The Indonesia – Australia

8/8/2019 The Indonesia Australia

1/69

1

Joint Feasibility Study onA Bilateral Free Trade Agreement Between Australia and Indonesia


2/69

2

Outline Presentation

1. Background2. Objectives of FTA Indonesia-Australia study

3. Assesment of FTA of Australia and IndonesiaEconomic Approach

4. Indonesian Approach to FTA Agreement

5. Conclusion


3/69

3

Australia and Indonesia agreed that the study would becompleted by mid-2008.

The trading relationship is already substantial.Two-way bilateral trade amounted to some A$10.4 billion(71,935 billion Rupiah) in 2006.

From Australia s perspective, Indonesia is its 13 th largesttrading partner. For Indonesia, Australia is its 12 th largestpartner.

I. Background


4/69

4

There is substantial scope to strengthen the tradeand investment relationship, including by addressingbarriers to trade and investment in both economies.

Considerable opportunities exist to expand trade in

goods and services, as well as investment, Australia sinvestment in Indonesia, for example, is limitedcompared with that in some other economies.

Its services exports to Indonesia have declined inrecent years, as have Indonesia s services exports toAustralia.


5/69

5

Australia and Indonesia agreed that the feasibilitystudy would assess the prospects for building on theprogress achieved in the Australia-ASEAN-New

Zealand Free Trade Agreement negotiations.

According to the terms of reference, the study was toexamine the benefits and costs to Australia andIndonesia of a WTO-consistent FTA that included:

II. Objectives of FTA Indonesia-Australia


6/69

6

comprehensive tariff liberalisation;enhanced bilateral trade by addressing non-tariff barriers;broad-based liberalisation of the services sector;potential for greater access to government procurementcontracts;addressing impediments to the two-way flow of investment;measures to strengthen intellectual property regimes;competition policy reform;improved customs procedures;

measures to address technical barriers to trade, such asdiffering technical regulations and standards; andcapacity building.


7/69

7

III. Assesment of FTA of Australia and IndonesiaEconomic Approach


8/69

8

Outline Assesment of FTA of Australia andIndonesia Economic Approach

3.1 The Australia-Indonesia economic relationshipM erchandise TradeSevices TradeInvestmentM ovement of People

3.2 Complementary or competing economies?Comparative advantage indexBilateral trade intensity indexTrade specialisation indexIntra-industry trade index

Trade complementarity index3.3 Barriers to trade

Tariff barriers to merchandise tradeNon-tariff barriers to merchandise tradeBarriers to services trade

Trade liberalisation and dynamic productivity


9/69

9

3.4 Investment liberalisation

Current barriers to investmentAustralia-Indonesia bilateral investment liberalisationWhat are the effects of investment liberalisation?Quantifying the impact of investment liberalisation3.5 Assesing the economic impacts of liberalisation

The economic model usedThe baselineBilateral liberalisation undertaken by Australia and Indonesia3.6 Macroeconomic effects of the liberalisationM acroeconomic effects - AustraliaM acroeconomic effects - IndonesiaBilateral Trade3.7 Sectoral effects of the liberalisation

Impact of liberalisation on Australian sectorsImpact of liberalisation on Indonesian sectors3.8 Other modelling simulations

Slower paced trade liberalisation


10/69

10

3.1 The Indonesia AustraliaEconomic Relationship


11/69

11

Bilateral merchandise trade


12/69

12

D irection of Merchandise Trade 2006


13/69

13

Composition of Bilateral Merchandise Trade 2006


14/69

14

Top ten bilaterally traded goods 2006


15/69

15

Bilateral services trade


16/69

16

Composition of BilateralServices Trade 2006


17/69

17

Australian Personal Service Importsfrom Indonesia


18/69

18

InvestmentCurrent bilateral investment flows comprising portfolio, direct, and other

investment are quite modest. In 2006 total Australian investment in

Indonesia was valued at A$3.1 billion, whereas Indonesian investment in

Australia totalled A$487 million.

In terms of foreign direct investment (FDI), Indonesia is not an important

source of FDI for Australia. It is estimated that in 2006 just 0.02 per cent (some

A$56 million) of Australias total inward FDI stock came from Indonesia.

Indonesia is the destination for a likewise small share (0.5 per cent) ofAustralias outward FDI stock. In 2006, the Australian FDI stock in Indonesia

was valued at A$1470 million.


19/69

19

M ovement of people

Composition of arrivals in Australia Indonesian visitor arrivals to Australia


20/69

20

Australia s exports of education related services to all countries 2006


21/69

21

3.2 Complementary or competing economies?


22/69

22

Comparative advantage index 2006

The RSCA ranges from -1 to 1, where a value greater than (less than) zero reveals a countryscomparative advantage (disadvantage) in the production of a good.


23/69

23

Ex ample of RSCA at different levels of aggregation

Australia has a very strong (in e x cess of 0.9) for four of the five products groups that

comprise animal and animal products, whilst Indonesia has a comparative advantage infish and seafood products.


24/69

24

Bilateral trade intensity index 2005

The trade intensity inde x takes values from zero, with no upper bound. Values greater than one infers

that trade between the e x porting and partner country are intense relative to their trade with the rest of the world.


25/69

25

Trade specialisation index 2006


26/69

26

Intra-industry trade index 2006


27/69

27

Trade complementarity index


28/69

28

Trade complementarity indices for select trading partners2006


29/69

29

3.3 Barriers to trade


30/69

30

Barriers to tradeD istribution of applied tariffs 2007


31/69

31

Applied tariff barriers to bilateral merchandisetrade 2007


32/69

32

Trade Restrictiveness Indices(M FN applied tariffs and NTBs)


33/69

33

Nontariff barriers to trade

Barriers to services trade via modes 1 and 4


34/69

34

Trade Liberalisation and dynamic productivity

Following the approach of Itakura, Hertel and Reimer (2003), dynamic productivity

gains arising from increased imports, exports and foreign direct investment due toAustralia and Indonesia undertaking bilateral trade and investment liberalisationhave been included in the economic modelling, specifically:increases in imports productivity gain is a function of the percentage change inrelative prices of imports and local production and the ability of firms to absorb areduction in mark-ups (prices) in order to maintain output (the elasticity of

domestic price mark-up with respect to foreign prices, assumed to be 0.2);increases in exports exporters are assumed to be 8 per cent more efficient thandomestically orientated firms, hence if the change in output exported exceeds thechange in output sold domestically, productivity of the sector rises (productivitygain depends on relative changes in output exported/sold domestically and shareof output exported/used domestically; and

increases in foreign direct investment a 1 percentage point increase in FDI seesan increase in productivity, with the productivity gain varying depending on theLevel of FDI, ranging between a maximum gain of 1.7 per cent at an FDI to GDPratio of zero, to a productivity gain of 0.01 per cent at an FDI to GDP ratio of 2.


35/69

35

3.4 Investment Liberalisation


36/69

36

Cu rrent barriers to investmentFDI restrictions in regional economies Service sectors


37/69

37

A u straliaIndonesia bilateral investment liberalisationFDI barriers in A u stralia and Indonesia Service sectors


38/69

38

W hat are the effects of investment liberalisation? Lowering investment barriers can have a number of impacts.

1. Increasing the allocative efficiency of investment. That is, investment canmove to areas where it has the highest marginal product of capital or cangenerate the greatest value of production. This can happen by reducingdiscrepancies in the marginal product of capital between differentcountries. Alternatively, it can happen if investment is attached toparticular skills and technology, in which case these attributes areallocated more efficiently. Improvements in allocative efficiency can driveup productivity.

2. Lowering the cost of investment through increasing the pool of availablefunds. A reduction in investment barriers may effectively increase thesupply of funds for Australia and Indonesian investment and therefore

lower the cost of obtaining those funds. Note that there could also beincrease in the demand for funds through the impacts noted above.

3. Lowering the transaction costs of investment barriers. For instance, therequirement to notify the Foreign Investment Review Board in Australia of a proposed foreign investment imposes a (small) transactions cost on that

investment.


39/69

39

Q uantifying the impact of investment liberalisation

Quantifying the impact of investment liberalisation on investment andwelfare is not an easy task. This reflects a number of factors.Isolating the impact of any investment liberalisation from the numerousother events going on in the economy is inherently difficult.Quantifying the size of the liberalisation is difficult. Because eachliberalisation is different, as are countries starting positions, the mostrobust work would need to quantify the differences in the extent andpatterns of liberalisation between different agreements. There has onlybeen limited research into quantifying investment barriers, and little toquantify the extent of investment agreements on these barriers.

There may be many other aspects of the economies that mitigate orenhance the impact of investment liberalisation. For instance, thestructure and size of the economies and savings patterns could all beimportant.


40/69

40

Bilateral A u straliaIndonesia FDI


41/69

41

FDI stocks in A u stralia and Indonesia


42/69

42

Assumptions used to condition the analysis


43/69

43

Chart. 4.7 Investment barriers and F D I Service sectors


44/69

44

3.5 Assessing the economic impactsof liberalisation


45/69

45

The economic model used

CIEG-Cubed is the most appropriate global economic model currently available withwhich to analyse the welfare implications of a trade and investment agreement. Theadvantages of using CIEG-Cubed include:

identification of trade flows between countries/regions;

identification of investment flows between countries/regions;incorporates an integrated financial sector (comprising money, bonds, interestrates, lending, borrowing, expectations, financial flows, and wealth);it is a fully dynamic model that can capture the time path of adjustment for eachof the economies/regions modelled;

consumers and producers are allowed to borrow and lend money over time, withdecision influenced by the return on capital versus other assets;inclusion of adjustment costs and expectations; andidentification of up to 57 sectors of production and 87 countries.


46/69

46

The baseline


47/69

47

B ilateral liberalisation undertaken by Australia and Indonesia

Results from the liberalisation simulation(s) are compared with thebaseline, with the difference being attributable to the bilateral trade andinvestment liberalisation between Australia and Indonesia. Model resultsare typically presented as a percentage change from the baselineoutcome and are presented for each year until 2030.

Australia and Indonesia have a vast range of liberalisation implementationscenarios at their disposal. For e x ample, trade barriers could either becompletely or partially eliminated; removed immediately or phased outover 5 or 10 years; goods, services and investment could be covered, or

just goods; and so on. Furthermore, both countries need not adopt thesame trade liberalisation schedule.


48/69

48

3.6 Macroeconomic Effects

of the Liberalisation


49/69

49

Macroeconomic effects for Australia


50/69

50

Australia s production and welfare gains NPV


51/69

51

Sources of Australia s gains NPV 2008


52/69

52

Changes in real GDP in Australia


53/69

53

Changes in employment and wages in Australia

ff f d


54/69

54

Macroeconomic effects for Indonesia


55/69

55

Indonesia s production and welfare gains NPV 2008


56/69

56

Changes in real G D P in Indonesia

Sources of Indonesia s gains NPV 2008


57/69

57

Changes in employment and wages in Indonesia


58/69

58

Bilateral Indonesia-Australia trade


59/69

59

3.7 Sectoral Effects of the Liberalisation

Impact of liberalisation on Australian sectors 2020


60/69

60

Impact of liberalisation on Australian sectors 2020,per cent deviation from baseline

I f lib li i I d i 2020


61/69

61

Impact of liberalisation on Indonesian sectors 2020,per cent deviation from baseline


62/69

62

3.8 Other Modelling Simulations

Sl d t d lib li ti


63/69

63

Slower paced trade liberalisationMain economic impacts under different phase-in scenarios


64/69

64

Present value of economic impacts underdifferent phase-in scenarios NPV


65/69

65

IV. Indonesian Approach toFTA Agreement


66/69

66


67/69

67

ConclusionAustralia and Indonesia already enjoy a wide-ranging economicrelationship that could be strengthened and further developed through abilateral FTA. It would also support bilateral trade and investment linkages,and play an important role in integrating the two economies over the longterm. A FTA would build on the gains made under AANZFTA, thereby

facilitating faster regional economic integration, which is one of the maingoals of AANZFTA. In addition, a FTA would provide a solid platform forstrengthened engagement and cooperation across a range of non-economic issues.FTA would provide an opportunity to minimise transaction costsassociated with bilateral trade and investment. In particular, a FTA wouldbe expected to strengthen cooperation in a variety of trade related areas,including in the areas of customs procedures, sanitary and phytosanitarymeasures, technical regulations and standards, intellect ual property rightsand electronic commerce.


68/69

68

A FTA would facilitate a more rapid integration of theAustralian and Indonesian economies, and in so doingsupplement regional efforts to promote economic integration.A FTA would send a signal that both countries remaincommitted to open trading relationships an importantmessage during these current uncertain times. It could alsoencourage investment from third countries. It would serve asa vital symbol of the importance that Australia and Indonesia

place on our bilateral relations.


69/69

The study finds that a bilateral FTA ought to include provisionsthat deal with tariff and non-tariff impediments to trade andinvestment, trade-related domestic regulation, cooperation toexpand and enhance trade as well as institutionalarrangements that would facilitate implementation of theFTA.This study has demonstrated that an Australia-Indonesia FTAwould provide worthwhile benefits to both Australia and

Indonesia in the short and long term.

The Indonesia – Australia

Documents

Transcript of The Indonesia – Australia