MIXED REACTIONS IN EASTERN INDONESIA TOWARD ASEAN/CHINA FTA

UNCLAS SECTION 01 OF 02 SURABAYA 000007 SENSITIVE SIPDIS DEPT FOR EAP/MTS DEPT FOR EEB/CBA USTR KELHERS; BWEISEL E.O. 12958: N/A TAGS: ECON ETRD EAID PGOV SOCI KMCA MCC ID SUBJECT: MIXED REACTIONS IN EASTERN INDONESIA TOWARD ASEAN/CHINA FTA SURABAYA 00000007 001.2 OF 002 This message is Sensitive But Unclassified. Please protect accordingly. ¶1. (SBU) SUMMARY: Political and business leaders in Eastern Indonesia have mixed views of the impact that the recently implemented ASEAN/China FTA will have on local economies. Some express concern that the FTA will allow cheap Chinese goods to flood local markets. Others express optimism that the FTA will provide an opportunity for Indonesian businesses to expand their exports to China. Economic observers expect the positive and negative impacts on the East Java economy to balance each other out. END SUMMARY. -------------- -------------- CONCERNS OF INCREASED CHINESE COMPETITION -------------- -------------- ¶2. (SBU) Some business and political leaders in Eastern Indonesia are concerned that the ASEAN/China FTA which came into effect on January 15 will harm local businesses. For example, the chairman of the Sidoarjo Chamber of Commerce, Imam Sugiri, said that the FTA would allow cheap Chinese goods to flood the market and undercut locally made products. Imam, who is also an opposition candidate for the upcoming Regent elections in Sidoarjo, said that this increased competition would be especially harmful to small and medium sized businesses, which make up 90% of the 1,500 business in the regency. He said that a combination of expensive raw materials and high corruption make it impossible for these SME's to compete with cheaper Chinese products -------------- -------------- ANTICIPATION OF A BETTER EXPORT ENVIRONMENT -------------- -------------- ¶3. (SBU) However, other leaders are optimistic about the possibilities the FTA provides. Sherlina Kawilarang, the chairwoman of the East Java Indonesian Textile Association (API),said that the FTA gives Indonesian businesses the opportunity to "pour textile products into Chinese markets." She pointed out that East Java alone exported nearly 125 thousand tons of textiles worth $357 million to China in 2009. This represents 3.5% of East Java's estimated 2009 non-oil exports of $10 billion. She said that the FTA would allow East Java textile businesses to export even more textiles to China in the coming years. The East Java API expects textile exports to China to increase to 133 thousand tons worth $375 million in 2010, due to the FTA. ¶4. (SBU) Yasin Limpo, the Governor of South Sulawesi, told press in Makassar that the FTA represents a good opportunity for South Sulawesi businesses to expand their exports to China, which is currently the province's 7th largest export destination. In particular, he said that South Sulawesi will focus on expanding exports of five commodities to China: cacao, corn, seaweed, shrimp, and rice. However, Yasin criticized the central government for not assisting local governments in efforts to market local products overseas. He said that such support would be necessary for local Indonesian businesses to take full advantage of the new FTA. -------------- SAME SIZED PIE; DIFFERENT SHAPED PIECES -------------- ¶5. (SBU) Indra Fauzi, the director of Regional Economic Development Institute (REDI),an independent economic think-tank, argued that while the FTA will have both positive and negative effects on different aspects of East Java's economy, these effects will most likely balance each other out. Indra said that the manufacturing sector would feel most of the negative impact. While East Java has a comparative advantage in certain specialized fields -- for example, batik textiles or teak furniture -- Indra expects that Chinese products will generally be cheaper than their locally produced counterparts. Indeed, he pointed out that in 2009 East Java's imports from China were twice the value of its exports to China. While China is the fourth largest foreign market for East Java's exports, it is the largest source for the provinces' imports. He expects that imbalance to grow as a result of the FTA. ¶6. (SBU) On the other hand, Indra also emphasized that the vast SURABAYA 00000007 002.2 OF 002 majority of the people living in East Java are employed in the agricultural sector, and that consumption accounts for almost two-thirds of the economy in the province. In this broader economic context, he argued that the FTA would exert a downward pressure on the price of goods in the province, which would benefit the broader economy. However, Indra said that he expected the positive impact of generally lower prices to be roughly equivalent to the negative impact on manufacturing. He said that the FTA "won't alter the size of the pie; it will just adjust the relative size of some of the pieces." MCCLELLAND