Indonesia’s New Trade Law Scares Foreign Investors & Traders

By Brian Kraft

Source: jorien@london's flickr photostream, used under a creative commons license.

Workers load a vessel in Jakarta’s port. Source: jorien@london’s flickr photostream, used under a creative commons license.

The Indonesian parliament on February 11 passed a new and ambiguous trade law that is likely to frighten current investors and deter future ones. The legislation—Indonesia’s first trade law since a 1935 Dutch ordinance—grants the state far-reaching control of imports and exports, and is intended to develop downstream production and boost high-value domestic industries.

The important potential value of finally having a comprehensive trade law in place is undercut by two critical problems. First, it is written so vaguely that investors cannot interpret what exactly the law will mean for them. Second, it allows the state to change the rules of trade on a whim, with no recourse. Both of these problems will result in investors losing confidence in Indonesia. Some of the biggest concerns by foreign companies about the new law could be resolved when the government drafts implementing regulations.

The new law is the latest in a series of protectionist policies championed by the parliament under the banner of developing domestic value-added industries. On January 12, a ban on exporting raw mineral ores went into effect, sending the mining industry into disarray. Since then, new minerals and concentrates have been added to the ban, further confusing mining firms. Such protectionist measures also signal that Indonesia is not ready to lead the way on regional economic integration.

The biggest trouble with the new trade law is its ambiguity. Multiple articles can be interpreted at the convenience of the Ministry of Trade. For example, article 49.4 says that “the Minister of Trade can propose temporary cuts or additions to imports to enter the country in the interest of national competitiveness,” according to a translation by the American Chamber of Commerce in Jakarta. The words “national competitiveness” are vague enough that the state can use this article as a catch-all to justify the implementation of protectionist regulations.

Many of the law’s articles also grant the government freedom to break contracts. For instance, article 84.1 says, “the government, with approval from the House of Representatives can review or cancel an international trade pact, [the implementation of which] was enforced by laws, for the sake of the national interest.”

The international community is concerned about the recent uptick in protectionism from Jakarta. ASEAN neighbors are wondering how committed Jakarta really is to regional integration under the ASEAN Economic Community due to be implemented in 2015. Japan and China have massive investments in Indonesia and protectionist measures are making them nervous. Japan is considering taking Indonesia to the World Trade Organization (WTO) over the new trade law. Many international observers believe the legislation violates WTO rules.

The Indonesian parliament does not see the law the same way as its neighbors and foreign investors. Lawmakers view it as good policy aimed at adding downstream value and defending economic resources. The trade law gives the Ministry of Trade, the administration, and parliament the legal grounds to enact regulations on an ad-hoc basis, which is perceived as a victory. How harmful this legislation will end up being for investors in Indonesia will depend on the specific regulations enacted to implement this new legal framework.

The parliament is right that Indonesia needs a comprehensive trade law, but the new one enacted is too vague and too sweeping to do much good in the long run. The possibility of ad-hoc protectionist regulations from Jakarta increases risk and scares off investment. Lawmakers need to consider redefining some of the most ambiguous articles in the law so potential investors know the rules by which they will be playing.

Once those rules are properly defined, Jakarta must work hard to protect them. Surprise regulations and reneging on investment contracts is a quick way to scare off future investors. The Indonesian parliament working with economic ministries has an opportunity to draft implementing regulations that make the new trade law clearer and more market-friendly, allowing the country to take the lead on regional economic integration and attract much needed foreign investment.

Mr. Brian Kraft is researcher with the Sumitro Chair for Southeast Studies at CSIS.

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