Newsletter No. 1040
News-Analysis
June 2, 2008

 

The following article was written by David Adam Stott (Shingetsu Member No. 17). Stott is based at The University of Kitakyushu.

JAPAN-INDONESIA ECONOMIC PARTNERSHIP AGREEMENT TAKES EFFECT

After ratification by the Japanese parliament (Diet), and following the exchange of diplomatic notes, it has been confirmed that the Japan-Indonesia Economic Partnership Agreement (JIEPA) will come into force on July 1, 2008. The exchange of diplomatic notes took place in Tokyo on Sunday, June 1, and was attended by Takahiro Wakabayashi, the head of the Economic Cooperation Division of the Japanese Foreign Ministry, and Tulus Budhiant, the Indonesian Trade Attache.

The two countries formally began negotiations on the JIEPA in July 2005, with the intention of reaching a deal by the end of 2006. Taking longer than expected, the pact was finally sealed on August 20, 2007, when Japanese Prime Minister Shinzo Abe and President Susilo Bambang Yudhoyono signed a Memorandum of Understanding during Abe's three day visit to Indonesia.

Despite a decline in recent years, Japanese firms still have more investment tied up in Indonesia than in any other Southeast Asian state. The Indonesian Investment Coordinating Board calculates that between 1967 and 2007 Japanese firms invested some US$40 billion in Indonesia but such inflows have fallen dramatically since 1997. In 2007 Japan ranked fourth in terms of Indonesian foreign direct investment inflows.

The JIEPA promises to redress this reverse and widen cooperation between the two countries. Under its terms, Indonesia is committed to eliminating about 93% of 11,163 tariffs on Japanese goods, with 58% of these to be cut immediately after implementation of the agreement. Japan, for its part, will slash more than 90% of 9,275 tariffs on Indonesian products, with 80% of these set to disappear upon implementation. For Indonesia, the biggest immediate beneficiaries from these tariff cuts will be the automotive, electronics and construction sectors, as there are some 26 new Japan investment undertakings in these industries, most of which expand existing operations and are worth around US$557.5 million.

Whilst the JIEPA also covers other areas such as intellectual property rights, perhaps its most eye catching clause is that Japan will begin accepting some 400 Indonesian nurses and 600 care workers. Indeed, the first group of these professionals could be dispatched as early as July 1, 2008, the first day of the JIEPA's implementation. It has been reported that they will hold special visas for up to three-years for nurses and four-years for care workers. They are expected to learn Japanese during the initial six-month period, and thereafter they will have to acquire Japanese licenses while working in Japan. Those who fail to obtain licenses before their visas expire will be required to leave the country. A test to be taken after two years of employment has also been mooted. A similar provision for nurses and care workers was included in the Japan-Philippines EPA signed in Helsinki on September 9, 2006.

For Tokyo the raison d'etre for the JIEPA was to secure a continued and stable supply of energy. Since the mid-1970s, Indonesia has been the biggest supplier of natural gas to Japan. Indeed, in this period Japan has bought between 50% and 70% of Indonesia's LNG exports. Ironically however, Jakarta has repeatedly stated that, upon expiry in 2010 and 2011, its current contracts with Japanese utilities will be renewed at just a quarter of their present volume, and for shorter terms.

As detailed in Shingetsu Newsletter No. 1004, Jakarta's decision is especially embarrassing for Tokyo given that the JIEPA negotiations have coincided with its so-called ‘New National Energy Strategy,’ adopted in late May 2006. This strategy aims for stronger relations with resource-rich nations at a time of growing competition for energy. Specifically, it targets a greater share in oil imports of oil developed by domestic companies from the present 15% to 40% of total imports by 2030, and aims to improve relations with oil- and gas-producing countries through ODA and trade agreements. Thus, the Japanese government had long urged Jakarta to guarantee LNG supplies as part of the JIEPA. However, despite the two countries agreeing approximately US$4 billion worth of energy projects on the sidelines of the JIEPA signing, the Indonesian government has refused to meet this request.

For Indonesia, the pact provides a framework to encourage Japanese investment in energy development projects. For instance, there is a proposed scheme to build new large-scale coal-fired power stations to further move away from costly oil. No doubt Japanese investment in this massive project will be sought, as per the JIEPA, and Indonesia remains desperate to secure foreign investment.

Moreover, Jakarta hopes that the JIEPA will spur wider foreign investment as if the country is good enough for Japan, with its reputation for high quality manufacturing, it is good enough for other investors too. Nevertheless, there is a suspicion in the Indonesian media that Japan got the better deal in the JIEPA. Such a perception is nothing new as Indonesia has long felt at a disadvantage in its dealings with Japan. This feeling manifests itself in both imports and exports. For instance, domestically it is felt that Japanese goods are dumped in Indonesia to the detriment local industry, whilst Indonesian exporters are prevented from accessing Japanese markets due to powerful informal barriers to trade. As the JIEPA focuses largely on bilateral tariff reductions, some Indonesian business leaders are skeptical that it can be an engine for domestic growth in manufacturing and fear that it will facilitate further dumping of Japanese products on the Indonesian market. Indeed, Indonesia's inability to sell finished goods, such as furniture and food, to Japan has long been a source of bilateral tensions.

Over the coming months, the Shingetsu Institute will be watching closely to see if the JIEPA really does deliver substantive improvements in the bilateral relationship.

COMMENTARY

1) From Eric D. Ramstetter of the International Centre for the Study of East Asian Development on June 2, 2008:

As a supplement to Prof. Stott's newsletter, I thought the information below might be relevant for Shingetsu's consideration. Some of it is a bit out of date (written last Sep-Oct), but most of it is still valid.

THE INDONESIA-JAPAN ECONOMIC PARTNERSHIP AGREEMENT

On 20 August 2007, Indonesian President Yudhoyono and former Japanese Prime Minister Abe signed an Economic Partnership Agreement (EPA) covering trade, investment regulation, technical assistance and labour movements. It is expected to take effect early in 2008. Reflecting Indonesia's importance as a source of Japan's oil and gas imports, the EPA includes provisions to ensure stable energy supplies. Nonetheless, its effects on exports to Japan are likely to be small, primarily because of Japan's low tariffs. Exports of some food products (e.g. bananas, pineapples and shrimp) are possible exceptions. Indonesia also hopes that cooperation from Japan will help improve the quality of Indonesian products and access to Japanese markets. The agreement's effects on Indonesia's imports from Japan are likely to be larger, especially for commodities used as inputs by Japanese firms in Indonesia. For example, Japanese firms are important producers in Indonesia's automobile industry, and hope to benefit from lower tariffs on high-grade steel imports, auto parts and electrical machinery. This is likely to affect local firms little because they produce few competing products. Indonesia is also hoping that the agreement will stimulate Japanese investment in the country, but its direct effects will probably be small, because the agreement does not contain provisions that would fundamentally change the costs of doing business in Indonesia. In this regard, the two governments and Japanese corporate representatives, coordinated by the Jakarta Japan Club, established a High Level Government/Private Sector Joint Forum on Investment in March 2005 to address related issues. The Forum drafted a Strategic Investment Action Plan containing 118 specific measures to improve the investment environment, and its November 2006 evaluation showed that satisfactory progress had been made toward implementing 83 of these. However, some corporate representatives do not evaluate progress as highly as the Forum did. This has important implications for Japanese investment, because potential new investors often gather information on the investment climate in Indonesia from existing Japanese firms. Japan has been a very large donor to Indonesia, and the EPA provides further support for capacity building. Indeed, this is perhaps one of the agreement's most important characteristics. Through the Manufacturing Industrial Development Centre, Japan will provide training for local workers in various fields such as the use and manufacture of dies and moulds. This should be of benefit to local firms (through better access to Japanese supplier networks) and to Japanese firms (through reductions in their procurement costs). Japan has also agreed to help train Indonesian nurses and paramedical helpers (those who assist nurses and medical staff) so that they can obtain licences to practise in Japan. Japan hopes these efforts will help consolidate political relations between the two countries as well.

-- Excerpted from Takii, Sadayuki and Eric D. Ramstetter, 'Survey of Recent Developments,' Bulletin of Indonesian Economic Studies, Vol. 43, No. 3 (December 2007), pp. 295-322 (this information box is on p. 316).