RECENT ECONOMIC REPORTS

2005 USTR National Trade Estimate Report 
on Foreign Trade Barriers - Indonesia 
( PART I)

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Table of Contents:

• Overview

• Import Policies

• Standards, Testing, Labeling And Certification

• Government Procurement

• Export Subsidies

• Intellectual Property Rights (IPR) Protection 

• Services Barriers

• Investment Barriers

• Electronic Commerce

• Other Barriers

OVERVIEW 

Although Indonesia's economy weathered the 2002 global economic slowdown relatively well, the country still has not fully recovered from the effects of the 1997-98 financial crisis. The government of former President Megawati Soekarnoputri maintained a measure of political stability during its tenure, despite an ongoing conflict with separatists in the gas-rich province of Aceh. In 2004, Indonesians elected a new President, Susilo Bambang Yudhoyono, who took office in October pledging fundamental reform as part of his "100-Day Plan." President Yudhoyono has announced an ambitious economic reform program that focuses on reducing poverty by raising Indonesia's GDP growth rate, eliminating corruption, and improving the business climate. The earthquake and tsunami that struck Sumatra and the Indian Ocean region on December 26, 2004, left over 150,000 dead in Indonesia alone and caused incalculable human suffering as well as losses in property and infrastructure. As of the end of 2004, it was unclear what effect this natural disaster would have on Indonesia's economy and President Yudhoyono's reform plans.

The Indonesian government generally has adhered to its long-term trade liberalization program, although some backsliding occurred under the Megawati administration between 2002 and 2004. Indonesia fully implemented the final stage of its commitments under the ASEAN Free Trade Agreement (AFTA) on schedule on January 1, 2002. However, during its tenure, the Megawati administration expressed reservations about the pace of liberalization within AFTA, and noted an interest in pursuing emergency exit clauses from AFTA commitments in general.

Indonesia has a mixed record in the WTO. In the current Doha multilateral negotiations, Indonesia continues to advocate special product exemptions for rice, sugar, soybeans, and corn. 2002 textile regulations favor domestic textile fabrics over imports, and we have raised our concerns in the WTO. However, in 2003 the government used WTO-compliant mechanisms, like safeguards, as an alternative to protectionist measures.

Indonesia's garment sector suffers from poor capital investment and low productivity. Some observers predict the industry may lose half of its four percent world market share following the expiration of the Multi Fiber Agreement at the end of 2004.

The new Yudhoyono administration has pledged to reassert Indonesia within multilateral trade organizations like the WTO, APEC and ASEAN. The new government has also committed itself to improving Indonesia's trade competitiveness by streamlining bureaucracy, improving competitiveness, and rectifying ill-conceived policies of the past. Indonesia's relationship with the International Monetary Fund (IMF) provided the framework for the country's economic policies since November 1997. IMF-supported economic reforms helped stabilize the macro economy, restructure the financial sector, and reinforce policies of trade and investment liberalization. Indonesia concluded its IMF program at the end of 2003.

President Yudhoyono has proposed creating an economy characterized by efficient resource allocation, open markets and free trade, the protection of property rights, and a stronger rule of law that is applied transparently and free from corruption and that diffuses knowledge broadly. He has also proposed increasing Indonesia's competitiveness in priority sectors including: electronics, textiles, automotive, fisheries, wood-based and rubber-based industries, as well as key service sectors such as air travel, tourism, health care and electronic commerce, and smalland medium-sized businesses. The economic goals expressed by President Yudhoyono touch on U.S. industry's continuing concerns over the wide range of business problems it encounters in Indonesia, including the lack of contract enforceability, discriminatory taxation, the absence of a transparent and predictable regulatory environment, arbitrary and inconsistent interpretation and enforcement of laws, irregularities in government procurement tenders, and ineffective enforcement of intellectual property rights. These business problems cause great uncertainty, which combined with widespread corruption, an ineffective judicial system, non-existent credit reporting, and underdeveloped capital markets, hinders commercial dealings in Indonesia.

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IMPORT POLICIES 

Tariffs As of January 2003, about 70 percent of Indonesia's tariff lines were assessed import duties ranging between zero percent and five percent. Indonesia's unweighted tariff average is 7.3 percent, compared to 20 percent in 1994.

In the late 1980s the Indonesian government began long-term trade reform to wean the economy away from its dependence on oil and gas and to increase Indonesia's industrial competitiveness. In the early 1990s, it began a series of annual deregulation packages designed to gradually lower applied tariff rates, convert non-tariff barriers into tariffs, and remove restrictions on foreign investment. The January 11, 2001, tariff reduction package cut five percentage points on 1,279 tariff lines. The majority, 769 lines, had tariff rates reduced to 10 percent or below. Effective January 1, 2002, Indonesia, along with the other five original ASEAN members, implemented the final phase of the ASEAN Free Trade Agreement (AFTA). Indonesia has reduced tariffs for all products included in its original commitment (7,206 tariff lines) to five percent or less for products of at least 65 percent ASEAN origin. The government released a new tariff reduction package in January 2004. The new tariff book categorizes tariffs into International Non-ASEAN Tariffs and ASEAN Tariffs. Most Non-ASEAN tariffs fall into 0 percent, 5 percent, and 10 percent tiers, except for sensitive items such as automotive goods and alcohol. ASEAN tariffs fall into three tiers, 0 percent, 2.5 percent, and 5 percent, for all goods covered by the ASEAN Free Trade Agreement (AFTA).

In the Uruguay Round market access negotiations, Indonesia committed to bind 94.6 percent of its tariff schedule; most tariffs are bound at 40 percent. Products for which tariff bindings exceed 40 percent, or which remain unbound include automobiles, iron, steel, and some chemical products. Indonesia committed to remove import surcharges on items bound in the Uruguay Round by the year 2005, and had done so by the end of 1996. In accordance with the WTO Agreement on Agriculture, Indonesia agreed to eliminate non-tariff barriers on agricultural products, and replace them with tariffs. In the agricultural sector, 1,341 tariff lines have bindings at or above 40 percent, including the most sensitive and heavily protected sectors. In the current WTO Doha negotiations, Indonesia has been advocating special products exemptions from tariff reductions for rice, sugar, soybeans, and corn.

Beginning in 2002 and intensifying through 2004, domestic agricultural interests put pressure on the Indonesian government for protection from international competition. However, with some notable exceptions, the Indonesian government has resisted such pressure. Since late 1999, rice imports have been subject to a specific tariff of 430 rupiah per kilogram (5.1 cents per kilogram or approximately 30 percent on an ad valorem basis). In 2004, the Indonesian government instituted bans on imports of rice, sugar and salt. Local agriculture interests continue to lobby the government to increase tariff rates above the levels bound in the WTO on sensitive agricultural products, such as sugar, soybeans and corn. However, the Yudhoyono administration has announced plans for a review of all rules and regulations related to imports and exports and business licensing. The stated intention of the review is to identify and rectify onerous bureaucracy and ill-conceived trade policies.

Non-Tariff Barriers Since 1997, Indonesia has dismantled many formal non-tariff barriers. In September 1998, the Indonesian government sharply curtailed the role of the National Logistics Agency (Bulog), which had a monopoly on importing and distributing major bulk food commodities, such as wheat, rice, sugar, and soybeans. Bulog now maintains the status of a state-owned enterprise with responsibility for maintaining stocks for distribution to military and low-income families, and for managing the country's rice stabilization program. The agency has floated the idea of again becoming a state trading enterprise with monopoly import rights for some products, but the Indonesian government has not taken action on this proposal. Bulog is no longer entitled to draw on Bank Indonesia credit lines, a privilege it long enjoyed under the Soeharto regime, and must use commercial credit and pay import duties. In conjunction with the minimization of Bulog's authority and role, some designated private companies are now permitted to import rice, wheat, wheat flour, soybeans, garlic, and sugar.

The Indonesian government continues to maintain a ban on imports of chicken parts originally imposed in September 2000 by the Directorate General of Livestock Services in the Ministry of Agriculture. The U.S. government has raised concerns about this issue, but the Ministry of Agriculture continues to insist on the necessity to assure consumers that imports are halal (produced in accordance with Islamic practices). U.S. imports comply with Indonesia's established requirements for halal certification, and several ministries have unsuccessfully sought to repeal the ban. U.S. industry estimates the value of lost trade from this ban at roughly $10 million per year.

Indonesia's government also imposes de facto quantitative restrictions on imports of meat and poultry products by requiring an Importer Letter of Recommendation ("Surat Rekomendasi Importir"). In approving requests for such letters the government can arbitrarily alter the quantity allowed to enter, raising concerns that these Letters of Recommendation are being used to limit imports. U.S. industry estimates the annual trade impact of this restriction to be between $10 million and $25 million.

The government imposed a rice import ban in February 2004 just prior to the rice harvest season (February - May). The ban is supposed to be in effect one month before and two months after the planting season. The Ministry of Agriculture, however, requested that the ban be extended through the end of 2004. Meanwhile, U.S. rice exports increased from $5 million in 2001 to $18.5 million in 2002. Most of these exports were linked to two P.L. 480 Title I concessional loan programs in each respective year. Although the Indonesian government rejected the program for 2003, U.S. rice exports reached $16.3 million (mostly for humanitarian purposes), 12.2 percent lower than in 2002.

In June 2004, the Ministry of Trade banned the importation of salt during the harvest season from July through the end of the year. Under the regulations, salt importing companies must be registered and source 50 percent of their raw materials locally. A September 2004 Ministry of Industry and Trade decree allows five companies to import sugar. It also states that the Ministry of Trade decides which companies can import sugar and how much.

The U.S. government has received reports that Indonesia's Customs Service uses a schedule of arbitrary "check prices" rather than actual transaction prices on importation documents for assessing duties on food product imports. While Indonesia's government officials defend this practice on the basis of combating under-invoicing, they do not publicize the list or the methods used to arrive at those prices. As a result, although most food product import tariffs remain at five percent, the effective level of duties can be much higher.

Other quantitative limits apply to wines and distilled spirits. In addition to the regular import duty of 170 percent, a 10 percent VAT and 35 percent luxury tax, Indonesia's government restricts imports of alcoholic beverages to three registered importers, including one state-owned enterprise.

Import Licensing Indonesia's government has continued to reduce the number of products subject to import restrictions and special licensing requirements. Currently, 141 tariff lines are subject to import licensing restrictions, down from 1,112 tariff lines in 1990. Alcoholic beverages, lubricants, explosives, and certain dangerous chemical compounds, among other items, are subject to these requirements.

In March 2002, the Minister of Industry and Trade issued a decree on Special Importer Identification Code Numbers (NPIK). This decree requires importers of certain product categories to apply for a special importer identity card, without which products can be detained at port. These goods include: corn, rice, soybeans, sugar, textile and related products, shoes, electronics and toys.

On October 23, 2002, the Minister of Industry and Trade issued a decree concerning Textile Import Arrangements. Only companies that have production facilities to use imported fabrics as inputs for finished products, such as garments or furniture, may obtain import licenses. The United States has raised serious concerns that the import licensing requirements severely restrict and distort trade. Indonesia's government insists the regulations are designed to help curb smuggling. The U.S. Government has recommended that the decree be rescinded.

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STANDARDS, TESTING, LABELING AND CERTIFICATION 

In July 2000, the Indonesian government began to implement the Consumer Protection Law of 1998 by requiring registration of imported food products. Importers must apply for a registration number from the Agency for Drug and Food Control (BPOM). After complaints from Indonesian importers and retailers of overly complex, time consuming, and costly requirements, BPOM drafted revised procedures that would simplify the process. However, those draft regulations have stalled in the President's Office without approval or further comment.

All imported food products must be tested by BPOM. Fees for such testing range from Rp 50,000 ($6.00) to Rp 2.5 million ($300) per item, and between Rp 1 million ($120) to Rp 10 million ($1200) per product. Some U.S. producers have expressed concerns that the extremely detailed information on product ingredients and processing they must provide may infringe upon proprietary business information. This has led some U.S. exporters to discontinue sales. However, the government has not fully implemented these regulations, and enforcement is weak and inconsistent. If fully implemented the annual level of trade adversely affected by this requirement is estimated by U.S. industry at between $10 million and $25 million.

Indonesia's government also has been gradually implementing a strict food labeling law that requires labels written only in the Indonesian language on all consumer products. Labels may not include any other languages. U.S. companies, which generally design labels to accommodate several export markets (often in several languages), have concerns about this requirement because it makes it cost ineffective to export smaller volume products. However, as of December 2004, the government had not issued implementing rules or enforced the food labeling requirement. The United States is closely monitoring this situation.

Beginning January 2001, Indonesia's regulations required labels identifying food containing "genetically engineered" ingredients and "irradiated" ingredients. However, the government has not implemented these new requirements because it has yet to establish minimum thresholdpresence levels. U.S. industry estimates that the new regulation could affect sales of approximately $411 million annually in soybeans and soybean meal from the United States. The United States is closely monitoring the situation.

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GOVERNMENT PROCUREMENT
 Indonesia is not a party to the WTO Government Procurement Agreement (GPA). Indonesia's government procurement regime is governed by a number of overlapping laws, regulations, and presidential decrees. Most important is a presidential decree issued in February 2000, which updated the Law on Government Procurement of 1994. The decree simplified procurement procedures and enhanced transparency, but also granted special preferences to domestic sourcing. In addition, Construction Law 14/1999 governs procurement of civil engineering services and related consulting services. Regional decentralization also may introduce additional barriers as local and provincial governments adopt their own procurement rules.

Bilateral or multilateral donors finance many large government contracts and often impose special procurement requirements. For large, government-funded projects, international competitive bidding practices must be followed. The Indonesian government seeks concessional financing for most procurement projects. Since late 1999, the Indonesian government has conducted audits of the state-owned electricity company (PLN), the state oil and gas company (Pertamina), and the State Logistics Agency (Bulog), which identified serious irregularities in procurement. However, no legal action has been taken.

Foreign firms bidding on high value government-sponsored construction or procurement projects have been asked to purchase and export the equivalent value in selected Indonesian products. Government departments, institutes, and corporations are expected to utilize domestic goods and services to the maximum extent feasible, with the exception of foreign aid-financed goods and services procurement projects. State-owned enterprises that publicly offer shares through the stock exchange are exempted from government procurement regulations. The new oil and gas upstream authority, BP Migas, regulates the import of all materials used by the oil and gas sector.

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***

to be continued to Part II
Export Subsidies

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