Indonesia has introduced import duties on goods, primarily from China, to protect domestic industries from unfair competition. However, the drastic measure may backfire, particularly in an interconnected global economy.

In recent weeks, Indonesia’s trade policy has sparked intense debate and concern both domestically and internationally. The government’s decision to impose import duties ranging from 100 percent to a staggering 200 percent on textile goods, primarily from China, has drawn mixed reactions and raised profound questions about its economic and diplomatic ramifications.

The rationale behind this move, articulated by Indonesian Trade Minister Zulkifli Hasan, underscores a desire to shield the domestic textile industry from what has been described as unfair competition stemming from overcapacity in China. This situation, exacerbated by global trade tensions, has flooded Indonesian markets with cheap Chinese textiles, resulting in severe consequences for local manufacturers. Reports cite thousands of job losses and numerous companies shutting down operations, citing an inability to compete against the influx of low-cost imports.

The Indonesian Textile Association (API) has been vocal about the distressing impact, highlighting specific cases like PT Kusumahadi Santosa and PT Pamor Spinning Mills, where thousands of workers were laid off due to market pressures. Such developments underscore a pressing need for government intervention, but the question remains whether steep tariffs are the appropriate remedy.

Luhut Binsar Pandjaitan, Coordinating Minister for Maritime Affairs and Investment, has defended the tariffs as part of broader safeguard measures aimed at protecting various industries beyond textiles. This move is framed not as a targeted assault on Chinese goods alone but rather as a strategic defense mechanism against a broader range of imported products from various countries including ceramics, cosmetics, electronics, footwear, and apparel.

This statement aligns with Zulkifli Hasan’s clarification that the supplementary import tariff may vary, ranging from 50 percent to 100 percent, contingent upon its impact on the local industry. This measure will encompass products such as ceramics, cosmetics, electronics, footwear, and apparel—all subject to careful monitoring.

However, critics argue that such a drastic measure risks backfiring, particularly in an interconnected global economy. Virdika Rizki Utama from PARA Syndicate points out that high tariffs, particularly if perceived as discriminatory towards China, could invite retaliatory measures and strain diplomatic relations. This potential fallout extends beyond economics to the geopolitical arena, potentially isolating Indonesia and undermining its position in global trade dynamics.

Moreover, concerns raised also emphasise the broader socio-economic implications. The burden of increased prices, particularly felt by lower-income households, threatens to widen economic disparities within Indonesian society. This, coupled with potential diplomatic repercussions, paints a bleak picture of the unintended consequences of protectionist measures.

Following Virdika’s perspective, economist Faisal Basri similarly opposes what he views as discriminatory practices, particularly when targeted at Chinese products. Basri suggests that imposing high tariffs is justified only in cases where a country is found to be engaging in dumping. He emphasises the importance of governments applying countervailing duties to counteract subsidies provided by exporting nations.

Beyond Protectionism: Strategic Considerations

Apart from the benefits gained from Chinese investment, there are intriguing strategic maneuvers at play between the Indonesian and Chinese governments. The imposition of import duties of up to 200 percent on Chinese products can be viewed as a tactic to appease local textile business interests and possibly to incentivise Chinese investors eyeing Indonesia’s textile sector.

Recently, attention has shifted to Chinese investments in Indonesia’s textile industry following remarks by Coordinating Minister Luhut Binsar Pandjaitan regarding discussions with Chinese garment and textile investors. Luhut revealed proposals for new factories in Kertajati, Majalengka, near the BYD factory, with the potential to employ up to 108,000 workers, offering housing benefits as well.

Deputy for Investment and Mining Coordination at the Coordinating Ministry for Maritime Affairs and Investment, Septian Hario Seto, further highlighted plans by 11 prominent foreign investors, including Chinese entities, to establish textile factories across Subang, Karawang, Brebes, Solo, and Sukoharjo. These investments span the entire textile production chain, from midstream to upstream processes, promising to bolster Indonesia’s export capabilities while integrating into global supply chains.

It’s noteworthy that while specific companies have not been named, investment plans have been actively pursued since Seto’s visit in March 2024. The plan to impose high tariffs on Chinese textile products could be viewed as Indonesia’s strategic intent to attract foreign investments, particularly from China.

The connection lies in the policy that products resulting from Chinese investments in textiles are categorised as local goods and exempted from import duties. Consequently, this policy may lead to a slight reduction in imported textile products from China. However, it’s important to note that the local textile market would remain predominantly controlled by Chinese companies, maintaining their influence over domestic production and market dynamics.

Balancing Act for Indonesia’s Economic Future

Critically, while positioning China as a key investor, Indonesia must navigate a delicate balance. The government must grasp the significant risk posed by implementing this policy, especially if the increase reaches 200 percent. While imposing import duties on imported products serves as a precautionary measure to safeguard the local textile industry, setting such a high tariff is imprudent.

This move could precipitate adverse consequences, including retaliatory measures. Moreover, Indonesia has increasingly relied on China as its primary trading partner in recent years. Should China retaliate, Indonesia would sustain a severe economic setback that could reverberate not only within the textile industry but also potentially extend to other sectors, thereby harming the ties between both nations.

As Indonesia proceeds, a cautious approach is paramount. While safeguarding domestic industries is crucial, policy decisions must be underpinned by rigorous analysis of their economic and diplomatic implications. Collaborative measures such as countervailing duties and enhanced quality controls can offer a more nuanced approach to supporting local industries without unduly disrupting global trade relationships.

In conclusion, Indonesia stands at a pivotal juncture where strategic decisions will shape its economic trajectory for years to come. By fostering a conducive environment for both local and foreign investments, while maintaining an open dialogue with global partners, Indonesia can aspire to achieve sustainable economic growth and ensure inclusive prosperity for its citizens. The path forward demands foresight, pragmatism, and a steadfast commitment to navigating the complexities of a rapidly evolving global economy.

Dr. Muhammad Zulfikar Rakhmat is a researcher at the Center of Economic and Law Studies. His research focuses on China-Indonesia-Middle East relations.

Yeta Purnama is a researcher at the Center of Economic and Law Studies.

This article is published under a Creative Commons License and may be republished with attribution.