An interview with Mari Pangestu, Indonesian Minister of Trade.

Mari Pangestu, Minister of Trade, is in many ways the face of a new Indonesia - a country with a resurgent economy, a diverse and young population, and an increasingly influential voice in the politics of East Asia. Dr. Pangestu, an economist by training and the first female Chinese-Indonesian cabinet minister, has directed the nation’s booming economy since 2004, when she took over as Minister of Trade under the Susilo Yudhoyono government. Against some public opposition, she has forcefully championed the cause of closer economic relationships with India and China, leading negotiations for Free Trade Agreements with both countries.

This month, India and Indonesia began to implement an FTA after several years of difficult negotiations. The FTA will boost an already fast-growing trade relationship between the region’s two biggest democracies. In an interview with The Hindu during a visit to Beijing on October 20, Dr. Pangestu discusses how the two countries can now take forward the strategic partnership envisioned in 2005. Indonesia, she says, “welcomes very much the signal from India” to take ties to a new level by hosting President Yudhoyono as the chief guest at the Republic Day parade. Dr. Pangestu also speaks of what China’s growing economic and political influence means for the region. Excerpts from the interview.

Signing the Free Trade Agreement with India has been a long and difficult road, but it is finally being implemented now. What implications will this have for the trade relationship?

Firstly, we hope to see tariffs come down for market access to India, particularly for a number of agricultural products. For many of your manufacturing products too, the average tariff is still relatively high. We still have five years before the full implementation, so I think we need to focus on where the strengths of India are, and where the strengths of Indonesia, or of ASEAN in general, are.

India is very strong in heavy machinery and equipment, automotive, and IT and IT-based industries and services. If we talk to our business sector and ask which sectors they are worried about in [terms of] competing with India, they usually mention pharmaceuticals and, to some extent, automotives. For automotives, we already have from India TVS and Bajaj investing in Indonesia. We hope companies like Tata will also invest. Taking the example of TVS, which has invested in Indonesia not just for the Indonesian market but with the ASEAN market in mind, that is the kind of investment, moving into the future, that we would like to see.

Indonesia actually runs a trade surplus with India, as opposed to its growing trade deficit with China. How do you contrast Indonesia’s relations with the two countries?

China and India are quite different for us. China can produce many things competitively, and now they are going into services as well. So there is more anxiety in terms of competing with China. I think China definitely recognises that this [anxiety] is not just with Indonesia, but with ASEAN as a whole. What they are increasingly going to do is increase investment in ASEAN countries, including in manufacturing and infrastructure. Right now with Indonesia, most of China’s investment is in resource-based sectors, such as oil and gas, and mining.

With India, our exports to India are pretty much resource-based, such as coal, palm oil and copper ores. We are importing mainly cotton, and some petroleum-based products. So this is mainly commodities. We need to see how we can diversify the product structure. Once you have investments flowing both ways, and greater market access with the FTA, we hope that we will see more manufactured products.

What impact has the FTA with China had on the region? It was ASEAN’s first FTA. There are concerns now of growing trade deficits [$21.6 billion last year] with Chinese goods flooding the market.

What Indonesia has seen is our trade has more than doubled from around $ 13 billion in 2005 to almost $ 30 billion in 2008 before the crisis [India’s trade with Indonesia last year was $ 11 billion]. China has also become our largest source of imports, from about 10 to 12 per cent to around 18 per cent. Similarly with exports, we have seen a rise from 5 per cent to 10 percent. There are a number of factors besides the FTA, but it is an important reason.

We agreed with the Chinese side as to what concrete steps we can take to reduce the anxiety [over the deficit] and potential concerns of some sectors. By and large, both sides agreed there have been benefits, but there are a few sectors facing problems, particularly small and medium enterprises. We hope there will be more investment.

There is going to be an MoU signed today [October 20] between the China EXIM Bank and the Industrial and Commercial Bank of China (ICBC) with the Indonesia EXIM Bank for a $350 million facility to support trade financing and investments. China has proposed a $ 15 billion fund for infrastructure building for ASEAN as a whole. We have to go beyond goods. We have to go to investments and services.

Liberalisation, facilitation, and economic cooperation are very much the three pillars of well-designed regional agreements. We have an economic cooperation working group to ensure that the lesser developed members or certain sectors can be facilitated or supported so that they are not left behind or marginalised.

Some ASEAN countries, particularly those neighbouring China, have voiced concerns in recent months about what they say is China’s increasing assertiveness in the South China Sea. Indonesia, of course, is not a party to the political dispute. But does politics affect the economic relationships?

I don’t think I will comment on political side of it. But basically we don’t see that much influence on economic relations, because economic relations are driven by different factors. There is already a mechanism in place. We have been a dialogue partner with China for almost 14 years already. There is an established forum and an established mechanism. There has to be a willingness to have continued dialogue to resolve any problems.

If you go back to early 2000, the main message from China to the ASEAN countries, and this is the spirit in which the ASEAN-China FTA was born, was the notion of the peaceful rise of China. We will continue to work with China to ensure this is not just a symbolic statement. How do you actually make this peaceful rise work? China needs to reinforce the peaceful rise message by showing, first of all, that its pattern of investments is not just for resource security. That even if it is resource-based, it is increasing value-added, and also increasing availability of resources not just for China’s use, but for the region.

How have the growing economic ties changed the perception of China in Indonesia, given that there is a history of wariness of Chinese influence [particularly after the 1965 attempted coup d’état which was blamed on Indonesian Communists]?

There are anxieties [still] and we have to deal with them. But then on the other hand, Indonesians are getting cheaper hand phones, cheaper laptops, and cheaper capital goods. Some of this could be Chinese brands, some could actually be non-Chinese brands produced in China for lower costs. If you look at the benefit, our consumers are getting lower cost goods. Our producers are getting lower cost capital goods, making production costs cheaper and them more competitive. I think we need to be cautious on how to do deal with the potential negative effects, and that is more to do with the high volume, low cost type of products like low-end garments, shoes, toys.

What are the concrete steps that you think China needs to take to address these concerns?

Increasing investments, ensuring sustainable and balanced trade, and investments in infrastructure are possible areas. What we would also like to see is increased tourism.

Basically, moving ahead, China will have to restructure. China is restructuring and will continue to restructure away from the high-volume, low-cost, labour intensive kind of products because they are experiencing rising labour costs and reduced supply of labour, at least in the coastal areas.

I think the restructuring will happen. If you look at the supply chain, it is much more fragmented and much more complex. It means that countries can specialise within that supply chain. So I think for countries like Indonesia, the question is how do you position yourself within that supply chain? You have to watch what is happening in other countries like China.

As China moves on, it actually opens up a space for us. We shouldn’t stay still. Right now, we are regaining some of our competitiveness for low-cost labour type of production, but we need to keep moving on. We need to have a higher value-added component also being brought to Indonesia. We like to focus more on semi-skilled labour, design capabilities and more research and development. This is already happening. If you look at the relocation of the footwear industry, for instance. They are already relocating some of their design parts of their production to Indonesia, and some of the R &D too. I think that is the direction we go in.

Being the biggest economy in ASEAN, your interests often don’t align with those of smaller countries. For instance, as far as China is concerned, smaller countries have criticised the FTA and growing trade deficits. How does Indonesia balance its interest in pursuing its own independent engagement with China, whether politically or economically, with the interests of ASEAN as a whole?

Being the largest country in ASEAN, I don’t think we have a different line from the other ASEAN countries. All the other ASEAN countries have similar concerns, but maybe the sectors are different, or the issue is different, because every country has a different set up. In the ASEAN context, we are clear that there are some areas of cooperation beyond the ASEAN-China FTA where we would like to see China engage with us, such as technical cooperation and infrastructure building.

What role should a regional mechanism play in negotiating these different relationships?

From an ASEAN perspective, the core is still ASEAN. Now we are in the process of having FTAs with six of our dialogue partners [China, South Korea, Japan, India, Australia and New Zealand]. This is essentially the defined region of East Asia at the East Asia Summit.

There is debate on how we take this to the next stage – whether ASEAN plus three [China, South Korea and Japan] or ASEAN plus six. We sort of see it as it doesn’t matter how you do it, but the question is, how do we consolidate the process? You begin with the basic building blocks, which is the trade in goods. Take the rules of origin, and make this similar for all the FTAs. That is one step in consolidating the FTAs. Let us be pragmatic and take this process of regional integration in a stage by stage way.

Another issue that we talk about in ASEAN - a lot of it is still talk but we need to take this forward - is infrastructure. How do you build infrastructure to connect us better physically? One of the big, ambitious projects is the railroad from Kunming [in China’s southwest Yunnan province] to Singapore. Part of it is already built. For Indonesia, how do we connect the land and rail link to us? We need to develop sea-based transportation means. Connectivity within the region is still not efficient. It makes more economic sense for us to be integrated, and it also reduces the disparities. It will also increase people-to-people connectivity.

Now that the FTA between India and Indonesia is going forward, what is the next step?

I am planning to visit India in mid-December. We are going to have a bilateral meeting with [Commerce] Minister [Anand] Sharma and meetings with CII [the Confederation of Indian Industry]. This will pave the way for the President’s visit [in January]. We want to follow up on the joint study between Indonesia and India. We talked about the potential of the FTA. We now want to socialise this idea. We will brief industry groups about the potential of the FTA, so we can see what the response is from the business sector. We will also do a similar exercise in Indonesia. Preliminarily, the response has been pretty positive. What we are talking about is a top-up from the ASEAN-India FTA, and maybe addressing issues that are not addressed in the AIFTA, including economic cooperation.

Looking ahead to the President’s visit in January, how do the two countries take the strategic relationship forward?

The President’s visit in January is very symbolic, as he is invited as the guest of honour for the Republic Day parade. We understand India does not offer that to many countries. We welcome very much the signal from India to Indonesia. Obviously, we have a very long and historic relationship.

We now also have a strategic partnership, which we have not really taken forward and which we really need to take to the next stage. We need to ask, what do we do with the strategic partnership and our desire to be much more closely related? On the economic side, it is obviously trade and investment. I think tourism is another big area. We are also developing our creative industries. We know that India is quite progressive in IT, content industries, film, music and anything that is culture-based. So I think there is a lot that we can develop together.

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