Trade pact to hasten Indonesia's recovery, experts say

Indonesia's ratification of the world's biggest free-trade pact promises to help boost the economy's recovery from the pandemic and reinvigorate the process of industrialization, analysts say.

Indonesia's parliament passed a law on Aug 30 formalizing the nation's membership of the Regional Comprehensive Economic Partnership, or RCEP. The 15-member trade pact covers nearly a third of the world's population and about 30 percent of its gross domestic product.

"By joining the RCEP, Indonesia can take advantage of the momentum to be more able to participate in global value chains because barriers (tariff and non-tariff) between RCEP members can be minimized," said Fajar Hirawan, head of the Department of Economics at the Centre for Strategic and International Studies, a think tank in Jakarta.

Southeast Asia's biggest economy is moving toward recovery after two years of reeling from mobility controls and lockdowns. Hirawan said that the RCEP "could speed up the process of re-industrialization after the deep contraction in the sector during 2020".

Nicholas Mapa, senior economist at ING bank, said the ratification will further expand Indonesia's access to the huge export markets of other RCEP members like China, Japan and South Korea.

Ambitious goal

"This development, alongside Indonesia's thrust for (electric) vehicles (and battery) production bodes well to help expand access and attract investments to the country," said Mapa, referring to Indonesia's ambitions to become a key base for the production of electric vehicles.

Sanjay Mathur, chief economist for Southeast Asia and India at ANZ, said that while the RCEP can indeed boost trade and investments in Indonesia, such benefits will only be realized if the country continues to improve its investment climate.

He said Indonesia can also quickly move up the global value-added chain if it can spend more on human resources and implement laws like the Omnibus Law.

The Omnibus Law, passed in October 2020, has amended 76 laws to attract more investments and create more jobs in Indonesia. Some of its key provisions include the easing of business licensing procedures and the amendment of the Manpower Law.

With Indonesia ratifying the RCEP, Myanmar and the Philippines remain the only two RCEP signatories that are yet to cement their membership of the pact.

The pact's signatories are the 10 members of the Association of Southeast Asian Nations together with Australia, China, Japan, South Korea, and New Zealand.

The RCEP aims to establish a unified market by reducing tariff and non-tariff barriers. It was signed on Nov 15, 2020, at a virtual ASEAN summit hosted in Vietnam. It took effect in January after 10 signatories ratified the pact.