THE IMPLEMENTATION OF TRADE LIBERALIZATION

IN INDONESIA

Dewa K. S. Swastika and Sri Nuryanti

Pusat Analisis Sosial Ekonomi dan Kebijakan Pertanian

Jl. A. Yani No. 70 Bogor 16161

INTRODUCTION

Based on the Agreement on Agriculture of World Trade Organization

(AoA-WTO), all member countries should gradually reduced and phased out any
kind of protection, subsidy, and all non-tariff barriers. Import tariff is allowed and
bounded for each agricultural product. Indonesia is one among other countries
who signed and committed to be bounded in this agreement.
Nevertheless, most of developed countries actually protect their farmers,
through provision of farming subsidy and market support. To some extent, it was
allowed in the AoA-WTO which was designed by the developed countries.
Nowadays, many developing countries have realized that there are some
weaknesses and rooms in the AoA-WTO to be manipulated by the developed
countries. For example, in the period of 1995-2004, the European Union have
given more than 100 billion Euro in terms of producer support estimate (PSE) to
support their agricultural products, and tended to increase by 0.47 percent
annually. Similarly, USA have spent about US$ 68-109 billion annually to support
the marketing of their agricultural products, and tended to grow more rapidly by
4.03 percent per year (OECD, 2005a). All those policies launched by developed
countries were aimed to protect their farmers. Those policies of developed
countries had a negative impact on the competitiveness of agricultural products in
the developing countries, especially due to unfair international trade.
Unlike developed countries, Indonesia has no ability to significantly
provide domestic support to its farmers, neither as included in the Green Box nor
in the Amber Box. Budget limitation in line with long economic crisis has led
Indonesia to reduce even phased-out any kind of subsidy, and reduced price
support that was implemented in 1980s.
This article is aimed to describe the implementation of AoA-WTO in
Indonesia, by utilizing the available secondary data and earlier studies.

THE IMPLEMENTATION OF AoA-WTO

General Agreement on Agriculture
Trade is a very important sub-system in an agribusiness system to success.
It means that farmers should produce efficiently what they can sell. In the
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international market, many countries have bounded in some agreements of World
Trade Organization (WTO), based on Uruguay Round 1994. These agreements
were started applied in January 1995. The agreement on agriculture of WTO
(AoA-WTO) for agricultural products marketing was the most important among
general agreements.
Indonesia is one among other countries who signed those above
agreements, that included in Schedule XXI. The agreements on marketing of
agricultural products (AoA-WTO) consisted of some aspects, such as:
First, tariff reduction for 1,341 agricultural products used Harmonized
System with 9 digits. The simple ad-valorem tariff was about 48.1 percent on
average, and mostly 40 percent. The bounded tariffs of agricultural products were
ranging from 9 percent (cereal flour) up to 210 percent (dairy products = milk and
cream) in package.
Second, quota tariff for rice and milk. The import quota for rice was 70
thousand tons per year during the period of 1995-2004, with the tariff of 90
percent for this quota. Beyond this quota, the tariff was 160 percent. The import
quota of milk was 414.7 thousand tons, with the tariff of 40 percent. Beyond this
quota, the tariff was 210 percent.
Thirdly, the special safeguards (SSG) for 13 products consisted of 12
dairy products (milk, cream, cheese, fat, etc) and clove product. The objective of
this policy is to protect the domestic industry against exploding import. However
it is very difficult for developing countries to take advantage of this facility, due to
complicated procedure to prove that their products need SSG.
Fourthly, export subsidy is registered only for rice with the base outlay
level of US$ 28.35 million, start from US$ 27.67 million in 1995. After then, it
was declining to US$ 21.54 million in 2004. The base quantity was starting from
295,553 tons to 299,750 tons in 1995, and then declined to 275,785 tons in 2004.
Nevertheless, Indonesia was not able to use this facility, due to both
financial constraints and the status of Indonesia as a net importing country. Tariff
is the only instrument that Indonesia can use to protect its agricultural products,
especially rice.

Bounded Tariffs and Their Implementations in Indonesia

Indonesia is one among developing countries that radically liberalized the
marketing of its agricultural products, and reduced import tariffs that actually
already low. This policy was taken mainly due to pressure from IMF/World Bank,
since Indonesia requested this body to assist Indonesia to overcome the monetary
crisis in 1998. The Trade Policy Review Mechanism (TPRM, 2003), cited by
Sawit (2003), reported that there were increasing number of “declining tariffs” in
Indonesian agriculture during 1998-2003. In 2003, about 83 percent of tariff lines
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with the rates of 0-10 percent; about 15 percent in the range of 15-20 percent;
about 0.5 percent with the range of 15-30 percent; and only 1 percent have the rate
above 30 percent.
Indonesia imposed specific tariff for rice and sugar at a very low rate
compared to bounded tariff. Although Indonesia did not apply for specific tariff on
AoA-WTO, however, it is much easier to implement in order to prevent the
country from rice smuggling. Among other agricultural products, over quantity
and untimely import of soybeans as well as domestic price deterioration have got
high attentions of many institutions, mainly the government of Indonesia.
Simatupang (2004) and Sawit et al. (2005), have proposed Indonesian soybeans to
be grouped into special product (SP) and special safeguard mechanism (SSM),
together with rice, sugar, and maize. This proposal was aimed to enable Indonesia
to temporary protect its farmers against over quantity and untimely imports of
soybeans. Import monopoly of soybeans and soybean meal given to Bulog
followed by high tariff in 1980s, for example, have successfully stabilized
domestic prices of soybeans, soybeans meal, and feed, thus livestock industry was
well developed with the low risk (Ismet et al., 1996).
Since the end of 1980s, many deregulations were launched by the
government of Indonesia. Many trade barriers were gradually reduced, even some
were eliminated. Import monopoly on soybeans for Bulog was phased out in 1991.
Some private companies were allowed to import soybeans and soybeans meal with
the tariffs of 5 percent and 40 percent, respectively. This policy indicated that
Indonesia has liberalized the trade of agricultural products.
As generally happen in most of developing countries, Indonesia applied
tariffs much lower than what were bounded in the AoA-WTO agreement. For
example, the applied specific tariffs for rice and sugar were Rp 430/kg and Rp
700/kg, respectively, which were about 30 percent and 60 percent of ad-valorem
bounded tariffs. Meanwhile, the tariffs for other commodities were much lower
than these two commodities. Soybeans and milk bounded tariffs were 27 percent
and 210 percent in terms of ad-valorem, while their implementation were only 0
percent and 5 percent, respectively (Sawit, 2005). Therefore, Indonesia often
called as the most open country for agricultural products (Mageira, 2002 cited by
Sawit, 2005). Table 1 shows the bounded and implementation of tariffs for some
agricultural products for the last ten years period.
As shown in Table 1, that the applied tariffs of almost all agricultural
products were much lower than what were bounded in the AoA-WTO. Even some
commodities have no tariff. The low tariff policy has encouraged the high flow of
agricultural products from other countries to Indonesia. As a result, the prices of
imported agricultural commodities mostly lower than what they supposed to be.
Another impact is that the prices of imported commodities were lower than the
domestic one. It implies that the competitiveness of domestically produced
agricultural products will be relatively lower.

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Table 1. The Bounded and Applied Tariffs of Agricultural Products in Indonesia, 1994-
2004

Bounded Applied Tariffs in Indonesia (in % or Rp/kg)

Commodity
(1995) 1994 1996 1998 2000/01 2002/04
Rice 160 0 0 0 Rp 430 Rp 430
White Sugar 95 10 0 0 25 Rp 700
Milk/products 210 5 5 5 5 5
Soybeans 27 0 0 0 0 0
Corn 40 0 0 0 0 0
Wheat 18 0 0 0 0 0
Meats 50 5 5 5 5 5
Source: DGCE, Indonesian Custom Tariff Book, various years.

Trade Policy of AoA-WTO

In the International trade of agricultural products, all WTO member
countries have to follow the Agreements on Agriculture (AoA). There are three
basic pillars of AoA-WTO, namely: market access, domestic support, and export
subsidy.
Market Access is dealing with the importance of trade barrier reduction.
All trade barriers (ordinary custom) tariff and non-tariff barrier should be
converted into tariff, thus easier to measure and control. However, most of
developed countries applied high bound tariffs, while developing countries applied
the lower tariffs. Therefore, the tariff differences and their escalations for
processed (manufactured) products could hamper the trade of agricultural
products.
Domestic Supports enable member countries to provide support for their
farmers in order to encourage more production and increasing their export.
However, there are certain limitations to prevent market from trade distortion. The
domestic supports can be grouped into Green Box, Blue Box and Amber Box.
Domestic supports included in the Green Box are any support that do not have or
have minimum impacts on trade distortion. These supports including: research and
development (R&D), plant protection, extension, and marketing services. These
supports should be funded by government budget without burden to consumers in
terms of higher price.
Indonesia implemented two kinds of domestic supports (DS) that can be
grouped into Green Box and Amber Box. The DS included in the Green Box and
exempted from reduction are public services, food stock, domestic food aid for the
poor, direct payment to producer, income insurance and social safety network,
support for the case of emergency, supports for environment, and local support
(Sawit, 2005).

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 Amber Box is any subsidy that could make market distortion, and
therefore hamper international trade. In this category, there should be a reduction
in subsidy, including the difference between domestic and world price, and direct
payment to producers. But the exemption of subsidy should not more than 10
percent, so called de minimis. In other words, Indonesia is allowed to provide
subsidy in terms of price support, fertilizer subsidy, or seed subsidy, as long as
those subsidies are not exceed 10 percent of the product value per year.
Export subsidy is dealing with export subsidy reduction and ban. Because
this policy will definitely create world market distortion, except for the
commodities that included in the list of commitment. For the commodities that are
listed in the commitment, the country should reduce budget for subsidy and the
number of subsidized export commodities. The developed countries agree to
reduce the number of subsidized export commodities by 24 percent within 6 years,
while the developing countries by 14 percent within 10 years (Solagral, 2001).
During the 6 years implementation of tariff reduction commitment, the developing
countries, for certain condition, are allowed to use their subsidy to reduce export
cost. The reduction of export cost is an important strategy of developing countries
to create an international trade balance between developed and developing
countries in the global market.
The changes in the three pillars of AoA-WTO will affect the international
trade and domestic trade of agricultural products, in terms of production,
processing, marketing and consumption. A broader market access is actually a
better opportunity for Indonesia to increase the export of agricultural products.
However, this opportunity is not optimally utilized, due to many constraints.
The progress is that developed countries have utilized the three pillars of
AoA-WTO to legalize some forms of subsidies for their rich farmers. These
domestic supports and export subsidy given by developed countries have made
worse the competitiveness of the same commodities produced by developing
countries. The situation became worse, since the developed countries provided
some protections in terms of market access, such as tariff escalation, and some
non-tariff barriers. The developed countries make use these supports to expand the
marketing of their agricultural products, thus it created an unbalance international
trade.
The developed countries who are members of Organization for Economic
Cooperation and Development (OECD), provided some forms of domestic
supports, and tended to increase annually. There are at least three indicators of
domestic support given by OECD to their farmers, namely: (i) Nominal Protection
Coefficient for Producer (NPCp); (ii) Nominal Assistance Coefficient for Producer
(NACp); and (iii) Producer Support Estimate (PSE).
The NPCp is the ratio between actual price received by producer (farm
gate price) and import parity price (border price evaluated at farm gate). The
greater the coefficient the greater is the difference between domestic and world
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prices. The NACp is the ratio between actual output values received by farmers
(included support) and output value at the world price (without support). On the
other hands, PSE reflects the protection rate given to farmers, relative to actual
value of products at farm level. PSE is commonly used as an indicator of
protection comparison inter-countries, inter-commodities, and inter-temporal.
Table 2, Table 3, and Table 4, show the examples of NPCp, NACp, and PSE on
soybeans in some OECD countries.

The Nominal Protection Coefficient for Producer (Soybeans Case)

As presented in Table 2, that the aggregate NPCp for soybeans in the
OECD countries slightly declined from 1.96 before AoA-WTO (1986-1996) to
1.91 after AoA-WTO (1997-2004). It means that soybean farmers in these
countries received protection about 96 percent before AoA-WTO and 91 percent
after AoA-WTO. Switzerland, European Union, Japan and Slovakia reduced their
protection to soybean farmers, while South Korea, Turkey, USA, and Poland
increased their protection after AoA-WTO.

Table 2. The Nominal Protection Coefficient for Producer (Soybeans Case) in some
OECD countries, 1986 – 2004

Period 1986-1996 1997-2004

Growth Growth
Countries Average Average
(%/year) (%/year)

Switzerland 6.04 -3.79 3.75 -2.95

South Korea 5.92 5.54 8.07 5.72
European Union 1.83 -12.98 1.00 -0.02
Japan 1.73 -11.81 1.65 3.73
Slovakia 1.27 -7.91 0.80 1.32
Turki 1.25 1.26 1.40 -3.30
USA 1.00 -0.12 1.12 -0.83
Polandia 0.48 -19.64 1.10 8.94
OECD 1.96 -3.83 1.91 1.18
Source: OECD, 2005a. (Computed).

Switzerland and South Korea had NPCp higher than that of aggregate
OECD in both period. Before AoA-WTO, Switzerland gave the highest protection,
while after AoA-WTO South Korea gave the highest protection to their soybeans
farmers. The interesting case was that after AoA-WTO, soybeans farmers in
Slovakia got 20 percent protection from their government.
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The Nominal Assistance Coefficient to Producer (Soybeans Case)
The aggregate NACp of OECD countries for soybeans farmers slightly
increased from 2.19 before AoA-WTO to 2.33 after AoA-WTO, meaning that
farmers in these countries got revenue from soybeans 119 percent and 133 percent
higher than its parity, respectively, before and after AoA-WTO. Before AoA-
WTO, four countries (Switzerland, South Korea, European Union, and Japan) had
NACp higher than that of aggregate OECD, while after AoA-WTO, only
Switzerland and South Korea had NACp higher than that of aggregate OECD.
Before AoA-WTO, soybeans farmers in Poland got revenue from
soybeans 46 percent less that its parity, while after AoA-WTO, they got 16 percent
higher than its parity. In contrast, Slovakia got assistance 39 percent before AoA-
WTO and -4 percent after AoA-WTO, as presented in Table 3.

Table 3. The Nominal Assistance Coefficient for Producer (Soybeans Case) in some
OECD countries, 1986 – 2004

Period 1986-1996 1997-2004

Growth Growth
Countries Average Average
(%/year) (%/year)
Switzerland 6.53 -2.14 6.31 3.79
South Korea 6.06 5.88 8.39 6.15
European Union 2.54 -2.78 1.83 -1.86
Japan 2.32 -13.62 2.06 2.95
Slovakia 1.39 -9.30 0.96 1.09
Turkey 1.38 1.03 1.47 -4.76
USA 1.07 -0.25 1.25 1.53
Poland 0.54 -26.04 1.16 7.68
OECD 2.19 -4.51 2.33 2.00
Source: OECD, 2005a. (Computed).

The Producer Support Estimate (Soybean Case)

The total support given to soybeans farmers in OECD countries were
30.04 and 30.08, respectively, before and after AoA-WTO. It means that soybeans
farmers received protection about 30 percent, relative to actual value of product at
farm level. In other words, every US$ 100 of output value received by farmers in
OECD countries, US$ 30 is the transfer payment (as a protection). It could come
from price support, payment based on output, payment based on area planted,
payment based on input use, etc (OECD, 2005b). The details of producer support
estimates are presented in Table 4.
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Table 4. The Producer Support Estimate in some OECD countries (Soybeans Case), 1986-
2004

Period 1986-1996 1997-2004

Average Growth Average Growth
Countries (%) (%/year) (%) (%/year)
Switzerland 84.22 -0.39 83.64 0.88
South Korea 82.84 1.23 87.29 1.11
European Union 58.83 -1.91 45.25 -2.39
Japan 46.34 -13.35 50.44 2.74
Turkey 26.19 5.48 30.61 -11.80
Mexico 18.04 3.13 24.25 9.97
Canada 10.68 -8.94 14.20 15.06
USA 6.70 -3.57 19.14 12.42
OECD 30.04 -4.25 30.08 0.96
Source: OECD, 2005a. (Computed).

Before AoA-WTO, the OECD countries whose provided supports exceed

the aggregate OECD were Switzerland (84%), South Korea (83%), European
Union (59%) and Japan (46%). After AoA-WTO, most of OECD countries
increased support to their farmers. It indicated by the change in growth of support
from -4.25 percent per year before AoA-WTO to about 0.96 percent per year after
AoA-WTO. Turkey jointed the above four countries to give more protection to
their soybean farmers.

THE IMPACTS OF TRADE LIBERALIZATION ON INDONESIAN

AGRICULTURAL TRADE

The trade liberalization in agriculture, that has been design in the form of
AoA-WTO, was initially aimed to accelerate the economic development of
developing countries through international trade of agricultural products.
However, the fact is that the imports of agricultural products from developed
countries to developing countries were steadily increasing. On the other hands, the
exports of agricultural products from developing countries were declining. This
situation has made worse the economic development of developing countries.
Poverty and hunger in developing countries remain unchanged, even in some
countries are increasing. At the same time, budget constraints along with
increasing foreign debts have worsen the efforts of poverty alleviation, food
security programs, and rural development in developing countries. This negative
impact of trade liberalization and foreign debts was also happen in Indonesia
(Sawit and Rusastra, 2005).

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 Due to protection and subsidy given by developed countries to their
agricultural products, they sold their agricultural products (about 80% food) to
world market at a low price, so that the price of food in the world market remain
distorted, and tended to decline, especially rice, maize, soybeans, sugar, wheat,
and meat. The faster is price declining the higher is support given by developed
countries to their farmers. This support had a negative impact on the poor farmers
who produce food, since they could not compete in both international and
domestic markets.
The following discussion describes the growths of wholesaler real prices
of five food commodities in Indonesia during the period of 1998-2005. As
presented in Table 5, the growths of real prices of three food commodities were
negative. The real prices of soybeans, rice and milk grew at the rates of -1.87
percent, -2.18 percent, and -0.94 percent, respectively.

Table 5. The Trend of Wholesalers Real Prices of Five Food Commodities, 1998-2004

Agricultural Products
Year
Soybeans Maize Rice Sugar Milk
1998 1,703 395 814 957 5,905
1999 1,229 526 992 1,025 6,108
2000 1,084 493 807 1,098 5,642
2001 1,042 504 779 1,246 5,198
2002 991 499 844 1,071 4,926
2003 1,080 551 900 1,327 5,349
2004 1,012 486 699 1,049 4,332
Growth
-1.87 2.58 -2.18 2.73 -0.94
(%/year)
*) Real price = nominal price deflated by CPI 1996.
Source: Wholesalers Price Statistics, 1996-2005 (CAS).

If the production cost of these three commodities in Indonesia

continuously increasing, while their prices are declining, then farmers will be
suffering. The situation will be worsen if the import of same commodities are
increasing. The main producers of soybeans and milk are the strong developed
countries, such as USA and Australia. They give a high protection for their
soybeans and dairy cattle farmers. Internally, Indonesian soybeans and dairy
production are less efficient. Therefore, Indonesia will never be able to compete
with this two countries in producing soybeans and milk.
Rice in Indonesia is not just a staple food for more than 95 percent of the
population, but it is also a strategic political commodity. The dependency on
imported rice will hamper food security as well as economic and political stability.
Therefore, there should be some incentives for Indonesian farmers to produce
more rice, in order to be able to develop sustainable food security.

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 Husein Sawit and Rusastra (2005) suggested some strategic policies, such
as: (a) Increasing the frontier of production through development and promotion
of new high yielding varieties; (b) Improvement of farm management through
empowerment of extension services; (c) Improvement of global trade policy with
more orientation to the need of developing countries; (d) Improvement of policy
on domestic marketing system for food commodity through improvement of
institution and infrastructure facilities. The implementation of these policies are
expected to have a significant impact on the willingness of farmers to adopt new
technology. Finally the adoption of new technology is expected to be able to
increase productivity and farmers income.

CONCLUDING REMARKS

An unfair international trade performed by rich developed countries has

worsen the competitiveness of agricultural products in developing countries. As
WTO member, Indonesia has been liberalizing its market, so do other developing
countries. The applied import tariffs much lower than what have been bounded in
the WTO agreement. On the other hands, developed countries supported their
producer and restricted developing countries market access.
To compete with supported products in international market, Indonesia
should maximizes the domestic support pillar of Ana-WTO. The most important
elements of domestic support for facilitating farmers is general services.
Indonesian agricultural is still weak and poorly managed. Improvement in post
harvest technology and marketing of agricultural products by providing post
harvest equipments, micro financing, and infrastructure are urgently needed to
establish.
In Indonesia, soybeans is one among other imported food commodities.
Real price of soybeans grew negatively. It has no incentive for farmers to produce,
sell, and compete, even in domestic market. Similarly to soybeans, rice and milk
are increasingly imported. To reduce the dependency on food import, some
strategic policies are needed, such as: (a) Increasing the frontier of production
through development and promotion of new high yielding varieties; (b)
Improvement of farm management through empowerment of extension services;
(c) Improvement of global trade policy with more orientation to the internal need;
(d) Improvement of policy on domestic market through improvement of institution
and infrastructure facilities.

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