Tariffs tumble – will prices follow?
On Tuesday 10 January the long awaited Free Trade Agreement between Indonesia, Australia and New Zealand comes into effect, slashing tariffs, the contentious taxes added to imports.
Tariffs delight local industries, particularly the sloppy and inefficient wanting protection against smarter overseas manufacturers. But they anger consumers seeking lower prices.
This FTA is hardly racing ahead of the pack. The original documents were signed in February 2009, part of an overall agreement embracing the ten-member Association of Southeast Asian Nations (ASEAN). The changes were expected to come into force on 1 January 2010.
However a further 18 months passed before Indonesia ratified the agreement – the last cab off the rank. Even then the engine may have been running but the gears weren’t engaged.
Last July the director general for international trade cooperation Gusmardi Bustami said he hoped the FTA paperwork could be completed and the deal finalised that year.
His optimism was misplaced, but in the labyrinthine world of trade diplomacy getting real results would test the most skilled and patient. If trade negotiators were developing cellphones we’d still be using housebricks.
Fortunately for NZ its trade minister had an insider’s understanding of Indonesia’s arcane bureaucracy. Before entering Parliament Tim Groser was a diplomat heavily involved in the World Trade Organization. In the mid 1990s he was the NZ ambassador in Jakarta and speaks Indonesian.
Domestic politics, largely driven by the meat industry fearing competition from Australian and NZ beef exporters, are believed to have been behind the delays.
The RI milk industry was also reported to be opposing the FTA. However the rising demand in the archipelago for dairy products seems to have placated local producers who are hard pressed to quench the thirst.
Will Indonesians now be licking ice cream made with milk from cows, not coconuts, and grilling prime Angus T-bones fresh from the lush pastures of the South Pacific? Some, maybe, but even with tariffs down costly steaks will still be off the menu for the majority. They’ll continue to get their protein from locally produced chicken, fish and tempe (soy bean cake).
And will Kiwis be enjoying barbecues lounging on outdoor furniture made in Indonesia? That’s already happening, though business has been constricted by buyers insisting only plantation timber is used.
There’ll be no snappy changes with the FTA. About 11 per cent of NZ goods currently have duty free access to the Republic. That figure will slowly rise to more than 90 per cent by 2015.
Nor will improvements be dramatic. Most tariffs on NZ imports are around five per cent, though ‘prepared foods’ are burdened with a whopping 25 per cent. Which is why your favorite processed cheddar might be handy on the supermarket shelf but still out of reach.
Will prices fall? Only if traders pass on the cuts. The more unscrupulous will argue higher costs absorb the savings.
Although politicians are trumpeting the agreement as a major advance (Mr Groser described it as “a high-quality, regional trade agreement that provides benefits to all of its parties”) Australasia will be the prime beneficiary getting easier access to ASEAN markets – around 625 million people.
Business between the nations currently favors sellers to the Republic. Indonesia is NZ’s ninth largest export market and not surprisingly the biggest in Southeast Asia. Kiwi meat and milk products – worth NZ$ 865 million (US$ 670 million) go to Indonesia. The ships return with goods like petroleum and paper products worth NZ$ 628 million (US$ 490 million.)
Australia’s trade in the region, boosted by mineral sales, is already worth about US$ 100 billion.
Kiwis shopping for archipelagic products need ample time and comfortable shoes, preferably made in Indonesia. A major retailer is importing, but shoes and sandals are seldom promoted by the country of origin. (The exception is Italy.)
Instead they are mixed with footwear from Malaysia, Vietnam and China, the major supplier of consumer products.
Unlike Chinese imports on sale in Indonesia the goods found in stores from Darwin to Invercargill are generally well made and guaranteed for a year or more. Tough consumer protection laws, backed by government departments and the courts, mean customers can return duds and get a rapid refund or smiling exchange.
In Indonesia buyers usually insist boxes are unpacked and devices tested before their eyes prior to purchase. Guarantees, if offered, last only weeks. Retailers in Australia and NZ demand their overseas suppliers maintain strict quality control.
That issue needs to be addressed by Indonesian companies seeking to sell in markets where consumers are kings and queens – and knaves rapidly routed. Slapping thick black varnish on cracked green-timber furniture will give Indonesia the shoddy goods image once held by China.
The Indonesian Embassy in NZ is planning a trade and culture fair later this year to boost business. In the past it has backed displays of batik, a material almost universally associated with Indonesia and widely admired.
However follow-up merchandising hasn’t been effective, raising the question: Are Indonesian exporters serious about building markets in the south?
The problem is that many manufacturers seem happy supplying the domestic market, expanding in number and wallet size, particularly the cashed-up middle classes. NZ has only 4.4 million people, about the number living in Surabaya. Australia’s 22 million is much less than Jabotabek’s 28 million.
By contrast Australasians have to export or perish. That’s made us aggressive sellers and innovative marketers. Tariffs haven’t been the only problem. Although Indonesia is NZ’s nearest Asian neighbor it’s a long haul getting goods to the Republic. In the way is the big southern continent, its major competitor.
Glaciers have melted and species become extinct since free trade talks began, but the agreement removes barriers that for too long have been used as excuses by tardy traders. This should be good news for the public.
Governments have unlocked the gates. Now it’s up to business to push them open.
(First published in The Jakarta Post 10 January 2012)