Indonesia^[62]

1 Introduction

Indonesia is the fifth most populated country in the world and is a major producer of agricultural products. The islands of Java and Bali account for only 7 percent of Indonesia’s total land area but 60 percent of the population. Agriculture is very intensive on these islands, with up to three crop rotations per year. Off Java, soils are less fertile, and agriculture is less intensive. The major food crops, ranked by area harvested, are rice, corn, cassava, soybeans and peanuts. Indonesia is also one of the world’s largest producers and exporters of tree crops such as rubber, copra, palm kernels, palm oil, coffee, cocoa and spices (Ministry of Agriculture, 2001).

The Government of Indonesia has made a great effort to integrate the Indonesian economy into the world economy. The process began in the mid-1980s and accelerated in the 1990s when the Government reduced international trade barriers substantially and opened up the economy to foreign investment. The impetus for Indonesia’s market opening measures was the sharp drop in oil prices. The objective was to restructure the economy by diversifying the trade sector away from its heavy dependence on oil.

Government policies were highly successful at attracting foreign investment into light, labour-intensive export industries and led to the rapid growth of Indonesia’s manufacturing sector. One consequence is a declining share of agriculture in the total economy. In 1985, the share of agriculture in the GDP stood at 23.2 percent.^[63] By 2000, that share had fallen to 16.9 percent.

Although agriculture’s importance has declined, it remains critical to the overall health of the Indonesian economy. In 2000, for example, agriculture still absorbed 45.1 percent of the Indonesian labour force. Even more importantly, agriculture provided a cushion against the effects of the Asian economic crisis. Agriculture depends less on the formal financial system than other sectors and was therefore less affected by the collapse of Indonesian banks. Furthermore, the massive devaluation of the Indonesian rupiah caused a large adjustment in relative prices in favour of traded goods, such as agriculture. One consequence is that even though real GDP declined by 8.3 percent between 1997 and 2000, agriculture expanded by 3.0 percent.

Indonesia’s policy objectives for agriculture have evolved in response to the changing economy. These objectives are now far more complex than they were 25 years ago. Some examples of Indonesia’s more important objectives are:

• Diversification, which has long been a goal of agricultural policy, has taken on a broader meaning to include expanding the types of employment opportunities available in rural areas.

• A priority for trade policy is to enhance Indonesia’s industrial competitiveness and to move up the value-added processing chain. This is particularly the case for natural resource-based sectors such as agriculture where exports are still highly concentrated in primary products.

• As in other countries that have experienced rapid economic growth, Indonesia now attaches far more importance to protecting farm incomes. Twenty-five years ago, low food prices for consumers were a major objective of the Government. Now, some argue that high prices for producers are of equal importance.

As a result of the economic crisis, poverty in Indonesia nearly doubled from 15.7 percent of the population in 1996 to 27.1 percent of the population in 1999 (World Bank, 2001). Although poverty has since returned to pre-crisis levels, a significant proportion of the Indonesian population remains at risk. According to the World Bank, “poverty is the development challenge facing Indonesia today”.

Indonesia’s policy objectives can lead to inherent contradictions, particularly when price policy is the only policy instrument that is used for several objectives. Achievement of one objective through price policy can have negative consequences for others. This poses a dilemma for the Government and can make it more difficult to develop a clear strategy for the agricultural negotiations in the WTO.

2 Experience in implementing the agreement on agriculture

2.1 Market access^[64]

As noted in the Introduction, Indonesia began to open up its economy in the late 1980s. Trade policy reforms were implemented through a series of deregulation packages that were issued at least once each year and which aimed at converting non-tariff barriers into tariffs, rationalizing and reducing tariffs and removing restrictions on foreign investment.

An important feature of Indonesia’s reforms is that they were for the most part undertaken unilaterally. With few exceptions, Indonesia’s international trade policy commitments, such as those with the WTO, Association of South East Asian Nations (ASEAN) and Asia-Pacific Economic Cooperation (APEC), serve only to complement reforms that Indonesia had in any case decided to undertake unilaterally. Exceptions are Indonesia’s commitments to the IMF. Under the structural adjustment component of its 1998 Letter of Intent (LOI) with the IMF, Indonesia committed to a large number of trade policy reforms. Some of these reforms go further than what Indonesia had decided to undertake unilaterally, and to what it had agreed to internationally.^[65] This is particularly the case for agriculture.

Non-tariff import barriers

Initially, Indonesia’s trade reforms focused on import licensing restrictions. In 1990, such restrictions affected more than 1000 items in Indonesia’s tariff code. By 1996, the number of products requiring import licences had fallen to 200. The number has since declined even more as Indonesia implemented its WTO commitment to eliminate all NTBs for commodities bound in the WTO.

For agriculture, Indonesia bound 100 percent of its tariff lines as required during the UR and must eliminate all agricultural NTBs. By the time the UR agreements were implemented, however, many of the licensing restrictions affecting agriculture had already been removed. Those remaining consisted of:

• Local content rules for soybean meal and dairy products. Indonesia agreed to eliminate these in three and ten years, respectively. Local content rules were actually eliminated soon after implementation of the UR agreements.

• Licensing restrictions on alcoholic beverages. These restrictions remain today. Since alcoholic beverages are classified as agricultural commodities, they may eventually have to be eliminated unless Indonesia is granted special exemptions.^[66]

• Sole importer licences granted to public agencies. Indonesia had granted sole import rights for rice, soybeans, sugar, wheat, wheat flour and garlic to BULOG, the National Food Logistics Agency.^[67] Sole import rights for cloves were granted to the BPPC, a cloves marketing agency.

Indonesia notified the WTO that both BULOG and BPPC operate as state tradingenterprises (STEs) within the meaning of Article XVII of GATT. As a result, Indonesia’s WTO commitments for these commodities are to ensure that import purchases are non-discriminatory and that the margin between the domestic price and world price falls within the tariff binding for each commodity. There may have been a few occasions (e.g. sugar) where the margin between the domestic price and world price has been close to Indonesia’s bound rate.

With the exception of soybean meal and dairy products, the UR has not caused any changes to Indonesia’s import licensing regime for agricultural commodities. Of far more significance was Indonesia’s 1998 LOI with the IMF. Under the LOI, the Government agreed to phase out all import licensing restrictions that could not be justified for health, safety, environmental or security reasons. This included NTBs for industrial commodities that were not bound in the WTO, BPPC’s import monopoly for cloves and all BULOG import monopolies. The only exception was rice.

Although Indonesia was not required to eliminate BULOG’s monopoly over rice imports, Indonesia later opened up rice trade to the private sector as well. BULOG can still trade in rice and other commodities, but it no longer has the sole import right for any commodity. As discussed later, BULOG continues to have a role in domestic price stabilization and the distribution of rice to the poor.

Although Indonesia eliminated BULOG’s import monopoly for sugar as required by the IMF, it later introduced new licences that restrict imports to sugar processors. Under WTO rules for STEs, BULOG’s sole import licence for sugar may have been permitted. Under WTO rules for tariffication, the newest licences might be classified as NTBs and have to be eliminated.

Tariffs

During the UR, Indonesia bound 92 percent of all industrial tariff lines and 100 percent of all agricultural lines. For agriculture, the number of bound tariff lines increased to 1 500 compared with only 65 before the Round.

For industrial commodities, most tariff bindings are an across-the-board 40 percent. For agriculture, the bindings are far more variable and are much higher, averaging more than 70 percent.^[68] The average bound rate for agriculture is to be reduced by 24 percent before 2005, with a minimum reduction of 10 percent per tariff line. Some of the highest bound rates are for items that were subject to nontariff import barriers or were once under the control of BULOG (Table 1).

As was the case for non-tariff import barriers, the UR has had very little impact on Indonesia’s applied tariffs. In 1995, the simple average tariff for agriculture was 16 percent and was well below the average bound rate. There were only a few commodities where applied and bound rates were approximately equal. Most of these commodities had been bound at fairly low rates during earlier rounds of GATT negotiations.

Alcoholic beverages are exceptions. Bound rates for alcoholic beverages must be reduced from 170 percent to 150 percent by 2005. Since applied rates are currently equal to 170 percent, they will eventually have to be reduced as well in order to keep them at or below bound rates.

Table 1. WTO bound tariff rates for agricultural commodities with NTBs or formerly under BULOG

Source: Indonesia’s WTO Schedule XXI.

In May 1995, Indonesia announced a long-run tariff reduction package (Pakmei ’95), which was of far greater significance to tariffs than the UR. This package lays out a schedule of annual tariff reductions, where the reductions each year are based on the level of tariffs before May 1995 (Table 2). The final year of the package is 2003, when there would be a three-tiered tariff structure of 0, 5 and 10 percent.

The Pakmei schedule is meant only to be a guide to future tariffs.^[69] Furthermore, some tariff lines are exempt from the schedule and have higher long-run targets. This is particularly the case for agriculture. Some 300 tariff lines, or approximately 20 percent of all agricultural lines, are exempt from the schedule. Many of these lines pertain to fruits and vegetables. As a result, the average tariff for agriculture would be 13.2 percent in the final year of the schedule. This compares with an average of 7.2 percent for all tariff lines.

Table 2. Indonesia’s tariff reduction schedule (1995-2003)

Indonesia’s LOI with the IMF has resulted in a much faster pace of tariff reductions for agriculture and to tariffs that are lower than those envisioned under Indonesia’s Pakmei schedule. To reduce the inflationary impact of the rupiah depreciation on food prices, the Government agreed to reduce all food tariffs to 5 percent in February 1998. Tariffs on all non-food agricultural items are also to be reduced, but in stages of 5 percentage points each year. The long-term target for non-food agricultural tariffs is a maximum of 10 percent by 2003. As a result of the LOI, Indonesia’s average tariff for agriculture is now close to 5 percent. This is much lower than the Pakmei target of 13.2 percent in 2003.

Rice and sugar are exempt from Indonesia’s IMF commitment of zero tariffs for food items. Initially set at zero, the tariffs on rice and sugar were raised when BULOG’s monopoly over imports was eliminated. Currently, there are 20 to 25 percent tariffs on the various types of sugars. These tariffs were to be reduced over three years in conjunction with a plan to restructure the sugar processing industry, including the closure of inefficient state-owned sugar mills. In the case of rice, the tariff was set in specific terms at Rp430/kg through August 2000. At that time, the ad valorem equivalent of the specific tariff was estimated to be 30 percent. Although meant to be temporary, the tariffs on sugar and rice are still in effect.

Regional trade agreements

Indonesia is a founding member of the ASEAN and participates in the ASEAN Free Trade Area (AFTA). With few exceptions, AFTA tariffs on intraregional trade are to be reduced to between 0 and 5 percent by 2002. Initially, 20 percent of Indonesia’s tariff lines were excluded from AFTA reductions. Now, only 1 percent are excluded. The excluded lines pertain mostly to dangerous items and alcoholic beverages. Tariff reductions for certain sensitive items, such as rice and sugar, are delayed until some time after 2002.

Reductions in Indonesia’s AFTA tariff rates have closely followed reductions in MFN rates. As a result, the margin of preference for Indonesia’s ASEAN trading partners has remained fairly small at about 2.5 percent. The margin is probably even smaller for agricultural commodities because of the sharp reduction in tariffs required by Indonesia’s LOI with the IMF. Since most ASEAN trade is with non-ASEAN countries, the impact of AFTA on Indonesia and other ASEAN countries has probably been small (Feridhanusetyawan and Pangestu, 2001).

Special access commitments (tariff rate quotas)

During the UR, Indonesia agreed to special access commitments for rice, 70 000 tonnes at tariffs of no more than 90 percent, and dairy products, 414 700 tonnes in milk equivalent at tariffs of no more than 40 percent. Indonesia did not set up special procedures to administer its tariff quotas. In the case of rice, BULOG had an import monopoly and thus had the responsibility for all imports, including those within the quota. For dairy, Indonesia already operated a local content system under which domestic and imported milk were mixed in a fixed ratio. Quotas were allocated using milk absorption certificates that were based on the amount of domestically produced milk used in processed products.

Indonesia’s markets for rice and dairy are now fairly open. BULOG no longer controls rice imports, and the local content scheme for dairy has been eliminated. As a result, rice and dairy products may be brought into the country by general importers at tariffs, or tariff equivalents, which are less than the in-quota tariff rates. As a result, no special quota arrangements are necessary. Since implementation of the AoA, Indonesia’s imports of these products have been well in excess of the quota amounts.

The special safeguard and other trade remedies

The AoA’s special safeguard is available only for those commodities where nontariff import barriers were eliminated and replaced by tariffs. Since Indonesia had very few NTBs to eliminate, it could avail itself of the special safeguard in only a few cases. According to Indonesia’s WTO Schedule of Commitments, the special safeguard is only available for dairy products and cloves. Since implementation of the Uruguay Round Agreements, Indonesia has not used the special safeguard.

Indonesia’s Custom Law of 1995 authorizes the Government to take antidumping and countervailing duty actions provided that those actions are consistent with WTO rules. In the following year, the Government introduced new anti-dumping and countervailing duty procedures and established a trade remedies unit under the Minister of Finance and the Minister of Industry and Trade. Safeguard procedures have also been drafted but have not yet been approved by the President. To date, about 14 anti-dumping petitions have been filed. Only one of these involved an agricultural commodity - wheat flour. Although there was a positive finding of dumping and injury in the case of flour, the Government has delayed the imposition of duties pending further investigation of Indonesia’s national interest.

2.2 Domestic supports

Indonesia maintains a number of domestic programmes that are classified as domestic supports under the AoA. These include general services, programmes to promote agricultural development (research, extension, etc.), stockholding and administered price systems for some commodities, and domestic food aid.^[70] With the exception of administered prices, most of these programmes appear to fall either under the Green Box or under Special and Differential Treatment, and need not be reduced as a result of the AoA. Indonesia’s Green Box programmes, as notified to the WTO, are listed in Table 3.

Table 3. Indonesia’s Green Box measures

Source: Indonesia’s Notification to the WTO on Domestic Supports.

There are many loopholes in the Domestic Support section of the Agreement; as a result, most countries are not required to undertake policy changes that reduce domestic supports. Indonesia, however, did not offer a commitment on the “total” value of support to agriculture (AMS) and consequently cannot provide support in excess of the de minimis standard to any single product. Since Indonesia has “developing country” status under the Agreement, that standard is 10 percent. As noted below, there may be a few cases where domestic support has exceeded the standard. By failing to commit on the total value of support, Indonesia might therefore be subject to greater disciplines than countries that did make such a commitment, even though those countries provide far greater levels of support.

Some of Indonesia’s more important domestic support programmes are as follows.

Domestic food subsidies

In response to the economic crisis, the Government introduced a special distribution programme for rice in 1998. Under the programme, up to 20 kg of rice is distributed monthly to needy households at a price that is considerably below the market price. The number of target families was originally set at 7.4 million, but this has since been raised to 16.8 million. There are now proposals to double the programme budget to compensate the poor for reductions in fuel subsidies and to make various administrative improvements so as to eliminate leakage and ensure better targeting of the poor.

Administered prices

Under the Domestic Support section of the AoA, any policy system that provides price support to farmers could be subject to reduction commitments. Indonesia maintains administered prices for sugar and rice. If the administered price for either of these commodities exceeds the world reference price by more than 10 percent (after taking transport and taxes into account), the de minimis standard for a single product would be exceeded. It is probably the case that Indonesia’s administered price for rice exceeds the de minimis standard. However, the Government lacks the resources to support domestic prices at the administered level. In other words, the system has been ineffective at providing farmers the full support implied by the administered price.

Government stockholding

BULOG operates a stockholding programme for rice that is linked to the administered price system and involves seasonal rice purchases. Although the AoA permits government stockholding for the purpose of food security, the rules are unclear. On the one hand, government stockholding for food security is “permitted” and is a Green Box measure. On the other hand, stockholding is “amber” if it provides price support to farmers. Indeed, most programmes accumulate stocks when prices are at their lowest in peak harvest months, and thereby provide price support to farmers. Finally, stockholding could be “red” if it involves exports from stocks at less than the purchase price.

2.3 Export policies

Export subsidies

Indonesia has very few programmes that might qualify as export subsidies. In the 1980s, Indonesia operated a generally available export credit programme that has since been eliminated. In the late 1980s and early 1990s, there were occasions when BULOG needed to reduce stocks and exported surplus rice at less than the domestic price. At that time, Indonesia was more or less self-sufficient in rice, exporting in some years and importing in others.

In order to allow policy-makers as much flexibility as possible in regard to the future disposal of stocks, Indonesia decided to make a commitment on export subsidies. Export subsidies for rice were bound at ceiling amounts of US$28.3 million and 299 750 tonnes in 1995, declining to US$21.5 million and 257 785 tonnes by 2004. Since implementation of the AoA, Indonesia has not subsidized exports of rice.

Restrictions on exports

Under its LOI with the IMF, Indonesia agreed to eliminate nearly all restrictions on exports. In the case of agriculture, this includes export taxes on leather and a ban on exports of palm oil. The latter was replaced with an export tax of 40 percent, which is to decline eventually to 10 percent.^[71]

2.4 Sanitary and phytosanitary standards

In 1996, Indonesia introduced a new law on food safety, which covers labelling and packaging requirements, food additives, pesticide residues and other contaminants (USDA, 2000). In 1999, Indonesia also introduced a Consumer Protection Act, which includes provisions on the retail sale of foods. Although comprehensive, both of these laws are general in nature, and regulations need to be implemented before they can be enforced. For example, a producer of genetically engineered foods must ensure that the product is safe for human consumption and must label the food as “GENETICALLY ENGINEERED”, but further regulations and guidelines on genetic engineering have yet to be issued.

In addition, most processed food imports must be registered with the Department of Health and may require certificates referring to the degree of radiation, standards on Islamic purity (“Halal”), food additives, food safety and alcoholic content. With the exception of a recent case on chicken legs, there appear to be few instances where Indonesian standards have been used to discriminate against imports. Rather, importers have complained about the overall efficiency of the registration process. There are also complaints that an otherwise routine import “approval process” has been used to block imports of meat in times of local surpluses.

In the case of chicken legs, Indonesia’s Ministry of Agriculture had banned imports of US chicken legs on the grounds that they were not produced in accordance with Islamic practices. Although still under review, the Government may decide to rescind the import ban and instead will protect the domestic market by raising tariffs on chicken legs.

2.5 Trade-related intellectual property rights

During the past couple of years, Indonesia has enacted and amended its laws on copyrights, patents and trademarks. In 2000, new laws were also enacted on trade secrets, industrial design, integrated circuits and plant varieties. Although questions remain concerning the compliance of Indonesian laws with the TRIPS Agreement, Indonesia’s trading partners appear mostly concerned with the implementation and enforcement of those laws. There have been no major issues with respect to the protection of plant varieties.

3 Experience with food and agricultural trade

Indonesia is traditionally a net exporter of agricultural products (Table 4). During the latter half of the 1980s, the agricultural surplus ranged from US$1 200 to US$1 500 million per annum. By the latter half of the 1990s, however, the surplus had fallen to US$900 million per annum. The decline was due mostly to a sharp turnaround in the food balance. Net exports of foods fell from a surplus of US$500 million in the late 1980s to a deficit of US$900 million in the second half of the 1990s.

Table 4. Agriculture and food trade (annual averages)

Source: FAOSTAT.

3.1 Agricultural exports

Indonesia’s major agricultural exports consist of products of tree crops, including palm and coconut products (33.8 percent), rubber (18.6 percent), coffee, tea and spices (25.9 percent).^[72] Indonesia has also had some success at diversifying into higher valued fruits and vegetables (5.8 percent). Together, these four product categories accounted for 84.0 percent of all agricultural exports in 1998-2000.

Indonesia’s food and agricultural exports grew at 4.8 and 8.1 percent per annum, respectively, between 1984-1986 and 1994-1996 (Table 5). Since then, food exports have increased only slightly, whereas total agricultural exports have declined. This has been a major concern of the Government, which had hoped that the huge devaluation of the rupiah would lead to an export-led recovery from the economic crisis.

Table 5. Indonesian agricultural exports

Source: FAOSTAT.

As indicated in Table 5, declining commodity prices are one of the main reasons for Indonesia’s poor export performance in recent years. Unit values for Indonesia’s major export products fell precipitously, whereas most volumes actually increased between 1994-1996 and 1998-2000. The price declines were particularly severe for rubber. Another factor that may have contributed to Indonesia’s weak export performance is the structural collapse of Indonesia’s trade finance system. Massive bank failures and increased Indonesian “country” risk caused the complete collapse of local and international trade finance mechanisms during the early years of the crisis (Brown and Magiera, 2000). Increased commercial risk might also have led to risk discounts and lower dollar prices for Indonesian exports.

3.2 Agricultural imports

Indonesia’s most important non-food agricultural imports are textile fibres (17.5 percent) and animal feeds (7.5 percent).^[73] Indonesia’s most important food imports are rice (20.2 percent), other cereals (16.6 percent), oilseeds (6.4 percent) and sugar (10.1 percent). Together, these products accounted for 78.2 percent of all agricultural imports in 1998-2000.

Indonesia’s food and agricultural imports grew rapidly at 17.5 and 16.5 percent per annum, respectively, between 1984-1986 and 1994-1996 (Table 6). It is this rapid expansion of imports that accounts for the decline in Indonesia’s agricultural trade surplus. Although imports have fallen slightly in the last couple of years, so also have exports. Meanwhile, rice and sugar imports continue to rise, causing the deficit in food trade.

Table 6. Indonesian agricultural imports

Source: FAOSTAT.

Within the non-food category, imports of textile fibres reflect conditions in the textile and garment industries. Most of the rapid expansion in these industries occurred during the late 1980s and the early 1990s. The growth in feed imports reflects higher incomes and the resulting rising demand for poultry. Imports are concentrated in the protein feeds where Indonesia is traditionally in deficit.

Within the food category, increased sugar imports reflect long-term structural problems in the Indonesian sugar industry. Sucrose yields have been declining ever since the 1970s; farmers often find it more profitable to grow crops other than sugar; and Indonesia’s expanding food and beverage industries require a higher-quality sugar than can be produced domestically. The Government has attempted to restructure the industry by moving cane production to extensive areas off-Java and by either selling or closing state-owned mills. However, these efforts now date back more than 20 years and have been unsuccessful at reducing imports.

Of most concern to the Government has been the increase in rice imports. During the past decade, there have been two weather-related increases in rice imports. The first occurred in 1995 and was caused by the extremely low level of stocks and poor harvest of the previous year. As a result, rice imports rose from an average of 300 000 tonnes annually in the early 1990s to almost 2 million tonnes annually in 1994-1996. The second occurred because of El Niño of 1997 and 1998. This caused rice imports to rise even more to an average of 3 million tonnes annually during 1998-2000.

Although Indonesia has experienced close to normal weather during the past few years, production has not returned to trend levels. Between 1985 and 1996, rice production increased by 2.1 percent per annum. This enabled continued increases in the per capita availability of domestically produced rice, even though the population grew at 1.7 percent per annum. Between 1996 and 2002, however, rice production was stagnant. Neither the acreage harvested nor the yields have shown much change. With continued population growth, the per capita availability of domestic rice has declined, and imports have continued at high levels. In 2001, rice imports were about 1 million tonnes. In 2002, they climbed above 3 million tonnes. This has led to concerns that Indonesia now has a structural deficit in rice (Tabor et al., 2002).

Indonesia’s other major cereal import is wheat. Wheat flour products are a substitute for rice and are consumed primarily by middle- and high-income households. Imports rose rapidly between 1984-1986 and 1994-1996 but have declined during the economic crisis.

3.3 Tariff reductions and trade

The Indonesian Government’s decision to reduce import barriers has led to concerns about increased imports. Some believe that Indonesian industries lack competitiveness and cannot compete in a low-tariff environment. To evaluate this concern, Table 7 compares changes in tariffs with changes in trade for major commodity groups. The table shows Indonesia’s average tariffs for the years 1994 and 1998, and the change in Indonesia’s trade surplus (or deficit) between 1994 and 1999, where the change is defined as:

Change in trade surplus = (exports minus imports in 1999) minus (Exports minus imports in 1994).^[74]

A positive number indicates that Indonesia’s trade situation has improved between 1994 and 1999. A negative number indicates that the trade situation has deteriorated. As indicated in Table 7, there has been a substantial reduction in tariffs for all economic sectors. For the entire non-oil/gas sector, Indonesia’s average tariff declined by 50 percent - from 19.6 percent in 1994 to 9.5 percent in 1998. Yet, there are no signs that this has had a detrimental effect on import competing sectors. On the contrary, Indonesia’s trade surplus improved by US$17.7 billion between 1994 and 1999. This reflects the fact that a country’s trade balance is determined not so much by tariffs, but by macroeconomic factors - particularly the relationship between savings and investment. The improvement in Indonesia’s trade surplus is mostly due to the economic crisis and the decline in imports that resulted from the movement of foreign savings out of the Indonesian economy. The results for the agricultural sector are more mixed than those for the overall economy. The trade balance for the entire agricultural sector (including fish products) declined by US$900 million. Agricultural sectors with declining trade balances were rubber, cereals and sugar. In the case of rubber, the decline was due to a drop in exports - not to an increase in imports.^[75] Only in the case of cereals and sugar was the deterioration due to an increase in imports.

It is difficult to determine whether protection has increased or decreased for cereals and sugar since both were subject to non-tariff import barriers for many years. A rough guess is that protection has increased for rice but declined for sugar. In the case of rice, BULOG attempted to keep rice prices at parity with world prices during the early 1990s. Now, the ad valorem equivalent of the specific tariff on rice is approximately 30 percent. For sugar, the tariff equivalent of NTBs in the early 1990s may have reached 100 percent. Now, the ad valorem tariff on sugar is 20-25 percent. It would appear, therefore, that sugar is the only commodity for which decreased protection is correlated with increased imports.

Table 7. Indonesia’s tariffs and non-oil/gas trade (1994-1999)

Source: Magiera (2000a).

Table 8. Tariff escalation for products of export interest to Indonesia

Source: Lindland (1997). The base tariff wedge is the difference between the average output and input tariff for each commodity group in 1986-88. The bound tariff wedge is the difference between the average WTO bound output tariff and the bound input tariff. Only positive wedges are used to calculate the averages for each commodity group and for each country. In other words, negative tariff escalation is excluded from the averages.

3.4 Tariff escalation in foreign markets

As indicated earlier, a major policy goal of the Indonesian Government is to reduce the dependence on exports of primary products and to move up the valueadded chain into processed foods. The achievement of this goal has been frustrated by both internal and external factors. Internally, processors face high costs for capital, inefficiencies in the domestic marketing system and difficulties in securing reliable, high-quality supplies of raw materials.^[76] Externally, Indonesia faces problems meeting the quality standards of foreign markets (see next section) and traditional trade barriers such as tariff escalation.

In a 1997 study, the FAO found that the UR will result in reduced tariff escalation for nearly all agricultural products in the EU, Japanese and US markets (Lindland, 1997). This is illustrated in Table 8, which shows the gap between output and input tariffs for products of export interest to Indonesia. With the exception of tobacco in Japan and coffee/cocoa in the United States, there is a decline in tariff escalation for all products of interest to Indonesia.^[77] For most products, this decline is lower than the average decline for all products. This may reflect the fact that the products of interest to Indonesia are mostly tropical products, which tend to have lower base tariffs than the temperate zone products produced in developed countries.

3.5 Trade remedies and sanitary/phytosanitary standards in foreign markets

Indonesia has faced a large number of anti-dumping and other trade remedy actions abroad. Although developed countries have initiated most of the cases, there have been a growing number in the developing countries of Asia as well. Defending against such actions has required large amounts of resources, both on the part of the Government and on the part of the private sector. Some cases are clearly motivated by political pressures in the country initiating the action.

Anti-dumping actions involving Indonesia’s agricultural exports are fairly few in number - tomato paste in Australia, sorbitol in the EU, canned mushrooms in the United States. There have also been a number of cases involving downstream products processed from leather and natural fibres. The Indonesian press reports that several billion dollars of trade may be affected by anti-dumping and countervailing duty actions. Even though the number of agricultural cases is small, Indonesian officials are under pressure to solve the problem and could link results in the negotiations on agriculture to improved rules on anti-dumping and safeguards.

Figure 1. Number of holding orders affecting Indonesian exports of processed foods to Australia.

Source: Compiled by Indonesia’s Ministry of Industry and Trade.

Indonesia is also concerned about the increasing number of measures taken to limit agricultural and fish exports for reasons of sanitary or phytosanitary standards, technical barriers to trade, and the environment (Figure 1). Indonesian exporters have great difficulty meeting the different standards of various developed country markets and in tracking changes to the regulations in those markets. In cases where the regulations appear to represent an unfair barrier to trade, Indonesia has yet to be involved in a formal WTO dispute.^[78] At the same time, Government officials argue that bilateral consultations are of little use in resolving disputes. Indonesia would thus benefit from any changes that lead to improved transparency and greater harmonization of standards based on internationally agreed norms.^[79]

4 Food security concerns

Indonesia has been very successful at reducing the number of poor during the past two decades (Figure 2). As a result of the economic crisis, however, the poverty level rose substantially from 15.7 percent of the population in 1996 to 27.1 percent of the population in 1999. The problem was temporary, and poverty has since fallen back to its pre-crisis level. The World Bank estimates that declining food prices (mostly for rice) explain 41 percent of the recovery. The remainder was due to rising incomes. Although the situation has improved, 50 percent of the Indonesian population have incomes of less than US$2 per day and remain at risk (World Bank, 2001).

Figure 2. Percentage of Indonesian population below the poverty line.

Source: Indonesian Central Bureau of Statistics. In 1996, the series was revised. For comparisons, therefore, poverty estimates under the old and new series in 1996 are provided.

FAO provides a favourable picture of the food security situation in Indonesia (FAO, 2001). In 1997-1999, the proportion of undernourished people in Indonesia was significantly below that elsewhere in Asia. For Indonesia, the proportion was 6 percent. In Southeast Asia and South Asia, the proportions were 13 and 24 percent, respectively. Of the 99 developing countries in the FAO study, Indonesia was the third best performer in terms of reducing the number of undernourished people between 1990-1992 and 1997-1999. The number of undernourished in Indonesia declined by 5 million over this period.

Indonesia’s foreign exchange earnings also appear ample for covering Indonesia’s food import needs. Before 1994, the proportion of food imports in total exports, net of amortization and interest payments on the public foreign debt, amounted to only 4-6 percent (Figure 3). Although that percentage has risen since 1995 because of greater food imports, it is still below 10 percent.^[80]

Figure 3. Indonesian food imports as a percentage of total exports net of payments on the public foreign debt.

Source: Food imports are from FAO. Total exports are from Indonesia’s Bureau of Statistics. Amortization and interest payments on the public foreign debt are from the Bank of Indonesia.

4.1 Food security and rice

Rice continues to be Indonesia’s most important commodity. It is the single most important source of energy and protein in Indonesian diets and the most important employer in rural areas. For the past couple of years, there has been a heated debate within Indonesia concerning rice policy. Food security appears to be at the heart of this debate, where food security means the adequate domestic production of rice, or rice self-sufficiency.

Those in favour of rice self-sufficiency argue that it should be achieved even if it requires domestic prices that are above world prices (Tabor et al., 2002). High prices can generate positive externalities by transferring incomes to rural areas, where most of the poor are located, and promoting rural development. The counter-argument is that rice is a major consumption item of the poor and that most rice farmers are themselves net consumers of rice. High rice prices tax the poor and may not be of much net benefit to rice farmers. Furthermore, high prices may generate little increased production, since rice farmers are now producing at the technological frontier. If a price-induced increase in rice production does occur, it will likely be at the expense of other food crops.

The food policy debate also concerns the types of policy instruments that should be used to achieve Indonesia’s rice policy objectives. Central to the debate are the use of trade policies to support farm incomes and a number instruments classified as domestic supports. The instruments being debated include administered prices, the level of the rice tariff, the type of tariff, whether to reintroduce sole importer status for BULOG, some combination of tariff and state trading, and how the various policy levers will link to stabilize prices. In recent months, the rice policy debate has intensified because of inconsistencies in the application of current policy instruments.^[81] How it is resolved could greatly affect Indonesia’s position towards the agricultural negotiations in the WTO.

5 Issues of concern in further negotiations on agriculture

Indonesia has taken a strong position in favour of SDT for developing countries during the current round of agricultural negotiations.^[82] As is typical of other developing countries, Indonesia’s proposals refer to policy objectives, not to specific measures or types of policies. Indonesia has proposed a list of objectives that would fall under the SDT provisions of the Agreement. These include agriculture and rural development, poverty alleviation and food security, where Indonesia’s definition of food security encompasses not only accessibility to foodstuffs but also the ability to produce Indonesia’s own food needs. Indonesia also supports the objectives proposed by other developing countries, including support for low-income and resource-poor farmers, rural employment and diversification of agriculture. Finally, Indonesia has proposed that the concept of SDT be broadened to address the fundamental problems of development and growth in developing countries.

Indonesia proposes that all measures used by developing countries to meet SDT objectives be excluded from WTO disciplines. If not excluded, Indonesia would argue that developing countries should have considerable flexibility in the applications of the rules. Flexibility in this case refers not only to a longer time frame for reform but also to the nature and depth of the commitments.

With respect to specific negotiating areas, issues of concern to Indonesia might be as follows.

5.1 Import access

One of Indonesia’s principal goals during the current round of negotiations might be to maintain and open up markets for its export commodities. For example, Indonesia strongly advocates the elimination of tariff peaks, NTBs and tariff escalation on products of interest to developing countries. This includes tropical products. The elimination of tariff escalation is especially important to Indonesia now that it has removed export taxes. Export taxes are one means to counter tariff escalation in other countries.

Indonesia might also favour linking concessions in agriculture to concessions in other negotiating areas, such as anti-dumping and countervailing duties. Indonesia has been subject to a large number of anti-dumping actions and views these as disguised protectionist policies that are practised mostly by developed countries. In addition to lost trade, Indonesia often complains about the huge legal costs associated with the implementation of WTO rules, particularly those pertaining to anti-dumping and other trade remedies. Improved rules which, for example, limit the use of anti-dumping measures to clear cases of predatory pricing is an area where Indonesian negotiators see clear benefits for the Indonesian economy. Indonesia is also concerned about the possible use of sanitary/phytosanitary measures as disguised forms of protectionism, and favours improved transparency and harmonization.

With regards to Indonesia’s own trade policies, applied tariffs have been reduced by two-thirds during the past six years, and most NTBs have been eliminated. As a result, the agricultural sector is fairly open to foreign trade. Even if Indonesia wishes to preserve the flexibility to increase tariffs in the future, it could still offer to reduce its own tariff bindings in return for meaningful market opening measures by other countries. Tariff bindings would have to fall by a considerable extent before approaching applied rates. Indonesia has also adopted the position that reciprocity for tariff reductions made by developed countries should not be required of developing countries, when this is inconsistent with their “development, financial, and trade needs”, when the objective is to protect subsistence farmers, or when the goal is food security.

5.2 Domestic supports

Indonesia supports various proposals to allow developing countries greater flexibility to exclude from reduction commitments those measures that are used for food security, rural development, etc. Indonesia proposes that the Green Box be expanded to include such measures.

As noted earlier, Indonesia is now in the process of debating its policies on rice. Included in the debate are policy measures which would be classified as domestic supports and which might be included in the AMS. Since Indonesia did not submit a commitment on the AMS, it could be constrained in its ability to use such measures in the future. Like other developing countries, Indonesia feels that the Agreement is biased in this regard. By not making a commitment on the AMS, Indonesia may come under more disciplines than those countries where domestic subsidies are far more prevalent. The policies of interest to Indonesia include stockholding for food security, and the administered price systems needed to make such programmes operational.

5.3 Export subsidies

Indonesia has proposed that all export subsidies used by developed countries be eliminated. Even though Indonesia states that it does not intend to use export subsidies in the future, it does propose that developing countries retain the existing flexibility to use such subsidies.

5.4 Export taxes and other restraints

Indonesia holds the view that no changes in Article 12 are necessary. If there are modifications, these should not undermine the SDT provisions of the Article. Indonesia reports that it has occasionally used export taxes because of critical food shortages and to conserve natural resources.

5.5 Special safeguards

Indonesia proposes that the special safeguard be eliminated for developed countries. For developing countries, Indonesia proposes that the special safeguard be made more widely available, irrespective of whether NTBs were converted into tariffs. The safeguard could be used to protect “domestic production” from import surges or a decline in prices and would qualify as a measure for food security. Indonesia apparently favours the special safeguard since it operates mechanistically without proof of injury. As noted earlier, Indonesia does not yet have a general safeguard mechanism.

6 Conclusions

The AoA appears to have placed very few practical constraints on Indonesian policy-makers. Nevertheless, Indonesia is now reconsidering its agricultural policies, and the results of this debate could significantly affect Indonesia’s position in the agricultural negotiations. The debate within Indonesia centres on food security and the policy instruments that might be used to stabilize and possibly support domestic agricultural prices.

The political economy of agriculture is such that developed countries tend to support farm incomes, while developing countries are equally concerned with price stabilization. The domestic support part of the AoA is oriented towards the types of policies traditionally used by developed countries. These policies typically have an on-budget financial exposure that developing countries can ill afford. Price-stabilization policies, however, often operate in conjunction with trade policies and have less on-budget financial exposure.^[83] WTO rules governing the use of such policies appear unclear.

Major issues during the current round of agricultural negotiations are likely to be very similar to those of the UR and include market access, export subsidies and domestic supports. Where developing countries desire special and differential treatment with respect to market access in developed countries, it might be best to frame SDT in terms of specific commitments. Where developing countries desire greater flexibility in their own commitments, it might be best to frame this flexibility in terms of policy measures and criteria, rather than policy objectives. The development of specific criteria for permitted agricultural programmes was one of the hallmarks of the AoA. It is therefore difficult to envision how developing countries could receive blanket approval to omit policies from disciplines based solely on the objective of the policy.

One of Indonesia’s major goals during the negotiations might be to open up markets for its export commodities. Indonesia’s own agricultural markets are now fairly open to foreign trade, and Indonesia’s tariff bindings are quite high. As a result, Indonesia could easily offer to reduce its bindings in return for meaningful market opening measures by other countries. Indonesia might also favour linking concessions in agriculture to concessions in other negotiating areas, such as improved rules on the use of antidumping and countervailing duties.

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