DD

i
APINDO Policy Series

Perspective from
Indonesias Business Sector
In Facing the
Indonesia-European Union
Comprehensive Economic
Partnership Agreement:
Riandy Laksono
Rosa Situmorang
This project is co-funded by
the European Union
ACTIVE (Advancing Indonesias Civil Society in
Trade and Investment Climate)
Vol. P.001/DPN-EUKAJ-I/2014
i
Perspective from
Indonesias Business Sector
In Facing the
Indonesia-European Union
Comprehensive Economic
ii
APINDO-EU ACTIVE Project Team Members:
Barliana Amin (Advisor)
Maya Safira (Project Manager)
Riandy Laksono (Lead Economist)
Rosa Situmorang (Economist)
Daniel P. Purba (Public Affairs & Media Officer)
Muryenthi Ambarsari (Project Assistant)
The content of APINDO-EU ACTIVE working papers is the sole responsibility of the
author(s) and can in no way be taken to refect the views of Indonesia Employers
Association (APINDO) or its partner institutions. APINDO-EU ACTIVE working papers
are preliminary documents posted on the APINDO website (www.apindo.or.id)
and widely circulated to stimulate discussion and critical comment.
Di scl ai mer
ACKNOWLEDGEMENT
A
PINDO-EU ACTIVE working papers are issued in joint
cooperation between Indonesia Employer Association
(APINDO) and Advancing Indonesias Civil Society in Trade and
Investment (ACTIVE), a project co-funded by the European Union.
ACTIVE project aims to strengthen APINDOs policy making
advocacy capabilities in preparing the business environment and
to empower national competitiveness in facing global integration.
For more information, please contact ACTIVE Team
at active@apindo.or.id or visit www.apindo.or.id.
Dewan Redaksi
Pelindung : Sofyan Wanandi
Pembina : Chris Kanter
Suryadi Sasmita
Anthony Hilman
Pemimpin Redaksi : P. Agung Pambudhi
Tim Penyusun : Diana M. Savitri
Riandy Laksono
Rosa Situmorang
Made Astri Karniani
Adrinaldi
Wahyu Handoko
Editor : Communication Division
Layout/Design : Chandra K. Putra
iii
FOREWORD
S
ince 2009 Indonesia and The European Union have been doing several assessments on the
proposed Comprehensive Economic Partnership Agreement (CEPA) between Indonesia and The
EU. The CEPA is convinced to strengthen bilateral trade and investment with its triangular architecture
which involves market access, capacity building, and facilitation of trade and investment. It is also
believed to create a strong mutual beneft for both parties through increased trade volume, enhanced
EUs investment in Indonesia, and the establishment of capacity building. Despite the overall positive
outlook of the Indonesia-EU CEPA, the government as well as private sectors in Indonesia worry
that as the level of development between EU and Indonesia difers signifcantly, the beneft of CEPA
will be more likely bias towards the EU side, while Indonesia will be the one bearing most of the
adjustment cost.
As an ofcial partner of the GoI, APINDO holds a credential position representing the private sectors
to actively assist the government in forming efective economic policies. This policy recommendation
sets down a grand mechanism on how to optimize the beneft and minimize the potential adjustment
cost coming from the proposed Indonesia-EU CEPA on the perspective of business communities. This
paper looks into several relevant aspects, such as tarif, non-tarif measures, services, investment, trade
defense, agriculture subsidy, public procurement, IPR, and competition law. It provides suggestion not
only on how liberal the Indonesia should be opened up to EU, but also in what aspects Indonesia
might push the EUs trade policy to be more accommodative and less-restrictive in the pursuit of
mutually benefcial Indonesia-EU CEPA.
Overall, we convey our appreciation to APINDO EU ACTIVE Team who has successfully delivered
this policy paper and we would like to thank Riandy Laksono and Rosa Situmorang for conducting
the study. We hope our policy recommendation will contribute a signifcant input in moving forward
the Indonesia EU CEPA negotiations.
Sofan Wanandi Chris Kanter
General Chairman Vice Chairman
Indonesian Employers Association(APINDO) Indonesian Employers Association(APINDO)
iv
LI ST OF ABBREVI ATI ONS
AoA Agreement on Agriculture
ACFTA ASEAN-China Free Trade Area
ACTIVE Advancing Indonesias Civil Society in Trade and Investment
ADA Anti-Dumping Agreement
ADB Asian Development Bank
AEC ASEAN Economic Community
CAP Common Agriculture Policy
CEPA Comprehensive Economic Partnership Agreement
EAFRD European Agricultural Fund for Rural Development
EAGF European Agricultural Guarantee Fund
EIBN European Union-Indonesia Business Network
EQI Export Quality Infrastructure
EU European Union
FDI Foreign Direct Investment
FTA Free Trade Area
GATS General Agreement on Trade in Services
GATT General Agreement on Trades and Tarifs
GDP Gross Domestic Product
GoI Government of Indonesia
GSP Generalized System of Preference
ILO International Labour Organization
IPR Intellectual Property Rights
ISO International Standards Organization
ISPO Indonesia Sustainable Palm Oil
MFN Most Favored Nation
MRA Mutual Recognition Agreement
NGO Non-Governmental Organization
NTM Non-Tarif Measures
OECD Organization for Economic Co-operation and Development
RED Renewable Energy Directive
RSPO Roundtable Sustainable Palm Oil
SMEs Small and Medium Enterprises
SPS Sanitary and Phytosanitary
TBT Technical Barriers to Trade
UNCTAD United Nations Conference on Trade and Development
UNWTO United Nations World Trade Organization
VET Vocational Education and Training
WTO World Trade Organizations
WTTC World Travel and Tourism Council
v
CONTENTS
Acknowledgement ..................................................................................................................................................................................... ii
Foreword .......................................................................................................................................................................................................... iii
List of Abbreviations ............................................................................................................................................................................. iv
Contents ............................................................................................................................................................................................................. v
List of Figures .............................................................................................................................................................................................. vi
List of Tables ................................................................................................................................................................................................. vi
Abstract ............................................................................................................................................................................................................... 7
A. Introduction .............................................................................................................................................................................................. 7
B. Indonesia-EU Comprehensive Economic Partnership Agreement:
Basic Features and The Role of Indonesias Business Sector .................................................................................. 10
C. Key Issues on Indonesia EU CEPA: Perspective of Business Sectors ...................................................... 11
C.1. Market Access of Trade in Goods ................................................................................................................................... 12
C.2. Market Access on Services ................................................................................................................................................... 19
C.3. Reinforcing EU Investment .................................................................................................................................................. 23
C.4. Ensuring Fair and Competitive Trade under Indonesia-EU CEPA:
Trade Defence Measures and Agriculture Policy .................................................................................................. 27
C.5. Other CEPA Elements: Public Procurement, Competition Policy,
and IPR Public Procurement ................................................................................................................................................ 34
D. Concluding Remarks ...................................................................................................................................................................... 35
References ...................................................................................................................................................................................................... 37
Appendix ........................................................................................................................................................................................................ 38
vi
LI ST OF FI GURES
Figure 1. UNCTAD Classifcation of Non-Tarif Measures .............................................................................................. 14
Figure 2. The Extensiveness of SPS and TBT Measures by Sector in
European Union .................................................................................................................................................................. 15
Figure 3. Indonesias Trade on Services Balance ................................................................................................................ 20

TABLES
Table 1. Existing and On-Going FTA Agreement in Indonesia and
European Union ..................................................................................................................................................................... 9
Table 2. Key Issues of Services ....................................................................................................................................................... 20
Table 3. Indonesia Statistics of FDI Realization (in USD million) ........................................................................... 24
Table 4. Provisions on Investment Agreement .................................................................................................................. 25
Table 5. Goods Originating from Indonesia which are subject to
Anti-Dumping and Anti-Subsidy Measures in EU ....................................................................................... 28
Table 6. The Development of EU Common Agricultural Policy (CAP) .............................................................. 30
7
A. Introduction
I
n a dynamics global economic landscape,
like nowadays, the open economic policy
regime has gained increasing popularity
among the policy makers in both developed
as well as developing countries. There is a
belief that open market can enhance local
competitiveness, spur innovation, promote higher
growth, create more jobs, and even reduce poverty
through more productive activities. As the multilateral
negotiation through the WTO is still somewhat stalling,
countries seeking to expand businesses abroad
increasingly seek for regional and bilateral economic
partnership agreement, if not free trade agreement (FTA).
Indonesia and European Union are among the countries,
which are being very actively engaged in numerous FTA
Perspective from Indonesias
Business Sector
In Facing the Indonesia European
Union Comprehensive Economic
By: R. Laksono & R. Situmorang
Abstract
In a dynamic global economic landscape like nowadays, the open economic policy regime has gained
increasing popularity among policy makers in both developed as well as developing countries. As the
multilateral negotiation through WTO is still somewhat stalling, countries seeking to expand businesses
abroad increasingly seek for regional and bilateral economic partnership agreement, if not free trade
agreement (FTA). This study is an attempt to identify the key policy issues of the proposed Indonesia-EU
CEPA and serves as a recommendation for the government on how to best deal with the Indonesia-EU CEPA
negotiation, particularly from the perspective of private sectors. In doing so, this paper looks into several
relevant aspects, such as tarif, non-tarif measures, trade in services, investment, trade defence, agriculture
subsidy, public procurement, IPR, and competition law. It mostly contains of general recommendation on
the best position the Indonesian government should take in the negotiation process of Indonesia-EU CEPA.
It provides suggestion not only on how liberal the Indonesia should be opened up to EU, but also in what
aspects Indonesia might push the EUs trade policy to be more accommodative and less-restrictive in the
pursuit of mutually benefcial Indonesia-EU CEPA.
Keywords: Free Trade Agreement, Comprehensive Economic Partnership Agreement, European Union, Indonesia, Trade,
Investment, private sectors.
8
negotiations. According to ADB data (ARIC ADB 2013),
Indonesia has 22 FTAs (and CEPA) which is already signed
or at least under negotiation and consultation. Most of
the Indonesias FTA is done between its Asian partners
and to some extent refecting the dynamism of private
sector in response to the new international division of
labor happening very extensively in East Asia recently,
i.e. the 2nd unbundling. Business participation in the
global value chain has now become widely accepted
policy strategy, as it will beneft local frms and the
whole economy. Its even most desirable for Indonesia,
as it will help Indonesia to step up from middle-income
country to fully developed countries, through stimulating
technology transfers, human resources development,
and innovation (Kimura 2012).
On the other hand, the EU is widely known as the major
proponent of multilateralism and less involved in FTAs
euphoria, especially with Asian partners, until very recently.
In 2006, the European Commission launched a new trade
policy approach, putting more emphasize on creating
comprehensive and ambitious FTAs, especially with the
undiscovered Asian partner, i.e. ASEAN countries, Korea,
India, and, possibly, China (European Commission 2006).
It becomes a new external trade policy direction for the
EU in contributing more efectively to stimulate growth
and create jobs in Europe. Currently, European Union is
involved in no less than 21 FTAs (and CEPA) (European
Commission 2013 and ARIC ADB 2013), including the
newly proposed Indonesia-EU Comprehensive Economic
Partnership Agreement (see Table 1).
The relation between EU and Indonesia had been very
substantial. The scope of relationship lies from business-
as-usual cooperation such as trade and investment, to
contemporary issues, like justice, climate change and
fghting corruption. Since 1990, the bilateral trade in
goods has been quadruple amounting to 28.7 billion
USD in 2012, with Indonesia as a net-exporter (4 billion
USD surplus) and EU as the net-importer (9 billion USD
defcit). In 2012, EU was ranked as the fourth largest
source of import (share: 7.4%), and the third largest export
destination for Indonesias products (share: 9.5%), right
after Japan and China (WITS 2013). The most exported
products from Indonesia to EU, in 2012, comes from the
(natural) resource-based and labor intensive industry, like
palm oil, rubber, mineral resources, textile, footwear and
(semi) manufactured products. In addition to that, the
European Union is the 4th largest export destination
for Indonesias animal and/or vegetables oils products
(palm oil included).
Indonesia is not yet among the top major trading
partners of EU for most of its leading products,
accounting at only 0.21% of total EU export and 0.38%
of total EU import (WITS 2013). However, Indonesias
market has currently gained increasing attractiveness for
EU products. From 2000 to 2012, EU exports to Indonesia
has grown dramatically at 162.2 percent, with annual
growth more than 10 percent (WITS 2013). EU exports
to Indonesia is mostly on high-value added industrial
products such as machinery, electrical, and transport
equipment, pulp and paper, organic chemicals products,
as well as higher value added agriculture processed
products, such as dairy produce. The records also show
that Indonesia is the 3rd largest market in the world
and the 1st largest market in ASEAN countries for EUs
pulp and papers products (WITS 2013). The evidence
suggests that the trade characteristic between EU
and Indonesia is somewhat complementary, making
it as an essential foundation for a mutually benefcial
CEPA/FTA agreement.
Direct investment from EU has been very infuential for
Indonesian economy, contributing signifcantly, but not
limited, to the employment creation, value-addition, and
technology transfer. In term of FDI stock from 2004 to
2012, EU is the third largest source of FDI in Indonesia,
right after Singapore and Japan, respectively (Bank of
Indonesia 2013). The investment from EU is mostly
located in value added and industrial sector such as
electronics, construction, chemical and pharmaceutical
products, power generation, mining, and general
manufacturing (EU report 2011). However, theres still
large room for further enhancement of EU investment,
as Indonesia in 2011 accounts only around 0.5% of total
(extra-) EU FDI stocks and 13.5% of EU FDI stocks to
ASEAN countries (Eurostat 2013). Therefore, the plan to
create Indonesia EU CEPA could excavate greater
investment opportunity for Indonesia, moreover when
considering on its huge market potential weathered
with such a pro-business macro-policy environment,
making it very attractive as a production base for EU
private sectors.
9
Status of FTA
Agreement
Indonesia EU
Signed/Concluded
ASEAN Free Trade Area Korea-EU FTA
ASEAN-Australia and New Zealand Free Trade
Agreement
EU-Chile Association Agreement
ASEAN-India Comprehensive Economic
Cooperation Agreement
EU-Mexico Economic Partnership, Political
Coorperation,and Cooperation Agreement
ASEAN-Japan Comprehensive Economic
Partnership
EU South Africa Trade, Development and
Cooperation Agreement (TDCA)
ASEAN-Korea Comprehensive Economic
Cooperation Agreement
ASEAN-Cina Comprehensive Economic Cooperation
Agreement
Japan-Indonesia Economic Partnership
Pakistan-Indonesia Free Trade Agreement
Preferential Tariff Arrangement-Group of Eight
Developing Countries
Trade Preferential System of the organization
of the Islamic Conference (only the Framework
Agreement)
Negotiation
launched/under
consultation and
study
ASEAN-EU FTA ASEAN-EU FTA
Indonesia-EU Comprehensive Economic
Partnership Agreement (CEPA)
Indonesia-EU Comprehensive Economic Partnership
Agreement (CEPA)
ASEAN-Hongkong-China FTA India-EU FTA
ASEAN Pakistan FTA Japan-EU Economic Parthership Agreement
Comprehensive Economic Partnership for East Asia
(CEPEA/ASEAN+6)
Malaysia-EU FTA
East Asia Free Trade Area (ASEAN+3) Singapore-EU FTA
Indonesia-Chile FTA Thailand-EU FTA
Indonesa-European Free Trade Association FTA Vietnam-EU FTA
Indonesia-Korea FTA EU-Canada Comprehensive Economic and Trade
Agreement (CETA)
Regional Comprehensive Economic Partnership EU-Gulf Cooperation Council (CGC) FTA
US-Indonesia FTA EU-Ukraine FTA
Armenia-EU FTA
Georgia-EU FTA
Pasic ACP-EC Economic Partnership Agreement
Pakistan-EU FTA
TABLE 1 EXISTING AND ON-GOING FTA AGREEMENT IN INDONESIA AND EUROPEAN UNION
Source: ARIC ADB (2013), European Commission (2013)
Apart from the commercial relation between Indonesia
and EU, there is a lot of other cooperation and EU
support taking place in Indonesia. Aid for Trade (AfT) is
one of the EU fagship program aiming at developing
Indonesias capacity to trade. It has focused on building
new infrastructure, improving ports or customs facilities and
building Indonesias capacity on health and safety standards.
There is EUR 700 million cooperation/support fund per
year from EU to Indonesia in the areas such as education,
health, trade, and sustainable development (EU report 2011).
The Comprehensive Economic Partnership Agreement
(CEPA) between Indonesia and the EU is, therefore,
expected to further deepen and widen the existing
cooperation and support programs in Indonesia.
10
B Indonesia-EU Comprehensive Economic
Partnership Agreement: Basic Features and
The Role of Indonesias Business Sector
I
n 2009, Leaders from Indonesia and the EU
started a conversation on how to strengthen
bilateral trade and investment in todays fast
changing world businesses and geo-political
situation. The Vision Group, tasked by both
countrys leaders, then come up with a
proposal to create bilateral agreement between EU and
Indonesia, called: Comprehensive Economic Partnership
Agreement (CEPA). The Indonesia EU CEPA is
essentially a more comprehensive and ambitious
Free Trade Agreement (FTA), equipped with a
triangular architecture: market access, capacity
building, and facilitation of trade and investment.
The term comprehensive means that it aims not only
at liberalizing the traditional market access in goods,
services, and investment, but covers also broad range
of cooperation such as capacity building, public
procurement, infrastructure development, public-private
partnership, IPR and Competition policy, as well as
sustainable development. Indonesia EU CEPA will also
be more ambitious, aiming at highest possible degree of
liberalization and cooperation, while fully respecting the
gap of development level between the two countries.
In term of market access, the EU will most likely
propose a package containing at least full parity
benefit as other concluded Indonesias bilateral
FTA / CEPA, especially with countries which are
competitors to EU, for example Japan under the
Indonesia-Japan Economic Partnership Agreement
(IJEPA). The Vision Group report (2011) has made some
indications on the market access proposal. Liberalization
on trade in goods would aim at eliminating tarif for 95%
of tarif lines, covering at least 95% of trade value. The
schedule of tarif reduction would be made as such in
order to allow for some fexibility, considerin the diferent
levels of development (principle of asymmetry over
time). The CEPA will also tackle the issue of non-tarif
barriers through regulatory convergence and provision of
trade facilitation. The market access of trade in services
and investment would be opened up to certain levels,
which ensure the creation of new business opportunities
and legal certainty for business sectors.
Trade facilitation and capacity building are the primary
vehicles on improving the capacity of business sectors to
better utilize improved market access in both countries. It
is a critical element to any successful bilateral agreement
and embedded as an integral factor constructing the
whole architecture of Indonesia EU CEPA. Since the (MFN)
tarif rates of both countries, in average, are already
relatively low (in 2011 Indonesia: 7.1%, EU: 5.2%) and the
gains from eliminating tarif measure would expectedly
be fairly small, it is now the NTMs measures, such as
standards and technical requirements, which are more
pressing to ensure the beneft of CEPA. In this regards,
the Indonesia EU CEPA is expected to overcome the
issues of industrial requirements, testing recognition and
accreditation of certifcation as well as to harmonize all
of them to comply with the international standards via
trade facilitation and capacity building programs. The
complete information on how the Indonesia EU CEPA
would be looked like is available in Appendix 1.
Competi ti ve pressure, comi ng from economi c
liberalization, will unavoidably create some adjustment
for Indonesias private sectors, especially for a certain
small and medium enterprises (SMEs). Yet, theres also
greater business opportunity wide-open following the
establishment of Indonesia EU CEPA. A comprehensive
mechanism needs to be developed, focusing on how
to reap optimum beneft and minimize the potential
adjustment cost coming from the proposed Indonesia-
EU CEPA. Intensive participation from the business
sector in the dialogue process, consultation and study,
negotiation process, as well as in the implementation
of the cooperation (and capacity building) program can
possibly provide essential foundation to do that.
11
1
It is well acknowledged that the EU is seeking for preferential concession with ASEAN. As regional consultation is going nowhere, the negotiation shift towards
the bilateral concession targeting individual ASEAN member states with a hope that each bilateral agreement can be harmonized someday. The negotiation
went well with some of the ASEAN countries, like Singapore, Thailand, and Malaysia. Even Singapore is entering the ratification stage of CEPA agreement.
Since 2012, The Employers Association of Indonesia
(APINDO), one of the most prominent business
communities in Indonesia, has been working together
with the European Union to improve the readiness of
Indonesias business community in facing the proposed
Indonesia-EU CEPA. APINDO, under the scheme of
Advancing Indonesias Civil Society in Trade and
Investment (ACTIVE) project, helps to improve private
sector understanding and capacity in facing the CEPAs/
FTAs issues, especially through research and policy
C. Key Issues on Indonesia EU CEPA:
Perspective of Business Sectors

advocacy as well as socialization program. APINDO has
actively conducted numerous socialization programs to
inform business community on the Indonesia-EU CEPA
proposal. Many key issues and insightful inputs have been
gathered from the discussion with the private sector.
This paper is an efort to collaborate all of those key
fndings and serves as an integrated proposal from
the business sectors on how to best deal with the
Indonesia-EU CEPA.

T
here is so much potential economic
beneft that can be reaped by trading
freely/partnering so closely with the
EU. As a contributor of 23 percent of
world (nominal) GDP and 7.3 percent
of global population, the EU indeed
ofers a fruitful market potential for Indonesia. The Vision
Group (2011) reported that there is an additional 0.1
percent of Indonesias GDP growth in the short-run, and
1.3 percent in Indonesias GDP in the long-run as an
impact of Indonesia-EU CEPA implementation. Beside its
impact on GDP, the Indonesia-EU CEPA will also improve
the production of light industries (5% increase), trade
balance (increase by around 2 billion USD), and overall
wages (1.5% increase). Moreover, the comprehensive
trade and investment liberalization will also be poverty-
reducing (Vision Group Report 2011).
Nevertheless, there are several fundamental issues
inherent in the Indonesia-EU CEPA if it is to be negotiated.
Despite the overall positive outlook of the Indonesia-EU CEPA,
the government as well as private sectors in Indonesia worry
that as the level of development between EU and Indonesia
difers signifcantly, the beneft of CEPA will be more likely
bias towards the EU side, while Indonesia will be the one
bearing most of the adjustment cost. It is a reasonable
worry in a context that it will be much easier for EU to
penetrate into Indonesias market than for Indonesia
to enter EU market, as EU producers/operators are
highly equipped with better technical and fnancial
capacity, thus will fnd no difculty in complying
with low-level Indonesias standard and technical
requirement. In contrast, a signifcant adjustment
cost is more likely borne to Indonesias private
sectors, as they have to adapt with such a stringent
compliance system in EU. Even (assuming) when the
Indonesias product passes the EU standards, exporter
from Indonesia are still forced to compete with heavily
subsidized domestic producers protected with quite a
high custom duty (tarif rate), especially when it comes
to agriculture products.
Not only will the Indonesia-EU CEPA pose some
signifcant challenges, holding it back will also possibly
cause an opportunity loss for Indonesia. When the
ASEAN Economic Community (AEC) is fully realized,
the ASEAN countries will be integrated economically as
a single production base which make doing business
intra-regionally seems like domestics, because of minimal
economic barriers. EU frms will fnd it more competitive
to build a plant where it is cheaper to import raw material
and there is a guarantee for preferential investment
protection and incentive. It is all made possible if one
conclude an FTA/CEPA agreement with the EU aiming
at eliminating substantial customs duty and liberalizing
market access of investment. If EU want to satisfy market
demands coming from other ASEAN countries
1
which
is not yet having CEPA, exporting under zero tariff
12
2
Indonesia has been exposed with numerous FTA, one of which is perceived to be somewhat detrimental for the private sector in Indonesia, i.e. ACFTA. If
both Indonesia and EU want to promote that this CEPA would be different from the other FTA and more mutually beneficial, the package should contain
policy effort to tackle such issues triggering imbalance relationship between Indonesia and EU (e.g. stringent regime on standards and technical requirement,
application of agriculture subsidization and protection, etc.).
3
Tariff peak are high tariffs usually defined as tariffs that are three times the national weighted average. It aims at protecting the sensitive domestic industries,
mostly applied by developed countries, notwithstanding EU. The problem of tariff peaks occurs largely in the following sectors: food industry, textiles and
clothing, footwear, leather and travel goods, automotive sector as well as other transport and high technology goods. For industrialized countries, tariffs of
15% and above are generally recognized as tariff peaks ( WTO Definition).
4
Tariff escalation occurs when tariff levels increase with the degree of processing. If a country wants to protect its processing or manufacturing industry, it
can set low tariffs on imported materials used by the industry (cutting the industrys costs) and set higher tariffs on finished products to protect the goods
produced by the industry. This practice protects domestic processing industries and discourages the development of processing activity in the countries
where raw materials originate. If tariff escalation happens in developed countries, it may prevent the development of value-added industries in developing
countries. ( WTO Definition).
5
The Products are water-pipe tobacco (HS 24.03.11.00.00) and smoking tobacco (HS 24.03.19.10.00 and 24.03.19.90.00).
scheme in AEC is a more preferable solution for them,
instead of be bothered by establishing a plant where
domestic demand is existed. In this case, Indonesia will
lose investment and trade enhancement momentum
unless there is strong political will to proceed with
CEPA negotiation.
By not moving forward with this CEPA agreement, the
trade and investment impediments between the two
countries will still remain and no economic enhancement
will be made. Yet, the Indonesia-EU CEPA ofers signifcant
opportunity for Indonesia to negotiate the existing
barriers and turning it into mutually benefcial economic
deal that will enhance both economic conditions. In this
case, it is best to view the challenges as negotiating tools
instead of impeding factors. Indonesia might accept
the EU proposal in exchange for lowering down the
technical barriers and domestic protection in EU as well
as capacity building for the private sectors and relevant
stakeholders. This move will possibly be much better
than simply declining or holding back from it, because
private sectors will be much more benefted, in a real
and fair term, from improved market access and business
potential, thus enhancing the political acceptability and
build positive images
2
of Indonesia-EU CEPA. This section
will elaborate major issues concerning the Indonesia-EU
CEPA proposal as well as the existing barriers impeding
further economic relation deepening between the two
countries, particularly from the perspective of business
sector. A policy action to tackle the challenges will then
be derived from the process.
C.1. Market Access of Trade in Goods
Liberalization of tarif rates as well as facilitation and
streamlining of non-tariff measures are the major
component of any trade agreement, aiming at improved
market access (trade in goods) between the parties.
Based on the Vision Group report, tarif elimination of
95 percent of tarif line and regulatory convergence
on NTM issues are proposed to create more seamless
Indonesia EU economic relation, through the CEPA.
Some of the concerns raised by Indonesias business
community, like the following, are noteworthy.
Tarif
Distortive and high tarif rates are bad for business as
they reducie the optimal trade value can be attained
in the absence of tarif barriers. Despite the success of
globalization in reducing the general tarif rate in all
over the world, there are still numerous issues perceived
as a problem, especially by the developing countries.
The most prominent problems related to tarif, which
are often complained about by the business sectors in
developing countries, are tarif peaks
3
and escalation
4
.
Initial fndings from the statistical data show that EU
still has severe problem related to the tarif peaks and
escalation. The average general MFN tarif rate in EU is
indeed relatively low, amounting at 5.36% in 2012, with
higher rate applying to agricultural products (11.05%)
rather than manufacturing products (4.05%). However,
the problem of tarif peak is still clearly found in EU, as
theres still a product with duty rate striking at almost
75% under the HS 24.03 chapter (smoking-tobacco
products)
5
. Not only is the tarif rate peaking up for
certain products, it is also escalated as the degree of
processing increase. The product which best represent
the tarif escalation problem in EU is grapes and its
processed products. The import tarif rate for fresh grape
is only 11.5%, while it can reach up to 40% in the form
13
6
NTM is Broadly defined as all border and behind-the-border policy measures, other than tariff, that can potentially distort the international trade. It is often
categorized into technical (SPS, TBT, and pre-shipment) and non-technical measures (quota and price control as well as other trade protective measures).
Please see Figure 1 for detail disaggregation.
of Grape Juice (WITS 2013). It occurs also in the palm
oil product, wherein the tarif for CPO is only 0-3.8%,
while its downstream products is charged by higher
tarif rate, ranging between 5.1-12.8%.
The fndings are in line with the complaint that APINDO
received from the ground (local business community).
The complaint comes from the downstream player
of agro-industry sector, especially the fsh-processing
industry and cocoa producers. Indonesias cocoa
exporters complain on the tarif escalation for cocoa
products entering EU market. There is duty free for
cocoa beans entering EU market, but the tarif remains
signifcantly high for the processed-cocoa products
(around 6-9 percent). The fsh-processing industry fnds
it somewhat uncompetitive to export to EU market, as
the tarif rate is still around 13 percent or more. The
fsh-processing industry in Indonesia cannot compete
with the relatively cheap products from African,
Caribbean, and Pacifc countries (ACP), because they
have preferential arrangement with EU.
The development of downstream/value-added industries
is a major agenda for any developing countries,
notwithstanding Indonesia. The protectionist tarif policy,
especially the tarif escalation problem, applied in EU is
perceived to be detrimental to the goal. Therefore, a
mechanism to negotiate and resolve the problem of
tarif peaks and escalation must be addressed in the
Indonesia-EU CEPA at any possible means, aiming
to support the industrial-upgrading agenda in
Indonesia. In order to conclude the Indonesia-EU CEPA,
the EU is expected to show its good will to liberalize
its tarif rate especially on the processed products of
interest for Indonesia.
Generally, as a bargaining tools, it is recommended for
Indonesia to push EU to lower its tarif rate for agricultural
products and some of its processed products where high
custom duty still remains, in exchange for Indonesias
commitment on the tarif elimination modality as proposed
by the EU which covers 95% tarif lines within 7 years. By
doing so, Indonesia has to come up with robust proposal
in identifying which EUs tarif should be further lowered
in exchange for Indonesias commitment. In requesting
further tarif rate elimination, Indonesia is expected to
target the products which are deemed as sensitive
by the EU or of special importance to EU, considering
also the volume of Indonesias export to EU (at the
current and potential level). These kinds of products are
usually associated with high tarif and subsidy, such as
processed fruit products, tobacco, processed fsheries
products and beef.
Non-Tarif Measures (NTMs)
6
Policy makers around the world have now shifted their
focus more on the NTM issues, as the tarif has been
progressively reduced, following the fast-improved
dynamism of international business. Normally, the NTM
is used by the government in order to correct market
failures and achieve public policy objective which cant
be done by relying solely on market mechanism, such
as consumer health and safety as well as environment
protection. Unfortunately in the actual practices, it is
sometimes hard to diferentiate between legitimate
and protectionist motivation of NTM application. It is
understandable in the sense that when the tarif is
already relatively low in average, NTM is the last defense
mechanism often used by the countries seeking to
protect their national interest. However, the non-tarif
measures are not allways barriers to trade, which are
welfare or trade reducing. Sometimes they are just
the trade formalities, such as automatic licensing,
yet at the same time they can also take the form of
price control, quantity restriction, as well as stringent
technical requirements (please see Figure 1 for further
categorization).

14
For business community in Indonesia, the European
Union is widely known as a difcult market to entry, as
it applies extensive and stringent non-tarif measures
both in agriculture as well as manufacturing products.
Simple statistical exercise based on UNCTAD NTM 2010
data (WITS 2013) shows that the majority of NTMs type
applied by the EU authorities is the technical measures,
namely SPS
7
(56.18%) and TBT
8
(42.2%). There is only
A SANITARY AND PHYTOSANITARY MEASURES
B TECHNICAL BARRIES TO TRADE
C PRE-SHIPMENT INSPECTION AND OTHER FORMALITIES
D CONTINGENT TRADE-PROTECTIVE MEASURES
E NON-AUTOMATIC LICENSING, QUOTAS, PROHIBITIONS AND QUALITTY-
CONTROL MEASURE OTHER THAN FOR SPS OR TBT REASONS
F PRICE-CONTROL MEASURE, INCLUDING ADDITIONAL TAXES AND CHARGES
G FINANCE MEASURES
I TRADE-RELATED INVESTMENT MEASURES
J DISTRIBUTION RESTRICTIONS
K RESTRICTION ON POST-SALES SERVICES
L SUBSIDIES (EXCLUDING EXPORT SUBSIDIES UNDER P7)
M GOVERMENT PROCUREMENT RESTRICTIONS
N INTELECTUAL PROPERTY
O RULES OF ORIGIN
P EXPORT-RELATED MEASURES
TECHNICAL
MEASURES
EXPORT
MEASURES
I
M
P
O
R
T

M
E
A
S
U
R
E
S
NON-
TECHNICAL
MEASURES
FIGURE 1 UNCTAD CLASSIFICATION OF NON-TARIFF MEASURES
Source: Non-Tariff Measures to Trade: Economic and Policy Issues for Developing Countries, UNCTAD (2013).
a small amount of non-technical and formalities NTM
applied by EU, such as pre-shipment inspection and
other formalities, non-automatic licensing, quantity
control, fnancial, and competition measures, totaling
at around only 1.62 percent. The fndings imply that
the more pressing issue in trading with EU is the
standards and technical requirement rather than
trade documents and other formalities.
7
Sanitary and Phytosanitary measures (SPS) are the measures, including all relevant laws, decrees, regulations, requirements and procedures that are applied
to protect human or animal life from risks arising from additives, contaminants, toxins or disease-causing organism in their food; to protect animal or plant
life from pests, diseases, or disease-causing organisms; to prevent or limit other damage to a country from the entry, establishment or spread of pests; and
to protect biodiversity. These include measures taken to protect the health of fish and wild fauna, as well as of forests and wild flora. SPS doesnt include
measure on protecting the environment (UNCTAD 2012).
8
Technical Barriers to Trade (TBT) is a measure referring to technical regulations, and procedures for assessment of conformity with technical regulations
and standards, excluding measures covered by the SPS Agreement. A technical regulation is a document which lays down product characteristics or their
related processes and production methods, including the applicable administrative provisions, with which compliance is mandatory. It may also include or deal
exclusively with terminology, symbols, packaging, marking or labelling requirements as they apply to a product, process or production method. A conformity
assessment procedure is any procedure used, directly or indirectly, to determine that relevant requirements in technical regulations or standards are fulfilled;
it may include, inter alia, procedures for sampling, testing and inspection; evaluation, verification and assurance of conformity; registration, accreditation and
approval as well as their combinations (UNCTAD 2012).
15
The SPS measures are extensively found in agriculture
products, such as fisheries (12.54%), preparation of
vegetable and fruit products (12.48), dairy produce
(8.22%), meat products (7.33%), as well as animal and
vegetable oils and fats (6.77%). On the other hand, TBT
measures are mostly found in manufacturing products,
such as machinery and mechanical products (26.45%)
as well as chemical products (16.48%). It is also applied
to some extent in the agri-based processed products,
such as prepared food-stuf (7.68%). Figure 2 provides
detail information on the sectoral extensiveness of TBT
and SPS measures in EU.
FIGURE 2 THE EXTENSIVENESS OF SPS AND TBT MEASURES BY SECTOR IN EUROPEAN UNION
Source: Processed from WITS NTM data (2013)
Prepared foodstuffs
Live animal and its products
Vegetable products
Animal and vegetable oils and fats
Chemical products
Wood and articles of wood
Machinery and mechanical appliances
Base metals
Stone, ceramics, glass
Raw hides and skin, leather
Textile and textile products
Mineral products
Miscellaneous manufactured
Pulp, wood, adn paper product
Plastics
Pearl and precious stone
Works of art
Arms and ammunition
Optical, clock, musical instrument
Vehicles and transport equipment
Footwear
Machinery and mechanical appliances
Chemical products
Base metals
Prepared foodstuffs
Live animal and its products
Textile and textile products
Optical, clock, musical instrument
Vegetable products
Plastics
Animal and vegetable oils and fats
Mineral products
Miscellaneous manufactured
Vehicles and transport equipment
Stone, ceramics, glass
Footwear
Wood and articles of wood
Pulp, wood, adn paper product
Raw hides and skin, leather etc.
Pearl and precious stone
Arms and ammunition
Works of art
The Incidence of Sanitary and Phytosanitary Measures by Sector
The Incidence of Technical Barrier to Trade by Sector
P
r
o
d
u
c
t

S
e
c
t
i
o
n
P
r
o
d
u
c
t

S
e
c
t
i
o
n
Frequency (in %)
Frequency (in %)
0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00%
0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00%
16
Every country (including EU), wishing to apply SPS and
TBT measures for the sake of their national interest, is
expected to follow WTO principle
9
to ensure business
predictability and sustainability. As for developing
country like Indonesia--where the Export Quality
Infrastructure (EQI)
10
is relatively lacking as compared
to developed countries--achieving the international
standards, which is WTO consistent, is sometimes not
an easy task to accomplish. Even more, there are a lot of
complaints from Indonesias business sectors stating that
in many cases EU is still inconsistent with its application
and also tends to put more restrictions than necessary.
In order for Indonesia-EU CEPA to be concluded, a
comprehensive joint efort to eliminate and reduce
the barriers efect of NTM application especially in EU
should be seriously considered and institutionalized
under the CEPA agreement.
There are at least three kind of problems which were
raised by the business sectors in Indonesia regarding
to the technical NTM (i.e. SPS and TBT) applied in EU,
namely (i) regulatory divergence, (ii) strict and high
standards applied by EU, and (iii) policy inconsistency.
Those three problems have commonality in reducing and
hampering the trade potential; but in order to eliminate
them, they need diferent policy approach.
(i) Settling Regulatory Divergence through Mutual
Recognition Agreement (MRA)
Divergence, in this context, is interpreted as the condition
of which each party has the regulation and standards
governing the quality and sustainability of the business
process, but not entirely matched to each other. In the
context of palm oil products, the domestic regulation
applied in Indonesia is the Indonesia Sustainable Palm
Oil (ISPO), while EU only recognizes palm oil products
complying with the globally accepted regulation,
namely Roundtable Sustainable Palm Oil (RSPO). Business
player in Indonesia argued that ISPO has fully aligned
to the international standards, therefore should not be
9
The main principles of TBT are: (i) transparency, (ii) non-discriminatory and national treatment, (iii) not more restrictive than necessary (proportionality),
(iv) based on international standards, and (v) equivalence (accepting technical regulations of other members as equivalent to their own). Similarly, the main
principles of applying SPS measures are (i) scientific based, (ii) least restrictive (not be a barrier to trade), (iii) based on international standards, (iv) recognition
of equivalence, and (v) transparency. All the principles are intended to promote predictable and sustainable trade.
10
EQI is a set of infrastructure ranging from laboratory and testing equipment, accreditation, and standardization which is needed to ensure that the processes
and products the country can export are able to comply with the technical requirements required by external market.
substantially diferent with the RSPO. On the other hand,
EU still insists that ISPO is not reliable as a basis for further
equivalency / convergence between the two standards
because the palm oil business practice in Indonesia in
reality is still far from being sustainable and even more
the institutional capability as well as the EQI system are
perceived to be still lacking. Therefore compliance to
RSPO is still mandatory for Indonesias palm oil producer
wishing to enter EU market.
This double standard will certainly incur higher cost of
compliance for palm oil industry in Indonesia. Hence,
the upcoming Indonesia-EU CEPA is expected to
promote greater policy dialogue in fnding mutual
acceptance between RSPO and ISPO, where possible,
in order to further improve and facilitate market
access of Indonesias palm oil products entering
EU market. The policy dialogue should aim at fnding
similarity and identifying gap between RSPO and ISPO.
The similarity should be a base for further regulatory
convergence, while the identified gap should be
addressed by enhancing capacity building program
for the private sectors and improving EQI in Indonesia.
Considering that theres a huge opportunity to align
RSPO with ISPO, Indonesia is recommended to sign
Mutual Recognition Agreement (MRA) with EU,
covering mutual acceptance on standards (RSPO-
ISPO convergence), certification, and testing.
Although concluding MRA with industrialized country
like EU is not an easy task to do, Indonesia is urged
to frmly utilizing its position as the largest palm oil
producer and exporters in the world. Indonesia has to
be bolder and more optimistic in negotiating the MRA in
palm oil because the necessary system is already there and
the Industrial practices getting more sophisticated, making
it as a good base for MRA negotiation.
(ii) enhance capacity building program for private
sectors and improve the EQI system in Indonesia
in order to comply with high-level and stringent
regulation and standards in EU
17
11
Based on information as shown in http://www.cen.eu/cen/products/en/pages/default.aspx
EU is widely known as a territory which has stringent
and high-level regulation and standards in governing
the quality of the products entering to their market. In
many cases, EU regulation on standards and technical
requirements is more restrictive and at the higher level
as compared to the international standards (e.g. ISO). This
is particularly highly driven by consumer sophistication
in EU who demands better product quality and safety.
Based on European Committee for Standardization (CEN),
theres only 30% of European Standards (EN) which are
identical to the ISO standards
11
. The rest is not really
identical meaning that it can be either more restrictive or
more complex, thus making it even harder for developing
countries like Indonesia to comply with EU standards.
There are a lot of cases where EU border authority
rejected Indonesias products because of incompliance
to the standard and technical regulation applied in EU,
especially with regards to the environment sustainability
standards and other SPS measures. The data from Henson
and Olale (2011) shows that from 2002 to 2008 there
are 285 cases of rejection of Indonesias food and feed
products by the EU border authority, which is equivalent
to 16.5 billion USD in term of export value. Indonesia
is among the top 10 countries receiving the highest
rejection by EU authority, with 41 cases of rejection
happened every year from 2002 to 2008. Fish and fshery
products in Indonesia is the most rejected products
by EU authority, mostly because it is still contained
of drug-chemical residue, heavy metal, and biotoxins/
contaminants which are perceived to be dangerous for
human safety and health as well as detrimental for the
environment.
Not only in fsh and fshery products, rejection and
boycott are also experienced by palm oil, wood, pulp
and paper industry as well as textile and textile products
because of incompliance to EU standards mostly in the
aspect of environment sustainability criteria. For the pulp,
paper, and wood products, ensuring an environmentally
sustainable business process along the supply chain and
getting the legality proof of a timber, are among the key
pressing issues for the industry; as for the textile products,
it is the compliance to chemical substance regulation,
so-called REACH, which is challenging for the industry.
It is fair to say that, by far, some (or even most) of the
Indonesias private sectors are not ready yet to comply
with the stringent standards in EU. It occurs not only
because such good practice is still costly for Indonesias
business sectors, but also the domestic regulation and
the whole EQI system are simply not well endowed to
meet such a high-level of standards in EU.
In the context of previously mentioned cases, this
study argues that pursuing the MRA or even lower
level of mutual understanding with EU is perceived to
be impossible to be done. For the areas/sectors where
the whole component of EQI (i.e. human resources
and equipment) and sustainable business practices are
still lacking to ensure compliance with EU standards,
Indonesia is suggested to: (i) pursue cooperation
program with EU in the area of exchanging
information on standard and technical requirements,
(ii) request EU to provide assistance and intensive
capacity building for the private sectors in order
to comply with EU and international standards, as
well as (iii) engage EU to contribute in improving
the state of equipment and human resources of the
whole EQI system in Indonesia. It is worth to note
that even after all the capacity building and information
exchange program, when it comes to complying with
EU standards, it will still cost them signifcantly both in
term of monetary and time cost as they need to pass
through both the domestic and international testing
and conformity point. Therefore, in term of improving
the state of EQI system and boosting export capability
to EU, it is best for Indonesia to start looking at the
possibility to engage EU to invest in establishing EU
laboratory and testing center in Indonesia, instead
of just conducting the ordinary capacity building
enhancement program. Real investment in laboratory
and testing center is perceived to be more impactful
in enhancing the EQI system and to the economy as a
whole. More over, with no less important, it will also be
more long lasting than a simple capacity building will
do. Most importantly, it will reduce the compliance cost
incurs to private sectors, as they now only have to pass
through one time testing and assessment with local cost.
18
(iii) Promote greater policy transparency and certainty
in the area of NTM (i.e. TBT and SPS), equipped with
consultation forum involving respective authorities and
private sector to settle any NTM-related policy issues
In order to implement fair trade and promote mutually
benefcial CEPA, countries shall follow the WTO principles
in SPS and TBT application, especially with regards to
transparency. The principle of transparency requires
every application of SPS and TBT measures to be based
on scientifc justifcation and legitimate public policy
objective. Not only this has to be transparent, countries
are generally encouraged to bring greater certainty and
consistency in any trade-related policy implementation in
order to keep fair and healthy business and trade climate.
The implementation of trade-related policy in EU is
still far from ideal. There are many complaints from
Indonesias business community stating that some of
EU members implemented diferent policy framework
from the one set out at the regional/EU level. The
case of import quota for Indonesias palm oil products
by Spanish authority, as well as diferent practices in
assessing the standards are among the kind of policy
inconsistency problem Indonesias exporters have to
face in trading with EU. More over, there are several
cases found in EU showing that EU authority actually
put more burden than necessary and sometimes theres
no legitimate and scientifc justifcation in doing that.
The cases such as: (i) wide-spreading misleading issues
provoked by international NGO stating that palm oil
products in Indonesia is resulted from environmentally
harmful business activity (i.e. in the form of harmful
CPO labeling), (ii) voluntary labeling initiated by private
entity and NGO to indicate freeness from/contains of
palm oil substance (e.g. stating: contains of dangerous
and harmful CPO), as well as (iii) inconsistent and highly
stringent of RED
12
applications are among the evidences
showing that NTM-related policy application in EU is not
yet fully transparent and rationally justifable.
Therefore, the upcoming CEPA is a very good chance
for Indonesia to demand greater policy transparency,
consistency, and certainty from the EU in the
application of Non-tarif measures (NTM), especially
with regards to SPS and TBT. A regular consultation
forum, involving relevant authorities and private sectors,
also needs to be developed in order to inform any
regulatory changes, facilitate discussion, and seek for
solution of any NTM-related policy issues between
EU and Indonesia. In order to clarify the misleading
information involving provocation from the international
NGO and unnecessary additional labeling by the private
sectors, the CEPA should contain a program which
enable Indonesia to socialize the actual practice of
Indonesias palm oil business to the EUs citizen, the
international NGO as well as private sectors.
Based on the already-concluded EU CEPA/FTA with other
partners, there are at least two general modalities on
how the EU treated SPS and TBT in the legal text of its
preferential trade agreement. It difers on how ambitious
the coverage of TBT and SPS agreement are. The frst
modality is the conservative one, meaning that the
TBT and SPS chapter are more or less a repetition or
highly refer to the principle as stipulated in the WTO
agreement, i.e. ensure policy transparency, alignment
to international standards, and be based on scientifc
and legitimate public policy objective justifcation. The
conservative modality doesnt aim at negotiating MRA
neither harmonizing standards and regulation. It only
encourages the parties involved in the agreement to
cooperate in exchanging information and technical
assistance program. The other one is the ambitious
modality which aims not only at implementing the
traditional WTO principle on SPS and TBT, but also
opening up the possibility of mutual recognition of
standards and conformity assessment in the sectors of
mutual economic interest (WTO-plus provision). The
example of conservative modality can be seen in the
EU-Mexico and EU-Chile preferential trade agreement,
while the example of ambitious legal draft can be found
in EU-South Africa trade agreement. In the context of
Indonesia-EU CEPA, it is strongly recommended for
Indonesia to seek for WTO-plus provision on SPS
12
RED is the regulation governing the adoption of renewable energy in EU. Foreign exporter who can meet the standards and technical requirements of RED
(e.g. 35% green house emission saving) is eligible for tax exemption and counted as part of national mandatory target to increase the share of renewable
energy use in EU. Unfortunately, it is very hard and costly to comply with RED in EU in order to get tax exemption and formally utilize renewable energy
mandatory in EU. Even if exporters can demonstrate that they can meet the standards stipulated in RED, the EU authority often denied market access for
them, especially biofuel coming from developing countries.
19
13
Transportation as sector covers all transportation services that involve carriage of passengers, movement of goods (freight), rentals with crew, and related
supporting services. Excludes freight insurance, which is included in insurance services. Excludes goods procured in ports by non-resident carriers and repairs
on transport equipment, which are included in goods. (UNCTAD)14 Travel sector includes goods and services acquired from an economy by non-resident
travelers during visits shorter than one year. (UNCTAD)15 Communication sector consists of postal, courier and telecommunications services between
residents and non-residents. (UNCTAD)16 Construction sector covers the work performed on construction projects and installations by an enterprise outside
the economy of residence of that enterprise. (UNCTAD)
14
Travel sector includes goods and services acquired from an economy by non-resident travelers during visits shorter than one year. (UNCTAD)
15
Communication sector consists of postal, courier and telecommunications services between residents and non-residents. (UNCTAD)
16
Construction sector covers the work performed on construction projects and installations by an enterprise outside the economy of residence of that
enterprise. (UNCTAD)
17
Approximated number of 2012, source: World Bank Indonesia Economic Quarterly Report, March 2013.
18
Calculation was based on the data Gross Domestic Product at Current Market Prices By Industrial Origin 2012 from Badan Pusat Statistik (BPS) Indonesia. The
calculation included sectors: construction, trade, hotel & restaurants, transport & communication, finance, real estate and business services and (other) services.
and TBT arrangements, which also includes mutual
recognition in the sectors of mutual interest as well
as establishment of a joint committee to facilitate
discussion and fnding resolution of any NTM-related
trade policy issues. Furthermore, it is suggested that
any WTO-plus provision on SPS and TBT must be clearly
and explicitly set out in the legal text of Indonesia-EU
CEPA in order to make it more institutionalized. Indonesia
negotiating team has to make sure that the TBT and
SPS chapter in the legal text contains of both traditional
and WTO-plus provision.
C.2. Market Access on Services
The ser vi ces sector conti nuously shows robust
growth in the global economy. It is transforming the
economies in the massive scale. In the global downturn,
theworldsservicetradeshowed its relative resilience by
its expanding value from USD 5 trillion in 2005 to USD
8trillionin2011. It contributed up to 70% of the economy
in developed countries. World Trade Organization (WTO)
recorded the service as the fastest growing sector which
accounts for nearly 20% of global trade, one third of
global employment, and two thirds of global output.
Moving along with the liberalization of trade in goods,
Indonesias international trade in services has been
increasing. However, the balance of trade in services
shows negative value from year to year. The defcit
was dominantly driven by transportation sector
13
(USD
9.1 billion in 2012). On the other hand, the positive
balance showed up in travel sector
14
(USD 1.6 billion),
communication services
15
(USD 373 million), and
construction services
16
(USD 231 million).
In trade with the EU, Indonesia has been net importer
of commercial services. In 2011 Indonesia imported
around EUR 2.9 billion of commercial services from the
EU and exported EUR 1.8 billion. Although Top of Form
Bottom of Form the balance of trade in services always
shows a defcit, Indonesias international trade in services
has been growing rapidly in the last decade. The total
service trade (export and import) was USD 57 billion in
2012 or almost doubled from 2002 (Figure 3). Along with
the positive growth of trade in services to the world,
Indonesia-EU trade in services also grew positively at
the average of 12.6% per year from 2008-2011.
Services take an increasingly important role in Indonesia
economic development. Services sector approximately
contributes 43% of the employment
17
, 49% of PDB
18

and potentially can contribute up to 80% of poverty
alleviation. Services sector has created its signifcant
position as an accelerator of the economy. Nevertheless,
World Bank Indonesia Quarterly Report (March 2013)
noted the service value-added in Indonesia exports
is particularly low, refecting a limited development
of domestic ancillary services for supporting exports
and also low usage by Indonesia exporters of foreign-
supplied export services. Thus, integration into global
supply chains could help to diversify export away from
commodities. Considering its role in the economy, it is
imperative to mobilize a precise and vigilant liberalization
policy on service to maximize its contribution to the
development. Especially, service sector in Indonesia
is a fedgling industry where the capacity to present
the expansion to EU is still considerably limited in the
foreseeable future.
Trade in services is mostly afected by non-tarif barriers
such as technical standards, qualifcation procedures,
and licensing agreements. It thereabouts distinguishes
trade in service and trade in goods. International trade
20
Mode Example of Services Key Issues of Services
1. Cross-border supply: Services
supplied from one country to
another.
International telephone calls
Postal services
Tele-consultancy
Technical procedures (e.g.
visa)
Physical distance & the
level of connectivity (e.g.
transportation infrastructure)
Standardization
2. Consumption abroad:
Consumer/rms making a use of
a service in one country.
Tourism
Educational services
Ship repair services
3. Commercial presence: A
foreign company setting up
subsidiaries or branches to
provide services in one country.
Banks
Consultancy rms
Telecommunication rms
Foreign investment regulation
(ownership and other
requirements)
4. Presence of natural persons:
Individuals travelling from their
own country to supply services in
another
Professionals
Blue-collar workers
Domestic labors
Qualication requirements
Recognition
Working permit
TABLE 2 KEY ISSUE SERVICES
FIGURE 3 INDONESIAS TRADE ON SERVICES BALANCE
in services is sensitive to national regulations that
afect the supply of services. The non-tarif barriers
usually result the highly protective domestic market
and restriction of foreign investment. To defne the
barriers of trade in services, we shall frstly sense the
nature of service sectors. The agreement on services
shall also refer to the General Agreement on Trade in
Services (GATS) architecture and rules. The GATS has
classifed four modes of supply on services: cross-border
supply, consumption abroad, commercial presence, and
presence of natural persons. Each mode has its own
conduct which generates diferent key issues on trade
liberalization (Table 2).
Source: International Trade Center calculations based on International Monetary Funds Statistics
(In Billion USD)
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
21
The scope of Indonesia-EU CEPA however seems quite
ambitious where it is expected to have a broad coverage
and covers all modes of supply by all possible elimination
of all market access and national treatment measures. On
the other hand, in respect to the readiness of Indonesian
service sector, the concern of Government of Indonesia
(GoI) is to protect the integrity of Indonesian business to
achieve the economies of scale in service sector which
requires a clear distinction between liberalization and the
right to regulate the service. To accommodate the service
interests between the EU and Indonesia, we shall focus
on potential economic outcomes (and threat) through
the possible easing measures. Bearing in mind Indonesias
capacity to establish commercial service presence in
the EU is still insufcient, besides eliminating barriers
we shall focus on the service sectors which bring huge
multiplier efect to Indonesia economy.
Visa no-reciprocity: travel income vs unequal mobility
dilemma
One of the most potential sectors for Indonesia is travel
service which always showed positive balance. Since
facilitation of people movement has been an important
factor, the technical procedures and the connectivity
are the key issues in this sector. This facilitation includes
simplifying application procedures, improving processing
times, reducing fees, and extending visa exemption
lists. The research by World Travel & Tourism Council
(WTTC) and the World Tourism Organization (UNWTO)
found that improving visa facilitation could generate
an additional USD 206 billion in tourism receipts and
create as many as 5.1 million new jobs by 2015 in the
G-20 economies
19
. Nevertheless, Indonesias degree of
openness (UNWTO, 2013) was scored higher than the
openness of world emerging economies in average
20
.
The current regulation in Indonesia allows EU countries
(excludes Croatia) to be eligible to get visa on arrival
(VOA)
21
. It is favorable for Indonesian tourism where
according to data from Badan Pusat Statistik (BPS), the
European tourists visiting Indonesia on 2012 amounted
1,108,521. This number accounts 14% of the total foreign
tourists came to Indonesia at that time.
However, with no-reciprocity principle of granting VOA,
this entry permit regulation has increased the people
infow from Europe to Indonesia more than vice versa,
particularly for temporary stay (traveling) purpose. This
condition has raised the issue on inequity of mobilization,
especially with the increasing cases of VOA trespassing
(the misuse of VOA by foreigners to work in Indonesia)
and challenges posed by irregular movement of persons
22
.
The visa application procedure for Indonesian to get into
EU region has also been disincentive to spread the trade
activities to EU which is time-consuming and costly.
The unequal mobility impacts unequal opportunity to
access each-other market, where Indonesian business
has less access to visit EU region. Learning from EU-
CARIFORUM Economic Partnership Agreement that
commit to facilitate the movement of natural person, the
facilitation shall also include the entry of persons who
are not supplying services but engage in several business
purposes, namely research and design, marketing,
training, trade fairs, sales, purchasing, and tourism. The
technical procedure of visa application has to be as
least difcult as possible to stimulate the interaction
between two parties. Therefore, Indonesia-EU CEPA
shall be able to ensure a fair access for both parties
by simplifcation and facilitation of visa application
for Indonesian business to access the EU.
19
This joint study by the WTTC and the UNWTO which was supported by the Forums New Models for Travel & Tourism Global Agenda Council examined
the important link between facilitation of travel and the creation of jobs and was presented to the 4th T20 Ministers Meeting in May 2012. (Source: WEF)
20
The UNWTO (2013) scored Indonesia 54 out of 100 for the degree of openness in term of tourism. This score is lower than the neighbors namely Philippines
(84), Singapore (67) and Thailand (59), while the openness of world emerging economies in average was scored 31.
21
Regulation of Minister of Law and Human Right of the Republic of Indonesia No. M.HH-01.GR.01.06/2012.
22
The inadequate control on VOA trespassing has become a concern of Indonesian business for there are a lot of illegal business get an easy access to enter
Indonesian market through the misuse of VOA. Concerning the increase of visa trespassing cases and its impact (includes people smuggling, trafficking in
persons, and related transnationals crimes), on August 20, 2013, Jakarta Declaration was signed by representatives of 13 countries in the Special Conference
on Irregular Movement of Persons. This declaration commits the joint actions on eradiation of irregular people movement.
22
Taking the multiplying beneft of education liberalization
On the EU side, personal, cultural and recreational
services
23
are very potential import for EU economy as
it has contributed around 60% of total world export on
this category in recent years
24
. This services sector covers
education and health services, excluding the expenses for
health and education services paid by non-residents who
stay less than one year which are however accounted
in travel services. Education service in EU is potentially
having an increasing demand from Indonesia and it has
been a main focal sector in EU-Indonesia cooperation.
Along 2013, four thousand Indonesians started higher
education in Europe and this number increased 30%
from the year before. Currently, there are more than
seven thousand Indonesian students which are pursuing
education in Europe. Moreover, EU provides about 1,000
grants per year for Indonesian to study in European
universities.
Considering the potential demand of the European
education, there came up an idea for further opportunity
that education business could be shifted to mode
3 of services where the establishment of institution
representatives is allowed. Nevertheless, education
becomes strategic service sector yet the current negative
investment list (DNI) of Indonesia has been very strict
in this sector. The Law No.20/2003 concerning National
Education System incorporates education institution as
non-proft which has been discouraging the foreign
investment to establish education business in Indonesia
25
.
However, referring to Presidential Regulation No. 36/2010
(on negative investment list) the non-formal education
is allowed for foreign investment up to 49% ownership.
It opens the space for informal courses and training to
enter the market.
Since the education has to be able to answer the labor
market demand, the Vocational Education and Training
(VET) have become popular to produce skilled workforce.
23
Personal, cultural and recreational service is defined as: (1) Audiovisual and related services cover the production of motion pictures, video and radio
programs, musical recordings, (and similar) including fees paid to personnel involved. Related limited distribution rights are also covered. Fees paid for
sporting, theatrical and similar events belong to this category as well. (2) Other personal cultural and recreational services encompass services associated with
museums, libraries, archives, and other cultural and sporting activities. Education and health services are covered under this category (excluding, however,
the expenses for health and education services paid by travelers, which belong to travel services).
24
Based on the calculation from UNCTAD data, EU has been contributing more than 60% of total world export in personal, cultural, and recreational sector.
25
The current regulation allows local institutions to establish partnership with international institutions. Foreign participation in education sector is ruled by
Ministerial Regulation no 26/2007 which mentioned the form of partnership. Moreover, the Law No. 12/ 2012 framed the foreign partnership in higher education.
In EU, VET has been programmed to be fostered among
young people to respond adequately to the global
competition and young unemployment. It is considered
as the engine to enhance growth and productivity. As
Indonesia-EU CEPA is expected to boost national
development, this VET service can be a promising
sector for Indonesia to take a multiplying beneft
because it is in line with the capacity building
program while VET produces skilled workforce
and induces transfer of knowledge. In addition, VET
escalates the standardization of skilled-labor as it is very
important to accelerate the establishment of Mutual
Recognition Agreement (MRA) on skills and professionals.
The MRA will be the key success to carry forward the
movement of natural persons and to overcome the
standardization issues.
Therefore, I ndonesia-EU CEPA shall reinforce the
commitment on the joint investment in VET. The
SKILL
STANDARDIZATION
MUTUAL
RECOGNITION
MOVEMENT OF
NATURAL PERSON
TAKING THE MULTIPLYING BENEFIT
23
26
Lall & Narula (2004) explained many Asian countries that have relied on a passive FDI-dependent strategy for industrial development have not succeed
because FDI per se does not provide growth opportunities unless a domestic industrial sector exists which has the necessary technological capacity to profit
from the externalities from MNE activity.
27
Indonesia received only 1.6 % of all EU FDI going into Asia, and only 6 % of all EU investments flowing into ASEAN (Euro Chambers, 2013).
agreement shall not only eliminate the barrier to invest
on this area but also have to be accompanied with the
commitment of EU to establish the curriculum that comply
EU standardization on the necessary skill which at the end
drifts the mutual recognition on skill.
Equal does not necessarily mean fair
The sufcient development of service sector has become
a necessary condition for a country to prosper. In fact,
EU has 24.8% share of world trade for services, where
the service sector accounts about three-quarters of
the GDP and provides more than three-quarters of EU
jobs. It is clear that EU has a high ambition for certain
services namely fnancial services, telecommunications,
e-commerce, computer services, maritime transport,
postal and courier services. This Vision Group has defned
this CEPA as a Doha-plus with new openings in several
key sectors and greater freedom to invest locally in
Indonesias services sectors. Particularly, despite it is a
net importer of services, Indonesia is the largest market
in ASEAN and very potential destination for EU services.
Although Indonesia-EU CEPA will aim to provide the
equal market access opportunities for service providers
and investors in both parties, we have to discern the
imbalance level of development on service sector
between both parties. The agreement on services
between Indonesia and EU cannot entirely refer to, for
example, EU-Singapore FTA which commits to give the
Singaporean services providers the highest level of access
to EU large services market vice versa. This CEPA shall
be more discreet otherwise Indonesia will end up as
consumers without having sufcient capacity to enter
the EU market. Indonesia-EU CEPA shall establish a fair
trade which is commensurate with the capacity of each
party moreover enable the knowledge transfer from EU
business which has a higher level of development on
services to Indonesia. The agreement on services has
to be conditional by the envisaged capacity building. It
has to commit to establish necessary capacity buildings
to boost Indonesian service sector development
and improving export capacity of Indonesian service
providers to enter EU market. Moreover, the services
negotiation should best adopt a balance framework
taking into account also the need to secure sufcient
space for small services frms in Indonesia to grow.
C.3. Reinforcing EU Investment
For many developing economies, FDI is a key factor to
increase the development pace through employment
creation, technology transfer and competitiveness
improvement which eventually reduces income gap and
accelerates poverty alleviation. The fact that 72% of the
investment in Indonesia was foreign investment (BKPM,
2012) denoted the importance of FDI for Indonesian
economic development. Thus, the current government
policy toward foreign investment is directed to the
manufacturing sector in regards to enhance the value-
added creation, eliminate the dependency on imported
products and encourage the export. Although the
efectiveness of the developing countries policies that
relying on inward FDI is still questioned
26
, the FDI is
believed as one of the keys to succeed the national
leverage acceleration as it assists the economy to expedite
the national integration into the global value chain.
Within the last decade, the world production base
has been shifted to ASEAN for advancing the ASEAN
Economic Community. Foreign investment came to
labor-intensive industries, mineral resources, and several
infrastructure projects. Indonesia was ranked the fourth
country (after China, Hong Kong, Singapore) to receive
the most FDI in East Asia and ASEAN region in 2012 with
the total FDI valued USD 24.6 billion. The most appealing
sectors were Mining (USD 4.3 billion), Transportation,
Warehousing & Telecommunication (USD 2.8 billon),
Chemical & Pharmaceutical Industry (USD 2.8 billion),
Metal, Machinery & Electronics Industry (USD 2.5 billion),
Transport Equipment & Other Transport Industry (USD
1.8 billion). EU has been the third largest source of FDI
for Indonesia as it approximately contributed 9% of total
FDI from 2010-2013 (Table 3). However, the allocation
of EU investment to Indonesia is still low compared to
the total investment in ASEAN
27
.
24
The EU investment has been playing a signifcant role
in Indonesia, there are approximately 700 EU companies
invest in Indonesia which absorb 500,000 labor forces.
Statistics of BKPM shows EU investment increases from
year to year, there were more than 400 new projects
every year which values USD 2.3 billion in 2012 (from
458 projects)
28
. The total EU investment in Indonesia is
estimated amounts USD 70 billion spans over various
sectors in manufacturing as well as in oil & gas, mining
and banking. There are still a lot of open opportunities
for EU investment, especially in infrastructure and green
economy development. Therefore, the Indonesia-EU CEPA
shall content a high commitment of EU to increase its
investment in Indonesia to assist Indonesia in leveling
up its economy development. This good intention will
be an accelerator in succeeding Indonesia-EU trade
relationship.
To reap from the CEPA
There are four broad categories of investment provisions
in international agreements (Szepesi, 2004): investment
promotion, investment protection, market access/
restrictions for foreign investors (pre-admission) and
post-admission regulations (Table 4). The listed provisions
between EU and Indonesia will cover the general
2010 2011 2012
Q1-Q3
2013
Average
Share
Asia Excluding ASEAN 1845.94 3293.64 5638.38 6393.73 20%
ASEAN 6131.91 5841.82 5460.02 3750.37 27%
European Union 1160.61 2158.15 2303.35 2039.32 9%
United States of America 930.88 1487.79 1238.28 1993.06 7%
America Excluding US 1784.10 531.12 901.23 880.43 5%
Africa 149.99 202.13 1195.70 796.45 3%
Australia 214.21 89.70 743.59 181.64 1%
Europe Excluding EU 141.66 21.80 270.54 133.64 1%
Others 3855.46 5848.39 6813.60 5034.05 26%
Total 16214.79 19474.53 2564.67 21202.70 100%
TABLE 3 INDONESIA STATISTICS OF FDI REALIZATION (IN USD MILLION)
Source: BPKPM (2013)
commitment between two parties. However, the option
of concluding separate investment protection could be
left individually to the related EU member states and
the negotiating party. Private investment decisions
are very much afected by institutional factors, which
are addressed in the investment agreement. Thus, it is
important to precisely conceive a set of provisions that
would beneft both parties. Those provisions shall also
accommodate of the interests of each party and facilitate
the dispute that might happen in the future.
The i nvestment promoti on means to sti mulate
investment flows by enhancing the information
sources and simplifying the investment procedures. It
includes some committed activities namely information
exchange, preparation of studies, training programs,
establishment of links between research centers,
regulatory coordination, institutional development and
technical assistance. In November 2013, EU-Indonesia
Business Network (EIBN) has been inaugurated in
Jakarta, aims to promote Indonesia as a potential trade
and investment destination in the EU and to actively
support Indonesia in its eforts to improve the business
and investment climate as well as intensify EU-Indonesia
business relationships. It also commits to provide an entry
point for European companies (especially SMEs) to enter
28
The value of EU investment from Q1-Q3 2013 valued USD 2.0 billion, came from 661 projects. The number excludes Oil & Gas, Banking, Non-Bank Financial
Institution, Insurance, Leasing, Investment which licenses issued by technical/sectoral agency, Porto Folio as well as Household Investment.
25
and invest in Indonesia. This became one substantial step
to advance the negotiation between Indonesia and EU
later on the CEPA rounds
29
.
The investment promotion provisions could be
specifcally mention sectors which would be stressed
as priority. In accordance with The Masterplan for
Acceleration and Expansion of Indonesias Economic
Development (abbreviated MP3EI) agenda to increase
value-adding and expanding the value chain for industrial
production processes, Indonesia-EU CEPA shall carry out
the creation of economic activities within and among
regions. In fact, in many cases of developing economies,
foreign capital infow does not necessarily bring spillover
efect to the local players, especially while the industrial
structure does not go on with the foreign investment
policy. Therefore, the CEPA has to be designed to
reinforce the industrial linkages between the upstream
and downstream industries which in this scheme, the
participation of local players (including SMEs) have
to be taken into account. The CEPA shall not only
generate new investment, but also create supply
chain linkages between foreign and domestic plants
to ensure the productivity and technology spillovers.
29
EIBN work closely with its Indonesian partners namely APINDO, BKPM and KADIN as well as other business association. It will conduct a variety of activities,
including the creation of a web-based portal containing all necessary information on how to do business in Indonesia, over 140 events in Europe and in
the region and the strengthening working groups and seminars, business-support services to European companies, policy research, and liaison with ASEAN
stakeholders.
30
At the same time there is a declining trend in Indonesias export of final goods as the raise of China and other emerging economics in final goods assembling.
31
The overall import content of Indonesias exports (OECD I-O Database) is 17.77%. Although it is lower if it is compared to the share for China (27.4%), India
(18.5%), Thailand (38.1%) and Vietnam (27.5%) it might due to the high share of non-value-added products, such as raw materials and extractive goods in
Indonesia export.
No. Provision Categories Scope
1 Investment promotion Information exchange, regulatory coordination,
information promotion machineries or technical
assistance.
2 Investment protection Capital liberalization, property rights, the settlement
of investment disputes.
3 Pre- admission Market access and potential barriers while entering
certain economic sectors in host country.
4 Post- admission The treatment after foreign investors
establish in host country, especially includes
national treatment principle.
Source: European Center for Development Policy Management (2004)
TABLE 4 PROVISIONS ON INVESTMENT AGREEMENT
Moreover, the trade and investment liberalization which
is supported by advance innovation in information
technology has changed the production architecture of
the world nowadays by leading the production process
to be fragmented across countries. This Global Value
Chains (GVCs) concept has shifted the global trade into
the form of trade in task, given the opportunity for each
economy to reap the advantage of value added creation.
Within the past two decades, a trend persistently shows
Indonesias contribution to GVCs with three quarters
of its export is intermediate goods (Tijaja, 2013)
30
. To
improve its position in GVCs, Indonesia has to move
towards higher value-adding activities
31
.
The regional integration with the establishment of
ASEAN Economic Community (AEC) has created one
single ASEAN market and has a high ambition to
make ASEAN as a production base by attracting global
investors to establish in ASEAN. It is not only increase
the competition with global players, but also among the
ASEAN countries. Moreover, each ASEAN country is now
in concluding several bilateral economic partnerships
with other economies in order to invite the foreign
investment. It prompts Indonesia to follow the trend
26
to liberalize its investment policy. Otherwise, potential
investors would place their plants in other ASEAN
countries and sell their products to Indonesia with no
signifcant barriers by the establishment of ASEAN one
single market. Hence, Indonesia-EU CEPA agenda on
investment shall focus on specifc sectors that lead to
level up Indonesias competitiveness and accelerate
its integration into regional and global value chains,
with the commitment to bring Indonesia to be the
production base of EU companies for the ASEAN
region and for the world.
The next concern in international agreement on
investment is the investment protection and consultation
mechanism for dispute settlement, especially related to
the repatriation of capital. We could learn from The EU
Chile Association Agreement which includes reservation
to capital market liberalization as mitigation for the efect
of a free capital movement. Chile reserves the right for
its central bank to function independently and allows the
government to maintain investment legislation that may
restrict capital movements (ECDPM, 2004). Indonesia
EU CEPA could refer to several agreements EU had been
made with several developing economies. The provision
of investment protection authorized Chile to impede EU
investors who have invested under voluntary investment
programs (such as newly privatized companies, utility
sectors, the defense industry) to repatriate an investment
before a certain period has elapsed since the initial
investment. EU agreement with Tunisia and Morocco in
The Euro-Mediterranean Association Agreements and the
Trade, Development, and Cooperation Agreement also
mentioned the full liberalization of capital movement
will be allowed when the time is right. The EU -
Mexico Global Agreement, although is keen to establish
capital movement liberalization, put the exemptions for
situations where serious difculties exist with exchange-
rate or monetary policy. There are several conditions that
shall be underlined in order to reserve the capital market.
Besides the tax incentives, a stated commitment to keep
the EU investment in Indonesia will be very convenient
for Indonesia. Indonesia shall adapt the reservation
to capital market provision as a guaranty to ensure
the investment to remain and reinvest in domestic
market until it delivers the expected beneft.
Other concerns in the investment agreement are the pre
and post admission provisions which include the market
access and the national treatment issue. Pre-admission
provisions defned the market barriers that potentially
are encountered by foreign investors while entering the
domestic market
32
. Therefore, the potential sectors
that will bring multiplying beneft to Indonesia shall
be concerned. The potential sectors are: high value
added industries, such as automotive, electronics
and processed food; emerging industries in term of
Indonesia-EU, such as fsheries, textile, footwear, furniture
and chemicals & pharmaceutical; service industry
especially logistics and infrastructure development;
and the technology to implement green economy.
Furthermore, the commitment of investment promotion
shall embrace all the business scale in Indonesia with
the awareness of enhancing SMEs
33
. Once the foreign
investment establishes in Indonesia, it uses to get the
national treatment or non-discriminatory treatment with
the domestic frms. However, some conditions allow
the reservation on national treatment principle, this
reservation usually implies by retaining the limit on the
proportion of foreign ownership. The specifc industries
are those which are reserved for SMEs and cooperatives,
those for which a partnership is required, those for which
certain shareholding arrangements are required, those
that may be conducted only in certain locations, those
for which a special license is required
34
. Moreover, for
some specifc industries which plays crucial role in the
economy (such as mining and extraction business of
other natural resources), the commitment to increase
the local participation (or ownership) gradually shall
be attached.
Overall, the FDI from EU has to bring acceleration
of Indonesias development by a real employment
32
In order to protect the economy sovereignty, the foreign investment law under the Presidential Regulation No. 36/ 2010 lists 20 nominated industries or
fields of business that are closed to foreign investment.
33
We could learn from The Economic Partnership, Political Coordination, and Cooperation Agreement European Union Mexico, was signed in December
1997 clearly targeted the SMEs in the agreement as the instrument to stimulate the reciprocal investment between both parties.
34
Referring to Presidential Regulation No. 36 / 2010.
27
creation and transfer technology. Despite the massive
employment industry and technology base industry
usually go in the opposite way, the key success to unleash
it is by reinforcing the linkage between foreign and local
business. EU investment commitment in Indonesia-EU
CEPA is expected to contribute a big endowment to
Indonesias growth.
C.4. Ensuring Fair and Competitive Trade
under Indonesia-EU CEPA: Trade Defence
Measures and Agriculture Policy
Country wishing to enter a free trade concession often
worries, at least, about these two things: (i) whether
the FTA conclusion will seriously hurt domestic industry
because of surging imports, and (ii) the possible extent
of unfair competition and trade policy distortion
surrounding business activity between the parties, e.g.
dumping and subsidy. This paper argues that robust
trade defence system and non-distortive agriculture
policy are the keys in ensuring fair and competitive
trade climate under the Indonesia-EU CEPA. This
section is an efort to identify key policy issues and
possible recommendation in order to strengthen
the application of trade defence policy as well as to
minimize the distortive efect of domestic agriculture
policy.
Trade defence measures are the measure designed to
protect domestic industry against unfair competition,
distortive trade policy, and unforeseen consequences
following trade liberalization. There are three types
of trade defence measures, namely (i) safeguards
measures-aiming to allow countries for temporary
relief from sudden import surges, (ii) countervailing
duties measures-designed to counteract subsidies
implemented by partner countries, and (iii) anti-
dumping policy-created to counteract unfairly low
prices set by trading partners. Anti-dumping (AD,
hereafter) and countervailing duties/anti-subsidy (CVD,
hereafter) pertain to counteract unfair trade practices,
while safeguards are more like the safety valve in case
theres sudden and sharp imports surge wherein the
domestic industry can not adapt with. As a consequence
of the diference in the underlying motives, they also
have diferent principle in the remedy mechanism. AD
and CVD measures is limited only to the amount of
dumping and subsidization, while safeguards remedies
might take more fexible form which deemed necessary
for domestic industry to be restructured and adjusted
from the unfavorable condition.
The practices of trade defence policy are regulated
multilaterally through a set of WTO agreements which
are binding for all of its member. WTO Agreement
on Safeguards (SA, hereafter) set down rules
pertaining to the application of safeguards measures,
WTO Agreement on Subsidies and Countervailing
Measures (SCMA, hereafter) is designed to regulate
countervailing measures and subsidization policy
particularly for non-agriculture products, while the
WTO agreement on agriculture (AA, hereafter) is the
one which regulate subsidization policy for agriculture
products. The multilateral benchmark on anti-dumping
application is the Agreement on Implementation of
Article VI of GATT 1994, which is also known as Anti-
Dumping Agreement (ADA). However, despite its binding
characteristics, these three types of trade defence instruments
are exempted from WTO principle of non-discriminatory,
thus making it possible for some modifcations suitable
for bilateral/regional context (Kasteng and Prawitz 2013).
As far as it concerns, this section also seeks for possible
formulation of trade defence chapter in the Indonesia-
EU CEPA in order to be more mutually benefcial while
respecting the gap of development level between the
two parties.
In order to fnd a fair formulation of trade defence
chapter under the Indonesia-EU CEPA, one has to
respect the underlying diferences surrounding the trade
defence policy implementation in the two countries. EU
as a developed country has a very well established
trade defence system as compared to Indonesia
which is more as a laggard due to lack of technical
capability. There are two committees in Indonesia which
are responsible in the area of trade defence, namely
Komite Anti-Dumping Indonesia (KADI)-taking care of
anti-dumping and anti-subsidy (countervailing) measures,
as well as Komite Pengamanan Perdagangan Indonesia
(KPPI)-responsible for safeguards measures application.
KADI is in charge to counteract unfair trading practices,
i.e. dumping and subsidy, while KPPI is responsible
to safeguard the domestic industry from unforeseen
negative consequences following the CEPA/FTA, such as
28
TABLE 5 GOODS ORIGINATING FROM INDONESIA WHICH ARE SUBJECT TO ANTI-DUMPING AND ANTI-
SUBSIDY MEASURES IN EU
Anti-Dumping Scope
Bicycles-terminated
Biodiesel
Cotton fabrics (unbleached)terminated
Coumarin-repealed
Fatty alcohols
Footwear (with uppers of
leather or plastics or textile)expired
Lighters (disposable)terminated
Magnetic disks (3.5 microdisks)expire
Monosodium glutamate
Under Investigation
Open mesh fabrics of glass bres
Polyester staple bresrepealed
Polyester textured lament yarn (PTY)
terminated
Polyethylene terephthalateexpired
Ring binder mechanismsexpired
Sodium cyclamate
Stainless steel fasteners and parts thereof
expired
Threaded tube or pipe cast ttings, of
malleable cast iron (MTF)terminated
Tube and pipe ttings, of iron or stee
Biodieselterminated
Polyester staple bres-expired
Polyester textured lament yarn (PTY)
terminated
Polyethylene terephthalate (PET)terminated
Ring binder mechanisms-expired
Note: Data as of 16 December 2013. Black color means that the measures in particular product is either expired, terminated
or repealed, while red color indicates that AD and CVD measures are still applied on the products.
Source: European Commission (downloaded from trade.ec.europa.eu/doclib/html/113191.htm)
sudden import surges. Although the system is already
there, the implementation of trade remedies in Indonesia
is still somewhat lacking. There is a signifcant gap on
the implementation of trade defence policy between
Indonesia and EU. The below section provides illustration
on how signifcant the gap is.
As of December 2013, there are 19 Indonesias products
afected by EUs anti-dumping policy, 5 of which are
also subject to countervailing measures (anti-subsidy),
namely: biodiesel, polyester, polyethylene, and ring
binder mechanisms (please see complete list in Table
5). However, many of these products listed in the Table
5 are either expired, terminated, or repealed indicating
that the anti-dumping policy and countervailing duties
are no longer applied for those products. There are
only 5 Indonesias products, by far, which are still
attached with the EUs anti-dumping measures,
namely biodiesel, fatty alcohol, open mesh fabrics of
glass fbers, sodium cyclamate, as well as tube and
pipe fttings (of iron or steel). Moreover, theres an
on-going investigation conducted by the European
Commission for the alleged dumped monosodium
glutamate product originating from Indonesia. On the
contrary, there was only one product of the EU which
were subject to Indonesias anti-dumping duties back in
the 2001, namely the liquid sorbitol (D-Glucitol). Because
it has been expired since 2006, theres practically none of
EU product being attached by Indonesia anti-dumping
29
and/or anti-subsidy measures as of today; not even an
investigation. Not only in terms of anti-dumping and
anti-subsidy measures, Indonesia is also still lagging
behind with regards to applying safeguards measures
as compared to EU.
Subsidization policy-especially in the form of price
support-is regarded as one of the anti-competitive
and unfair trade practices of which its application
in the international arena is strictly regulated by the
WTO. Subsidy is counterproductive with the spirit of
free trade encompassed in the Indonesia-EU CEPA as it
will unfairly makes goods seemed cheaper and act as
a barrier to keep domestic industry out of competition
viz a viz imported products. Agriculture is among the
highly subsidized and protected economic sectors in
EU which is represented by its well-known fagship
program, namely the Common Agriculture Policy (CAP)
accounting at almost 46 percent of total EU expenditure
budget (Costa et.al. 2009). Because the agriculture
subsidy tends to be heavily applied in EU rather than in
Indonesia, to what extent the Indonesia-EU CEPA can
accommodate the principle of fair and competitive
trade will largely depend on how willing the EU is to
commit itself in minimizing the distortive practices
in its agriculture sector. The nature of EUs agriculture
subsidy under the CAP and how it impacts the state
of international market will be described in the below
section.
Agriculture is such a strategic sector for the EU in a way
that any mismanagement in the respective sector would
place the whole EU integration at stake. The CAP serves
as a grand mechanism in ensuring its citizen that EUs
agriculture sector is still able to provide fair standard of
living for its farmer as well as to secure supply of high
quality and afordable food products for its 500 million
consumers. The EU positions its farmers not only as the
providers of private goods, namely food products, but
also as suppliers of public goods by help preserving
the EUs natural resources heritage (e.g. soils, landscape,
biodiversity) at the countryside for the sake of all EU
citizens. As the market doesnt pay the farmers for this
positive externalities, the EU authorities then fnd it
essential to provide the farmers with direct income
support as a payof for their generous services (European
Commission 2012). Apart from the traditional objectives,
this kind of perspective might provide additional
motivation for the European Commission to keep the
CAP subsidization policy in place in the future.
The EU CAP is essentially an expenditure policy which
is characterized by the two pillars, namely Pillar I and
Pillar II. Pillar I comprises of market suppor
35
and direct
income payment
36
programs fnanced by the European
Agricultural Guarantee Fund (EAGF), while Pillar II
37
covers
comprehensive rural development programs funded by
the European Agricultural Fund for Rural Development
(EAFRD). It has experienced several notable reforms since
its establishment in 1962. At its early stage, the CAP
focuses on improving EUs agriculture productivity and
ensuring a stable good price for the farmers so that they
are incentivized to keep produce major food products
for EUs consumers. In doing so, the EU is heavily reliant
on export subsidies and price guarantee measures which
constitutes around 97% of total CAP expenditure in 1971.
The frst set of the CAP program was then proven to be
a huge inefciency which resulted in a food mountain
and unsustainable CAP budget. In responding to this
situation, the EU launch the 1992 MacSharry reforms
which aims at shifting the CAP away from market
support reliant towards more producers support and
consideration for the environment. Through the 1992
CAP reforms, the EU was intended to make its agriculture
sector be more competitive by reducing the amount
of price support and replace it with coupled income
support which is tied to production decision, as well as
by introducing another measures in order to stabilize
CAP budget and reduce the abundant food surpluses.
35
There are two types of market support measures under the Pillar I, namely price guarantee and export subsidy. The price guarantee scheme is granted
when the actual domestic market price is lower than the EUs guaranteed price, whereas export subsidies-or also known as export refund-are paid by the
government to bridge the gap between high EU guaranteed prices and low world prices.
36
The direct income payments under the Pillar I consists of two different income support which differs on its linkage to agriculture production. The coupled
payments is an income support which requires certain production decision as the payoff, while the decoupled direct payments are designed to provide the
farmers with a minimum level of income without creating any distortion in agriculture market.
37
Pillar II neither aims at altering market outcome nor providing minimum income support to the farmers. Instead, it covers only general expenditure program
which relate to the promotion of sustainable agriculture and rural development objectives, such as rural infrastructure and human capital development.
30
1971 1992 2005 2011
Measures Billion Euro Percent Billion Euro Percent Billion Euro Percent Billion
Euro
Percent
Pillar I 1.75 96.7% 31.28 91.6% 42.08 80.7% 43.52 78.0%
Market Support: 1.75 96.7% 25.38 74.3% 8.38 16.1% 3.34 6.0%
Export refund (subsidies) 0.8 44.2% 9.47 27.7% 3.05 5.8% 0.18 0.3%
other (price guarantee) 0.95 52.5% 15.91 46.6% 5.33 10.2% 3.16 5.7%
Income Support: 5.9 17.3% 33.7 64.6% 40.18 72.0%
Coupled Payment 5.9 17.3% 32.25 61.8% 3.35 6.0%
Decoupled Payment 1.45 2.8% 38.83 66.0%
Pillar II: Rulal
Development
0.06 3.3% 2.88 8.4% 10.09 19.3% 12.3 22.0%
Total 1.81 100.0 34.16 100.0 52.17 100.0% 55.82 100.0%
CAP Foundation Productivity Competitiveness Sustainability
Policy concern
Product Support
Income
Sabilization
Market Orientation
Market
Stabilization
Reduce Surpluses Consumer Concern
Improving
Productivity
CAP budget
Stabilization
Rural Development
Environment Environment
WTO Compatibility
TABLE 6 THE DEVELOPMENT OF EU COMMON AGRICULTURAL POLICY (CAP)
Source: European Commission (2012) and downloaded from http://ec.europa.eu/agriculture/cap-history/index_en.htm
In 1992, the share of market support measures had
declined to 74.3%, while the portion of income support
in the form of coupled payment made up around 17.3%
of total CAP budget (please see Table 6).
The state of agriculture policy in EU has experienced
further reforms following the conclusion of the new
version of GATT 1994, establishment of the WTO and the
implementation of the Agreement on Agriculture (AA).
Those new platforms, especially the AA, has set down
a comprehensive international regulatory framework as
regards to trade in agriculture which aim at establishing
a fair and market-oriented agricultural trading system. The
Agreement on Agriculture has restricted all agriculture
policy measures which have potential efect in altering
competitive market outcome (price and volume) and
are deemed as trade-distorting, such as export subsidy,
price guarantee, and coupled payment. The union has
responded to this development by issuing the 2003s
CAP reforms plan which is way more market-oriented.
Under the 2003s CAP reform package, the EU maintain
its compatibility with the WTO regulation by introducing
a new measures which are not distortive to agriculture
market and by strengthening its commitment to the
rural development agenda. In complying with the
WTO agreement, the CAP reform in 2003 has focused
on cutting the links between subsidy/income support
and agriculture production (decoupled payment) as
well as reducing signifcantly the expenditure budget
for market support measures, i.e. price guarantee and
export subsidy. As a result of 2003s reform, in 2011 the
EU has relied more on the decoupled income subsidies
(66%) instead of coupled payment (6%), while the market
support measures constitute only a minor part in the
whole agriculture policy, accounting at around 6% of
total CAP expenditure. Although being highly restricted
by the WTO, the EU is able to maintain the amount of
export subsidy and price guarantee at a minimum level
31
allowable by the Agreement on Agriculture (AA) covering
products, such as: cereals and wheat, rice, cereal-based
products, dairy products, pig meat, poultry meat, cereals,
beef and veal, eggs, sugar, and syrups. Among those lists,
the dairy products and beef products are the EUs most
exported agriculture products to Indonesia.
The EU CAP is a game changer in the international
agriculture business. As the worlds largest importer
of agriculture products, it is understandable that any
domestic policy shocks in EU will most likely afect the
global market outcome of agriculture trade. Costa, et.al
(2009) suggested that the CAP encourage signifcant
agriculture expansion in the host country, while at the
same time stimulate agriculture contraction abroad. The
study further found that the CAP leads to a 6-8 percent
increase in the domestic (EU) output of agriculture and
food products as well as a decrease in the domestic (EU)
output of manufacturing and services sectors which are
equivalent to around $US 65 Billion. On the other hand,
the study presented that the EU CAP drives the world
prices down to 2-4 percent for agriculture products
and to around 1 percent for food processing goods.
It consequently spurs the reallocation of economic
resources in the non-EU countries away from agriculture
and food processing toward other sectors of the economy
in search of higher returns, such as in manufacturing and
services sectors. The net global welfare cost of the CAP
is estimated to be equivalent to around USD 45 billion
which is mostly borne to the EU itself.
The subsidization policy in EUs agriculture sectors,
especially under the Pillar I (market support and direct
payment), matters a lot for Indonesias businesses. As
described by Costa et.al (2009), the CAP is likely to be
harmful rather than benefcial, especially for developing
countries. There are at least two mechanisms on how the
CAP will negatively impact Indonesias private sectors. The
frst mechanism works through the export subsidy
scheme in EU. By benefting from export refund (export
subsidy), EU exporters fnd no difculty in competing with
other more efficient producers in the world agriculture
market, as it addresses any price differences especially
when the world prices fall below the EUs guaranteed prices.
Assuming that Indonesia and the EU compete directly
at the same products and market, the export subsidy
policy in EU will hurt Indonesias producers signifcantly.
This is mostly because the price effect of export
refund will make the worlds consumer in favor of
EUs agriculture products rather than Indonesias
produce, especially when considering also the fact
that agriculture products originating from EU usually
is in better quality than that of Indonesias. When
there is a large pool of homogenous products (in term
of price) at the same market, the one with higher quality
will certainly be picked up the most. As the Indonesias
exporters are still lagging behind the EU producers in
term of product quality, it will make Indonesias private
sectors lose out from the global competition.
Not only does the EU unfairly support its farmers and/
or exporters to be able to compete in the international
market, it also gives signifcant protection to the domestic
industry against imported products. The domestic
support measures under the CAP package, such as price
guarantee as well as coupled and decoupled income
support, are the protectionist measures granted for
the EUs domestic industry in order to cope with the
reverse efect of market competition. They are all trade
distorting in so many ways. It artifcially encourages
the expansion of agriculture sectors domestically
in the expense of lower export opportunity for
developing countries (ODI 2012). This is the second
mechanism of how the CAP package would be harmful
to Indonesias businesses, especially for the frms wishing
to penetrate into EU market. In addition, the EUs farmers
are protected from rising market competition not only by
distortive behind-the-border measures-such as the CAP
measures, but also by protectionist border policy such as
high import tarif rates and stringent technical measures,
especially for agriculture products.
Despite the massive application of agriculture subsidy
in EU as well as its negative impact to Indonesias
businesses, there is only a little room for Indonesia to
counterbalance the EUs distortive policy, be it bilaterally
or multilaterally. One of the main reasons is that the EU
justifes its CAP to be WTO compliance
38
and is able to
38
It mostly consists of decoupled payment classified as green box in the WTO Agreement on Agriculture which are exempted from reduction or elimination
commitment (please see the legal text of Agreement on Agriculture for more detail classification).
32
maintain the restricted measures (e.g. export subsidy
and other market distorting measures)
39
at the minimum
allowable level as stipulated in the WTO Agreement
on Agriculture. Considering this condition, it would
be hard for Indonesia to bring up EUs case into WTO
dispute settlement, as theres no sufcient evidence to
convince that the current EU CAP practices violates the
WTO agreement. Furthermore, the technical capability
of KADI, especially in applying the countervailing (anti-
subsidy) measures, is still lacking, making it even harder
to counteract EUs subsidy in a bilateral basis.
Based on those findings, it is implied that robust
trade defence mechanism as well as non-distortive
agriculture policy are the cornerstone in ensuring fair
and competitive business climate under the Indonesia-
EU CEPA. Those two aspects are often forgotten in the
study and consultation stage of CEPA/FTA and also are
not very well articulated in the legal text, making it
less fair and less comprehensive as it couldve been.
This paper argues that fair and competitive business
climate surrounding the Indonesia-EU CEPA cannot
prevail under the policy absent. There has to be a
policy efort to institutionalize the principle of fair and
competitive trade into the Indonesia-EU CEPA legal text in
order to ensure its realization. By doing so, modifcation
on the provision of trade remedies chapter as well as
commitment to reduce the application of agriculture
subsidy are among the issues need to be highlighted
and explicitly articulated in the legal text of Indonesia-
EU CEPA. In light of this, the following programs
and recommendations might be worth pursuing for
Indonesia:
Strengthening trade remedies system in Indonesia
In order to be prepared for the increased competition
following the conclusion of Indonesia-EU CEPA, the role
of trade remedies system, which is designed to ensure
competitive and fair trade, has to be strengthened. This
policy efort will not only keep Indonesia out of unfair
trading practice, but also allow Indonesia to temporarily
suspend the tarif concession that is made with the EU to
provide domestic industry the breathing room it needs
in order to adjust from increased import competition
39
It is classified as Amber Box measures in the Agreement on Agriculture, and hence subject to reduction or elimination.
(Pierce and Nicely 2004). In doing so, it is recommended
for Indonesia to:
1. Establish cooperation and capacity building
programs with the EU in the area of trade remedies,
covering activities such as-but not limited to:
a. Training for trade remedies personnel in
Indonesia especially on the technical know-how
b. Sharing session on the best practices of trade
remedies policy in EU
c. Dispatch expert in the area of trade remedies
to help improve the trade remedies framework
in Indonesia
2. Revitalize the use of safeguards measures in
addressing the sudden import surges which might
cause serious injury to the domestic industry and
threaten the sustainability of balance of payments.
Negotiating better deal on trade remedies provision
I n order to have robust trade remedies system
surrounding the Indonesia-EU CEPA, this study suggests
Indonesia negotiating team to:
1. Put the Trade Remedies provision into
separate chapter. I t is recommended for
Indonesia to take the Trade Remedies provision
out from Trade in Goods chapter and put it into
separate chapter in the agreement. This is because
the trade remedies measure can also be applied
for trade in services-especially with regards to
safeguards measures, although theres still no
signifcant development on that.
2. Strengthen policy transparency in the
application of trade remedies. The trade
defence measures are indeed essential in ensuring
competitive and fair business climate between
Indonesia and the EU. However, one has to make
sure that its application is not inconsistent in a
way that it might create more restriction than
necessary. There is a complaint from Indonesias
biodiesel producers whose product is being
charged by the EUs anti dumping duties. They are
skeptical about how the dumping assessment system
takes place in EU and suspecting that the EU doesnt
33
40
The lesser duty rule refers to the Article 3.3 on the draft of EU-Singapore FTA: Should a Party decide to impose any anti-dumping or countervailing duty,
the amount of such duty shall not exceed the margin of dumping or countervaiable subsidies, and it should be less than the margin if such lesser duty
would be adequate to remove the injury to the domestic industry.
use justifable standard in valuing production cost
of their biodiesel products. Indonesias producers
feel that the European Commission on anti-
dumping has overestimated the production cost
of Indonesias biodiesel, making it eligible for
additional anti-dumping duties.
To address the inconsistency problem, this study
suggests Indonesia to reach a deal with the EU to
commit on greater policy transparency in applying
the trade defence measures (trade remedies). The
commitment should be explicitly articulated in the legal
text, making it more institutionalized to implement. The
possible programs are to:
a. Exchange information on the assessment
system of anti-dumping, anti-subsidy, and
safeguards measures. This is to establish
common understanding on the assessment
framework implemented by each country.
b. Establish a joint committee on trade remedies.
A committee on trade remedies is needed in
order to update each party about the regulatory
changes with regards to trade remedies as well
as to serve as a dialogue mechanism in settling
any trade remedies related issues.
3. Make a deal with the EU regarding the Lesser
Duty Rule. Although being highly recommended
by the WTO agreement, the principle of lesser
duty rule is not yet widely implemented by the
member states, particularly by the EU which often
charged Indonesias products by excessive anti-
dumping and/or countervailing measures. The
Indonesia-EU CEPA provides a great opportunity for
Indonesia to mark a deal with the EU to commit on
lesser duty rule in the application of anti-dumping
and anti-subsidy measures, like the one that has
been done with Singapore under the EU-Singapore
FTA. The lesser duty rule would be very benefcial
for both countries, as it encourages reduction on
the amount of anti-dumping or countervailing
duties if such lesser duty is deemed adequate
to remove the injury to domestic industry
40
.
This is even better for Indonesia considering that
there are quite a lot of Indonesias products which
are subject to anti-dumping measures in EU. The
lesser duty rule would, therefore, provide them
some relaxation.
Reinforcing commitment to eliminate trade-distorting
practices of agriculture policy
The agriculture subsidy and other distortive protection
are heavily applied in EU rather than in Indonesia. The
EUs farmers are benefted from the protection not only
by distortive behind-the-border measures, such as the
CAP, but also by restrictive border protection in the form
of high import tarif and stringent technical measures
(e.g. SPS and TBT). If the Indonesia-EU CEPA would
like to gain sufcient political and public support to
smoothen the negotiation process, the issue of subsidy
and protection in the EUs agriculture sectors needs to be
seriously addressed. This is because agriculture and food
products are among the highly exported commodities
to EU and the key drivers of economic development in
Indonesia. In order to create the foundation of business
climate that is fair and competitive under the Indonesia-
EU CEPA, it is recommended for Indonesia to push
the EU in reinforcing its commitment to eliminate
agriculture subsidy and minimize the use of other
distortive protection, especially as regards to the
measures which is highly restricted according to
the WTO agreement. Specifcally the EU is expected to:
Eliminate all market support measures under the
CAP (i.e. price guarantee and export subsidy)
Reduce significantly the import tariff rate for
its agriculture products, especially for the ones
which have extremely high tarif rate and receive
signifcant subsidy in the form of price guarantee
and export refund, such as: tobacco, dairy produce,
beef, and etc.
Commit on improving transparency and bringing
greater certainty and consistency in the application
of technical measures, i.e. TBT and SPS, especially
with regards to agriculture products. The EU has
34
to make sure that its application wouldnt pose
excessive barriers which could impede trade
relation between the two countries.
C. 5. Ot her CEPA El ement s: Publ i c
Procurement, Competition Policy, and IPR
Public Procurement
Public procurement includes all government purchasing
on goods, services, and project which usually takes
form of public tendering. Government procurement
constitutes a signifcant share on the economy, accounts
at 15-20% of total GDP in OECD countries in 2002 and
17% of EU GDP in 2009 (Anderson, et.al. 2011). The
international platform, which set out principle and
regulation of international market access to public
procurement, is the WTO Agreement on Government
Procurement (GPA). The GPA is a plurilateral agreement
containing only a subset of the full WTO membership
which oblige its member to improve market access in
public procurement only for other members involved
in the agreement. Indonesia is one of the observer of
the GPA but not yet a full member of GPA, thus isnt
obliged to provide non-discriminatory market access
for foreign entity and at the same time cannot beneft
from improved market access of the international public
tendering process ofered by the members joining the
GPA. While, on the other hand, EU is one of the member
of GPA and has been the leading advocate for more open
regime of international public procurement.
One way to engage non-GPA member to liberalize
its public procurement market is by concluding the
preferential trade agreement which also include public
procurements chapter therein. Indonesia-EU CEPA is a
channel of which EU might deal, in a reciprocal basis
41
, for
a greater market access in public procurement with non-
GPA countries like Indonesia. In the Indonesia-EU CEPA,
a specifc chapter regarding the public procurement will
most likely be toughly negotiated, as Indonesia is a huge
potential market for public procurement comprising of
hundreds central, provincial, and municipality authority.
Furthermore, there would be high pressure coming
from local frms which are closely related to public
procurement activities, such as construction companies,
as they fear on losing market share following the
participation of more efcient foreign operators. A win-
win mechanism on how far Indonesia should liberalize
the public procurement market is therefore very necessary
to be developed.
It is worth to note that although EU, under the GPA, is
highly committed to liberalize its public procurement
market, the actual data shows that the real share of
imported public goods and services is relatively low
as compared to Japan, Canada, and even China. One
suggested (Messerlin and Miroudot, 2012) that theres
a substantial technical barriers hindering foreign entity
to participate optimally in EU public procurement
market. As in the case of trade in goods, there will be
no optimal value of trade without eliminating both
tarif and non-tarif barriers. Therefore, in this context, it
is recommended for Indonesia to negotiate Public
Procurement chapter in the most precautious way
by focusing more on:
Technical cooperation in information exchange
and establishment of one-stop-shop regarding
public procurement procedures in both parties
Technical capacity building programs for all
relevant stakeholders in Indonesia in order to
improve readiness to comply with EUs regulatory
framework as well as international platform on
public procurement
Mutual agreement in improving policy transparency
and consistency to ensure fair trade in public
procurement market
The benefit of liberalization in public procurement
market would not be symmetrically distributed between
the parties. EUs operator with better technical capacity
and financial resources as well as high compliance
to standards will easily compete in Indonesias public
tendering process. While Indonesias operator will
most likely have a difcult time in competing with
more efficient international operator in EUs public
tendering process, not to mention in complying with
EUs stringent technical standards. Although the beneft
41
Reciprocity means EU will grant market access of its public procurement only if the trading partners commit to do so.
35
would not be symmetrically distributed, liberalization in
public procurement market would possibly unlock the
infrastructural development potential, as it will encourage
greater participation of foreign entity into Indonesias
public infrastructure project, especially through PPP. In
this context, there is a good chance that Indonesia-EU
CPA will provide legal framework and certainty for EUs
operator and fnancial institution wishing to participate
into Indonesias infrastructure development project.
Instead of proceeding with broad and ambitious EUs
proposal on liberalizing most of public procurement area,
this paper strongly argues that it might be more relevant
and benefcial for Indonesia to aim only for specifc and
limited liberalization of public procurement market
focusing on the most critical sectors for Indonesias
development, such as large-scale infrastructure and
utilities project, where the capacity of local operators/
frms is still lacking. There are two logics on this proposed
position: (i) the capacity of local operator is still somewhat
lacking in responding to the increasingly demanded
large-scale infrastructure and utilities project in order to
keep pace with the economic progress, and (ii) Market
access opening up in a broader sectors is deemed to
be detrimental for small-and-medium local operators,
as they mostly rely on smaller-scale project, such as
public procurement of goods and services, especially
the one procured by local government. Therefore in the
public procurement negotiation under the Indonesia-EU
CEPA, the Indonesias negotiating team is expected to
proceed with the balance framework taking into account
the need of advancing Indonesias development progress
and securing sufcient space for small-and-medium local
operator to grow.
Intellectual Property Rights (IPR) and Competition Policy
The inclusion of IPR and competition policy chapter in
the Indonesia-EU CEPA is a logical consequence of trade
liberalization and more open investment regime. There
has to be solid legal mechanism to ensure protection
of intellectual property and fair business competition
following the increased business activity between EU
and Indonesia. In this context, there is a signifcant gap
between EU and Indonesia in the capacity to enforce,
implement, and monitor the IPR and competition law.
Albeit Indonesia has already had an IP and Competition
law, theres still large room for improvement on its
implementation and monitoring mechanism. Therefore,
in negotiating the IPR and competition policy chapter
under the Indonesia-EU CEPA, Indonesia is expected
to go beyond EU proposal to follow the international
standards (e.g. TRIPs for IPR) and pushing more for
capacity building enhancement program, especially with
regards to strengthening Indonesias capacity to enforce,
implement, and monitor the IPR and competition law
in Indonesia. The request on capacity building program
is best to be clearly stated in the body agreement of
Indonesia-EU CEPA and serves as a complement for the
already proposed-cooperation program (as stated in the
scoping paper). It is best to distinguish the concept
between cooperation and capacity building program, in
order to avoid any misinterpretation in the future and to
serve as a guideline for deriving actual program out of it.
D. Concluding Remarks
T
his paper argues that if Indonesia
doesnt want to lose the momentum
of trade and investment enhancement
and is willing to maintain its centrality
in ASEAN, then Indonesia should
move forward with the Indonesia-
EU CEPA. Nonetheless, Indonesia has to take the most
precautious way in negotiating the Indonesia-EU CEPA
by ensuring that: (i) the CEPA will not severely hurt
domestic industry (like the past experience with other
FTA, i.e. ACFTA), and (ii) there is a fair market access
opening for exporter from Indonesia wishing to penetrate
into EU market. Therefore the Indonesia-EU CEPA must
be build under the principle of mutually benefcial, fair,
and competitive business climate. It has to also respect
the gap on the development level between Indonesia
and EU when determining the level of ambition of
the liberalization package under Indonesia-EU CEPA.
This study suggest that it is best for Indonesia to view
the existing challenges as negotiation tools, instead
of impeding factors. This is because the barriers and
challenges will still remain if Indonesia holds back from
36
the negotiation, whereas theres a greater chance to solve
all existing problems and impediments by negotiating
under the Indonesia-EU CEPA.
This study is an attempt to identify the key policy issues
of the proposed Indonesia-EU CEPA and serves as a
recommendation for the government on how to best
deal with the Indonesia-EU CEPA negotiation, particularly
from the perspective of private sectors. In doing so, this
paper looks into several relevant aspects, such as tarif,
non-tarif measures, trade in services, investment, trade
defence, agriculture subsidy, public procurement, IPR,
and competition law. The policy recommendation sets
down a grand mechanism on how to optimize the
beneft and minimize the potential adjustment cost
coming from the proposed Indonesia-EU CEPA. It mostly
contains of general recommendation on the best position
the Indonesian government should take in the negotiation
process of Indonesia-EU CEPA. It provides suggestion not
only on how liberal the Indonesia should be opened
up to EU, but also in what aspects Indonesia might
push the EUs trade policy to be more accommodative
and less-restrictive in the pursuit of mutually benefcial
Indonesia-EU CEPA.
37
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38
APPENDIX 1 SUMMARY OF VISION GROUP RECOMMENDATION ON INDONESIA EU CEPA
Trade in Goods
Tarif
Eliminate tarif (zero tarif) for 95% of tarif lines, covering at least 95% of trade value, in a period of
maximum 9 years. The remaining 5% should permit further progress.
The modality of tarif reduction should follow the principle of asymmetry over time
TBT and NTMs
Cooperation, capacity building, and conduct consultation in the feld of technical regulations, standards,
and conformity assessment procedures in order to ensure efective and least-cost adaptation of regulatory
frameworks.
Establish a framework for joint eforts to facilitate mutual recognition in the most appropriate and cost-
efective manner, which takes form of streamlined procedures, mutual recognition of laboratories, testing
facilities and certifcation processes
Joint dialogue to seek an explanation and fnd a solution in any shortcomings in compliance
Enhance competitiveness and build downstream industries of priority sectors
SPS
Improving transparency and bringing certainty and consistency to the application of SPS measures.
Establish mechanism to facilitate trade, including pre-listing of food establishments, and working towards
the recognition of disease-free health and pest-free areas when applied by the parties for both animal
and plant diseases, while maintaining essential border checks
Establish appropriate arrangement to address market access barriers and to facilitate resolution of
diferences
Intensify cooperation aspects in the area of SPS and animal welfare, especially related to testing and
accreditation (e.g. EU-Indonesia cooperation on establishing National Rapid Alert System for Food Products
to strengthen national capacities in the risk management for food safety)
Rules of Origin (ROO)
ROO should be trade facilitative and less hampering. The vision group recommended to take liberal view
on ROO, which is trade and investment friendly and also taking into account the planned negotiations with
other ASEAN member states
Safeguards Measures
Build a joint mechanism to decide on the future safeguards based on objective criteria and short exit periods
Trade in Services
Services liberalization must be signifcantly above the package ofered in Doha Development Agenda
(DDA) negotiations
consolidate both countries current level of opening to foreign economic actors
focus on opening up mode 1 and mode 3 of services
eliminate investment restriction in some Indonesian services sectors
Vision Group Recommendation No.
1
2
39
Investment
Investment Facilitation (pre-establishment)
review substantially the limitation of foreign ownership (e.g. equity caps and joint-ventures requirements)
at least for priority sectors
review the rules of local content requirements
ensure transparency and clarity in the regulatory framework
review regulatory authorities to ensure they can operate independently
ensure transparency and predictability of taxation climate
Investment Protection (post-establishment)
Conclude an ambitious investment protection agreement covering all EU member States, at least including
these elements:
non-discriminatory treatment
nationalization / expropriation
compensation for losses
subrogation
transfer
dispute settlement
Investment Promotion
Enhance efort to attract potential investment sources from EU countries, and similarly promote Indonesian
investment to EU as well
Cooperation and Capacity Building
Cooperation and Capacity Building on market access
the cooperation programmes should aim at a better understanding of each others regulatory frameworks and
system. A strong emphasis should then subsequently be put on building up the export quality infrastructure
of Indonesia. The program may covers, but not limited to:
alignment to da common set of standards, based on international rules
recognition of conformity assessment and certifcation systems
establish an EU-Indonesia helpdesk and standards information platform on each other regulatory regimes
cooperation on building up a strong certifcation and laboratory system to be able to fulfll technical
regulation in EU
Cooperation and Capacity Building to facilitate direct investment
Intensify the cooperation to facilitate direct investment in a view to increase involvement of EU frms in
Indonesia to enhance access to higher technologies and export quality infrastructure
Public Procurement, Infrastructure and Public Private Partnership
Set up transparent rules and negotiate additional levels of mutual access in public procurement, especially
in public infrastructure
Set up dialogue to reduce supply constraints in Indonesia, which lie in logistics and infrastructure, including
power, transportation, roads, and ports
3
4
5
40
Create a fully functioning PPP model for infrastructure development including local companies and
investors
Provide government supports in the form of guarantees for the infrastructure projects
To include European Investment Bank (EIB) to be able to participate in Indonesias infrastructure development
Establish a single point of entry for frms and to reduce the complexity of the decision-making processes
with regard to infrastructure projects, including dealing with certain aspects of regionalization
Develop joint marketing eforts to create more proactive interest from EU exporters and to attract
European capital
IPR and Competition Policy
The IPR chapter should cover all categories of intellectual property namely: copyright and related rights,
patents, trademarks, designs; layout-designs, geographical indications, protection of undisclosed information
and plant variety rights.
To create a high level on ambition of GI protection. As a part of CEPA, GI protection should go beyond
TRIPS obligations for foodstufs and provide for extension of the protection at least to TRIPS article 23
level (referred to as TRIPS +).
To establish capacity building and facilitation for Indonesia in order to accomplish efective implementation
of such IPR provisions, which includes include exchange of information and experience on issuessuch as
best practice, promotion dissemination, streamlining, management, protection and efective application of
intellectual property rights, the prevention of abuses of such rights, and the fght against counterfeiting
and piracy.
to establish closer cooperation in the feld of competition policy, such as:
Exchanging information concerning the relevant imposition of competition policy measures.
Include provisions in the CEPA on consultations and dialogues on all matters relating to competition
policy.
Enhancing capacity building such as providing training, education, human resources development,
and technical assistance, and possible exchange of staf or traineeships.
Exploring the merits and scope of possible cooperation between the Competition Supervisory
Commission of Indonesia and the European Commission.
Sustainable Development (environment)
To include concrete measures to promote the greening of EU-Indonesia trade and direct investment that
evolve EU-Indonesia business to a sustainable competitive business model which benefts both parties.
To include structures that ensure any sustainability policy neither accidentally impedes trade nor restricts
growth or job creation.
Encouraging Indonesian manufacturing to move up the value chain in a sustainable manner, branding
goods with higher sustainability value and growing the business opportunities for both parties.
To establish capacity building and trade facilitation with sustainability objectives, specifcally there should
be a framework of mutual understanding of the value of long-term sustainability overriding short-term
economic gains.
6
7
Source: Indonesia-EU Vision Group Report - Invigorating The Indonesia-EU Partnership Towards a Comprehensive Economic
Partnership Agreement.
41
APPENDIX 2 ISSUES AND RECOMMENDATION IDENTIFIED FROM INDONESIAS BUSINESS COMMUNITY: BY SECTORS
No. Issues by sectors Recommendations
Automotive
1
Insufcient infrastructure (software & hardware)
and high logistics cost.
The elimination of import duties shall be compensated
by the capacity building in labor skill and infrastructures.
2
Limited capacity of production that hampers
motor vehicles industry to be export oriented
industry.
CEPA is expected to bring real investment in spare-parts
industry. Japan investment in Malaysia/ Thailand should
be best practice in spare-part industry.
Palm
1
RSPO vs ISPO
There are diferences between Roundtable on
Sustainable Palm Oil (RSPO) and Indonesian
Sustainable Palm Oil System (ISPO).
CEPA shall facilitate a evaluation and/or point-by-point
comparison between RSPO and ISPO to fnd the best
applicable standardization of palm oil.
2
RED
- Indonesian palm oil failed to meet the
standard required for biofuel production in
EU (while EU required 35% greenhouse gas
energy saving, however Indonesia only met
19%). In addition, -there is diferent standard
of Renewable Energy
Directive (RED) applied among EU countries
which impacts the high cost of audit for
Indonesian companies.
- RED could not be benefted by small farmers
due to the insufcient capacity to meet the
sustainability scheme.
Through the implementation of CEPA, EU shall be
able to assist palm plantation in Indonesia to be more
environmental friendly.
43% of palm producers in Indonesia are small farmers with
2-5 hectares of plantation area. Therefore, CEPA shall also
take into account to empower and encourage the capacity
of small farmers.
3
Other Non-Tarif Barriers:
- Import Quota
Some EU countries (e.g. Spain) applied import
quota for Indonesian palm oil products.
- Enviromental Issue
Some companies in EU with the support of
international NGOs applied voluntary labelling
against palm oil products.
- Dumping
Indonesian biodiesel was claimed as dumping
practice by European Bio-fuel Board (EBB)
which impacted tax imposition on Indonesian
biodiesel products.
CEPA shall ensure the ease of market access to EU region,
thus it shall not only focus on elimination of tarifs but
also have to take into account the barriers that might
occur by the implementation of NTMs. Elimination of
non-tarif barriers include the abolition of import quota
and socialization to raise positive awareness on palm oil
products.
42
Timber, Pulp and Paper
1
Certifcation:
- Due Diligence:
European Union Timber Regulation requires
traders who place timber products on the EU
market for the frst time to exercise due diligence
which undertakes a risk management exercise
so as to minimise the risk of placing illegally
harvested timber, or timber products containing
illegally harvested timber, on the EU market.
This regulation is applied to timber & timber
products, includes solid wood products, fooring,
plywood, pulp and paper. It requires access to
information describing the timber and timber
products, country of harvest, species, quantity,
details of the supplier and information on
compliance with national legislation.
However its difcult in Indonesia to track the
species for the timber products (e.g. pulp).
- VPA:
Related with Voluntary Partnership Agreements
(VPAs) between the EU and Indonesia, only
timber and timber products that have a Forest
Law Enforcement Governance and Trade
(FLEGT) Licence may enter the EU market. The
FLEGT licenses certify that the timbers have
been harvested and produced in compliance
with the laws and regulations of the partner
country and that information can be traced
back through the whole supply chain, in
Indonesia FLEGT is covered in SVLK. Under
this regulation, operations of timber producers,
traders, processors and exporters will be audited
annually by independent auditors that verify
the legality of their operations. However in
the current condition, there are only some
products ready to apply this SVLK license. In
addition, the cost of SVLK implementation is
quite high and the socialization on SVLK is still
perceived insufcient to educate the business
communities.
CEPA shall eliminate the non-tarif barrier by encouraging
Indonesian business to raise its capacity to comply EU
standardization. Thus, technology transfer in plantation and
timber processing is very essential.
The activation and scope of VPA & SVLK should be
incremental, because there are still a lot of products cannot
comply this regulation immediately.
43
2 Society:
- There are a lot of protests from NGOs on
timber as alternative source of energy which
is claimed as an action against environment,
whereas in RED timber is included as a
renewable energy source.
- Several NGOs in EU demanded Indonesian
exporters to have certifcation from Forest
Stewardship Council (FSC). The certifcation
includes the forest management certifcate,
which has been already acquired by Kongo.
EU countries government with assistance of Indonesian
government shall raise positive awarness on Indonesian
timber products. It can be conducted by educating the
market that Indonesian certifcation complies the legal
logging standardization.
Cocoa
1 Under the GSP scheme, Ghanas and Ivory
Coasts cocoa beans and cocoa products
can enter EU market with import duty free.
However, Indonesia only get duty free for cocoa
beans while cocoa products are imposed tarif
6-9% which impact price incompetitiveness of
Indonesian cocoa products.
The CEPA is expected to eliminate the tarif of Indonesian
cocoa products and ensuring the fair competition.
Fish product
1 Tarif
Indonesian fshery products are still imposed
more than 13% impor duty, as well as Africa,
Carribean, and Pacifc (ACP) products.
The CEPA is expected to eliminate the tarif of Indonesian
fshery products.
2 Non-tarif Measure
EU has a strict rule on fsh and fsh products,
while it does not accept fish without SHTI
certifcation (Sertifkat Hasil Tangkapan Ikan)
which is issued by Indonesian Ministry of Marine
and Fisheries. This certifcate warrants the quality
of products and legal fshing action. It also
includes the use of VMS tracking (technology to
trace the location source and tools of fshing).
The CEPA shall encourage the capacity of Indonesian fshery
industry to comply EU standardization.
Textile
44
1 REACH
EU has a strict regulation on textile produxts
under Registration, Evaluation, Authorisation,
and restriction of Chemicals (REACH). Application
of REACH which aims to protect of the
consumers health and environmental protection,
making the registration of chemical substances
mandatory, and restricting the professional use
to only those chemical substances which have
been registered has also a signifcant implication
on the importation of textile in EU. Under this
regulation, companies have to provide the
physical-chemicals and toxicological data of
the products.
CEPA shall establish capacity building on laboratory
technology and human resources on research and
development in textile industry. With the support of EU,
Indonesian laboratories shall be able to conduct product
test and development to comply EU standardization.
CEPA should establish a Mutual Recognition Agreement
(MRA) to ensure the compliance of standardization.
CEPA shall increase the facility of tarif in the scheme
of Generalized System of Preference (GSP) on garment
products.
2 Negative List
There are 20 products of textile listed in negative
list of chemical products. It requires exporter/
importer to have registration on those certain
products.
3 Standardization
There are some differences between EU
standards and the standard which is applied
on Indonesian textile industry, though most of
factory in Indonesian textile industry refers to
European or Japanese standards, there are still
some criterias cannot comply EU standardization,
for example in term of the laboratorium quality
or human resources quality.
Source: APINDO-EU-ACTIVE Socialization
45
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47
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g
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S
o
c
i
a
l
i
z
a
t
i
o
n
48
APPENDIX 4 RECOMMENDATION FROM OTHER STAKEHOLDERS
No. Recommendations
SMEs
1
Competitiveness
CEPA shall increase SMEs competitiveness through the comitment of capacity building and technology
transfer.
2 Investment
EU investment shall take into account the empowerment of SMEs.
3
Market Access
Indonesian SMEs expect a distinction on market access to EU. CEPA shall bring an ease of market access
to EU for Indonesian SMEs.
4
Socialization
Government of Indonesia (GoI) have to build an intense communication with business sectors in the
regions and ensure the agreement can accommodate business perspective.
Labor Union
1
CEPA shall generate an agreement on labor protection and commitment to establish an intensive social
dialogue. This agreement shall respect to the international stadards which have been concluded in ILO
and G20 ministers.
2 CEPA shall establish a capacity building in labor quality.
Source: APINDO-EU-ACTIVE Socialization
49
Asosiasi Pengusaha Indonesia
(APINDO)
Gedung Permata Kuningan Lantai 10
Jl. Kuningan Mulia Kav. 9C,
Guntur Setiabudi,
Jakarta 12980 Indonesia
Telp. +62-21 8378 0824
Faks. +62-21 8378 0823, 8378 0746
E-mail: timkajian@apindo.or.id
Website: www.apindo.or.id

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