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Asosiasi Pengusaha Indonesia (APINDO) ADVOCACY Paper “In Facing Indonesia-European Union Comprehensive Economic Partnership Agreement: Perspective from Indonesia’s Business Sector”

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InItIal PrIvate Sector’S PoSItIon aS of february 20141

Asosiasi Pengusaha Indonesia (APINDO)

ADVOCACY Paper“In Facing Indonesia-European Union Comprehensive Economic Partnership Agreement: Perspective from Indonesia’s Business Sector”

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InItIal PrIvate Sector’S PoSItIon aS of february 20142

A. IntroductionA.1. Indonesia-EU Trade and Investment: There’s large room

for further enhancement

General position on bilateral trade in goods: Indonesia is the net-exporter (4 billion USD), while the EU is net-importer (9 billion USD).

Indonesia’s export to EU:

Main export: palm oil, rubber, mineral resources, TPT, footwear (Natural resource-based and labor-intensive industry).

In 2012, EU is ranked as the fourth largest source of import (share: 7.4%), and the third largest export destination for Indonesia’s products (share: 9.5%). Moreover, EU is the 4th largest export destination for Indonesia’s animal and/or vegetable oils products (palm oil included).

EU’s export and FDI to Indonesia:

Main export: machinery, transport, electrical, pulp and paper, chemical, agriculture-processed products (high-value added/industrial products). EU’s export share on pulp and paper products to Indonesia is the 3rd largest in the world and the 1st largest in ASEAN.

In general, Indonesia is not among the top major trading partner of EU (0.21% of total EU export, 0.38% of total EU import). However, Indonesia’s market has currently gained increasing attractiveness as the EU exports to Indonesia, from 2000 to 2012, has grown dramatically at 162.2 percent with annual growth more than 10 percent.

Indonesia accounts only a minor share of total EU FDI to the world (0.5%) and to ASEAN countries (13.5%), in term of FDI stock.

ADVOCACY Paper“In Facing Indonesia-European UnionComprehensive Economic Partnership Agreement: Perspective from Indonesia’s Business Sector”

Asosiasi Pengusaha Indonesia (APINDO)

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The fact that Indonesia-EU trade is somewhat complementary will provide an essential foundation for a mutually beneficial CEPA. The Indonesia-EU CEPA proposal will, therefore, excavate greater trade and investment opportunity between the two countries.

A.2. Indonesia-EU CEPA: The basic features

The Indonesia-EU CEPA is essentially a more comprehensive and ambitious FTA with a triangular architecture: market access, capacity building and facilitation of trade and investment.

Market Access:

Tariff elimination for 95% of tariff lines, covering at least 95% of trade value (7 years, flexibility up to 10 years)

NTM reduction through regulatory convergence and provision of trade facilitation

Trade in services liberalization: broad sectoral coverage and cover all modes of supply

Investment negotiation: cover liberalisation and protection of investment, both for services and non-services sectors

Liberalization in public procurement market covering Procurement of goods, services and public works, as well as procurement by central and local authorities, state controlled entities and monopolies, especially those operating in the utilities sectors

Cooperation and Capacity Building (CCB): covering CCB on market access and investment

Trade (and Investment) Facilitation: promoting convergence and co-ordination and cooperation in the customs and trade facilitation field, using relevant international standards as appropriate

A.3. The Significances and Strategic Consideration on Indonesia-EU CEPA

Based on the Vision Group report (2011), the proposed Indonesia-EU CEPA is predicted to have significant benefit, such as:

An additional 0.1% of Indonesia’s GDP growth in the short-run

An additional 1.3% in Indonesia’s GDP in the long-run

Around USD 2 billion increase in trade balance

5% production increase in light industries

1.5% increase in overall wages

The foreseeable impact of employment creation and poverty reduction

Aside from its potential benefit, there are several strategic points worth to be further considered:

The gap on the development level The benefit of CEPA will be more likely bias towards the EU side

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It will be much easier for EU to penetrate into Indonesia’s market than for Indonesia to enter EU market, as EU producers/operators are highly equipped with better technical and financial capacity, thus will find no difficulty in complying with low-level Indonesia’s standard and technical requirement. In contrast, a significant adjustment cost is more likely borne to Indonesia’s private sectors, as they have to adapt with such a stringent compliance system in EU.

Toward single production base under the AEC the cost of holding back is way greater than the cost of participation into the EU CEPA

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. If EU want to satisfy market demands coming from other ASEAN countries which is not yet having CEPA, exporting under zero tariff 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.

Viewing all the barriers and challenges embedded in Indonesia-EU trade and investment relation more as negotiating tools, instead of impeding factors

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, under Indonesia-EU CEPA, there’s opportunity to negotiate the existing barriers and turning it into mutually beneficial economic deal that will enhance both economic conditions. For example: Indonesia might accept some of 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.

The Indonesia’s private sector argues that joining the EU CEPA might provide net-benefit at the margin. However in moving forward with the Indonesia-EU CEPA negotiation, Indonesia has to take the most precautious way by ensuring that:

The CEPA will not severely hurt domestic industry (like the past experience with other FTA, e.g. ACFTA).

There is a fair market access opening, especially for Indonesia’s exporter wishing to penetrate into EU market.

The chapter, program, and the spirit of CEPA itself reflect, as much as possible, the fact that EU and Indonesia differ significantly on its development level.

This study attempts to further identify the key issues on 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 tariff, non-tariff 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 Indonesia should be opened up to EU, but also in what aspects Indonesia might push the EU’s trade policy to be more accommodative and less restrictive in the pursuit of mutually beneficial Indonesia-EU CEPA.

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B. Indonesia-EU CEPA: Key Issues and Recommendations

B.1. Market Access on Trade in GoodsTArIFFKey issues:

EU average MFN tariff rate in 2012: 5.36%; average tariff for agriculture: 11.05%; average tariff rate for manufacturing products: 4.05%. The most complained problem by the private sectors is tariff peaks and escalation.

The problem of tariff peaks1 especially on agriculture and manufacturing products have been making Indonesia’s export less competitive. The major example is on tobacco products (HS24.02 – 24.03), especially smoking tobacco products (HS 24.03) with duty rate striking at almost 75%.

Tariff escalation2 might prevent the development of value-added industries in Indonesia. For example: duty rate for CPO is around 0-3.8%, while its downstream products: 5.2-12.8%. Tariff rate for fresh grape is 11.5%, while in the form of grape juice it can reach up to 40%.

Policy Recommendation:

Indonesia – EU CEPA has to establish a mechanism to negotiate and resolve the tariff peaks and tariff escalation problems at any possible means, aiming to support the industrial-upgrading agenda in Indonesia.

EU shall lower its tariff rate for sensitive products, such as agriculture products and some of its processed products, where high custom duty still remains, in exchange for Indonesia’s commitment on the tariff elimination modality as proposed by the EU which covers 95% tariff lines within 7 years.

In requesting further tariff 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 Indonesia’s export to EU (current and potential level). These kinds of products are usually associated with high tariff and subsidy, such as processed fruit products, tobacco, processed fisheries products and beef.

NoN-TArIFF MEAsUrEsKey issues:

The issues are mostly on Technical Barriers to Trade (TBT) and Sanitary and Phytosanitary Measures (SPS).

There are 3 group of issues raised by the business sectors in Indonesia regarding to the technical NTM3 applied in EU:

1 Tariff peaks: high tariffs usually defined as tariffs that are three times the national weighted average which aims to protect the sensitive domestic industries. For industrialized countries, tariffs of 15% and above are generally recognized as “tariff peaks” (WTO Definition). For example: Smoking-tobacco products have duty rate striking at almost 75% under the HS 24.03 chapter.

2 Tariff escalation occurs when tariff levels increase with the degree of processing to protect domestic processing industries. For example: The import tariff rate for fresh grapes (11.5%) compared with grape juice (40%), crude palm oil (0-0.3.8%) compared with its downstream products (5.1-12.8%).

3 The common of NTM applied by the EU authorities is the technical measures, namely Sanitary and Phytosanitary measures (SPS) (56.18%) and Technical Barriers to Trade (TBT) (42.2%)

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regulatory divergence

Mostly occurs in the context of palm oil products, i.e. IsPo vs rsPo.

Indonesia’s private sectors claim ISPO to be highly referred to the international standards, while EU accept only the palm oil products with compliance to RSPO standards, arguing that the palm oil business in Indonesia is not yet sustainable and the institutional capability in charge over the ISPO monitoring is perceived to be lacking.

stringent and high-level of regulation and standardization in EU

EU regulation on standards and technical requirements is more restrictive and at the higher level as compared to the international standards (e.g. ISO). There’s only 30% of European Standards (EN) which are identical to the ISO standards.

High level of incompliance of the Indonesia’s products to the EU standards and technical regulation, especially for its food and feed products. From 2002 to 2008: there are 285 cases of rejection, equivalent to 16.5 billion USD in term of export value (Henson and Olale 2011). 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.

Other key pressing issues for Indonesia’s business sector in the area of technical regulation: Pulp, paper, and wood products: compliance to EU Timber Regulation, SVLK and other stringent

environment standards. TPT: REACH.

Pursuing MRA or even lower level of mutual understanding is simply impossible to be done for some of Indonesia’s products with low quality and standards. This is because: (i) the good practices are still perceived to be costly, and (ii) the domestic regulation and EQI system in Indonesia are not well endowed to meet such a high-level standards in EU.

Policy inconsistency

The implementation of trade-related policy in EU is still far from ideal.

The3e are many complaints from Indonesia’s business community stating that some of EU members implemented different policy framework from the one set out at the regional/EU level. For example:

Import quota for Indonesia’s palm oil products by Spanish authority Different practices in assessing the standards

Wide-spreading misleading issues provoked by international NGO stating that palm oil products in Indonesia is resulted from environmentally harmful business activity.

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”).

Inconsistent and highly stringent of RED4 applications are among the evidences showing that NTM-related policy application in EU.

4 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.

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Policy Recommendation:

signing MrA with the EU in palm oil product covering mutual acceptance on standards (rsPo-IsPo convergence), certification, and testing (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).

Enhancing capacity building program for private sectors and improve the EQI system in Indonesia

Cooperation program with EU in the area of exchanging information on standard and technical requirements.

Assistance and intensive capacity building for the Indonesia’s private sectors in order to comply with EU and international standards.

Engage EU to invest in establishing EU laboratory and testing center in Indonesia as well as to contribute in improving the state of equipment and human resources of the EQI system in Indonesia.

Promoting greater policy transparency and certainty in the application of NTM measures (i.e. TBT and SPS), equipped with consultation forum involving respective authorities and private sector in order to inform any regulatory changes, facilitate discussion, and seek for solution of any NTM-related policy issues.

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 Indonesia’s palm oil business to the EU’s citizen, the international NGO as well as private sectors.

B.2. Market Access on Trade in Services and InvestmentsErVICEsKey issues:

General position on trade in services: Indonesia is a net-importer, while EU is a net exporter.

Indonesia’s services trade deficit mostly comes from the high importation on transportation services as well as royalty payment and income fee for foreign brand and trademarks.

The most exported services sector in Indonesia are travel, communication, and construction services.

The scope of Indonesia-EU CEPA on services liberalization seems quite ambitious, while Indonesian service sector is still a fledgling industry with limited expansion capacity to EU in the foreseeable future.

Imbalance level of development on service sector between both parties.

Indonesia will likely to end up as only a consumers without having sufficient capacity to enter the EU market.

Unequal provision in granting VISA leads to unequal mobility.

The EU’s citizen can get Indonesia’s visa on arrival, but not vice versa.

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The burdensome visa application procedure for Indonesian to get into EU region impedes the spreading of business and trade activities to EU.

The unequal mobility impacts unequal opportunity to access each-other market, where Indonesian business has less access to visit EU region.

Policy Recommendation:

Indonesia has to tactfully determine the sectors to be liberalized to bring greatest multiplier effect to Indonesian economy.

The CEPA shall be able to ensure a fair access for both parties by simplification and facilitation of visa application for Indonesian business to access EU.

This facilitation includes simplifying application procedures, improving processing times, reducing fees, and extending visa exemption lists.

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.

Support liberalization in education sectors, especially the Vocational Education and Training (VET), to improve Indonesia’s human resources competitiveness.

VET escalates the standardization of skilled-labor which is critical as a foundation to the Mutual Recognition on skills and professionals between Indonesia and EU in the future. The mutual recognition, then, will enable Indonesia to proceed with the agenda of movement of natural person between the two countries.

The commitment on the joint investment in VET.

Eliminate the barrier to invest in the area of VET.

Reinforcing EU’s commitment to establish the curriculum that comply EU standardization on the necessary skill which at the end drifts the mutual recognition on skill.

To attach the services liberalization under the Indonesia-EU CEPA with effective program on capacity building.

It has to commit on establishing necessary capacity buildings to boost Indonesian service sector development and improving export capacity of Indonesian service providers to enter EU market.

The services negotiation should best adopt a balance framework taking into account also the need to secure sufficient space for small services firms in Indonesia to grow.

INVEsTMENTKey Issues:

Indonesia received relatively small portion of total EU’s investment in ASEAN.

Foreign capital inflow does not necessarily bring spillover effect to the local players. However, FDI is one of keys to link Indonesia’s producer into Global Value Chain.

There is volatility risk of capital outflow with the capital market liberalization.

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Policy Recommendation:

EU has to commit to increase its investment in Indonesia following the conclusion of Indonesia-EU CEPA and create linkages between foreign and domestic plants to ensure the productivity and technology spillovers.

Indonesia also shall focus on the potential sectors that will bring multiplying benefit, includes high value-added industries, emerging industries in Indonesia-EU trade, services sector, and implementation of green economy.

Moreover, The CEPA 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 benefit.

B.3. Ensuring Fair and Competitive Trade under the Indonesia-EU CEPA: Trade Defense Measures and Agriculture Policy

Key Issues:

Robust trade defense5 system and non-distortive agriculture policy are the keys in ensuring fair and competitive trade climate under the Indonesia-EU CEPA

There is a significant gap on the implementation of trade defense policy between Indonesia and EU

Trade Defense Policy in EU:

Well established system.

19 Indonesia’s products are attached by anti-dumping and 5 of which also subject to anti-subsidy measures (many of these are either expired, terminated, or repealed).

As of today, 5 Indonesia’s products are subject to EU’s anti-dumping measures: biodiesel, fatty alcohol, open mesh fabrics of glass fibers, sodium cyclamate, tube and pipe fittings, monosodium glutamate.

Trade Defense Policy in Indonesia:

Lack of technical capability and less-proactive

None of EU product being attached by Indonesia anti-dumping and/or anti- subsidy measures as of today; not even an investigation

The application of safeguards is still insignificant

There is a complaint from Indonesia’s biodiesel producers whose product is being charged by the EU’s anti dumping duties

They are skeptical about how the dumping assessment system takes place in EU and suspecting that the EU doesn’t use justifiable standard in valuing production cost of their biodiesel products

Indonesia’s producers feel that the European Commission on anti-dumping has overestimated the production cost of Indonesia’s biodiesel, making it eligible for additional anti-dumping duties

5 Trade defense/trade remedies instrument consists of: (i) Safeguard measures- aim at allowing countries for temporary relief from sudden import surges, (ii) Countervailing duties measures (anti-subsidy)- designed to counteract subsidies implemented by partner countries, (iii) Anti-dumping policy- created to counteract unfairly low prices set by trading partners.

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Agriculture sector in EU is highly subsidized and protected, under its flagship program, namely the Common Agriculture Program (CAP)6, which accounts at around 46% of total EU expenditure

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

EU CAP negatively impacts Indonesia’s private sectors, at least at the two front: Export subsidy produces the price effect which makes EU products more favorable than that

of Indonesia’s Other domestic support (e.g. price guarantee and direct income support) encourages the

expansion of agriculture sectors domestically (in EU) in the expense of lower export opportunity for developing countries, notwithstanding Indonesia

However, there is only a little room for Indonesia to counterbalance the EU’s distortive policy, be it bilaterally or multilaterally:

EU CAP is increasingly WTo compliance The EU is able to maintain the amount of export subsidy and price guarantee at a minimum

level 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 EU’s most exported agriculture products to Indonesia.

The technical capability of KADI is still lacking, making it even harder to counteract in bilateral basis

Policy Recommendation

strengthening trade remedies system in Indonesia

Establishing cooperation and capacity building programs with the EU in the area of trade remedies

Training for trade remedies personnel (technical know-how) Sharing session on the best practices of trade remedies policy in EU Dispatch expert in the area of trade remedies to help improve the trade remedies framework

in Indonesia

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

Put the “Trade remedies” provision into separate chapter and to be out from Trade in Goods chapter, because the trade remedies measure can also be applied for trade in services-especially with regards to safeguards measures

6 The EU CAP has 2 pillars, namely Pillar I and Pillar II. The Pillar I consists of market support measures (i.e. price guarantee and export subsidy) and direct income payment (i.e. coupled and decoupled income payment). Pillar II of the CAP contains of comprehensive rural development program.

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To make a commitment with the EU on greater policy transparency in applying the trade defense measures

Exchange information on the assessment system (to establish common understanding on the assessment framework implemented by each country)

Establish a joint committee on trade remedies 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

Negotiating the “Lesser Duty Rule” 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.

There are quite a lot of Indonesia’s 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, specifically:

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 tariff rate and receive significant subsidy in the form of price guarantee and export refund, such as: tobacco, diary 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.

B.4. Other CEPA Elements: Public Procurement, Competition Policy, and IPR

PUBlIC ProCUrEMENTKey issues:

Indonesia is not a full member of WTo agreement on Government Procurement (GPA) no obligation to liberalize market access, and at the same time cannot benefit from improved market access of the international public tendering process offered by the members joining the GPA

Indonesia-EU CEPA is a channel of which EU might deal, in a reciprocal basis7, for a greater market access in public procurement with non-GPA countries like Indonesia

Indonesia is a huge potential market for public procurement comprising of hundreds central, provincial, and municipality authority. However, there would be high pressure coming from local firms which are closely related to public procurement activities, such as construction companies, as they fear on losing market share following the participation of more efficient foreign operators

7 Reciprocity means EU will grant market access of its public procurement only if the trading partners commit to do so.

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There’s a substantial “technical barriers” hindering foreign entity to participate optimally in EU public procurement market

The benefit of liberalization in public procurement market would not be symmetrically distributed between the parties

EU’s operator with better technical capacity and financial resources as well as high compliance to standards will easily compete in Indonesia’s public tendering process

Indonesia’s operator will most likely have a “difficult time” in competing with more efficient international operator in EU’s public tendering process, not to mention in complying with EU’s stringent technical standards

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

Policy Recommendation:

Establishing technical cooperation in information exchange and establishment of one-stop-shop regarding public procurement procedures in both parties and conducting technical capacity buildings.

Mutual agreement in improving policy transparency and consistency to ensure fair trade in public procurement market.

Aim only for specific and limited liberalization of public procurement market focusing on the most critical sectors for Indonesia’s development, such as large-scale infrastructure and utilities project, instead of proceeding with broad and ambitious EU’s proposal on liberalizing most of public procurement area.

IPr AND CoMPETITIoN PolICYKey issues:

There is a significant gap between EU and Indonesia in the capacity to enforce, implement, and monitor the IPR and competition law.

Policy Recommendation:

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 Indonesia’s capacity to enforce, implement, and monitor the IPr and competition law in Indonesia.

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T his publication is a brief overview of the full paper entitled “In Facing Indonesia-European Union Comprehensive Economic Partnership Agreement: Perspective from Indonesia’s Business Sector”. For

more information, please contact ACTIVE Team at [email protected] or visit www.apindo.or.id.

This publication is under the joint authorship of Riandy Laksono (Lead Economist) and Rosa Situmorang (Economist). The authors may be contacted at [email protected].

DIsClAIMEr

The content of this publication is the sole responsibility of the author(s) and can in no way be taken to reflect the views of Indonesia Employers Association (APINDO) or its partner institutions. APINDO-EU ACTIVE publications are preliminary documents posted on the APINDO website (www.apindo.or.id) and widely circulated to stimulate discussion and critical comment.

APINDo-EU ACTIVE Project Team Members:

Maya safira (Project Manager)riandy laksono (Lead Economist)

rosa situmorang (Economist)Muryenthi Ambarsari (Project Assistant)

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CONTACT US

APINDO-EU ACTIVE Project

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Tel: +62-21-83780594Faks: +62-21-8378 0823, 8378 0746

E-mail: [email protected]: www.apindo.or.id

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