI) stated that the RCEP is “just a TPP formed by China instead of the United States. The Chinese are interested in realising the RCEP because they want to compete with America’s TPP.” However, the overall aims of the RCEP are not as complex as the TPP as the RCEP devotes more attention to forming an actual trade deal than reducing import taxes. The TPP’s nontariff barriers far exceed that of the RCEP. Where the TPP’s nontariff barriers encompass 20 different issues, the RCEP’s only encompasses 6. The RCEP is also more clearly geographically defined and limited than the TPP and avoids touching upon sensitive issues such as agriculture and intellectual property rights.


In approaching these two giants in free trade, the equalisation of development and economic growth should be Indonesia’s main aims. However, which agreement is best suited to accommodate those aims is still up to debate. Should Indonesia lean towards the TPP’s radically “free” notion of free trade, or should it side with more like-minded, guarded states in protecting its national interests through the RCEP?