MIXED REACTIONS IN EASTERN INDONESIA TOWARD ASEAN/CHINA FTA

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SUBJECT: MIXED REACTIONS IN EASTERN INDONESIA TOWARD ASEAN/CHINA FTA

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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.

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CONCERNS OF INCREASED CHINESE COMPETITION
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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

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ANTICIPATION OF A BETTER EXPORT ENVIRONMENT
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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.

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SAME SIZED PIE; DIFFERENT SHAPED PIECES
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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

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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