Supply Chain Linkages Across Borders in Asia: Indonesia’s Perspective Andin Hadiyanto

1. Supply Chain Linkages Across Borders in Asia: Indonesia’s Perspective Andin Hadiyanto Director of the Business Climate Research and Development Center Ministry of Trade - Indonesia Fostering Trade through Private-Public Dialogue Expert Meeting on Regional Integration in Asia New Delhi, India, 28-29 March 2007

2. Indonesia Export Competitiveness Indonesia's Non-Oil Exports By Region • Japan and high-growth Asian markets are Indonesia’s best customers • China, India, Malaysia and Thailand markets grew fastest for Indonesian products since 2000, reflecting the global trend of regional trading blocs and production sharing arrangements Export Value ($m) 12,000 2004 10,000 2003 8,000 6,000 4,000 2,000 0 EU25 NAFTA ASEAN Japan China Other EA ROW Indonesia's Non-Oil Export Growth by Region 2000-2004 20% 18.24% 15% 10% 7.39% 4.46% 5% 2.14% 1.00% 0.29% 0% -1.80% -5% EU25 NAFTA ASEAN Japan China Other EA ROW

3. ASEAN Trade and Investment Trade • ASEAN’s trade with the world has grown from US$0.7 to US$1.1 trillion from 2001 to 2005 • Exports grown from US$0.4 to US$0.6 trillion • Imports grown from US$0.3 to US$0.5 trillion • Major ASEAN trading partners are the US, the EU and Japan • Intra-ASEAN trade has grown from US$141 to US$268 billion from 2001 to 2005 • Exports grown from US$77 to US$144 billion • Imports grown from US$64 to US$125 billion • Major intra-ASEAN trading partners are Singapore, Malaysia and Thailand Investment • Total foreign direct investment in ASEAN from the world has grown from US$18.5 to US$25.6 billion from 2001 to 2004 • Increasing investment in ASEAN’s manufacturing sector • Total intra-ASEAN investment has fallen slightly from US$2.5 to US$2.4 billion from 2001 to 2004

4. The Benefits to Indonesia from the Global Supply Chain • Strengthened comparative advantage • Indonesia is able to specialise in a segment of the production chain to cement its place in the global supply chain • Provides greater room for specialisation especially in labour intensive stages of production • Sustainable jobs and exports • Strengthened comparative advantage ensures sustainable and expanding jobs in export industries • Advance up the technology ladder • Move from the specialisation in the existing segment of the production chain to a higher value added segment of the production chain

5. The Benefits to Indonesia from the Global Supply Chain • Impetus for more improved Indonesian infrastructure • Just-in-time production networks necessitates improving the efficiency of production supporting infrastructure • Transport and telecommunications infrastructure • Demand driven infrastructure development • Provides opportunities for Indonesia supplying the global supply chain • Indonesia can develop a segment of the production network to feed into the region production network and then global supply chain • Benefit from globalisation, climbing the technology ladder and gain wider access to international markets • A more integrated and closer to the region (EA/ASEAN) • Production sharing means Indonesia becoming more interdependent on each other with countries in the region • Impetus for more market oriented policies • Renders protectionist, import substitution and anti-foreign investment policies less effective

6. Lessons for Indonesia • To develop diverse products in a timely and cost effective way in response to market demand and to exploit market opportunities • To respond in a timely and cost effective way to the changing demand for components • To continue to improve logistics • Adopt, in a timely and cost effective, the process of controlling the flow and storage of materials, finished goods, services, in response to changing environmental conditions • To improve information technology system to adapt and support changing requirements of the business environment

7. Indonesia’s Way Forward Support to ASEAN Economic Community • Continue to pursue ASEAN’s vision as a single market and production base by 2015 • Strengthens ASEAN’s position in the global supply chain • Deepens specialisation and improves the efficiency of ASEAN’s production base • ASEAN has a number of initiatives to support ASEAN as a single market and production base • Integration for 11 priority sectors • Argo-based products, air travel, automotive products, e-ASEAN, electronics, fisheries, health care, rubber-based products, textiles and apparels, tourism and wood-based products • Cost competitive products represent around 50 per cent of intra-ASEAN trade • ASEAN Investment Area • ASEAN Industrial Cooperation Scheme • ASEAN Single Window

8. Indonesia’s Way Forward A Three-Pronged strategic approach for Investment upgrading • Progressive Improvement in Investment Climates • Mostly regulatory and institutional reform in both general investment climates and infrastructure development. • Infrastructure Policy Package was launched on February 16, 2006 • Investment Policy Package was launched on March 3, 2006 • Ongoing efforts to address corruption and high costs of doing business • Infrastructure Indonesia 2005 – 2006 • Indonesian government held Infrastructure summit twice: the 1st summit was held on 17 – 18 January, 2005 and the 2nd on 1- 3 November 2006. • Indonesia infrastructure Summit and Exhibition is the public and private sector conference initiative of its kind, exclusively dedicated to advancing Indonesia’s infrastructure development projects. • Improving access to financing and cost of financing • Financial Sector Policy Package was launched on July 5, 2006: aims at improving coordination between the Government and the central bank, Bank Indonesia, and to continue reform steps to strengthen the banking industry, non-bank financial institutions and the capital market.

9. Indonesia’s Way Forward New Investment Climate Policy Package • Broadly Covers • General Investment Law and Regulations • Taxation • Customs • SME • Consists both policy and institutional reforms for creating legal certainty, policy consistency and reduce the costs of doing business • Short term measures on deregulation and reducing red tape, and ongoing anti corruption drive

10. Indonesia’s Way Forward Improving Investment Climate • New Investment Law: Just approved by the Parliament in March 2007 • More conducive environment for investment in Indonesia • Equal treatment between foreign and domestic investors • Clear definition of sectors closed/open with condition • Procedures for investment approvals will be streamlined • Protection from nationalization and expropriation • Incentives will be given to new investors for selected sectors (e.g. Pioneer sectors) and regions: Fiscal, Immigration, Access to land etc. • Improvements in trade facilitation measures • National and ASEAN Single Window (one stop service for processing of import and export documents/procedures) • Batam Pilot, 2007 Tanjung Priok • 25 government agencies (collection of documents, standardization) • Transparency of standards

11. Indonesia’s Way Forward Special economic Zones:islands of excellence and best practices • The Government has recently announced plans to develop new special economic zones. These will be located in certain geographical areas to create hubs of economic development. The Government is focusing on specific areas or ‘islands of excellence’ because it is easier to remove supply-side constraints from small geographical areas than the whole economy. • Efficient regulation and licensing will be a crucial part of these new special economic zones. Each zone will have a single zone authority which will provide best practices in terms of services to investors. This will involve the streamlined provision of necessary licenses and permits from the central and local governments to operate in the zones, provide services to resolve problems and provide an efficient supporting administrative services in various areas such as customs, import and export procedures. • The Government is currently working on a criteria to identify viable areas for these zones. Some of the issues under discussion in developing the criteria are areas which already have supporting infrastructure, a cluster of supporting industries and access to inputs of production such as skilled labor.

12. Indonesia’s Way Forward Multi-track strategy in Trade Negotiations Multilateral: World Trade Organization, Doha Development Agenda Regional: • ASEAN Economic Community: goods, services (partial), investment (partial), mutual recognition agreements, customs procedures and ASEAN Single Window by 2008 • ASEAN China Free Trade Agreement (ACFTA): goods, and beginning in services • ASEAN Korea FTA (AKFTA): goods • ASEAN India FTA (still in negotiations) • ASEAN Japan FTA (still in negotiations) • ASEAN Australia New Zealand FTA (AANZFTA) (still in negotiations) Bilateral: • Indonesia Japan Economic Partnership Agreement (IJEPA) - agreement in principle on major elements

13. Summary • Many benefits from trade integration • Generally, increased competitiveness • Major lessons are aimed at improving production efficiency • Diverse products, improve logistics, and improve information technology • ASEAN has some useful initiatives on a way forward • ASEAN EC, 11 Priority Sectors, ASEAN Investment Area, ASEAN Industrial Cooperation • Indonesia has adopted effective reforms to improve investment climate: Regionally and unilaterally

14. Thank You!