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i APINDO Policy Series This project is co-funded by the European Union ACTIVE (Advancing Indonesia’s Civil

APINDO Policy Series

This project is co-funded by the European Union

ACTIVE (Advancing Indonesia’s Civil Society in Trade and Investment Climate)

Indonesia’s Civil Society in Trade and Investment Climate) APINDO Policy Series Vol. P.001/DPN-EUKAJ-I/2014 In Facing

APINDO Policy Series Vol. P.001/DPN-EUKAJ-I/2014

In Facing the Indonesia-European Union Comprehensive Economic Partnership Agreement:

Union Comprehensive Economic Partnership Agreement: Perspective from Indonesia’s Business Sector Riandy

Perspective from Indonesia’s Business Sector

Economic Partnership Agreement: Perspective from Indonesia’s Business Sector Riandy Laksono Rosa Situmorang
Economic Partnership Agreement: Perspective from Indonesia’s Business Sector Riandy Laksono Rosa Situmorang

Riandy LaksonoUnion Comprehensive Economic Partnership Agreement: Perspective from Indonesia’s Business Sector Rosa Situmorang

Rosa SitumorangUnion Comprehensive Economic Partnership Agreement: Perspective from Indonesia’s Business Sector Riandy Laksono


APINDO Policy Series

In Facing the Indonesia-European Union Comprehensive Economic Partnership Agreement:

Perspective from Indonesia’s Business Sector

the Indonesia-European Union Comprehensive Economic Partnership Agreement: Perspective from Indonesia’s Business Sector
the Indonesia-European Union Comprehensive Economic Partnership Agreement: Perspective from Indonesia’s Business Sector




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Dewan Redaksi

: Sofyan Wanandi

: Chris Kanter Suryadi Sasmita Anthony Hilman

Pemimpin Redaksi : P. Agung Pambudhi

Tim Penyusun

: Diana M. Savitri Riandy Laksono Rosa Situmorang Made Astri Karniani Adrinaldi Wahyu Handoko


: Communication Division


: Chandra K. Putra

APINDO-EU ACTIVE Project Team Members:

Barliana Amin (Advisor) Maya Safira (Project Manager) Riandy Laksono (Lead Economist) Rosa Situmorang (Economist) Daniel P. Purba (Public Affairs & Media Officer) Muryenthi Ambarsari (Project Assistant)


A PINDO-EU ACTIVE working papers are issued in joint cooperation between Indonesia Employer Association

(APINDO) and Advancing Indonesia’s Civil Society in Trade and Investment (ACTIVE), a project co-funded by the European Union. ACTIVE project aims to strengthen APINDO’s policy making advocacy capabilities in preparing the business environment and to empower national competitiveness in facing global integration.

For more information, please contact ACTIVE Team at or visit


The content of APINDO-EU ACTIVE working papers is the sole responsibility of the author(s) and can in no way be taken to reflect the views of Indonesia Employers Association (APINDO) or its partner institutions. APINDO-EU ACTIVE working papers are preliminary documents posted on the APINDO website ( and widely circulated to stimulate discussion and critical comment.


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S ince 2009 Indonesia and The European Union have been doing several assessments on the proposed Comprehensive Economic Partnership Agreement (CEPA) between Indonesia and The

EU. The CEPA is convinced to strengthen bilateral trade and investment with its triangular architecture which involves market access, capacity building, and facilitation of trade and investment. It is also believed to create a strong mutual benefit for both parties through increased trade volume, enhanced EU’s investment in Indonesia, and the establishment of capacity building. Despite the overall positive outlook of the Indonesia-EU CEPA, the government as well as private sectors in Indonesia worry that as the level of development between EU and Indonesia differs significantly, the benefit of CEPA will be more likely bias towards the EU side, while Indonesia will be the one bearing most of the adjustment cost.

As an official partner of the GoI, APINDO holds a credential position representing the private sectors to actively assist the government in forming effective economic policies. This policy recommendation sets down a grand mechanism on how to optimize the benefit and minimize the potential adjustment cost coming from the proposed Indonesia-EU CEPA on the perspective of business communities. This paper looks into several relevant aspects, such as tariff, non-tariff measures, services, investment, trade defense, agriculture subsidy, public procurement, IPR, and competition law. It provides suggestion not only on how liberal the Indonesia should be opened up to EU, but also in what aspects Indonesia might push the EU’s trade policy to be more accommodative and less-restrictive in the pursuit of mutually beneficial Indonesia-EU CEPA.

Overall, we convey our appreciation to APINDO – EU ACTIVE Team who has successfully delivered this policy paper and we would like to thank Riandy Laksono and Rosa Situmorang for conducting the study. We hope our policy recommendation will contribute a significant input in moving forward the Indonesia – EU CEPA negotiations.

Sofjan Wanandi

Chris Kanter

General Chairman

Vice Chairman

Indonesian Employers Association(APINDO)

Indonesian Employers Association(APINDO)


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Agreement on Agriculture


ASEAN-China Free Trade Area


Advancing Indonesia’s Civil Society in Trade and Investment


Anti-Dumping Agreement


Asian Development Bank


ASEAN Economic Community


Common Agriculture Policy


Comprehensive Economic Partnership Agreement


European Agricultural Fund for Rural Development


European Agricultural Guarantee Fund


European Union-Indonesia Business Network


Export Quality Infrastructure


European Union


Foreign Direct Investment


Free Trade Area


General Agreement on Trade in Services


General Agreement on Trades and Tariffs


Gross Domestic Product


Government of Indonesia


Generalized System of Preference


International Labour Organization


Intellectual Property Rights


International Standards Organization


Indonesia Sustainable Palm Oil


Most Favored Nation


Mutual Recognition Agreement


Non-Governmental Organization


Non-Tariff Measures


Organization for Economic Co-operation and Development


Renewable Energy Directive


Roundtable Sustainable Palm Oil


Small and Medium Enterprises


Sanitary and Phytosanitary


Technical Barriers to Trade


United Nations Conference on Trade and Development


United Nations World Trade Organization


Vocational Education and Training


World Trade Organizations


World Travel and Tourism Council


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List of Abbreviations




List of Figures


List of Tables




A. Introduction


B. Indonesia-EU Comprehensive Economic Partnership Agreement:

Basic Features and The Role of Indonesia’s Business Sector


C. Key Issues on Indonesia – EU CEPA: Perspective of Business Sectors


C.1. Market Access of Trade in Goods


C.2. Market Access on Services


C.3. Reinforcing EU Investment


C.4. Ensuring Fair and Competitive Trade under Indonesia-EU CEPA:

Trade Defence Measures and Agriculture Policy


C.5. Other CEPA Elements: Public Procurement, Competition Policy, and IPR Public Procurement


D. Concluding Remarks







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Figure 1. UNCTAD Classification of Non-Tariff Measures Figure 2. The Extensiveness of SPS and TBT Measures by Sector in European Union



Figure 3. Indonesia’s Trade on Services Balance




Table 1.

Existing and On-Going FTA Agreement in Indonesia and European Union


Table 2.

Key Issues of Services


Table 3.

Indonesia Statistics of FDI Realization (in USD million)


Table 4.

Provisions on Investment Agreement


Table 5.

Goods Originating from Indonesia which are subject to Anti-Dumping and Anti-Subsidy Measures in EU


Table 6.

The Development of EU Common Agricultural Policy (CAP)



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In Facing the Indonesia – European Union Comprehensive Economic Partnership Agreement:

Perspective from Indonesia’s Business Sector

By: R. Laksono & R. Situmorang


In a dynamic global economic landscape like nowadays, the open economic policy regime has gained increasing popularity among policy makers in both developed as well as developing countries. As the multilateral negotiation through WTO is still somewhat stalling, countries seeking to expand businesses abroad increasingly seek for regional and bilateral economic partnership agreement, if not free trade agreement (FTA). This study is an attempt to identify the key policy issues of the proposed Indonesia-EU CEPA and serves as a recommendation for the government on how to best deal with the Indonesia-EU CEPA negotiation, particularly from the perspective of private sectors. In doing so, this paper looks into several relevant aspects, such as tariff, non-tariff measures, trade in services, investment, trade defence, agriculture subsidy, public procurement, IPR, and competition law. It mostly contains of general recommendation on the best position the Indonesian government should take in the negotiation process of Indonesia-EU CEPA. It provides suggestion not only on how liberal the Indonesia should be opened up to EU, but also in what aspects Indonesia might push the EU’s trade policy to be more accommodative and less-restrictive in the pursuit of mutually beneficial Indonesia-EU CEPA.

Keywords: Free Trade Agreement, Comprehensive Economic Partnership Agreement, European Union, Indonesia, Trade, Investment, private sectors.

A. Introduction

I n a dynamics global economic landscape, like nowadays, the open economic policy regime has gained increasing popularity among the policy makers in both developed as well as developing countries. There is a belief that open market can enhance local

competitiveness, spur innovation, promote higher

growth, create more jobs, and even reduce poverty through more productive activities. As the multilateral negotiation through the WTO is still somewhat stalling, countries seeking to expand businesses abroad increasingly seek for regional and bilateral economic partnership agreement, if not free trade agreement (FTA).

Indonesia and European Union are among the countries, which are being very actively engaged in numerous FTA


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negotiations. According to ADB data (ARIC ADB 2013), Indonesia has 22 FTAs (and CEPA) which is already signed or at least under negotiation and consultation. Most of the Indonesia’s FTA is done between its Asian partners and to some extent reflecting the dynamism of private sector in response to the new international division of labor happening very extensively in East Asia recently, i.e. the 2nd unbundling. Business participation in the global value chain has now become widely accepted policy strategy, as it will benefit local firms and the whole economy. It’s even most desirable for Indonesia, as it will help Indonesia to step up from middle-income country to fully developed countries, through stimulating technology transfers, human resources development, and innovation (Kimura 2012).

On the other hand, the EU is widely known as the major proponent of multilateralism and less involved in FTAs euphoria, especially with Asian partners, until very recently. In 2006, the European Commission launched a new trade policy approach, putting more emphasize on creating comprehensive and ambitious FTAs, especially with the “undiscovered” Asian partner, i.e. ASEAN countries, Korea, India, and, possibly, China (European Commission 2006). It becomes a new external trade policy direction for the EU in contributing more effectively to stimulate growth and create jobs in Europe. Currently, European Union is involved in no less than 21 FTAs (and CEPA) (European Commission 2013 and ARIC ADB 2013), including the newly proposed Indonesia-EU Comprehensive Economic Partnership Agreement (see Table 1).

The relation between EU and Indonesia had been very substantial. The scope of relationship lies from business- as-usual cooperation such as trade and investment, to contemporary issues, like justice, climate change and fighting corruption. Since 1990, the bilateral trade in goods has been quadruple amounting to 28.7 billion USD in 2012, with Indonesia as a net-exporter (4 billion USD surplus) and EU as the net-importer (9 billion USD deficit). In 2012, EU was ranked as the fourth largest source of import (share: 7.4%), and the third largest export destination for Indonesia’s products (share: 9.5%), right after Japan and China (WITS 2013). The most exported products from Indonesia to EU, in 2012, comes from the (natural) resource-based and labor intensive industry, like palm oil, rubber, mineral resources, textile, footwear and

(semi) manufactured products. In addition to that, the European Union is the 4th largest export destination for Indonesia’s animal and/or vegetables oils products (palm oil included).

Indonesia is not yet among the top major trading partners of EU for most of its leading products, accounting at only 0.21% of total EU export and 0.38% of total EU import (WITS 2013). However, Indonesia’s market has currently gained increasing attractiveness for EU products. From 2000 to 2012, EU exports to Indonesia has grown dramatically at 162.2 percent, with annual growth more than 10 percent (WITS 2013). EU exports to Indonesia is mostly on high-value added industrial products such as machinery, electrical, and transport equipment, pulp and paper, organic chemicals products, as well as higher value added agriculture processed products, such as dairy produce. The records also show that Indonesia is the 3rd largest market in the world and the 1st largest market in ASEAN countries for EU’s pulp and papers products (WITS 2013). The evidence suggests that the trade characteristic between EU and Indonesia is somewhat complementary, making it as an essential foundation for a mutually beneficial CEPA/FTA agreement.

Direct investment from EU has been very influential for Indonesian economy, contributing significantly, but not limited, to the employment creation, value-addition, and technology transfer. In term of FDI stock from 2004 to 2012, EU is the third largest source of FDI in Indonesia, right after Singapore and Japan, respectively (Bank of Indonesia 2013). The investment from EU is mostly located in value added and industrial sector such as electronics, construction, chemical and pharmaceutical products, power generation, mining, and general manufacturing (EU report 2011). However, there’s still large room for further enhancement of EU investment, as Indonesia in 2011 accounts only around 0.5% of total (extra-) EU FDI stocks and 13.5% of EU FDI stocks to ASEAN countries (Eurostat 2013). Therefore, the plan to create Indonesia – EU CEPA could excavate greater investment opportunity for Indonesia, moreover when considering on its huge market potential weathered with such a pro-business macro-policy environment, making it very attractive as a production base for EU private sectors.


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Table 1 Existing and on-going fta agrEEmEnt in indonEsia and EuropEan union

Status of FTA Agreement




ASEAN Free Trade Area

Korea-Eu FTA

ASEAN-Australia and New Zealand Free Trade Agreement

Eu-Chile Association Agreement

ASEAN-India Comprehensive Economic Cooperation Agreement

Eu-Mexico Economic Partnership, Political Coorperation,and Cooperation Agreement

ASEAN-Japan Comprehensive Economic Partnership

Eu South Africa Trade, Development and Cooperation Agreement (TDCA)

ASEAN-Korea Comprehensive Economic Cooperation Agreement



ASEAN-Cina Comprehensive Economic Cooperation Agreement


Japan-Indonesia Economic Partnership


Pakistan-Indonesia Free Trade Agreement


Preferential Tariff Arrangement-Group of Eight Developing Countries


Trade Preferential System of the organization of the Islamic Conference (only the Framework Agreement)




Indonesia-Eu Comprehensive Economic Partnership Agreement (CEPA)

Indonesia-Eu Comprehensive Economic Partnership Agreement (CEPA)

ASEAN-Hongkong-China FTA

India-Eu FTA

ASEAN Pakistan FTA

Japan-Eu Economic Parthership Agreement

Comprehensive Economic Partnership for East Asia

Malaysia-Eu FTA



East Asia Free Trade Area (ASEAN+3)

Singapore-Eu FTA



Indonesia-Chile FTA

Thailand-Eu FTA

consultation and

Indonesa-European Free Trade Association FTA

vietnam-Eu FTA


Indonesia-Korea FTA

Eu-Canada Comprehensive Economic and Trade Agreement (CETA)

Regional Comprehensive Economic Partnership

Eu-Gulf Cooperation Council (CGC) FTA

uS-Indonesia FTA

Eu-ukraine FTA


Armenia-Eu FTA


Georgia-Eu FTA


Pasific ACP-EC Economic Partnership Agreement


Pakistan-Eu FTA

Source: ARIC ADb (2013), European Commission (2013)

Apart from the commercial relation between Indonesia and EU, there is a lot of other cooperation and EU support taking place in Indonesia. “Aid for Trade” (AfT) is one of the EU flagship program aiming at developing Indonesia’s capacity to trade. It has focused on building new infrastructure, improving ports or customs facilities and building Indonesia’s capacity on health and safety standards.

There is EUR 700 million cooperation/support fund per year from EU to Indonesia in the areas such as education, health, trade, and sustainable development (EU report 2011). The Comprehensive Economic Partnership Agreement (CEPA) between Indonesia and the EU is, therefore, expected to further deepen and widen the existing cooperation and support programs in Indonesia.


APINDO Policy Series

B Indonesia-EU Comprehensive Economic Partnership Agreement: Basic Features and The Role of Indonesia’s Business Sector

I n 2009, Leaders from Indonesia and the EU started a conversation on how to strengthen bilateral trade and investment in today’s fast changing world businesses and geo-political situation. The Vision Group, tasked by both country’s leaders, then come up with a

proposal to create bilateral agreement between EU and Indonesia, called: “Comprehensive Economic Partnership Agreement (CEPA)”. The Indonesia – EU CEPA is essentially a more comprehensive and ambitious Free Trade Agreement (FTA), equipped with a triangular architecture: market access, capacity building, and facilitation of trade and investment.

The term comprehensive means that it aims not only at liberalizing the traditional market access in goods, services, and investment, but covers also broad range of cooperation such as capacity building, public procurement, infrastructure development, public-private partnership, IPR and Competition policy, as well as sustainable development. Indonesia – EU CEPA will also be more ambitious, aiming at highest possible degree of liberalization and cooperation, while fully respecting the gap of development level between the two countries.

In term of market access, the EU will most likely propose a package containing at least full parity benefit as other concluded Indonesia’s bilateral FTA / CEPA, especially with countries which are competitors to EU, for example Japan under the Indonesia-Japan Economic Partnership Agreement (IJEPA). The Vision Group report (2011) has made some indications on the market access proposal. Liberalization on trade in goods would aim at eliminating tariff for 95% of tariff lines, covering at least 95% of trade value. The schedule of tariff reduction would be made as such in order to allow for some flexibility, considerin the different levels of development (principle of “asymmetry over time”). The CEPA will also tackle the issue of non-tariff barriers through regulatory convergence and provision of

trade facilitation. The market access of trade in services and investment would be opened up to certain levels, which ensure the creation of new business opportunities and legal certainty for business sectors.

Trade facilitation and capacity building are the primary vehicles on improving the capacity of business sectors to better utilize improved market access in both countries. It is a critical element to any successful bilateral agreement and embedded as an integral factor constructing the whole architecture of Indonesia EU CEPA. Since the (MFN) tariff rates of both countries, in average, are already relatively low (in 2011 Indonesia: 7.1%, EU: 5.2%) and the gains from eliminating tariff measure would expectedly be fairly small, it is now the NTMs measures, such as standards and technical requirements, which are more pressing to ensure the benefit of CEPA. In this regards, the Indonesia – EU CEPA is expected to overcome the issues of industrial requirements, testing recognition and accreditation of certification as well as to harmonize all of them to comply with the international standards via trade facilitation and capacity building programs. The complete information on how the Indonesia EU CEPA would be looked like is available in Appendix 1.

Competitive pressure, coming from economic liberalization, will unavoidably create some adjustment for Indonesia’s private sectors, especially for a certain small and medium enterprises (SMEs). Yet, there’s also greater business opportunity wide-open following the establishment of Indonesia – EU CEPA. A comprehensive mechanism needs to be developed, focusing on how to reap optimum benefit and minimize the potential adjustment cost coming from the proposed Indonesia- EU CEPA. Intensive participation from the business sector in the dialogue process, consultation and study, negotiation process, as well as in the implementation of the cooperation (and capacity building) program can possibly provide essential foundation to do that.


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Since 2012, The Employers Association of Indonesia (APINDO), one of the most prominent business communities in Indonesia, has been working together with the European Union to improve the readiness of Indonesia’s business community in facing the proposed Indonesia-EU CEPA. APINDO, under the scheme of “Advancing Indonesia’s Civil Society in Trade and Investment” (ACTIVE) project, helps to improve private sector understanding and capacity in facing the CEPAs/ FTAs issues, especially through research and policy

C. Key Issues on Indonesia – EU CEPA:

advocacy as well as socialization program. APINDO has actively conducted numerous socialization programs to inform business community on the Indonesia-EU CEPA proposal. Many key issues and insightful inputs have been gathered from the discussion with the private sector. This paper is an effort to collaborate all of those key findings and serves as an integrated proposal from the business sectors on how to best deal with the Indonesia-EU CEPA.

Perspective of Business Sectors

T here is so much potential economic benefit that can be reaped by trading freely/partnering so closely with the EU. As a contributor of 23 percent of world (nominal) GDP and 7.3 percent of global population, the EU indeed

offers a fruitful market potential for Indonesia. The Vision Group (2011) reported that there is an additional 0.1 percent of Indonesia’s GDP growth in the short-run, and 1.3 percent in Indonesia’s GDP in the long-run as an impact of Indonesia-EU CEPA implementation. Beside its impact on GDP, the Indonesia-EU CEPA will also improve the production of light industries (5% increase), trade balance (increase by around 2 billion USD), and overall wages (1.5% increase). Moreover, the comprehensive trade and investment liberalization will also be poverty- reducing (Vision Group Report 2011).

Nevertheless, there are several fundamental issues inherent in the Indonesia-EU CEPA if it is to be negotiated. Despite the overall positive outlook of the Indonesia-EU CEPA, the government as well as private sectors in Indonesia worry that as the level of development between EU and Indonesia differs significantly, the benefit of CEPA will be more likely bias towards the EU side, while Indonesia will be the one bearing most of the adjustment cost. It is a reasonable worry in a context that it will be much easier for EU to penetrate into Indonesia’s market than for Indonesia to enter EU market, as EU producers/operators are

highly equipped with better technical and financial capacity, thus will find no difficulty in complying with low-level Indonesia’s standard and technical requirement. In contrast, a significant adjustment cost is more likely borne to Indonesia’s private sectors, as they have to adapt with such a stringent compliance system in EU. Even (assuming) when the Indonesia’s product passes the EU standards, exporter from Indonesia are still forced to compete with heavily subsidized domestic producers protected with quite a high custom duty (tariff rate), especially when it comes to agriculture products.

Not only will the Indonesia-EU CEPA pose some

significant challenges, holding it back will also possibly cause an opportunity loss for Indonesia. When the ASEAN Economic Community (AEC) is fully realized, the ASEAN countries will be integrated economically as

a single production base which make doing business

intra-regionally seems like domestics, because of minimal economic barriers. EU firms will find it more competitive to build a plant where it is cheaper to import raw material and there is a guarantee for preferential investment protection and incentive. It is all made possible if one

conclude an FTA/CEPA agreement with the EU aiming

at eliminating substantial customs duty and liberalizing

market access of investment. If EU want to satisfy market demands coming from other ASEAN countries 1 which

is not yet having CEPA, exporting under zero tariff

1 It is well acknowledged that the EU is seeking for preferential concession with ASEAN. As regional consultation is going nowhere, the negotiation shift towards the bilateral concession targeting individual ASEAN member states with a hope that each bilateral agreement can be harmonized someday. The negotiation went well with some of the ASEAN countries, like Singapore, Thailand, and Malaysia. Even Singapore is entering the ratification stage of CEPA agreement.


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scheme in AEC is a more preferable solution for them, instead of be bothered by establishing a plant where domestic demand is existed. In this case, Indonesia will lose investment and trade enhancement momentum unless there is strong political will to proceed with CEPA negotiation.

By not moving forward with this CEPA agreement, the trade and investment impediments between the two countries will still remain and no economic enhancement will be made. Yet, the Indonesia-EU CEPA offers significant opportunity for Indonesia to negotiate the existing barriers and turning it into mutually beneficial economic deal that will enhance both economic conditions. In this case, it is best to view the challenges as negotiating tools instead of impeding factors. Indonesia might accept the EU proposal in exchange for lowering down the technical barriers and domestic protection in EU as well as capacity building for the private sectors and relevant stakeholders. This move will possibly be much better than simply declining or holding back from it, because private sectors will be much more benefited, in a real and fair term, from improved market access and business potential, thus enhancing the political acceptability and build positive images 2 of Indonesia-EU CEPA. This section will elaborate major issues concerning the Indonesia-EU CEPA proposal as well as the existing barriers impeding further economic relation deepening between the two countries, particularly from the perspective of business sector. A policy action to tackle the challenges will then be derived from the process.

C.1. Market Access of Trade in Goods

Liberalization of tariff rates as well as facilitation and streamlining of non-tariff measures are the major

component of any trade agreement, aiming at improved market access (trade in goods) between the parties. Based on the Vision Group report, tariff elimination of 95 percent of tariff line and regulatory convergence on NTM issues are proposed to create more seamless Indonesia – EU economic relation, through the CEPA. Some of the concerns raised by Indonesia’s business community, like the following, are noteworthy.


Distortive and high tariff rates are bad for business as they reducie the optimal trade value can be attained in the absence of tariff barriers. Despite the success of globalization in reducing the general tariff rate in all over the world, there are still numerous issues perceived as a problem, especially by the developing countries. The most prominent problems related to tariff, which are often complained about by the business sectors in developing countries, are tariff peaks 3 and escalation 4 .

Initial findings from the statistical data show that EU still has severe problem related to the tariff peaks and escalation. The average general MFN tariff rate in EU is indeed relatively low, amounting at 5.36% in 2012, with higher rate applying to agricultural products (11.05%) rather than manufacturing products (4.05%). However, the problem of tariff peak is still clearly found in EU, as there’s still a product with duty rate striking at almost 75% under the HS 24.03 chapter (smoking-tobacco products) 5 . Not only is the tariff rate peaking up for certain products, it is also escalated as the degree of processing increase. The product which best represent the tariff escalation problem in EU is grapes and its processed products. The import tariff rate for fresh grape is only 11.5%, while it can reach up to 40% in the form

2 Indonesia has been exposed with numerous FTA, one of which is perceived to be somewhat detrimental for the private sector in Indonesia, i.e. ACFTA. If both Indonesia and EU want to promote that this CEPA would be different from the other FTA and more mutually beneficial, the package should contain policy effort to tackle such issues triggering imbalance relationship between Indonesia and EU (e.g. stringent regime on standards and technical requirement, application of agriculture subsidization and protection, etc.).

3 Tariff peak are high tariffs usually defined as tariffs that are three times the national weighted average. It aims at protecting the sensitive domestic industries, mostly applied by developed countries, notwithstanding EU. The problem of tariff peaks occurs largely in the following sectors: food industry, textiles and clothing, footwear, leather and travel goods, automotive sector as well as other transport and high technology goods. For industrialized countries, tariffs of 15% and above are generally recognized as “tariff peaks” (WTO Definition).

4 Tariff escalation occurs when tariff levels increase with the degree of processing. If a country wants to protect its processing or manufacturing industry, it can set low tariffs on imported materials used by the industry (cutting the industry’s costs) and set higher tariffs on finished products to protect the goods produced by the industry. This practice protects domestic processing industries and discourages the development of processing activity in the countries where raw materials originate. If tariff escalation happens in developed countries, it may prevent the development of value-added industries in developing


5 The Products are water-pipe tobacco (HS and smoking tobacco (HS and

(WTO Definition).


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of Grape Juice (WITS 2013). It occurs also in the palm oil product, wherein the tariff for CPO is only 0-3.8%, while its downstream products is charged by higher tariff rate, ranging between 5.1-12.8%.

The findings are in line with the complaint that APINDO received from the ground (local business community). The complaint comes from the downstream player of agro-industry sector, especially the fish-processing industry and cocoa producers. Indonesia’s cocoa exporters complain on the tariff escalation for cocoa products entering EU market. There is duty free for cocoa beans entering EU market, but the tariff remains significantly high for the processed-cocoa products (around 6-9 percent). The fish-processing industry finds it somewhat uncompetitive to export to EU market, as the tariff rate is still around 13 percent or more. The fish-processing industry in Indonesia cannot compete with the relatively cheap products from African, Caribbean, and Pacific countries (ACP), because they have preferential arrangement with EU.

The development of downstream/value-added industries is a major agenda for any developing countries, notwithstanding Indonesia. The protectionist tariff policy, especially the tariff escalation problem, applied in EU is perceived to be detrimental to the goal. Therefore, a mechanism to negotiate and resolve the problem of tariff peaks and escalation must be addressed in the Indonesia-EU CEPA at any possible means, aiming to support the industrial-upgrading agenda in Indonesia. In order to conclude the Indonesia-EU CEPA, the EU is expected to show its good will to liberalize its tariff rate especially on the processed products of interest for Indonesia.

Generally, as a bargaining tools, it is recommended for Indonesia to push EU to lower its tariff rate for agricultural products and some of its processed products where high custom duty still remains, in exchange for Indonesia’s

commitment on the tariff elimination modality as proposed by the EU which covers 95% tariff lines within 7 years. By doing so, Indonesia has to come up with robust proposal in identifying which EU’s tariff should be further lowered in exchange for Indonesia’s commitment. In requesting further tariff rate elimination, Indonesia is expected to target the products which are deemed as “sensitive” by the EU or of special importance to EU, considering also the volume of Indonesia’s export to EU (at the current and potential level). These kinds of products are usually associated with high tariff and subsidy, such as processed fruit products, tobacco, processed fisheries products and beef.

Non-Tariff Measures (NTMs) 6

Policy makers around the world have now shifted their focus more on the NTM issues, as the tariff has been progressively reduced, following the fast-improved dynamism of international business. Normally, the NTM is used by the government in order to correct market failures and achieve public policy objective which can’t be done by relying solely on market mechanism, such as consumer health and safety as well as environment protection. Unfortunately in the actual practices, it is sometimes hard to differentiate between legitimate and protectionist motivation of NTM application. It is understandable in the sense that when the tariff is already relatively low in average, NTM is the last defense mechanism often used by the countries seeking to protect their national interest. However, the non-tariff measures are not allways barriers to trade, which are welfare or trade reducing. Sometimes they are just the trade formalities, such as automatic licensing, yet at the same time they can also take the form of price control, quantity restriction, as well as stringent technical requirements (please see Figure 1 for further categorization).

6 NTM is Broadly defined as all border and behind-the-border policy measures, other than tariff, that can potentially distort the international trade. It is often categorized into technical (SPS, TBT, and pre-shipment) and non-technical measures (quota and price control as well as other trade protective measures). Please see Figure 1 for detail disaggregation.


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Figure 1 unctad classification of non-tariff mEasurEs

sanitary and phytosanitary mEasurEs a tEchnical tEchnical BarriEs to tradE B mEasurEs prE-shipmEnt inspEction and
sanitary and phytosanitary mEasurEs
tEchnical BarriEs to tradE
prE-shipmEnt inspEction and othEr formalitiEs
contingEnt tradE-protEctivE mEasurEs
non-automatic licEnsing, quotas, prohiBitions and qualitty-
control mEasurE othEr than for sps or tBt rEasons
pricE-control mEasurE, including additional taxEs and chargEs
financE mEasurEs
tradE-rElatEd invEstmEnt mEasurEs
distriBution rEstrictions
rEstriction on post-salEs sErvicEs
suBsidiEs (Excluding Export suBsidiEs undEr p7)
govErmEnt procurEmEnt rEstrictions
intElEctual propErty
rulEs of origin
Export-rElatEd mEasurEs
import mEasurEs

Source: Non-Tariff Measures to Trade: Economic and Policy Issues for Developing Countries, uNCTAD (2013).

For business community in Indonesia, the European Union is widely known as a difficult market to entry, as it applies extensive and stringent non-tariff measures both in agriculture as well as manufacturing products. Simple statistical exercise based on UNCTAD NTM 2010 data (WITS 2013) shows that the majority of NTM’s type applied by the EU authorities is the technical measures, namely SPS 7 (56.18%) and TBT 8 (42.2%). There is only

a small amount of non-technical and formalities NTM applied by EU, such as pre-shipment inspection and other formalities, non-automatic licensing, quantity control, financial, and competition measures, totaling at around only 1.62 percent. The findings imply that the more pressing issue in trading with EU is the standards and technical requirement rather than trade documents and other formalities.

7 Sanitary and Phytosanitary measures (SPS) are the measures, including all relevant laws, decrees, regulations, requirements and procedures that are applied to protect human or animal life from risks arising from additives, contaminants, toxins or disease-causing organism in their food; to protect animal or plant life from pests, diseases, or disease-causing organisms; to prevent or limit other damage to a country from the entry, establishment or spread of pests; and to protect biodiversity. These include measures taken to protect the health of fish and wild fauna, as well as of forests and wild flora. SPS doesn’t include measure on protecting the environment (UNCTAD 2012).

8 Technical Barriers to Trade (TBT) is a measure referring to technical regulations, and procedures for assessment of conformity with technical regulations and standards, excluding measures covered by the SPS Agreement. A technical regulation is a document which lays down product characteristics or their related processes and production methods, including the applicable administrative provisions, with which compliance is mandatory. It may also include or deal exclusively with terminology, symbols, packaging, marking or labelling requirements as they apply to a product, process or production method. A conformity assessment procedure is any procedure used, directly or indirectly, to determine that relevant requirements in technical regulations or standards are fulfilled; it may include, inter alia, procedures for sampling, testing and inspection; evaluation, verification and assurance of conformity; registration, accreditation and approval as well as their combinations (UNCTAD 2012).


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The SPS measures are extensively found in agriculture products, such as fisheries (12.54%), preparation of vegetable and fruit products (12.48), dairy produce (8.22%), meat products (7.33%), as well as animal and vegetable oils and fats (6.77%). On the other hand, TBT measures are mostly found in manufacturing products,

such as machinery and mechanical products (26.45%) as well as chemical products (16.48%). It is also applied to some extent in the agri-based processed products, such as prepared food-stuff (7.68%). Figure 2 provides detail information on the sectoral extensiveness of TBT and SPS measures in EU.

Figure 2

thE ExtEnsivEnEss of sps and tBt mEasurEs By sEctor in EuropEan union

Section Product SectionProduct

The Incidence of Sanitary and Phytosanitary Measures by Sector Prepared foodstuffs Live animal and its
The Incidence of Sanitary and Phytosanitary Measures by Sector
Prepared foodstuffs
Live animal and its products
vegetable products
Animal and vegetable oils and fats
Chemical products
Wood and articles of wood
Machinery and mechanical appliances
base metals
Stone, ceramics, glass
Raw hides and skin, leather
Textile and textile products
Mineral products
Miscellaneous manufactured
Pulp, wood, adn paper product
Pearl and precious stone
Works of art
Arms and ammunition
Optical, clock, musical instrument
vehicles and transport equipment
Frequency (in %)
The Incidence of Technical Barrier to Trade by Sector 0.00% 5.00% 10.00% 15.00% 20.00% 25.00%
The Incidence of Technical Barrier to Trade by Sector
Frequency (in %)

Machinery and mechanical appliances Chemical products base metals Prepared foodstuffs Live animal and its products Textile and textile products Optical, clock, musical instrument vegetable products Plastics Animal and vegetable oils and fats Mineral products Miscellaneous manufactured vehicles and transport equipment Stone, ceramics, glass Footwear Wood and articles of wood Pulp, wood, adn paper product Raw hides and skin, leather etc. Pearl and precious stone Arms and ammunition Works of art

Source: Processed from WITS NTM data (2013)


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Every country (including EU), wishing to apply SPS and TBT measures for the sake of their national interest, is expected to follow WTO principle 9 to ensure business predictability and sustainability. As for developing country like Indonesia--where the Export Quality Infrastructure (EQI) 10 is relatively lacking as compared to developed countries--achieving the international standards, which is WTO consistent, is sometimes not an easy task to accomplish. Even more, there are a lot of complaints from Indonesia’s business sectors stating that in many cases EU is still inconsistent with its application and also tends to put more restrictions than necessary. In order for Indonesia-EU CEPA to be concluded, a comprehensive joint effort to eliminate and reduce the barriers effect of NTM application especially in EU should be seriously considered and institutionalized under the CEPA agreement.

There are at least three kind of problems which were raised by the business sectors in Indonesia regarding to the technical NTM (i.e. SPS and TBT) applied in EU, namely (i) regulatory divergence, (ii) strict and high standards applied by EU, and (iii) policy inconsistency. Those three problems have commonality in reducing and hampering the trade potential; but in order to eliminate them, they need different policy approach.

(i) Settling Regulatory Divergence through Mutual Recognition Agreement (MRA)

Divergence, in this context, is interpreted as the condition of which each party has the regulation and standards governing the quality and sustainability of the business process, but not entirely matched to each other. In the context of palm oil products, the domestic regulation applied in Indonesia is the Indonesia Sustainable Palm Oil (ISPO), while EU only recognizes palm oil products complying with the globally accepted regulation, namely Roundtable Sustainable Palm Oil (RSPO). Business player in Indonesia argued that ISPO has fully aligned to the international standards, therefore should not be

substantially different with the RSPO. On the other hand, EU still insists that ISPO is not reliable as a basis for further equivalency / convergence between the two standards because the palm oil business practice in Indonesia in reality is still far from being sustainable and even more the institutional capability as well as the EQI system are perceived to be still lacking. Therefore compliance to RSPO is still mandatory for Indonesia’s palm oil producer wishing to enter EU market.

This double standard will certainly incur higher cost of compliance for palm oil industry in Indonesia. Hence, the upcoming Indonesia-EU CEPA is expected to promote greater policy dialogue in finding mutual acceptance between RSPO and ISPO, where possible, in order to further improve and facilitate market access of Indonesia’s palm oil products entering EU market. The policy dialogue should aim at finding similarity and identifying gap between RSPO and ISPO. The similarity should be a base for further regulatory convergence, while the identified gap should be addressed by enhancing capacity building program for the private sectors and improving EQI in Indonesia. Considering that there’s a huge opportunity to align RSPO with ISPO, Indonesia is recommended to sign Mutual Recognition Agreement (MRA) with EU, covering mutual acceptance on standards (RSPO- ISPO convergence), certification, and testing. Although concluding MRA with industrialized country like EU is not an easy task to do, Indonesia is urged to firmly utilizing its position as the largest palm oil producer and exporters in the world. Indonesia has to be bolder and more optimistic in negotiating the MRA in palm oil because the necessary system is already there and the Industrial practices getting more sophisticated, making it as a good base for MRA negotiation.

(ii) enhance capacity building program for private sectors and improve the EQI system in Indonesia in order to comply with high-level and stringent regulation and standards in EU

9 The main principles of TBT are: (i) transparency, (ii) non-discriminatory and national treatment, (iii) not more restrictive than necessary (proportionality), (iv) based on international standards, and (v) equivalence (accepting technical regulations of other members as equivalent to their own). Similarly, the main principles of applying SPS measures are (i) scientific based, (ii) least restrictive (not be a barrier to trade), (iii) based on international standards, (iv) recognition of equivalence, and (v) transparency. All the principles are intended to promote predictable and sustainable trade.

10 EQI is a set of infrastructure ranging from laboratory and testing equipment, accreditation, and standardization which is needed to ensure that the processes and products the country can export are able to comply with the technical requirements required by external market.


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EU is widely known as a territory which has stringent and high-level regulation and standards in governing the quality of the products entering to their market. In many cases, EU regulation on standards and technical requirements is more restrictive and at the higher level as compared to the international standards (e.g. ISO). This is particularly highly driven by consumer sophistication in EU who demands better product quality and safety. Based on European Committee for Standardization (CEN), there’s only 30% of European Standards (EN) which are identical to the ISO standards 11 . The rest is not really identical meaning that it can be either more restrictive or more complex, thus making it even harder for developing countries like Indonesia to comply with EU standards.

There are a lot of cases where EU border authority rejected Indonesia’s products because of incompliance to the standard and technical regulation applied in EU, especially with regards to the environment sustainability standards and other SPS measures. The data from Henson and Olale (2011) shows that from 2002 to 2008 there are 285 cases of rejection of Indonesia’s food and feed products by the EU border authority, which is equivalent to 16.5 billion USD in term of export value. Indonesia is among the top 10 countries receiving the highest rejection by EU authority, with 41 cases of rejection happened every year from 2002 to 2008. Fish and fishery products in Indonesia is the most rejected products by EU authority, mostly because it is still contained of drug-chemical residue, heavy metal, and biotoxins/ contaminants which are perceived to be dangerous for human safety and health as well as detrimental for the environment.

Not only in fish and fishery products, rejection and boycott are also experienced by palm oil, wood, pulp and paper industry as well as textile and textile products because of incompliance to EU standards mostly in the aspect of environment sustainability criteria. For the pulp, paper, and wood products, ensuring an environmentally sustainable business process along the supply chain and getting the legality proof of a timber, are among the key pressing issues for the industry; as for the textile products, it is the compliance to chemical substance regulation,

so-called REACH, which is challenging for the industry. It is fair to say that, by far, some (or even most) of the Indonesia’s private sectors are not ready yet to comply with the stringent standards in EU. It occurs not only because such good practice is still costly for Indonesia’s business sectors, but also the domestic regulation and the whole EQI system are simply not well endowed to meet such a high-level of standards in EU.

In the context of previously mentioned cases, this study argues that pursuing the MRA or even lower level of mutual understanding with EU is perceived to be impossible to be done. For the areas/sectors where the whole component of EQI (i.e. human resources and equipment) and sustainable business practices are still lacking to ensure compliance with EU standards, Indonesia is suggested to: (i) pursue cooperation program with EU in the area of exchanging information on standard and technical requirements, (ii) request EU to provide assistance and intensive capacity building for the private sectors in order to comply with EU and international standards, as well as (iii) engage EU to contribute in improving the state of equipment and human resources of the whole EQI system in Indonesia. It is worth to note that even after all the capacity building and information exchange program, when it comes to complying with EU standards, it will still cost them significantly both in term of monetary and time cost as they need to pass through both the domestic and international testing and conformity point. Therefore, in term of improving the state of EQI system and boosting export capability to EU, it is best for Indonesia to start looking at the possibility to engage EU to invest in establishing EU laboratory and testing center in Indonesia, instead of just conducting the ordinary capacity building enhancement program. Real investment in laboratory and testing center is perceived to be more impactful in enhancing the EQI system and to the economy as a whole. More over, with no less important, it will also be more long lasting than a simple capacity building will do. Most importantly, it will reduce the compliance cost incurs to private sectors, as they now only have to pass through one time testing and assessment with local cost.

11 Based on information as shown in


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(iii) Promote greater policy transparency and certainty in the area of NTM (i.e. TBT and SPS), equipped with consultation forum involving respective authorities and private sector to settle any NTM-related policy issues

In order to implement fair trade and promote mutually beneficial CEPA, countries shall follow the WTO principles in SPS and TBT application, especially with regards to “transparency”. The principle of “transparency” requires every application of SPS and TBT measures to be based on scientific justification and legitimate public policy objective. Not only this has to be transparent, countries are generally encouraged to bring greater certainty and consistency in any trade-related policy implementation in order to keep fair and healthy business and trade climate.

The implementation of trade-related policy in EU is still far from ideal. There are many complaints from Indonesia’s business community stating that some of EU members implemented different policy framework from the one set out at the regional/EU level. The case of import quota for Indonesia’s palm oil products by Spanish authority, as well as different practices in assessing the standards are among the kind of policy inconsistency problem Indonesia’s exporters have to face in trading with EU. More over, there are several cases found in EU showing that EU authority actually put more burden than necessary and sometimes there’s no legitimate and scientific justification in doing that. The cases such as: (i) wide-spreading misleading issues provoked by international NGO stating that palm oil products in Indonesia is resulted from environmentally harmful business activity (i.e. in the form of harmful CPO labeling), (ii) voluntary labeling initiated by private entity and NGO to indicate freeness from/contains of palm oil substance (e.g. stating: “contains of dangerous and harmful CPO”), as well as (iii) inconsistent and highly stringent of RED 12 applications are among the evidences showing that NTM-related policy application in EU is not yet fully transparent and rationally justifiable.

Therefore, the upcoming CEPA is a very good chance for Indonesia to demand greater policy transparency,

consistency, and certainty from the EU in the application of Non-tariff measures (NTM), especially with regards to SPS and TBT. A regular consultation forum, involving relevant authorities and private sectors, also needs to be developed in order to inform any regulatory changes, facilitate discussion, and seek for solution of any NTM-related policy issues between EU and Indonesia. In order to clarify the misleading information involving provocation from the international NGO and unnecessary additional labeling by the private sectors, the CEPA should contain a program which enable Indonesia to socialize the actual practice of Indonesia’s palm oil business to the EU’s citizen, the international NGO as well as private sectors.

Based on the already-concluded EU CEPA/FTA with other partners, there are at least two general modalities on how the EU treated SPS and TBT in the legal text of its preferential trade agreement. It differs on how ambitious the coverage of TBT and SPS agreement are. The first modality is the conservative one, meaning that the TBT and SPS chapter are more or less a repetition or highly refer to the principle as stipulated in the WTO agreement, i.e. ensure policy transparency, alignment to international standards, and be based on scientific and legitimate public policy objective justification. The conservative modality doesn’t aim at negotiating MRA neither harmonizing standards and regulation. It only encourages the parties involved in the agreement to cooperate in exchanging information and technical assistance program. The other one is the ambitious modality which aims not only at implementing the traditional WTO principle on SPS and TBT, but also opening up the possibility of mutual recognition of standards and conformity assessment in the sectors of mutual economic interest (WTO-plus provision). The example of conservative modality can be seen in the EU-Mexico and EU-Chile preferential trade agreement, while the example of ambitious legal draft can be found in EU-South Africa trade agreement. In the context of Indonesia-EU CEPA, it is strongly recommended for Indonesia to seek for WTO-plus provision on SPS

12 RED is the regulation governing the adoption of renewable energy in EU. Foreign exporter who can meet the standards and technical requirements of RED (e.g. 35% green house emission saving) is eligible for tax exemption and counted as part of national mandatory target to increase the share of renewable energy use in EU. Unfortunately, it is very hard and costly to comply with RED in EU in order to get tax exemption and formally utilize renewable energy mandatory in EU. Even if exporters can demonstrate that they can meet the standards stipulated in RED, the EU authority often denied market access for them, especially biofuel coming from developing countries.


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and TBT arrangements, which also includes mutual recognition in the sectors of mutual interest as well as establishment of a joint committee to facilitate discussion and finding resolution of any NTM-related trade policy issues. Furthermore, it is suggested that any WTO-plus provision on SPS and TBT must be clearly and explicitly set out in the legal text of Indonesia-EU CEPA in order to make it more institutionalized. Indonesia negotiating team has to make sure that the TBT and SPS chapter in the legal text contains of both traditional and WTO-plus provision.

C.2. Market Access on Services

The services sector continuously shows robust growth in the global economy. It is transforming the economies in the massive scale. In the global downturn, the world’s service trade showed its relative resilience by its expanding value from USD 5 trillion in 2005 to USD 8 trillion in 2011. It contributed up to 70% of the economy in developed countries. World Trade Organization (WTO) recorded the service as the fastest growing sector which accounts for nearly 20% of global trade, one third of global employment, and two thirds of global output.

Moving along with the liberalization of trade in goods, Indonesia’s international trade in services has been increasing. However, the balance of trade in services shows negative value from year to year. The deficit was dominantly driven by transportation sector 13 (USD 9.1 billion in 2012). On the other hand, the positive balance showed up in travel sector 14 (USD 1.6 billion), communication services 15 (USD 373 million), and construction services 16 (USD 231 million).

In trade with the EU, Indonesia has been net importer of commercial services. In 2011 Indonesia imported

around EUR 2.9 billion of commercial services from the EU and exported EUR 1.8 billion. Although Top of Form

Bottom of Form the balance of trade in services always shows a deficit, Indonesia’s international trade in services has been growing rapidly in the last decade. The total service trade (export and import) was USD 57 billion in 2012 or almost doubled from 2002 (Figure 3). Along with the positive growth of trade in services to the world, Indonesia-EU trade in services also grew positively at the average of 12.6% per year from 2008-2011.

Services take an increasingly important role in Indonesia economic development. Services sector approximately contributes 43% of the employment 17 , 49% of PDB 18 and potentially can contribute up to 80% of poverty alleviation. Services sector has created its significant position as an accelerator of the economy. Nevertheless, World Bank Indonesia Quarterly Report (March 2013) noted the service value-added in Indonesia exports is particularly low, reflecting a limited development of domestic ancillary services for supporting exports and also low usage by Indonesia exporters of foreign- supplied export services. Thus, integration into global supply chains could help to diversify export away from commodities. Considering its role in the economy, it is imperative to mobilize a precise and vigilant liberalization policy on service to maximize its contribution to the development. Especially, service sector in Indonesia is a fledgling industry where the capacity to present the expansion to EU is still considerably limited in the foreseeable future.

Trade in services is mostly affected by non-tariff barriers such as technical standards, qualification procedures, and licensing agreements. It thereabouts distinguishes trade in service and trade in goods. International trade

13 Transportation as sector covers all transportation services that involve carriage of passengers, movement of goods (freight), rentals with crew, and related supporting services. Excludes freight insurance, which is included in insurance services. Excludes goods procured in ports by non-resident carriers and repairs on transport equipment, which are included in goods. (UNCTAD)14 Travel sector includes goods and services acquired from an economy by non-resident travelers during visits shorter than one year. (UNCTAD)15 Communication sector consists of postal, courier and telecommunications services between residents and non-residents. (UNCTAD)16 Construction sector covers the work performed on construction projects and installations by an enterprise outside the economy of residence of that enterprise. (UNCTAD)

14 Travel sector includes goods and services acquired from an economy by non-resident travelers during visits shorter than one year. (UNCTAD)

15 Communication sector consists of postal, courier and telecommunications services between residents and non-residents. (UNCTAD)

16 Construction sector covers the work performed on construction projects and installations by an enterprise outside the economy of residence of that enterprise. (UNCTAD)

17 Approximated number of 2012, source: World Bank Indonesia Economic Quarterly Report, March 2013.

18 Calculation was based on the data “Gross Domestic Product at Current Market Prices By Industrial Origin 2012” from Badan Pusat Statistik (BPS) Indonesia. The calculation included sectors: construction, trade, hotel & restaurants, transport & communication, finance, real estate and business services and (other) services.


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figurE 3 indonEsia’s tradE on sErvicEs BalancE

(In Billion USD) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
(In Billion USD)

Source: International Trade Center calculations based on International Monetary Funds Statistics

in services is sensitive to national regulations that affect the supply of services. The non-tariff barriers usually result the highly protective domestic market and restriction of foreign investment. To define the barriers of trade in services, we shall firstly sense the nature of service sectors. The agreement on services shall also refer to the General Agreement on Trade in

Table 2

KEy issuE sErvicEs

Services (GATS) architecture and rules. The GATS has classified four modes of supply on services: cross-border supply, consumption abroad, commercial presence, and presence of natural persons. Each mode has its own conduct which generates different key issues on trade liberalization (Table 2).



Example of Services

Key Issues of Services


Cross-border supply: Services

International telephone calls

Technical procedures (e.g. visa)

supplied from one country to another.

Postal services


Physical distance & the level of connectivity (e.g. transportation infrastructure)


Consumption abroad:


Consumer/firms making a use of a service in one country.

Educational services

Ship repair services



Commercial presence: A


Foreign investment regulation (ownership and other requirements)

foreign company setting up subsidiaries or branches to provide services in one country.

Consultancy firms

Telecommunication firms


Presence of natural persons:


Qualification requirements

Individuals travelling from their own country to supply services in another

blue-collar workers


Domestic labors

Working permit


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The scope of Indonesia-EU CEPA however seems quite ambitious where it is expected to have a broad coverage and covers all modes of supply by all possible elimination of all market access and national treatment measures. On the other hand, in respect to the readiness of Indonesian service sector, the concern of Government of Indonesia (GoI) is to protect the integrity of Indonesian business to achieve the economies of scale in service sector which requires a clear distinction between liberalization and the right to regulate the service. To accommodate the service interests between the EU and Indonesia, we shall focus on potential economic outcomes (and threat) through the possible easing measures. Bearing in mind Indonesia’s capacity to establish commercial service presence in the EU is still insufficient, besides eliminating barriers we shall focus on the service sectors which bring huge multiplier effect to Indonesia economy.

Visa no-reciprocity: travel income vs unequal mobility dilemma

One of the most potential sectors for Indonesia is travel service which always showed positive balance. Since facilitation of people movement has been an important factor, the technical procedures and the connectivity are the key issues in this sector. This facilitation includes simplifying application procedures, improving processing times, reducing fees, and extending visa exemption lists. The research by World Travel & Tourism Council (WTTC) and the World Tourism Organization (UNWTO) found that improving visa facilitation could generate an additional USD 206 billion in tourism receipts and create as many as 5.1 million new jobs by 2015 in the G-20 economies 19 . Nevertheless, Indonesia’s degree of openness (UNWTO, 2013) was scored higher than the

openness of world emerging economies in average 20 . The current regulation in Indonesia allows EU countries (excludes Croatia) to be eligible to get visa on arrival (VOA) 21 . It is favorable for Indonesian tourism where according to data from Badan Pusat Statistik (BPS), the European tourists visiting Indonesia on 2012 amounted 1,108,521. This number accounts 14% of the total foreign tourists came to Indonesia at that time.

However, with no-reciprocity principle of granting VOA, this entry permit regulation has increased the people inflow from Europe to Indonesia more than vice versa, particularly for temporary stay (traveling) purpose. This condition has raised the issue on inequity of mobilization, especially with the increasing cases of VOA trespassing (the misuse of VOA by foreigners to work in Indonesia) and challenges posed by irregular movement of persons 22 . The visa application procedure for Indonesian to get into EU region has also been disincentive to spread the trade activities to EU which is time-consuming and costly. The unequal mobility impacts unequal opportunity to access each-other market, where Indonesian business has less access to visit EU region. Learning from EU- CARIFORUM Economic Partnership Agreement that commit to facilitate the movement of natural person, the facilitation shall also include the entry of persons who are not supplying services but engage in several business purposes, namely research and design, marketing, training, trade fairs, sales, purchasing, and tourism. The technical procedure of visa application has to be as least difficult as possible to stimulate the interaction between two parties. Therefore, Indonesia-EU CEPA shall be able to ensure a fair access for both parties by simplification and facilitation of visa application for Indonesian business to access the EU.

19 This joint study by the WTTC and the UNWTO which was supported by the Forum’s New Models for Travel & Tourism Global Agenda Council examined the important link between facilitation of travel and the creation of jobs and was presented to the 4th T20 Ministers Meeting in May 2012. (Source: WEF)

20 The UNWTO (2013) scored Indonesia 54 out of 100 for the degree of openness in term of tourism. This score is lower than the neighbors’ namely Philippines (84), Singapore (67) and Thailand (59), while the openness of world emerging economies in average was scored 31.

21 Regulation of Minister of Law and Human Right of the Republic of Indonesia No. M.HH-01.GR.01.06/2012.

22 The inadequate control on VOA trespassing has become a concern of Indonesian business for there are a lot of illegal business get an easy access to enter Indonesian market through the misuse of VOA. Concerning the increase of visa trespassing cases and its impact (includes people smuggling, trafficking in persons, and related transnationals crimes), on August 20, 2013, Jakarta Declaration was signed by representatives of 13 countries in the Special Conference on Irregular Movement of Persons. This declaration commits the joint actions on eradiation of irregular people movement.


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Taking the multiplying benefit of education liberalization

On the EU side, personal, cultural and recreational services 23 are very potential import for EU economy as it has contributed around 60% of total world export on this category in recent years 24 . This services sector covers education and health services, excluding the expenses for health and education services paid by non-residents who stay less than one year which are however accounted in travel services. Education service in EU is potentially having an increasing demand from Indonesia and it has been a main focal sector in EU-Indonesia cooperation. Along 2013, four thousand Indonesians started higher education in Europe and this number increased 30% from the year before. Currently, there are more than seven thousand Indonesian students which are pursuing education in Europe. Moreover, EU provides about 1,000 grants per year for Indonesian to study in European universities.

Considering the potential demand of the European education, there came up an idea for further opportunity that education business could be shifted to mode 3 of services where the establishment of institution representatives is allowed. Nevertheless, education becomes strategic service sector yet the current negative investment list (DNI) of Indonesia has been very strict in this sector. The Law No.20/2003 concerning National Education System incorporates education institution as non-profit which has been discouraging the foreign investment to establish education business in Indonesia 25 . However, referring to Presidential Regulation No. 36/2010 (on negative investment list) the non-formal education is allowed for foreign investment up to 49% ownership. It opens the space for informal courses and training to enter the market.

Since the education has to be able to answer the labor market demand, the Vocational Education and Training (VET) have become popular to produce skilled workforce.

taKing thE multiplying BEnEfit sKill standardization mutual rEcognition movEmEnt of natural pErson
taKing thE multiplying BEnEfit
movEmEnt of
natural pErson

In EU, VET has been programmed to be fostered among young people to respond adequately to the global competition and young unemployment. It is considered as the engine to enhance growth and productivity. As Indonesia-EU CEPA is expected to boost national development, this VET service can be a promising sector for Indonesia to take a multiplying benefit because it is in line with the capacity building program while VET produces skilled workforce and induces transfer of knowledge. In addition, VET escalates the standardization of skilled-labor as it is very important to accelerate the establishment of Mutual Recognition Agreement (MRA) on skills and professionals. The MRA will be the key success to carry forward the movement of natural persons and to overcome the standardization issues.

Therefore, Indonesia-EU CEPA shall reinforce the commitment on the joint investment in VET. The

23 Personal, cultural and recreational service is defined as: (1) Audiovisual and related services cover the production of motion pictures, video and radio programs, musical recordings, (and similar) including fees paid to personnel involved. Related limited distribution rights are also covered. Fees paid for sporting, theatrical and similar events belong to this category as well. (2) Other personal cultural and recreational services encompass services associated with museums, libraries, archives, and other cultural and sporting activities. Education and health services are covered under this category (excluding, however, the expenses for health and education services paid by travelers, which belong to travel services).

24 Based on the calculation from UNCTAD data, EU has been contributing more than 60% of total world export in personal, cultural, and recreational sector.

25 The current regulation allows local institutions to establish partnership with international institutions. Foreign participation in education sector is ruled by Ministerial Regulation no 26/2007 which mentioned the form of partnership. Moreover, the Law No. 12/ 2012 framed the foreign partnership in higher education.


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agreement shall not only eliminate the barrier to invest on this area but also have to be accompanied with the commitment of EU to establish the curriculum that comply EU standardization on the necessary skill which at the end drifts the mutual recognition on skill.

Equal does not necessarily mean fair

The sufficient development of service sector has become

a necessary condition for a country to prosper. In fact,

EU has 24.8% share of world trade for services, where the service sector accounts about three-quarters of the GDP and provides more than three-quarters of EU jobs. It is clear that EU has a high ambition for certain services namely financial services, telecommunications, e-commerce, computer services, maritime transport, postal and courier services. This Vision Group has defined this CEPA as a Doha-plus with new openings in several key sectors and greater freedom to invest locally in

Indonesia’s services sectors. Particularly, despite it is a net importer of services, Indonesia is the largest market

in ASEAN and very potential destination for EU services.

Although Indonesia-EU CEPA will aim to provide the equal market access opportunities for service providers and investors in both parties, we have to discern the imbalance level of development on service sector between both parties. The agreement on services between Indonesia and EU cannot entirely refer to, for example, EU-Singapore FTA which commits to give the Singaporean services providers the highest level of access to EU large services market vice versa. This CEPA shall be more discreet otherwise Indonesia will end up as consumers without having sufficient capacity to enter the EU market. Indonesia-EU CEPA shall establish a fair trade which is commensurate with the capacity of each party moreover enable the knowledge transfer from EU business which has a higher level of development on services to Indonesia. The agreement on services has to be conditional by the envisaged capacity building. It has to commit to establish necessary capacity buildings to boost Indonesian service sector development and improving export capacity of Indonesian service

providers to enter EU market. Moreover, the services negotiation should best adopt a balance framework taking into account also the need to secure sufficient space for small services firms in Indonesia to grow.

C.3. Reinforcing EU Investment

For many developing economies, FDI is a key factor to increase the development pace through employment creation, technology transfer and competitiveness improvement which eventually reduces income gap and accelerates poverty alleviation. The fact that 72% of the investment in Indonesia was foreign investment (BKPM, 2012) denoted the importance of FDI for Indonesian economic development. Thus, the current government policy toward foreign investment is directed to the manufacturing sector in regards to enhance the value- added creation, eliminate the dependency on imported products and encourage the export. Although the effectiveness of the developing countries’ policies that relying on inward FDI is still questioned 26 , the FDI is believed as one of the keys to succeed the national leverage acceleration as it assists the economy to expedite the national integration into the global value chain.

Within the last decade, the world production base has been shifted to ASEAN for advancing the ASEAN Economic Community. Foreign investment came to labor-intensive industries, mineral resources, and several infrastructure projects. Indonesia was ranked the fourth country (after China, Hong Kong, Singapore) to receive the most FDI in East Asia and ASEAN region in 2012 with the total FDI valued USD 24.6 billion. The most appealing sectors were Mining (USD 4.3 billion), Transportation, Warehousing & Telecommunication (USD 2.8 billon), Chemical & Pharmaceutical Industry (USD 2.8 billion), Metal, Machinery & Electronics Industry (USD 2.5 billion), Transport Equipment & Other Transport Industry (USD 1.8 billion). EU has been the third largest source of FDI for Indonesia as it approximately contributed 9% of total FDI from 2010-2013 (Table 3). However, the allocation of EU investment to Indonesia is still low compared to the total investment in ASEAN 27 .

26 Lall & Narula (2004) explained many Asian countries that have relied on a passive FDI-dependent strategy for industrial development have not succeed because FDI per se does not provide growth opportunities unless a domestic industrial sector exists which has the necessary technological capacity to profit from the externalities from MNE activity.

27 Indonesia received only 1.6 % of all EU FDI going into Asia, and only 6 % of all EU investments flowing into ASEAN (Euro Chambers, 2013).


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Table 3

indonEsia statistics of fdi rEalization (in usd million)









Asia Excluding ASEAN












European union






united States of America






America Excluding uS


















Europe Excluding Eu


















Source: bPKPM (2013)

The EU investment has been playing a significant role in Indonesia, there are approximately 700 EU companies invest in Indonesia which absorb 500,000 labor forces. Statistics of BKPM shows EU investment increases from year to year, there were more than 400 new projects every year which values USD 2.3 billion in 2012 (from 458 projects) 28 . The total EU investment in Indonesia is estimated amounts USD 70 billion spans over various sectors in manufacturing as well as in oil & gas, mining and banking. There are still a lot of open opportunities for EU investment, especially in infrastructure and green economy development. Therefore, the Indonesia-EU CEPA shall content a high commitment of EU to increase its investment in Indonesia to assist Indonesia in leveling up its economy development. This good intention will be an accelerator in succeeding Indonesia-EU trade relationship.

To reap from the CEPA

There are four broad categories of investment provisions in international agreements (Szepesi, 2004): investment promotion, investment protection, market access/ restrictions for foreign investors (pre-admission) and post-admission regulations (Table 4). The listed provisions between EU and Indonesia will cover the general

commitment between two parties. However, the option of concluding separate investment protection could be left individually to the related EU member states and the negotiating party. Private investment decisions are very much affected by institutional factors, which are addressed in the investment agreement. Thus, it is important to precisely conceive a set of provisions that would benefit both parties. Those provisions shall also accommodate of the interests of each party and facilitate the dispute that might happen in the future.

The investment promotion means to stimulate investment flows by enhancing the information sources and simplifying the investment procedures. It includes some committed activities namely information exchange, preparation of studies, training programs, establishment of links between research centers, regulatory coordination, institutional development and technical assistance. In November 2013, EU-Indonesia Business Network (EIBN) has been inaugurated in Jakarta, aims to promote Indonesia as a potential trade and investment destination in the EU and to actively support Indonesia in its efforts to improve the business and investment climate as well as intensify EU-Indonesia business relationships. It also commits to provide an entry point for European companies (especially SMEs) to enter

28 The value of EU investment from Q1-Q3 2013 valued USD 2.0 billion, came from 661 projects. The number excludes Oil & Gas, Banking, Non-Bank Financial Institution, Insurance, Leasing, Investment which licenses issued by technical/sectoral agency, Porto Folio as well as Household Investment.


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Table 4

provisions on invEstmEnt agrEEmEnt


Provision Categories



Investment promotion

Information exchange, regulatory coordination, information promotion machineries or technical assistance.


Investment protection

Capital liberalization, property rights, the settlement of investment disputes.



Market access and potential barriers while entering certain economic sectors in host country.



The treatment after foreign investors establish in host country, especially includes national treatment principle.

Source: European Center for Development Policy Management (2004)

and invest in Indonesia. This became one substantial step to advance the negotiation between Indonesia and EU later on the CEPA rounds 29 .

The investment promotion provisions could be specifically mention sectors which would be stressed as priority. In accordance with The Masterplan for Acceleration and Expansion of Indonesia’s Economic Development (abbreviated MP3EI) agenda to increase value-adding and expanding the value chain for industrial production processes, Indonesia-EU CEPA shall carry out the creation of economic activities within and among regions. In fact, in many cases of developing economies, foreign capital inflow does not necessarily bring spillover effect to the local players, especially while the industrial structure does not go on with the foreign investment policy. Therefore, the CEPA has to be designed to reinforce the industrial linkages between the upstream and downstream industries which in this scheme, the participation of local players (including SMEs) have to be taken into account. The CEPA shall not only generate new investment, but also create supply chain linkages between foreign and domestic plants to ensure the productivity and technology spillovers.

Moreover, the trade and investment liberalization which is supported by advance innovation in information technology has changed the production architecture of the world nowadays by leading the production process to be fragmented across countries. This Global Value Chains (GVCs) concept has shifted the global trade into the form of trade in task, given the opportunity for each economy to reap the advantage of value added creation. Within the past two decades, a trend persistently shows Indonesia’s contribution to GVCs with three quarters of its export is intermediate goods (Tijaja, 2013) 30 . To improve its position in GVCs, Indonesia has to move towards higher value-adding activities 31 .

The regional integration with the establishment of ASEAN Economic Community (AEC) has created one single ASEAN market and has a high ambition to make ASEAN as a production base by attracting global investors to establish in ASEAN. It is not only increase the competition with global players, but also among the ASEAN countries. Moreover, each ASEAN country is now in concluding several bilateral economic partnerships with other economies in order to invite the foreign investment. It prompts Indonesia to follow the trend

29 EIBN work closely with its Indonesian partners namely APINDO, BKPM and KADIN as well as other business association. It will conduct a variety of activities, including the creation of a web-based portal containing all necessary information on how to do business in Indonesia, over 140 events in Europe and in the region and the strengthening working groups and seminars, business-support services to European companies, policy research, and liaison with ASEAN stakeholders.

30 At the same time there is a declining trend in Indonesia’s export of final goods as the raise of China and other emerging economics in final goods assembling.

31 The overall import content of Indonesia’s exports (OECD I-O Database) is 17.77%. Although it is lower if it is compared to the share for China (27.4%), India (18.5%), Thailand (38.1%) and Vietnam (27.5%) it might due to the high share of non-value-added products, such as raw materials and extractive goods in Indonesia export.


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to liberalize its investment policy. Otherwise, potential investors would place their plants in other ASEAN countries and sell their products to Indonesia with no significant barriers by the establishment of ASEAN one single market. Hence, Indonesia-EU CEPA agenda on investment shall focus on specific sectors that lead to level up Indonesia’s competitiveness and accelerate its integration into regional and global value chains, with the commitment to bring Indonesia to be the production base of EU companies for the ASEAN region and for the world.

The next concern in international agreement on investment is the investment protection and consultation mechanism for dispute settlement, especially related to the repatriation of capital. We could learn from The EU – Chile Association Agreement which includes reservation to capital market liberalization as mitigation for the effect of a free capital movement. Chile reserves the right for its central bank to function independently and allows the government to maintain investment legislation that may restrict capital movements (ECDPM, 2004). Indonesia – EU CEPA could refer to several agreements EU had been made with several developing economies. The provision of investment protection authorized Chile to impede EU investors who have invested under voluntary investment programs (such as newly privatized companies, utility sectors, the defense industry) to repatriate an investment before a certain period has elapsed since the initial investment. EU agreement with Tunisia and Morocco in The Euro-Mediterranean Association Agreements and the Trade, Development, and Cooperation Agreement also mentioned the full liberalization of capital movement will be allowed “when the time is right”. The EU - Mexico Global Agreement, although is keen to establish capital movement liberalization, put the exemptions for situations where serious difficulties exist with exchange- rate or monetary policy. There are several conditions that shall be underlined in order to reserve the capital market. Besides the tax incentives, a stated commitment to keep the EU investment in Indonesia will be very convenient

for Indonesia. Indonesia shall adapt the reservation to capital market provision as a guaranty to ensure the investment to remain and reinvest in domestic market until it delivers the expected benefit.

Other concerns in the investment agreement are the pre and post admission provisions which include the market access and the national treatment issue. Pre-admission provisions defined the market barriers that potentially are encountered by foreign investors while entering the domestic market 32 . Therefore, the potential sectors that will bring multiplying benefit to Indonesia shall be concerned. The potential sectors are: high value added industries, such as automotive, electronics and processed food; emerging industries in term of Indonesia-EU, such as fisheries, textile, footwear, furniture and chemicals & pharmaceutical; service industry especially logistics and infrastructure development; and the technology to implement green economy. Furthermore, the commitment of investment promotion shall embrace all the business scale in Indonesia with the awareness of enhancing SMEs 33 . Once the foreign investment establishes in Indonesia, it uses to get the national treatment or non-discriminatory treatment with the domestic firms. However, some conditions allow the reservation on national treatment principle, this reservation usually implies by retaining the limit on the proportion of foreign ownership. The specific industries are those which are reserved for SMEs and cooperatives, those for which a partnership is required, those for which certain shareholding arrangements are required, those that may be conducted only in certain locations, those for which a special license is required 34 . Moreover, for some specific industries which plays crucial role in the economy (such as mining and extraction business of other natural resources), the commitment to increase the local participation (or ownership) gradually shall be attached.

Overall, the FDI from EU has to bring acceleration of Indonesia’s development by a real employment

32 In order to protect the economy sovereignty, the foreign investment law under the Presidential Regulation No. 36/ 2010 lists 20 nominated industries or fields of business that are closed to foreign investment.

33 We could learn from The Economic Partnership, Political Coordination, and Cooperation Agreement European Union – Mexico, was signed in December 1997 clearly targeted the SMEs in the agreement as the instrument to stimulate the reciprocal investment between both parties.

34 Referring to Presidential Regulation No. 36 / 2010.


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creation and transfer technology. Despite the massive employment industry and technology base industry usually go in the opposite way, the key success to unleash it is by reinforcing the linkage between foreign and local business. EU investment commitment in Indonesia-EU CEPA is expected to contribute a big endowment to Indonesia’s growth.

C.4. Ensuring Fair and Competitive Trade under Indonesia-EU CEPA: Trade Defence Measures and Agriculture Policy

Country wishing to enter a free trade concession often worries, at least, about these two things: (i) whether the FTA conclusion will seriously hurt domestic industry because of surging imports, and (ii) the possible extent of unfair competition and trade policy distortion surrounding business activity between the parties, e.g. dumping and subsidy. This paper argues that robust trade defence system and non-distortive agriculture policy are the keys in ensuring fair and competitive trade climate under the Indonesia-EU CEPA. This section is an effort to identify key policy issues and possible recommendation in order to strengthen the application of trade defence policy as well as to minimize the distortive effect of domestic agriculture policy.

Trade defence measures are the measure designed to protect domestic industry against unfair competition, distortive trade policy, and unforeseen consequences following trade liberalization. There are three types of trade defence measures, namely (i) safeguards measures-aiming to allow countries for temporary relief from sudden import surges, (ii) countervailing duties measures-designed to counteract subsidies implemented by partner countries, and (iii) anti- dumping policy-created to counteract unfairly low prices set by trading partners. Anti-dumping (AD, hereafter) and countervailing duties/anti-subsidy (CVD, hereafter) pertain to counteract unfair trade practices, while safeguards are more like the “safety valve” in case there’s sudden and sharp imports surge wherein the domestic industry can not adapt with. As a consequence of the difference in the underlying motives, they also have different principle in the remedy mechanism. AD and CVD measures is limited only to the amount of

dumping and subsidization, while safeguards remedies might take more flexible form which deemed necessary for domestic industry to be restructured and adjusted from the unfavorable condition.

The practices of trade defence policy are regulated multilaterally through a set of WTO agreements which are binding for all of its member. WTO Agreement on Safeguards (SA, hereafter) set down rules pertaining to the application of safeguards measures, WTO Agreement on Subsidies and Countervailing Measures (SCMA, hereafter) is designed to regulate countervailing measures and subsidization policy particularly for non-agriculture products, while the WTO agreement on agriculture (AA, hereafter) is the one which regulate subsidization policy for agriculture products. The multilateral benchmark on anti-dumping application is the Agreement on Implementation of Article VI of GATT 1994, which is also known as Anti- Dumping Agreement (ADA). However, despite its binding characteristics, these three types of trade defence instruments are exempted from WTO principle of non-discriminatory, thus making it possible for some modifications suitable for bilateral/regional context (Kasteng and Prawitz 2013). As far as it concerns, this section also seeks for possible formulation of trade defence chapter in the Indonesia- EU CEPA in order to be more mutually beneficial while respecting the gap of development level between the two parties.

In order to find a “fair” formulation of trade defence chapter under the Indonesia-EU CEPA, one has to respect the underlying differences surrounding the trade defence policy implementation in the two countries. EU as a developed country has a very well established trade defence system as compared to Indonesia which is more as a laggard due to lack of technical capability. There are two committees in Indonesia which are responsible in the area of trade defence, namely “Komite Anti-Dumping Indonesia” (KADI)-taking care of anti-dumping and anti-subsidy (countervailing) measures, as well as “Komite Pengamanan Perdagangan Indonesia” (KPPI)-responsible for safeguards measures application. KADI is in charge to counteract unfair trading practices, i.e. dumping and subsidy, while KPPI is responsible to safeguard the domestic industry from unforeseen negative consequences following the CEPA/FTA, such as


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sudden import surges. Although the system is already there, the implementation of trade remedies in Indonesia is still somewhat lacking. There is a significant gap on the implementation of trade defence policy between Indonesia and EU. The below section provides illustration on how significant the gap is.

As of December 2013, there are 19 Indonesia’s products affected by EU’s anti-dumping policy, 5 of which are also subject to countervailing measures (anti-subsidy), namely: biodiesel, polyester, polyethylene, and ring binder mechanisms (please see complete list in Table 5). However, many of these products listed in the Table 5 are either expired, terminated, or repealed indicating that the anti-dumping policy and countervailing duties

are no longer applied for those products. There are only 5 Indonesia’s products, by far, which are still attached with the EU’s anti-dumping measures, namely biodiesel, fatty alcohol, open mesh fabrics of glass fibers, sodium cyclamate, as well as tube and pipe fittings (of iron or steel). Moreover, there’s an on-going investigation conducted by the European Commission for the alleged dumped monosodium glutamate product originating from Indonesia. On the contrary, there was only one product of the EU which were subject to Indonesia’s anti-dumping duties back in the 2001, namely the liquid sorbitol (D-Glucitol). Because it has been expired since 2006, there’s practically none of EU product being attached by Indonesia anti-dumping

Table 5 goods originating from indonEsia which arE suBJEct to anti-dumping and anti- suBsidy mEasurEs in Eu







Polyester staple


Cotton fabrics (unbleached)–terminated

Polyester textured filament yarn (PTY)– terminated


Fatty alcohols

Polyethylene terephthalate (PET)–terminated

Footwear (with uppers of leather or plastics or textile)–expired

Ring binder mechanisms-expired

Lighters (disposable)–terminated

Magnetic disks (3.5” microdisks)–expire

Monosodium glutamateUnder Investigation

Open mesh fabrics of glass fibres

Polyester staple fibres–repealed

Polyester textured filament yarn (PTY)– terminated

Polyethylene terephthalate–expired

Ring binder mechanisms–expired

Sodium cyclamate

Stainless steel fasteners and parts thereof– expired

Threaded tube or pipe cast fittings, of malleable cast iron (MTF)–terminated

Tube and pipe fittings, of iron or stee

Note: Data as of 16 December 2013. black color means that the measures in particular product is either expired, terminated or repealed, while red color indicates that AD and CvD measures are still applied on the products.

Source: European Commission (downloaded from


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and/or anti-subsidy measures as of today; not even an investigation. Not only in terms of anti-dumping and anti-subsidy measures, Indonesia is also still lagging behind with regards to applying safeguards measures as compared to EU.

Subsidization policy-especially in the form of price support-is regarded as one of the anti-competitive and unfair trade practices of which its application in the international arena is strictly regulated by the WTO. Subsidy is counterproductive with the spirit of free trade encompassed in the Indonesia-EU CEPA as it will unfairly makes goods seemed cheaper and act as a barrier to keep domestic industry out of competition viz a viz imported products. Agriculture is among the highly subsidized and protected economic sectors in EU which is represented by its well-known flagship program, namely the Common Agriculture Policy (CAP) accounting at almost 46 percent of total EU expenditure budget (Costa 2009). Because the agriculture subsidy tends to be heavily applied in EU rather than in Indonesia, to what extent the Indonesia-EU CEPA can accommodate the principle of fair and competitive trade will largely depend on how willing the EU is to commit itself in minimizing the distortive practices in its agriculture sector. The nature of EU’s agriculture subsidy under the CAP and how it impacts the state of international market will be described in the below section.

Agriculture is such a strategic sector for the EU in a way that any mismanagement in the respective sector would place the whole EU integration at stake. The CAP serves as a grand mechanism in ensuring its citizen that EU’s agriculture sector is still able to provide fair standard of living for its farmer as well as to secure supply of high quality and affordable food products for its 500 million consumers. The EU positions its farmers not only as the providers of private goods, namely food products, but also as suppliers of public goods by help preserving

the EU’s natural resources heritage (e.g. soils, landscape, biodiversity) at the countryside for the sake of all EU citizens. As the market doesn’t pay the farmers for this “positive externalities”, the EU authorities then find it essential to provide the farmers with direct income support as a payoff for their generous services (European Commission 2012). Apart from the traditional objectives, this kind of perspective might provide additional motivation for the European Commission to keep the CAP subsidization policy in place in the future.

The EU CAP is essentially an expenditure policy which

is characterized by the two pillars, namely Pillar I and

Pillar II. Pillar I comprises of market suppor 35 and direct

income payment 36 programs financed by the European

Agricultural Guarantee Fund (EAGF), while Pillar II 37 covers comprehensive rural development programs funded by the European Agricultural Fund for Rural Development (EAFRD). It has experienced several notable reforms since its establishment in 1962. At its early stage, the CAP focuses on improving EU’s agriculture productivity and ensuring a stable good price for the farmers so that they are incentivized to keep produce major food products for EU’s consumers. In doing so, the EU is heavily reliant on export subsidies and price guarantee measures which constitutes around 97% of total CAP expenditure in 1971. The first set of the CAP program was then proven to be

a huge inefficiency which resulted in a “food mountain”

and unsustainable CAP budget. In responding to this situation, the EU launch the 1992 “MacSharry” reforms which aims at shifting the CAP away from market support reliant towards more producers support and consideration for the environment. Through the 1992 CAP reforms, the EU was intended to make its agriculture sector be more competitive by reducing the amount of price support and replace it with “coupled” income support which is tied to production decision, as well as by introducing another measures in order to stabilize CAP budget and reduce the abundant food surpluses.

35 There are two types of market support measures under the Pillar I, namely price guarantee and export subsidy. The price guarantee scheme is granted when the actual domestic market price is lower than the EU’s guaranteed price, whereas export subsidies-or also known as export refund-are paid by the government to bridge the gap between high EU guaranteed prices and low world prices.

36 The direct income payments under the Pillar I consists of two different income support which differs on its linkage to agriculture production. The “coupled” payments is an income support which requires certain production decision as the payoff, while the decoupled direct payments are designed to provide the farmers with a minimum level of income without creating any distortion in agriculture market.

37 Pillar II neither aims at altering market outcome nor providing minimum income support to the farmers. Instead, it covers only general expenditure program which relate to the promotion of sustainable agriculture and rural development objectives, such as rural infrastructure and human capital development.


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In 1992, the share of market support measures had declined to 74.3%, while the portion of income support in the form of coupled payment made up around 17.3% of total CAP budget (please see Table 6).

The state of agriculture policy in EU has experienced further reforms following the conclusion of the new

version of GATT 1994, establishment of the WTO and the implementation of the Agreement on Agriculture (AA). Those new platforms, especially the AA, has set down

a comprehensive international regulatory framework as

regards to trade in agriculture which aim at establishing

a fair and market-oriented agricultural trading system. The Agreement on Agriculture has restricted all agriculture policy measures which have potential effect in altering competitive market outcome (price and volume) and are deemed as trade-distorting, such as export subsidy, price guarantee, and “coupled” payment. The union has responded to this development by issuing the 2003’s

CAP reforms plan which is way more market-oriented. Under the 2003’s CAP reform package, the EU maintain its compatibility with the WTO regulation by introducing a new measures which are not distortive to agriculture market and by strengthening its commitment to the rural development agenda. In complying with the WTO agreement, the CAP reform in 2003 has focused on cutting the links between subsidy/income support and agriculture production (decoupled payment) as well as reducing significantly the expenditure budget for market support measures, i.e. price guarantee and export subsidy. As a result of 2003’s reform, in 2011 the EU has relied more on the decoupled income subsidies (66%) instead of coupled payment (6%), while the market support measures constitute only a minor part in the whole agriculture policy, accounting at around 6% of total CAP expenditure. Although being highly restricted by the WTO, the EU is able to maintain the amount of export subsidy and price guarantee at a minimum level

Table 6 thE dEvElopmEnt of Eu common agricultural policy (cap)







Billion Euro


Billion Euro


Billion Euro





Pillar I









Market Support:









Export refund (subsidies)









other (price guarantee)









Income Support:








Coupled Payment








Decoupled Payment






Pillar II: Rulal Development


















CAP Foundation






Policy concern




Product Support



Market Orientation





Reduce Surpluses


Consumer Concern



CAP budget


Rural Development









WTO Compatibility


Source: European Commission (2012) and downloaded from


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allowable by the Agreement on Agriculture (AA) covering products, such as: cereals and wheat, rice, cereal-based products, dairy products, pig meat, poultry meat, cereals, beef and veal, eggs, sugar, and syrups. Among those lists, the dairy products and beef products are the EU’s most exported agriculture products to Indonesia.

The EU CAP is a “game changer” in the international agriculture business. As the world’s largest importer of agriculture products, it is understandable that any domestic policy shocks in EU will most likely affect the global market outcome of agriculture trade. Costa, (2009) suggested that the CAP encourage significant agriculture expansion in the host country, while at the same time stimulate agriculture contraction abroad. The study further found that the CAP leads to a 6-8 percent increase in the domestic (EU) output of agriculture and food products as well as a decrease in the domestic (EU) output of manufacturing and services sectors which are equivalent to around $US 65 Billion. On the other hand, the study presented that the EU CAP drives the world prices down to 2-4 percent for agriculture products and to around 1 percent for food processing goods. It consequently spurs the reallocation of economic resources in the non-EU countries away from agriculture and food processing toward other sectors of the economy in search of higher returns, such as in manufacturing and services sectors. The net global welfare cost of the CAP is estimated to be equivalent to around USD 45 billion which is mostly borne to the EU itself.

The subsidization policy in EU’s agriculture sectors, especially under the Pillar I (market support and direct payment), matters a lot for Indonesia’s businesses. As described by Costa (2009), the CAP is likely to be harmful rather than beneficial, especially for developing countries. There are at least two mechanisms on how the CAP will negatively impact Indonesia’s private sectors. The first mechanism works through the export subsidy scheme in EU. By benefiting from export refund (export subsidy), EU exporters find no difficulty in competing with other more efficient producers in the world agriculture market, as it addresses any price differences especially when the world prices fall below the EU’s guaranteed prices.

Assuming that Indonesia and the EU compete directly at the same products and market, the export subsidy policy in EU will hurt Indonesia’s producers significantly. This is mostly because the price effect of export refund will make the world’s consumer in favor of EU’s agriculture products rather than Indonesia’s produce, especially when considering also the fact that agriculture products originating from EU usually is in better quality than that of Indonesia’s. When there is a large pool of homogenous products (in term of price) at the same market, the one with higher quality will certainly be picked up the most. As the Indonesia’s exporters are still lagging behind the EU producers in term of product quality, it will make Indonesia’s private sectors lose out from the global competition.

Not only does the EU unfairly support its farmers and/ or exporters to be able to compete in the international market, it also gives significant protection to the domestic industry against imported products. The domestic support measures under the CAP package, such as price guarantee as well as coupled and decoupled income support, are the protectionist measures granted for the EU’s domestic industry in order to cope with the reverse effect of market competition. They are all trade distorting in so many ways. It artificially encourages the expansion of agriculture sectors domestically in the expense of lower export opportunity for developing countries (ODI 2012). This is the second mechanism of how the CAP package would be harmful to Indonesia’s businesses, especially for the firms wishing to penetrate into EU market. In addition, the EU’s farmers are protected from rising market competition not only by distortive behind-the-border measures-such as the CAP measures, but also by protectionist border policy such as high import tariff rates and stringent technical measures, especially for agriculture products.

Despite the massive application of agriculture subsidy in EU as well as its negative impact to Indonesia’s businesses, there is only a little room for Indonesia to counterbalance the EU’s distortive policy, be it bilaterally or multilaterally. One of the main reasons is that the EU justifies its CAP to be WTO compliance 38 and is able to

38 It mostly consists of decoupled payment classified as “green box” in the WTO Agreement on Agriculture which are exempted from reduction or elimination commitment (please see the legal text of Agreement on Agriculture for more detail classification).


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maintain the “restricted” measures (e.g. export subsidy and other market distorting measures) 39 at the minimum allowable level as stipulated in the WTO Agreement on Agriculture. Considering this condition, it would be hard for Indonesia to bring up EU’s case into WTO dispute settlement, as there’s no sufficient evidence to convince that the current EU CAP practices violates the WTO agreement. Furthermore, the technical capability of KADI, especially in applying the countervailing (anti- subsidy) measures, is still lacking, making it even harder to counteract EU’s subsidy in a bilateral basis.

Based on those findings, it is implied that robust trade defence mechanism as well as non-distortive agriculture policy are the cornerstone in ensuring fair and competitive business climate under the Indonesia- EU CEPA. Those two aspects are often forgotten in the study and consultation stage of CEPA/FTA and also are not very well articulated in the legal text, making it less fair and less comprehensive as it could’ve been. This paper argues that fair and competitive business climate surrounding the Indonesia-EU CEPA cannot prevail under the policy absent. There has to be a policy effort to institutionalize the principle of fair and competitive trade into the Indonesia-EU CEPA legal text in order to ensure its realization. By doing so, modification on the provision of trade remedies chapter as well as commitment to reduce the application of agriculture subsidy are among the issues need to be highlighted and explicitly articulated in the legal text of Indonesia- EU CEPA. In light of this, the following programs and recommendations might be worth pursuing for Indonesia:

Strengthening trade remedies system in Indonesia

In order to be prepared for the increased competition following the conclusion of Indonesia-EU CEPA, the role of trade remedies system, which is designed to ensure competitive and fair trade, has to be strengthened. This policy effort will not only keep Indonesia out of unfair trading practice, but also allow Indonesia to temporarily suspend the tariff concession that is made with the EU to provide domestic industry the “breathing room” it needs in order to adjust from increased import competition

(Pierce and Nicely 2004). In doing so, it is recommended for Indonesia to:

1. Establish cooperation and capacity building

programs with the EU in the area of trade remedies, covering activities such as-but not limited to:

a. Training for trade remedies personnel in Indonesia especially on the technical know-how

b. Sharing session on the best practices of trade remedies policy in EU

c. Dispatch expert in the area of trade remedies to help improve the trade remedies framework in Indonesia

2. Revitalize the use of safeguards measures in addressing the sudden import surges which might cause serious injury to the domestic industry and threaten the sustainability of balance of payments.

Negotiating better deal on trade remedies provision

In order to have robust trade remedies system surrounding the Indonesia-EU CEPA, this study suggests Indonesia negotiating team to:

1. Put the “Trade Remedies” provision into separate chapter. It is recommended for Indonesia to take the “Trade Remedies” provision out from Trade in Goods chapter and put it into separate chapter in the agreement. This is because the trade remedies measure can also be applied for trade in services-especially with regards to safeguards measures, although there’s still no significant development on that.

2. Strengthen policy transparency in the application of trade remedies. The trade defence measures are indeed essential in ensuring competitive and fair business climate between Indonesia and the EU. However, one has to make sure that its application is not inconsistent in a way that it might create more restriction than necessary. There is a complaint from Indonesia’s biodiesel producers whose product is being charged by the EU’s anti dumping duties. They are skeptical about how the dumping assessment system takes place in EU and suspecting that the EU doesn’t

39 It is classified as “Amber Box” measures in the Agreement on Agriculture, and hence subject to reduction or elimination.


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use justifiable standard in valuing production cost of their biodiesel products. Indonesia’s producers feel that the European Commission on anti- dumping has overestimated the production cost of Indonesia’s biodiesel, making it eligible for additional anti-dumping duties.

To address the inconsistency problem, this study suggests Indonesia to reach a deal with the EU to commit on greater policy transparency in applying the trade defence measures (trade remedies). The commitment should be explicitly articulated in the legal

text, making it more institutionalized to implement. The possible programs are to:

a. Exchange information on the assessment system of anti-dumping, anti-subsidy, and safeguards measures. This is to establish common understanding on the assessment framework implemented by each country.

b. Establish a joint committee on trade remedies.

A committee on trade remedies is needed in

order to update each party about the regulatory changes with regards to trade remedies as well

as to serve as a dialogue mechanism in settling

any trade remedies related issues.

3. Make a deal with the EU regarding the “Lesser Duty Rule”. Although being highly recommended by the WTO agreement, the principle of “lesser duty rule” is not yet widely implemented by the member states, particularly by the EU which often charged Indonesia’s products by excessive anti- dumping and/or countervailing measures. The Indonesia-EU CEPA provides a great opportunity for Indonesia to mark a deal with the EU to commit on “lesser duty rule” in the application of anti-dumping and anti-subsidy measures, like the one that has been done with Singapore under the EU-Singapore FTA. The “lesser duty rule” would be very beneficial for both countries, as it encourages reduction on the amount of anti-dumping or countervailing duties if such lesser duty is deemed adequate to remove the injury to domestic industry 40 .

This is even better for Indonesia considering that there are quite a lot of Indonesia’s products which are subject to anti-dumping measures in EU. The lesser duty rule would, therefore, provide them some relaxation.

Reinforcing commitment to eliminate trade-distorting practices of agriculture policy

The agriculture subsidy and other distortive protection are heavily applied in EU rather than in Indonesia. The EU’s farmers are benefited from the protection not only by distortive behind-the-border measures, such as the CAP, but also by restrictive border protection in the form of high import tariff and stringent technical measures (e.g. SPS and TBT). If the Indonesia-EU CEPA would like to gain sufficient political and public support to smoothen the negotiation process, the issue of subsidy and protection in the EU’s agriculture sectors needs to be seriously addressed. This is because agriculture and food products are among the highly exported commodities to EU and the key drivers of economic development in Indonesia. In order to create the foundation of business climate that is fair and competitive under the Indonesia- EU CEPA, it is recommended for Indonesia to push the EU in reinforcing its commitment to eliminate agriculture subsidy and minimize the use of other distortive protection, especially as regards to the measures which is highly restricted according to the WTO agreement. Specifically the EU is expected to:

Eliminate all market support measures under the CAP (i.e. price guarantee and export subsidy)

Reduce significantly the import tariff rate for its agriculture products, especially for the ones which have extremely high tariff rate and receive significant subsidy in the form of price guarantee and export refund, such as: tobacco, dairy produce, beef, and etc.

Commit on improving transparency and bringing greater certainty and consistency in the application of technical measures, i.e. TBT and SPS, especially with regards to agriculture products. The EU has

40 The “lesser duty rule” refers to the Article 3.3 on the draft of EU-Singapore FTA: “Should a Party decide to impose any anti-dumping or countervailing duty, the amount of such duty shall not exceed the margin of dumping or countervaiable subsidies, and it should be less than the margin if such lesser duty would be adequate to remove the injury to the domestic industry”.


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to make sure that its application wouldn’t pose excessive barriers which could impede trade relation between the two countries.

C.5. Other CEPA Elements: Public Procurement, Competition Policy, and IPR Public Procurement

Public procurement includes all government purchasing on goods, services, and project which usually takes form of public tendering. Government procurement constitutes a significant share on the economy, accounts at 15-20% of total GDP in OECD countries in 2002 and 17% of EU GDP in 2009 (Anderson, 2011). The international platform, which set out principle and regulation of international market access to public procurement, is the WTO Agreement on Government Procurement (GPA). The GPA is a plurilateral agreement containing only a subset of the full WTO membership which oblige its member to improve market access in public procurement only for other members involved in the agreement. Indonesia is one of the observer of the GPA but not yet a full member of GPA, thus isn’t obliged to provide non-discriminatory market access for foreign entity and at the same time cannot benefit from improved market access of the international public tendering process offered by the members joining the GPA. While, on the other hand, EU is one of the member of GPA and has been the leading advocate for more open regime of international public procurement.

One way to engage non-GPA member to liberalize its public procurement market is by concluding the preferential trade agreement which also include public procurements chapter therein. Indonesia-EU CEPA is a channel of which EU might deal, in a reciprocal basis 41 , for

a greater market access in public procurement with non-

GPA countries like Indonesia. In the Indonesia-EU CEPA,

a specific chapter regarding the public procurement will

most likely be toughly negotiated, as Indonesia is a huge potential market for public procurement comprising of hundreds central, provincial, and municipality authority. Furthermore, there would be high pressure coming from local firms which are closely related to public

procurement activities, such as construction companies, as they fear on losing market share following the participation of more efficient foreign operators. A win- win mechanism on how far Indonesia should liberalize the public procurement market is therefore very necessary to be developed.

It is worth to note that although EU, under the GPA, is

highly committed to liberalize its public procurement market, the actual data shows that the real share of imported public goods and services is relatively low as compared to Japan, Canada, and even China. One suggested (Messerlin and Miroudot, 2012) that there’s

a substantial “technical barriers” hindering foreign entity

to participate optimally in EU public procurement market. As in the case of trade in goods, there will be no optimal value of trade without eliminating both tariff and non-tariff barriers. Therefore, in this context, it is recommended for Indonesia to negotiate “Public Procurement” chapter in the most precautious way by focusing more on:

Technical cooperation in information exchange and establishment of one-stop-shop regarding public procurement procedures in both parties

Technical capacity building programs for all relevant stakeholders in Indonesia in order to improve readiness to comply with EU’s regulatory framework as well as international platform on public procurement

Mutual agreement in improving policy transparency and consistency to ensure fair trade in public procurement market

The benefit of liberalization in public procurement market would not be symmetrically distributed between the parties. EU’s operator with better technical capacity and financial resources as well as high compliance to standards will easily compete in Indonesia’s public tendering process. While Indonesia’s operator will most likely have a “difficult time” in competing with more efficient international operator in EU’s public tendering process, not to mention in complying with EU’s stringent technical standards. Although the benefit

41 Reciprocity means EU will grant market access of its public procurement only if the trading partners commit to do so.


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would not be symmetrically distributed, liberalization in public procurement market would possibly unlock the infrastructural development potential, as it will encourage greater participation of foreign entity into Indonesia’s public infrastructure project, especially through PPP. In this context, there is a good chance that Indonesia-EU CPA will provide legal framework and certainty for EU’s operator and financial institution wishing to participate into Indonesia’s infrastructure development project.

Instead of proceeding with broad and ambitious EU’s proposal on liberalizing most of public procurement area, this paper strongly argues that it might be more relevant and beneficial for Indonesia to aim only for specific and limited liberalization of public procurement market focusing on the most critical sectors for Indonesia’s development, such as large-scale infrastructure and utilities project, where the capacity of local operators/ firms is still lacking. There are two logics on this proposed position: (i) the capacity of local operator is still somewhat lacking in responding to the increasingly demanded large-scale infrastructure and utilities project in order to keep pace with the economic progress, and (ii) Market access opening up in a broader sectors is deemed to be detrimental for small-and-medium local operators, as they mostly rely on smaller-scale project, such as public procurement of goods and services, especially the one procured by local government. Therefore in the public procurement negotiation under the Indonesia-EU CEPA, the Indonesia’s negotiating team is expected to proceed with the balance framework taking into account the need of advancing Indonesia’s development progress

D. Concluding Remarks

T his paper argues that if Indonesia doesn’t want to lose the momentum of trade and investment enhancement and is willing to maintain its centrality in ASEAN, then Indonesia should move forward with the Indonesia-

EU CEPA. Nonetheless, Indonesia has to take the most precautious way in negotiating the Indonesia-EU CEPA by ensuring that: (i) the CEPA will not severely hurt domestic industry (like the past experience with other FTA, i.e. ACFTA), and (ii) there is a fair market access

and securing sufficient space for small-and-medium local operator to grow.

Intellectual Property Rights (IPR) and Competition Policy

The inclusion of IPR and competition policy chapter in the Indonesia-EU CEPA is a logical consequence of trade liberalization and more open investment regime. There has to be solid legal mechanism to ensure protection of intellectual property and fair business competition following the increased business activity between EU and Indonesia. In this context, there is a significant gap between EU and Indonesia in the capacity to enforce, implement, and monitor the IPR and competition law. Albeit Indonesia has already had an IP and Competition law, there’s still large room for improvement on its implementation and monitoring mechanism. Therefore, in negotiating the IPR and competition policy chapter under the Indonesia-EU CEPA, Indonesia is expected to go beyond EU proposal to follow the international standards (e.g. TRIPs for IPR) and pushing more for capacity building enhancement program, especially with regards to strengthening Indonesia’s capacity to enforce, implement, and monitor the IPR and competition law in Indonesia. The request on capacity building program is best to be clearly stated in the body agreement of Indonesia-EU CEPA and serves as a complement for the already proposed-cooperation program (as stated in the scoping paper). It is best to distinguish the concept between cooperation and capacity building program, in order to avoid any misinterpretation in the future and to serve as a guideline for deriving actual program out of it.

opening for exporter from Indonesia wishing to penetrate into EU market. Therefore the Indonesia-EU CEPA must be build under the principle of mutually beneficial, fair, and competitive business climate. It has to also respect the gap on the development level between Indonesia and EU when determining the level of ambition of the liberalization package under Indonesia-EU CEPA. This study suggest that it is best for Indonesia to view the existing challenges as negotiation tools, instead of impeding factors. This is because the barriers and challenges will still remain if Indonesia holds back from


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the negotiation, whereas there’s a greater chance to solve all existing problems and impediments by negotiating under the Indonesia-EU CEPA.

This study is an attempt to identify the key policy issues of the proposed Indonesia-EU CEPA and serves as a recommendation for the government on how to best deal with the Indonesia-EU CEPA negotiation, particularly from the perspective of private sectors. In doing so, this paper looks into several relevant aspects, such as tariff, non-tariff measures, trade in services, investment, trade defence, agriculture subsidy, public procurement, IPR,

and competition law. The policy recommendation sets down a “grand mechanism” on how to optimize the benefit and minimize the potential adjustment cost coming from the proposed Indonesia-EU CEPA. It mostly contains of general recommendation on the best position the Indonesian government should take in the negotiation process of Indonesia-EU CEPA. It provides suggestion not only on how liberal the Indonesia should be opened up to EU, but also in what aspects Indonesia might push the EU’s trade policy to be more accommodative and less-restrictive in the pursuit of mutually beneficial Indonesia-EU CEPA.


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Anderson, R. D., P. Pelletier, K. O. Lah, A. C. Muller (2011). Assessing the Value of Future Accession to the WTO Agreement on Government Procurement (GPA):

Some New Data Sources, Provisional Estimates, and An Evaluation Framework for Individual WTO Members Considering Accession. WTO Staff Working Paper ERSD-2011-15, 6 October 2011

ARIC ADB (2013). Free Trade Agreement. Downloaded from

Bank of Indonesia (2013). Statistik Ekonomi dan Keuangan Indonesia (SEKI). Downloaded from http://www. Default.aspx

Costa, C., M. Osborne, X. Zhang, P. Boulanger, and P. Jomini (2009). Modelling the Effects of the EU Common Agricultural Policy. Productivity Commission Staff Working Paper, December 2009

European Commission (2006). Global Europe Competing in the World: A contribution to the EU’s Growth and Jobs Strategy. European Commission External Trade

European Commission (2012). The Common Agricultural Policy: A Partnership between Europe and Farmers. Belgium: European Union

European Commission (2013). The EU’s Bilateral trade and investment agreement-Where are we? Memo. 3 December 2013. Downloaded from http://


Eurostat (2013). European Commission-Eurostat. Downloaded from portal/page/portal/eurostat/home/

Kasteng, J. and C. Prawitz (2013). Eliminating Anti- Dumping Measures in Regional Trade Agreements:

The European Union Example. Kommerskollegium


Kimura, F. (2012). Japan’s Mission on Constructing a New International Economic Order. Japan Economic Currents: A Commentary on Economic and Business Trends, No.81, March 2012

Lall, S., & Narula, R. (2004). Fdi and its role in economic development: Do we need a new agenda? European Journal of Development Research, 16.

Messerlin, P. and S. Miroudot. EU Public Procurement Markets: How Open are They? Sciences Po. GEM Policy Brief, August 10, 2012

ODI (2012). The EU’s Common Agricultural Policy and Development. Project Briefing, No 79, November 2012

Pierce, K. J. and M. R. Nicely (2004). Overview of Trade Remedies in WTO System: Antidumping, Subsidies, Safeguards. Presented in NCIEC WTO Conference, Georgetown University Law Center, 11 March 2004

Szepesi, S. (2004). Comparing eu free trade agreements:

investment. In InBrief

Tijaja, J. P. (2013). The proliferation of global value chains:

Trade policy considerations for indonesia. TKN Report, Retrieved from


Ullrich, H. (2004). Comparing eu free trade agreements:

services. In InBrief

UNCTAD (2013). Non-Tariff Measures to Trade: Economic and Policy Issues for Developing Countries. Geneva:

United Nations Publication

UNIDO (2011). What do Border Rejections tell us about trade standards compliance of developing countries? Analysis of EU and US data 2002-2008. UNIDO Working Paper. Vienna: UNIDO

Vision Group Report (2011). Invigorating The Indonesia- EU Partnership: Towards a Comprehensive Economic Partnership Agreement. Downloaded from


WITS (2013). World Bank. Downloaded from http://wits.

World Bank. (2013). Pressures mounting. Indonesia Economic Quarterly, Retrieved from http://www.


World Tourism Organization (UNWTO), & World Travel & Tourism Council (WTTC) (2013, October). The impact of visa facilitation in apec economies. Report prepared for the Apec high level policy dialogue on travel facilitation, Bali. Retrieved from research/policy-research/visa-facilitation/


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appendix 1

summary of vision group rEcommEndation on indonEsia Eu cEpa


Vision Group Recommendation


Trade in Goods


Eliminate tariff (zero tariff ) for 95% of tariff lines, covering at least 95% of trade value, in a period of maximum 9 years. The remaining 5% should permit further progress.

The modality of tariff reduction should follow the principle of “asymmetry over time”

TBT and NTMs

Cooperation, capacity building, and conduct consultation in the field of technical regulations, standards, and conformity assessment procedures in order to ensure effective and least-cost adaptation of regulatory frameworks.

Establish a framework for joint efforts to facilitate mutual recognition in the most appropriate and cost- effective manner, which takes form of streamlined procedures, mutual recognition of laboratories, testing facilities and certification processes

Joint dialogue to seek an explanation and find a solution in any shortcomings in compliance

Enhance competitiveness and build downstream industries of priority sectors


Improving transparency and bringing certainty and consistency to the application of SPS measures.

Establish mechanism to facilitate trade, including pre-listing of food establishments, and working towards the recognition of disease-free health and pest-free areas when applied by the parties for both animal and plant diseases, while maintaining essential border checks

Establish appropriate arrangement to address market access barriers and to facilitate resolution of differences

Intensify cooperation aspects in the area of SPS and animal welfare, especially related to testing and accreditation (e.g. EU-Indonesia cooperation on establishing National Rapid Alert System for Food Products to strengthen national capacities in the risk management for food safety)

Rules of Origin (ROO)

ROO should be trade facilitative and less hampering. The vision group recommended to take liberal view on ROO, which is trade and investment friendly and also taking into account the planned negotiations with other ASEAN member states

Safeguards Measures

Build a joint mechanism to decide on the future safeguards based on objective criteria and short exit periods


Trade in Services

Services liberalization must be significantly above the package offered in Doha Development Agenda (DDA) negotiations

consolidate both countries current level of opening to foreign economic actors

focus on opening up mode 1 and mode 3 of services

eliminate investment restriction in some Indonesian services sectors


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Investment Facilitation (pre-establishment)

review substantially the limitation of foreign ownership (e.g. equity caps and joint-ventures requirements) at least for priority sectors

review the rules of local content requirements

ensure transparency and clarity in the regulatory framework

review regulatory authorities to ensure they can operate independently

ensure transparency and predictability of taxation climate

Investment Protection (post-establishment)

Conclude an ambitious investment protection agreement covering all EU member States, at least including these elements:

non-discriminatory treatment

nationalization / expropriation

compensation for losses



dispute settlement

Investment Promotion

Enhance effort to attract potential investment sources from EU countries, and similarly promote Indonesian investment to EU as well


Cooperation and Capacity Building

Cooperation and Capacity Building on market access

the cooperation programmes should aim at a better understanding of each other’s regulatory frameworks and system. A strong emphasis should then subsequently be put on building up the export quality infrastructure of Indonesia. The program may covers, but not limited to:

alignment to da common set of standards, based on international rules

recognition of conformity assessment and certification systems

establish an EU-Indonesia helpdesk and standards information platform on each other regulatory regimes

cooperation on building up a strong certification and laboratory system to be able to fulfill technical regulation in EU

Cooperation and Capacity Building to facilitate direct investment

Intensify the cooperation to facilitate direct investment in a view to increase involvement of EU firms in Indonesia to enhance access to higher technologies and export quality infrastructure


Public Procurement, Infrastructure and Public Private Partnership

Set up transparent rules and negotiate additional levels of mutual access in public procurement, especially in public infrastructure

Set up dialogue to reduce supply constraints in Indonesia, which lie in logistics and infrastructure, including power, transportation, roads, and ports


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Create a fully functioning PPP model for infrastructure development including local companies and investors

Provide government supports in the form of guarantees for the infrastructure projects

To include European Investment Bank (EIB) to be able to participate in Indonesia’s infrastructure development

Establish a single point of entry for firms and to reduce the complexity of the decision-making processes with regard to infrastructure projects, including dealing with certain aspects of regionalization

Develop joint marketing efforts to create more proactive interest from EU exporters and to attract European capital


IPR and Competition Policy

The IPR chapter should cover all categories of intellectual property namely: copyright and related rights, patents, trademarks, designs; layout-designs, geographical indications, protection of undisclosed information and plant variety rights.

To create a high level on ambition of GI protection.

As a part of CEPA, GI protection should go beyond

TRIPS obligations for foodstuffs and provide for extension of the protection at least to TRIPS article 23

level (referred to as TRIPS +).

To establish capacity building and facilitation for Indonesia in order to accomplish effective implementation of such IPR provisions, which includes include exchange of information and experience on issuessuch as best practice, promotion dissemination, streamlining, management, protection and effective application of intellectual property rights, the prevention of abuses of such rights, and the fight against counterfeiting and piracy.

to establish closer cooperation in the field of competition policy, such as:

Exchanging information concerning the relevant imposition of competition policy measures.

Include provisions in the CEPA on consultations and dialogues on all matters relating to competition policy.

Enhancing capacity building such as providing training, education, human resources development, and technical assistance, and possible exchange of staff or traineeships.

Exploring the merits and scope of possible cooperation between the Competition Supervisory Commission of Indonesia and the European Commission.


Sustainable Development (environment)

To include concrete measures to promote the greening of EU-Indonesia trade and direct investment that evolve EU-Indonesia business to a sustainable competitive business model which benefits both parties.

To include structures that ensure any sustainability policy neither accidentally impedes trade nor restricts growth or job creation.

Encouraging Indonesian manufacturing to move up the value chain in a sustainable manner, branding goods with higher sustainability value and growing the business opportunities for both parties.

To establish capacity building and trade facilitation with sustainability objectives, specifically there should be a framework of mutual understanding of the value of long-term sustainability overriding short-term economic gains.

Source: Indonesia-Eu vision Group Report - Invigorating The Indonesia-Eu Partnership Towards a Comprehensive Economic Partnership Agreement.


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appendix 2

issuEs and rEcommEndation idEntifiEd from indonEsia’s BusinEss community: By sEctors



Issues by sectors







Insufficient infrastructure (software & hardware) and high logistics cost.

The elimination of import duties shall be compensated by the capacity building in labor skill and infrastructures.


Limited capacity of production that hampers

CEPA is expected to bring real investment in spare-parts


motor vehicles industry to be export oriented industry.


Japan investment in Malaysia/ Thailand should

be best practice in spare-part industry.




RSPO vs ISPO There are differences between Roundtable on Sustainable Palm Oil (RSPO) and Indonesian Sustainable Palm Oil System (ISPO).

CEPA shall facilitate a evaluation and/or point-by-point comparison between RSPO and ISPO to find the best applicable standardization of palm oil.





Indonesian palm oil failed to meet the standard required for biofuel production in EU (while EU required 35% greenhouse gas energy saving, however Indonesia only met

Through the implementation of CEPA, EU shall be able to assist palm plantation in Indonesia to be more environmental friendly.

19%). In addition, -there is different standard


of Renewable Energy Directive (RED) applied among EU countries which impacts the high cost of audit for Indonesian companies.

43% of palm producers in Indonesia are small farmers with 2-5 hectares of plantation area. Therefore, CEPA shall also


RED could not be benefited by small farmers due to the insufficient capacity to meet the sustainability scheme.

take into account to empower and encourage the capacity of small farmers.


Other Non-Tariff Barriers:


- Import Quota Some EU countries (e.g. Spain) applied import quota for Indonesian palm oil products.

CEPA shall ensure the ease of market access to EU region, thus it shall not only focus on elimination of tariffs but also have to take into account the barriers that might occur by the implementation of NTMs. Elimination of non-tariff barriers include the abolition of import quota and socialization to raise positive awareness on palm oil products.

- Enviromental Issue Some companies in EU with the support of



international NGOs applied voluntary labelling against palm oil products.

- Dumping Indonesian biodiesel was claimed as dumping practice by European Bio-fuel Board (EBB) which impacted tax imposition on Indonesian biodiesel products.


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Timber, Pulp and Paper



- Due Diligence:

European Union Timber Regulation requires traders who place timber products on the EU market for the first time to exercise ‘due diligence’ which undertakes a risk management exercise so as to minimise the risk of placing illegally harvested timber, or timber products containing illegally harvested timber, on the EU market. This regulation is applied to timber & timber products, includes solid wood products, flooring, plywood, pulp and paper. It requires access to information describing the timber and timber products, country of harvest, species, quantity, details of the supplier and information on compliance with national legislation. However it’s difficult in Indonesia to track the species for the timber products (e.g. pulp).

- VPA:

Related with Voluntary Partnership Agreements (VPAs) between the EU and Indonesia, only timber and timber products that have a Forest Law Enforcement Governance and Trade (FLEGT) Licence may enter the EU market. The FLEGT licenses certify that the timbers have been harvested and produced in compliance with the laws and regulations of the partner country and that information can be traced back through the whole supply chain, in Indonesia FLEGT is covered in SVLK. Under this regulation, operations of timber producers, traders, processors and exporters will be audited annually by independent auditors that verify the legality of their operations. However in the current condition, there are only some products ready to apply this SVLK license. In addition, the cost of SVLK implementation is quite high and the socialization on SVLK is still perceived insufficient to educate the business communities.

CEPA shall eliminate the non-tariff barrier by encouraging

Indonesian business to raise its capacity to comply EU

standardization. Thus, technology transfer in plantation and timber processing is very essential.

The activation and scope of VPA & SVLK should be incremental, because there are still a lot of products cannot comply this regulation immediately.


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- There are a lot of protests from NGOs on timber as alternative source of energy which is claimed as an action against environment, whereas in RED timber is included as a renewable energy source.

EU countries government with assistance of Indonesian government shall raise positive awarness on Indonesian timber products. It can be conducted by educating the market that Indonesian certification complies the legal logging standardization.

- Several NGOs in EU demanded Indonesian exporters to have certification from Forest Stewardship Council (FSC). The certification includes the forest management certificate, which has been already acquired by Kongo.





Under the GSP scheme, Ghana’s and Ivory Coast’s cocoa beans and cocoa products can enter EU market with import duty free. However, Indonesia only get duty free for cocoa beans while cocoa products are imposed tariff 6-9% which impact price incompetitiveness of Indonesian cocoa products.

The CEPA is expected to eliminate the tariff of Indonesian cocoa products and ensuring the fair competition.


Fish product



Tariff Indonesian fishery products are still imposed more than 13% impor duty, as well as Africa, Carribean, and Pacific (ACP) products.

The CEPA is expected to eliminate the tariff of Indonesian fishery products.


Non-tariff Measure EU has a strict rule on fish and fish products, while it does not accept fish without SHTI certification (Sertifikat Hasil Tangkapan Ikan) which is issued by Indonesian Ministry of Marine and Fisheries. This certificate warrants the quality of products and legal fishing action. It also includes the use of VMS tracking (technology to trace the location source and tools of fishing).

The CEPA shall encourage the capacity of Indonesian fishery industry to comply EU standardization.





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REACH EU has a strict regulation on textile produxts under Registration, Evaluation, Authorisation, and restriction of Chemicals (REACH). Application of REACH which aims to protect of the consumer’s health and environmental protection, making the registration of chemical substances mandatory, and restricting the professional use to only those chemical substances which have been registered has also a significant implication on the importation of textile in EU. Under this regulation, companies have to provide the physical-chemicals and toxicological data of the products.

CEPA shall establish capacity building on laboratory technology and human resources on research and development in textile industry. With the support of EU, Indonesian laboratories shall be able to conduct product test and development to comply EU standardization.


Negative List There are 20 products of textile listed in negative list of chemical products. It requires exporter/ importer to have registration on those certain products.

CEPA should establish a Mutual Recognition Agreement (MRA) to ensure the compliance of standardization.

CEPA shall increase the facility of tariff in the scheme


Standardization There are some differences between EU standards and the standard which is applied on Indonesian textile industry, though most of factory in Indonesian textile industry refers to European or Japanese standards, there are still some criterias cannot comply EU standardization, for example in term of the laboratorium quality or human resources quality.

of Generalized System of Preference (GSP) on garment products.

Source: APINDO-Eu-ACTIvE Socialization

rEcommEndation from indonEsia’s BusinEss community: By rEgion

appendix 3


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Government of Indonesia have to guarantee the trade liberalization in CEPA (especially in agricultural products) will not extingusih the local business. Therefore, GoI shall be precise in forming

the sensitive list while in the other hand provides the necessary protection to the local business.

GoI also have to involve the role of regional government in CEPA socialization in order to prepare civil communities in facing Indonesia-EU CEPA.

The government of Indonesia have to actively conduct socialization on Indonesia- EU CEPA on the regions. The cooperation between national and regional governments have to be able to give any necessary assistance needed by local business to compete in CEPA.

Market Access



CEPA is expected to support the Indonesian business capacity expansion through financial reinforcement.

CEPA is expected to establish an ease of financial access for SMEs.

Moreover, the financing in infrastructure is needed to accelerate the regional growth and development.

Capacity Building

CEPA shall encourage Indonesian business to comply EU standardization through training and mentoring on products development. Moreover, CEPA shall establish necessary certifications (MRA) to ensure compliance of mutual standard. The capacity building have to take into account the

empowerment of SMEs and Cooperatives.

CEPA shall mentor Indonesian business to encourage the local players in complying EU standardization. The technology transfer can be conducted through partnership between EU and Indonesian local business.


CEPA shall increase investment in manufacture industry, especially agro-industry and machinery. The investment also shall bring technology transfer

to Indonesian industry.

CEPA shall encourage the value added of South Sulawesi potential products. Therefore, it is expected to bring investment in processing industry in South Sulawesi, especially to cocoa, seaweed, and fish products.



West Java


South Sulawesi


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CEPA shall not only eliminate

the tariffs, but also be able to ensure the market access through the adjustment of non-tariff measures.


GoI has to:

Conduct a sufficient socialization on Indonesia- EU CEPA in order to deliver a clear message on this CEPA and prepare the local business to compete and take the benefit from CEPA.

Simplify the bureaucracy in business licensing and permits. Currently the business permits in North Sumatera has been creating a high cost economy for business, there are 25 permits need to be done, which give spaces for some parties to take the advantage by creating illegal collections.



Market Access


GoI and EU have to establish an information center to provide one stop place for all informations needed by local business to export to EU.

GoI has to ensure the CEPA shall create an equal opportunity between parties to access each other market, this also shall include the simplification of visa permit.





Capacity Building


CEPA shall encourage Indonesian local business to comply EU standardization and to export to EU.

For example, in palm oil

sector, the application of ISPO which actually already refers to RSPO, should be accepted in EU.


CEPA shall be able to increase EU’s investment in East Java, while the current foreign investment from EU to East Java is still low (around USD 620 million). The investment is expected to be channeled to manufacture industries. In addition, the investment shall be done through partnership (joint venture) with local


CEPA is expected to revitalize Indonesia-EU trade and investment relation. North Sumatera has a big potential in plantation of palm, coffee, cocoa, and rubber,

however the investment in these sectors are limited by the land capacity. Therefore, the business communities expect CEPA will bring investment to plantation sector through partnership with local business. Moreover, the investment also shall be aimed to fish processing industry which is very potential in North Sumatera.



East Java


North Sumatera

Intensive communication between GoI and business communities is needed to

contrive the development of infrastructure and to increase the competitiveness. This communication shall involve all scale of industry.

Before the implementation of CEPA, GoI have to fix the internal issues such as bureaucracy reform, legal certainty, energy supply, and interest rate.



GoI shall provide a clear and facilitative

market information how to enter EU’s market.

The capacity building shall be done through each related ministry.

Source: APINDO-Eu-ACTIvE Socialization




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appendix 4

rEcommEndation from othEr staKEholdErs








CEPA shall increase SMEs competitiveness through the comitment of capacity building and technology transfer.



EU investment shall take into account the empowerment of SMEs.


Market Access


Indonesian SMEs expect a distinction on market access to EU. CEPA shall bring an ease of market access to EU for Indonesian SMEs.




Government of Indonesia (GoI) have to build an intense communication with business sectors in the regions and ensure the agreement can accommodate business perspective.


Labor Union


CEPA shall generate an agreement on labor protection and commitment to establish an intensive social


dialogue. This agreement shall respect to the international stadards which have been concluded in ILO and G20 ministers.


CEPA shall establish a capacity building in labor quality.

Source: APINDO-Eu-ACTIvE Socialization


APINDO Policy Series

Asosiasi Pengusaha Indonesia (APINDO) Gedung Permata Kuningan Lantai 10 Jl. Kuningan Mulia Kav. 9C, Guntur
Asosiasi Pengusaha Indonesia
Gedung Permata Kuningan Lantai 10
Jl. Kuningan Mulia Kav. 9C,
Guntur – Setiabudi,
Jakarta 12980 – Indonesia
Telp. +62-21 8378 0824
Faks. +62-21 8378 0823, 8378 0746
Telp. +62-21 8378 0824 Faks. +62-21 8378 0823, 8378 0746 E-mail: Website:
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