INDONESIA: A RECIPE FOR PROTECTIONISM

C O N F I D E N T I A L SECTION 01 OF 02 JAKARTA 000391 SIPDIS PASS TO USTR BWEISEL; KELHERS STATE FOR EAP MTS STATE FOR DAS MARCIEL E.O. 12958: DECL: 03/04/2019 TAGS: ECON EFIN ETRD ID PGOV SUBJECT: INDONESIA: A RECIPE FOR PROTECTIONISM REF: A) STATE 125609 B) JAKARTA 336 Classified By: Ambassador Cameron R. Hume for reasons 1.4 (b) and (d). ¶1. (C) Summary: Global economic turmoil, electoral politics and latent economic nationalism have created a climate conducive to protectionist policies. Indonesia has instituted a series of economic measures in recent months that, at a minimum, go against the spirit of its G-20 commitment to resist protectionist impulses. In private, some GOI technocrats concede the protectionist intent and express frustration about the adverse impact on Indonesia's international reputation and leadership standing in the G-20. End Summary And The List Goes On -------------- ¶2. (SBU) While economic nationalism in Indonesia is not new, the scope of measures initiated recently is striking. An accounting of controversial economic policies proposed by Indonesia in the last six months includes: a ministerial decree mandating import restrictions on more than 400 different major goods (including limiting imports to five seaports); new import licensing requirements for sugar; a Ministry of Health decree requiring foreign pharmaceutical companies to build manufacturing facilities locally; a Ministry of Tourism decree requiring foreign films to be processed locally; a draft Ministry of Telecommunications decree mandating local content requirements; and recent regulations imposed by Indonesia's food and drug agency (BPOM) requiring more stringent documentation for imported food products. ¶3. (SBU) The Ministry of Trade has issued a regulation requiring exporters of certain natural resource commodities to use Letters of Credit received through domestic foreign-exchange banks for payments. Indonesia has also introduced new regulations on the importation of steel and has revised import duties for select sectors to protect domestic industries. And the GOI plans to issue implementing regulations to a Presidential Instruction mandating domestic products be purchased for any government procurement. Implementation dates vary, but most of the above measures are scheduled to be "in force" within three months. Elections Are Important -------------- ¶4. (C) Indonesia's electoral season encourages short-sighted policies as nationalist sentiments play well to Indonesian voters. An example is Minister of Health Supari. In addition to her continuing refusal to share Avian Influenza samples, Supari also controls Indonesia's ostensibly independent food and drug agency (BPOM). BPOM restricts importation of foreign goods and publicly destroyed foreign products that independent tests confirmed safe for consumption. Supari has also issued a Ministry of Health decree affecting the operations of foreign pharmaceutical companies and has delayed license renewals for imported drugs. An Indonesian poll recently identified Minister Supari as the most popular Minister in President Yudhoyono's Cabinet, which may explain President SBY's reluctance to reverse her policies. And Expensive -------------- ¶5. (C) Upcoming elections also encourage the protection of domestic businesses reportedly in return for campaign funds. For example, food and beverage contacts complain that Vice-President Jusuf Kalla's involvement in issuing new import licensing requirements for sugar is driven by political fundraising. They allege domestic beneficiaries of the restrictive policy have promised contributions to Kalla's Golkar party. Meat importers make similar claims that Ministry of Agriculture restrictions on foreign beef ultimately generate campaign contributions for the Islamist PKS party. Smile When You Say That -------------- ¶6. (C) While most of Indonesia's recent policy measures were in some form of development before the economic crisis, the JAKARTA 00000391 002 OF 002 pace of implementation increased considerably in its wake. GOI officials defend these measures as both necessary and WTO consistent. Privately, government technocrats concede that many policies are indeed driven by economic worries and reflect protectionist intent. Confidants of Trade Minister Pangestu describe her as a devout free trader who privately vents her frustrations while continuing to defend Indonesia's policies in public. The Knives Come Out -------------- ¶7. (SBU) Pangestu has nonetheless engaged in a public row with Minister of Industry Fahmi Idris over protectionism. Idris, a senior Golkar member and adamant nationalist, had called for a joint ministerial decree requiring civil servants to purchase only domestic products. Pangestu dismissed the idea, prompting a rare display of open criticism from Idris. The public exchange exposed the long-running tensions between the nationalistic Minister of Industry and the technocratic Minister of Trade. Minister Idris has also suggested that Indonesia should "forget (the) WTO" in order to better weather the impacts of the global economic crisis. Fighting Back -------------- ¶8. (C) GOI trade officials tell us that invocation of Indonesia's multilateral commitments is the most effective argument to counter protectionist measures. Many of these measures are advanced by line ministries (such as the Ministry of Industry) with little regard for international agreements. The WTO process serves well to strengthen the arguments of technocratic officials in interministerial policy debates. It is also useful to emphasize to GOI officials how Indonesia's policy choices risk undermining President SBY's international credibility and weakening Indonesia's standing and effectiveness as a leader in the G-20. ¶9. (C) We have been coordinating closely in Jakarta with trade colleagues at six local missions: Australia, New Zealand, Japan, Canada, Singapore and the EU. Along with the U.S., these countries account for more than fifty percent of Indonesia's total exports. We have engaged the GOI jointly to convey our shared concerns. We have also supported Geneva-based efforts to produce joint submissions to the WTO, such as the recent U.S.-EU submission to the WTO subcommittee on import licensing. These efforts have been effective; Indonesia's import-restricting Decree 44 was revised two months after its initial issuance in response to concerns about WTO compliance. In addition, we have increased our outreach efforts to the Indonesian Business Association (KADIN) which enjoys strong influence with GOI officials. We were recently invited by KADIN to comment on GOI-proposed revisions to Indonesia's Investment Law and Negative List. (Ref B). KADIN has used our input to get several proposed restrictions delayed on procedural grounds. ¶10. (C) Given Indonesia's positive response to multilateral pressure, we encourage increased coordination and collaboration with Indonesia's other trade partners to address areas of shared concern. We recommend that USTR Weisel meet with our informal coalition during her visit to Jakarta in March to reinforce the value of this cooperation and discuss the possibilities for cooperation at the WTO. We also suggest delivering a strong pro-ASEAN message in meetings with GOI officials. Indonesia's trade and investment policy centers around its ASEAN commitments. Our influence with Indonesia on trade issues is enhanced by our perceived commitment to ASEAN. GOI officials have expressed interest in exploring cooperation in the logistics sector. A message from Washington signaling renewed interest in the U.S.-ASEAN TIFA process would deepen the impact of USTR's visit and lay the groundwork for a more effective discussion of our bilateral TIFA issues. HUME