Politics Stymies closer Indonesia-Taiwan Trade Ties

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LAST December, when Indonesia’s Institute of Sciences (Lipi) released a report suggesting that Jakarta sign an economic cooperation agreement with Taiwan, its lead author urged the government not to worry too much about political obstacles.

“Respecting the one-China policy doesn’t mean defending China’s interests. We do respect the policy, but (we) need to think about the maximum economic benefit that we can obtain from Taiwan,” researcher Elizabeth Adriana told the local media. 

Indonesia has recognised the communist government in Beijing as the sole government of China since 1950. Meanwhile, unofficial relations with Taiwan have improved enormously since the fall of President Suharto in 1998.

But efforts to find ways of forging still closer ties have been marred by a series of diplomatic hiccups. The most serious of these took place in May 2006, when an aircraft carrying then Taiwanese President Chen Shui-bian made an unscheduled refuelling stopover in Batam on the way back from a trip to Latin America.

Currently, Indonesia has a representative office in Taipei focusing on trade, while Taiwan has a similar representation in Jakarta.

The case for some sort of formal economic agreement between Indonesia and Taiwan, however, is persuasive. Despite the lack of formal diplomatic ties, Taiwan is Indonesia’s third largest trading partner and ninth as a foreign direct investment source. Taiwanese investment is also directly responsible for providing employment to about one million Indonesians.

Informal people-to-people links are also strong. Last year, about 212,000 Taiwanese tourists visited the country. There are also an estimated 185,000 Indonesian migrant workers in Taiwan.

The Lipi study argued that an economic cooperation agreement would benefit both sides. Indonesia could provide natural resources and labour, while Taiwan could offer technology and capacity building.

The study said additional Indonesian exports would likely comprise agricultural products and processed foods, textiles, chemical, rubber and plastic products, motor vehicles and parts, electronic equipment and machinery.

Taiwan would also see its exports rise as a result of the elimination of Indonesian import duties, as well as the liberalisation in the service sector and improvements in Customs clearance processes.

Those who support the drive for a free trade agreement can also cite at least two precedents. In 2011, Taiwan and Indonesia signed a memorandum of understanding on manpower placement. The two sides have also agreed on a joint-development project to transform the Indonesian island of Morotai into a Special Economic Zone.

The main impediments to a wider ranging economic agreement are largely political. In recent years Beijing has become more assertive in ensuring that its trading partners adhere to its one-China policy. This has been especially so when cross-strait ties were tense.

But with a new, more Beijing-friendly government now in power in Taiwan, Beijing’s objections may no longer be critical.

The most important hindrance to a free trade pact with Taiwan is domestic opposition. Popular feeling in Indonesia is that few tangible benefits have resulted from such agreements. This is partly the government’s fault. Having signed the Asean-China Free Trade Agreement (ACFTA) in 2002, for example, Jakarta did little to prepare the country for its implementation. The result was widespread local opposition in 2010 when cheap Chinese goods began to flood the local market.

Opportunistic politicians are also to blame. The ACFTA was signed by Indonesian Democratic Party-Struggle (PDI-P) leader Megawati Sukarnoputri when she was president. But this has not stopped PDI-P politicians from criticising President Susilo Bambang Yudhoyono’s administration for implementing it.

Meanwhile, the lack of a comprehensive agreement with Taiwan means that large investments sometimes face unnecessary delays as officials negotiate on a case-by-case basis. In December, Taiwanese electronics giant Foxconn postponed plans to establish a huge manufacturing base in an industrial estate in Banten.

With national elections due next year, however, few politicians are likely to be swayed by such matters.

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Key Political Risks

Asia is the fastest growing region in the world, and is likely to remain so in 2013. However, a number of risks cloud the picture.

The good news is that domestic demand in the region remains strong and should continue to cushion the impact of weaker external demand on overall economic growth. The completion of national elections in Japan and South Korea in December 2012 should also help reduce political uncertainties. 

But Asian governments will need to guard against the adverse impact of prolonged easy financial conditions on inflation.

Rising inequality also continues to threaten social stability. Ethnic and religious rivalries remain just below the surface in many countries. When combined with government corruption and (in some countries) high youth unemployment, this could become a deadly mix. This seems particularly true of China.

Territorial disputes also require close monitoring. Much diplomatic activity in the new year is likely to be centered on finding ways to reduce tensions over resource-rich islands in the South China Sea, where Beijing's claims overlap with those of Japan, Vietnam and other Southeast Asian states. South Korea and Japan also have rival territorial claims.

North Korea remains the wild card. Inclined to believe its own propaganda, Pyongyang's new leadership could miscalculate, making belligerent moves that plunge the region into a military conflict that nobody wants.

About Me

My name is Dr Bruce Gale and I am a senior writer with the Singapore Straits Times. I studied at  LaTrobe University (BA Hons) in Melbourne and later at the Centre for Southeast Asian Studies at Monash University (MA). My PhD thesis, which focussed on Malaysian political economy, was completed at the Malaysian National University (Universiti Kebangsaan Malaysia) in 1987.

From 1988 to 2003 I was Singapore Regional Manager for the Hong Kong based Political and Economic Risk Consultancy (PERC). 

I have written several books and articles on Southeast Asian affairs, including Political Risk and International Business: Case Studies in Southeast Asia (Pelanduk Publications, 2007). Books on language include Mastering Indonesian: a guide to reading Indonesian language newspapers (Pelanduk Publications, 2008)

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