PAPER OF INDONESIAN ECONOMY

THE BENEFITS OF INDONESIAN ECONOMY

TOWARDS INVOLVED IN ASEAN ECONOMIC
COMMUNITY (AFTA & AEC)

Disusun Oleh:

1. Ifa Nuzulul Rohmah C1L014019

2. Izhar Allessandria C1L014003
3. Siffasandi Sasmita C1I015025

Fakultas Ekonomi dan Bisnis

Universitas Jendral Soedirman
Purwokerto
2016

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 BAB I
PRELIMINARY
1.1 Background
The ASEAN Free Trade Area (AFTA) agreement was signed in 1992
by the regional groupings six member countries at the time: Brunei, Indonesia,
Malaysia, Philippines, Singapore and Thailand. Cambodia, Laos, Myanmar and
Vietnam joined the Association of Southeast Asian Nations after 1992 and all
four signed the AFTA agreement.
ASEAN member countries are working toward the total elimination of
import duties on all products to achieve the ultimate objective of a free trade
area. The AFTA Council agreed that the target dates to achieve this objective
would be 2010 for the six original ASEAN member countries and 2015 for the
newer members. Elimination of import duties is expected to create an integrated
market where there is a free flow of goods within the region.
The main implementing mechanism for AFTA is the Common Effective
Preferential Tariff (CEPT) agreement. CEPT requires that tariff rates levied
on a wide range of products traded within the region be reduced to 0% to 5%.
Quantitative restrictions and other non-tariff barriers are to be eliminated.

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1.2 Formulation of the Problem

How this AFTA affects Indonesian Economy and vice versa, which kind
of sectors and how they are affected by ASEAN Free Trade Area & ASEAN
Economy Community?

1.3 Purpose

The purpose of this paper is to find out about Indonesian Economys

capability to compete in the global market especially in ASEAN include the
benefits of AFTA & AEC for Indonesia as well as the benefits of Indonesia to
AFTA & AEC. Explanation will be written below also to pull the conclusion of
this issue.

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 BAB 2
DISCUSSION

The AEC and AFTA will have more specific impact on various industries
in Indonesia, such as the investment sector.
In the investment sector, AFTA, as a free-trade system in Southeast Asia,
will result in an interdependency and integration of investment. It will impact
investment and economic management, including in Indonesia, by making trade
free of tariffs and non-tariff barriers, meaning that goods produced by ASEAN
countries will be free to enter each ASEAN member country.

The purpose of AFTA is to help products produced within ASEAN

compete in the global market, attract more Foreign Direct Investment to the
region, and increase intra-ASEAN trade. According to Indonesias Center of
State Revenue Policy Fiscal Policy Agency (Pusat Kebijakan Pendapatan
Negara Badan Kebijakan Fiskal), there are several benefits of AFTA for
Indonesia, i.e., greater and wider market opportunity for Indonesian products,
lower production costs for Indonesian businesses that require capital goods and
raw/auxiliary materials from other ASEAN member countries, more diverse
product options in the domestic market for consumers, and greater opportunity
to enter into alliances with business actors from other ASEAN member
countries.

The next step is the establishment of the ASEAN Economic Community

(AEC), including AFTA, with the main objectives of creating a single market
and production base, a highly competitive economic region of equitable
economic development, and a region fully integrated into the global economy
by 2015. AEC would transform ASEAN into a region with free movement of
goods, services, investment, skilled labor, and capital. A key characteristic of
AEC is a single market and production base.
Below we describe the more specific impacts of AEC and AFTA on
various industries in Indonesia.
Trade
Export
It is argued that economic integration will largely benefit Indonesia considering
the number of multinational companies like Unilever relocating their factories
to Indonesia for the reason of cheaper labor costs. Multinational companies like
Unilever can export goods to ASEAN countries, which in turn will increase the
value of Indonesias exports.

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 Import
Indonesia, through its Ministry of Finance (MOF), has implemented its AFTA
commitment by imposing certain tariff rates on imported goods based on the
ASEAN Trade in Goods Agreement (ATIGA). This can be seen in MOF
Regulation No. 20B/PMK.011/2012 regarding Determination of Import Duty
Tariff in the Context of ATIGA (PMK ATIGA). PMK ATIGA regulates the
gradual tariff adjustment from January 1, 2013, until December 31, 2015. Most
of the tariffs on the goods are 0%, except for cane or beet sugar and chemically
pure sucrose, in solid form.

Financial Sector (Banking, Insurance, and Investment)

Indonesias banking sector needs to gear up to compete with banks in
other ASEAN countries. AFTAs schedule, which has been accelerated, requires
the Indonesian banking sector to step up efforts to compete with other banks in
the region. One issue concerns interest rates on loans employed by Singaporean,
Malaysian, and Thai banks, which are lower than those of Indonesian banks.
With the implementation of AFTA, the Indonesian banking sector will
have more responsibility in helping small and medium enterprises. Bank
Indonesia, the central bank, has drawn up four main policies to prepare for
AFTA, i.e., improving banking system durability, increasing banking
intermediation, increasing the role of Shariah banking, and increasing the role
of rural banks in providing micro- financing.
For the insurance sector, according to Edi Subekti, President Director of PT
Asuransi Jasa Indonesia (PT Jasindo) from 2001 to 2008, there are
consequences to the implementation of AFTA,
1. An influx of foreign capital and technical skills;
2. Globalization may accelerate product innovation and marketing
diversification;
3. The presence of new capital will increase competition in the domestic
market; and
4. Globalization will open opportunities for insurance companies to go
international.

Antonius Anton Lie, Chairman of the Education Commission of the

Indonesian Insurance Council, said one of the consequences of the
implementation of AFTA was that more foreign insurance companies, especially
from ASEAN countries, would enter Indonesia. If local insurance companies are
not ready to compete with these foreign companies, in terms of capitalization,
products, marketing, and human resources, they will find themselves pushed to
the edges of the industry.

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 The current Insurance Law and its implementing regulations have placed
limits on the entrance of foreign insurance companies into the local insurance
market by limiting foreign share ownership in Indonesian insurance companies.
The participation of Indonesia in AFTA does not require Indonesia to abolish
such restrictions on foreign ownership in the local insurance sector. While the
entrance of more foreign insurance companies to the local market could have
positive impacts in terms of capitalization and technical skills, there is no
indication that limits on foreign investment under the Insurance Law and its
implementing regulations will be liberalized due to AFTA.
In the investment sector, AFTA, as a free-trade system in Southeast Asia,
will result in an interdependency and integration of investment and will impact
investment and economic management, including in Indonesia, by making trade
free of tariff and non-tariff barriers; meaning that goods produced by ASEAN
countries will be free to enter each ASEAN member country.[5]
Foreign investment in Indonesia is regulated and limited under Indonesias
Negative Investment List, or Daftar Negatif Investasi (DNI). A new DNI was
issued this year and, according to Mr. Hatta Rajasa, who was Indonesias
Coordinating Minister for Economic Affairs at the time, one of the reasons for
revising the DNI was to accommodate ASEAN economic integration to allow
the free flow of investment.

Agriculture
The implementation of AFTA will affect the export and import of
Indonesian agricultural commodities. The net export of Indonesian agricultural
products has increased since the implementation of AFTA in 2003. It might be
advisable for Indonesia to focus on the production and export of rice, corn and
soybeans, commodities for which it has the advantage of plentiful land and low
production costs. Indonesia was the top rice-producing country in ASEAN from
1990 to 2008. Countries with low production costs may want to specialize in a
few products and increase their exports of these products. Countries can import
those goods for which high production costs mean it does not make economic
sense to produce the goods domestically.

Construction and Infrastructure

In a report prepared by the ASEAN Constructors Federation (ACF),
ASEAN countries in general are seen experiencing robust growth in the
construction industry. Indonesia had the largest construction industry among
ACF member countries in 2002, valued at US$9.92 billion. The adoption of
AFTA benefits the region in terms of better procurement of construction
materials, allowing the materials to move through the region more freely than

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before. The abundance of land outside Java that remains undeveloped makes
Indonesia an attractive destination for foreign investment.
Further, the need for infrastructure development and cheaper land present
a tempting opportunity for foreigners entering the Indonesian construction
industry. Expansion of infrastructure, particularly the construction of highways,
also provides opportunities to contractors from ACF member countries. In
addition, the Indonesian government has worked to open up its market to
foreign firms to form joint ventures with local construction firms for such
projects. These foreign firms are issued a three-year construction license.
With AFTA, the reduction in import duties could facilitate the expansion of the
regional steel market, lowering the price of steel products and enhancing the
pace of construction projects.

Manufacturing
While AFTA promotes the liberalization of trade, for Indonesia, which
has adhered to its commitments, some manufacturing sectors are expected to
face difficulties as a result of AFTA implementation. One of the biggest and
most prominent regards the impact on workers.
Most manufacturing sectors in Indonesia still use less advanced
technology and are labor intensive. This is to say that many manufacturing
sectors in Indonesia, particularly textiles and wood products, depend on low-
cost labor. The implementation of AFTA will require manufacturers to ensure
the sustainability of their businesses by moving away from low-cost labor and
improving the quality of their goods or finding some other advantage. This will
allow Indonesian products to stand alongside products from other ASEAN
countries.

Labor
In an ILO/ASEAN Joint Study on the Social Implications of AFTA on
Labor and Employment, free trade is seen leading to greater efficiency and
cheaper products. The idea is that removing trade barriers would bring huge
benefits to the people of ASEAN, lead to greater specialization and division of
labor as each country concentrates on producing goods and services in which it
has a competitive advantage. On the downside, however, the greater levels of
competition unleashed by AFTA will lead to the collapse of inefficient
companies that have been operating behind protectionist barriers. Therefore, for
countries, the key to taking advantage of trade liberalization is very much
determined by the competitiveness, or quality, of its labor force.
Unfortunately, a low-quality labor force is still a problem for Indonesia. This is
reflected by the relative lack of education of Indonesian workers compared to
other Asian countries. This will hinder the process of industrial transformation
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that would otherwise take place at a faster pace due to trade liberalization,
because workers are not flexible enough to change jobs and move into more
advanced sectors. Indonesia also has a relatively high unemployment rate,
which will prevent it from reaping the full benefits of trade liberalization. As the
economy opens up, Indonesian workers could find it difficult to compete with
workers from neighboring countries.
The implementation of AFTA will result in the free flow of skilled labor
in the ASEAN region. To facilitate such free flow of skilled labor, ASEAN is
working to improve the issuance of visas and employment passes for ASEAN
professionals and skilled workers who are engaged in cross-border trade and
investment-related activities.

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 BAB III
CLOSING
3.1 Conclusion
There are positive and negative impacts from the implementation of AEC
and AFTA in Indonesia. While businesses may benefit from the highly
competitive market as a venue to expand their production and networks, small
enterprises and poorly educated laborers may find it difficult to compete with
the free flow of goods, services, and skilled workers.
The Indonesian government will play a pivotal role in reconciling this
gap. Comprehensive and clear regulations regarding the implementation of
AFTA and AEC could help all of Indonesia benefit from an integrated market of
high-quality goods, services, and human resources.

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 REFFERENCES

http://www.cekindo.com/indonesia-for-afta-2015.html

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