Policy Brief Indonesia-Japan

Goedemorgen!

It’s been a while since my last post. Again, i got a chance to visit Europe again. Currently, i base on The Hague, Netherlands for some diplomatic training. Here i would like to present our final assignment where me and my partner, Ima, had to make policy paper about Indonesia-Japan. It was a bit hard at the beginning because we had to find a dilemma between these two countries. But miracles does happen people! A day before the deadline we decided to elaborate about the Economic Partnership Agreement (EPA). We found this issue very interesting and we got a bit carried away, lol. Well then, enjoy reading peeps!

Final Policy Brief Indonesia-Japan

What should the government do to solve unfairness issue in EPA (Economic Partnership Agreement) between Indonesia and Japan?

Group E: FA and KKD

Executive Summary:

Economic Partnership Agreement (EPA) between Indonesia and Japan was signed in 2007. The signing of partnership agreement was aimed at further promoting trade and investment between the two countries by reducing tariff barriers and improving cooperation in capacity building. During its implementation, many experts pointed out that the EPA most likely benefit Japan, thus the government then decided to postpone it in October 2013. In the other hand, Japan claimed that the EPA benefits both parties equally. This analysis suggests that Indonesia should continue the EPA with Japan with some adjustment by developing new mechanism in guarantee the fairness in the agreement. The future agreement should focus on environmentally friendly project. The implementation of this new policy should be done fast and well-coordinated because this policy can help Indonesia as developing country in reducing emissions, while also promoting Japanese exports of energy-efficient and low-pollution technology.

Objective       :

This study aim to analyze whether EPA (Economic Partnership Agreement) between Indonesia and Japan is beneficial or unfavorable to Indonesia and identify required actions from the government to answer the dilemma.

Introduction: 

On August, 27th, 2007, Indonesia and Japan signed an economic partnership agreement (EPA) covering the fields of environment, health care and a new free-trade deal. The signing of partnership agreement was aimed at further promoting trade and investment between the two countries by reducing tariff barriers and improving cooperation in capacity building.

In Indonesia, EPA is mainly criticized for failing to enhance cooperation in capacity building/ transfer technology.

EPA itself is Indonesia`s first bilateral free-trade deal that exempted Indonesian products from 90 percent of Japan`s 9,275 import duties, amounting to 99 percent of its export value. The agreement was also aimed at fostering the service sector and the export of workers to Japan. Meanwhile, Japan would be exempted from 93 percent of Indonesia`s 11,163 import duties, 92 percent of its export value, while being ensured of a steady supply of energy and raw materials from Indonesia. In addition, the EPA also includes cooperation in capacity building to ensure the quality of Indonesian products entering the Japanese market. In short, EPA’s scheme is based on liberalization, facilitation and cooperation in capacity building. EPA came into effect in 2008 and ended in 2012. In December 2013, there is a growing concern over EPA that many analysts criticize EPA had failed to benefit Indonesia.

The result can be assessed from the non-oil and gas import between Indonesia-Japan. From 2008 to 2013, the import balance from this two countries showed than Indonesia suffered from deficit from those period of time.

Interests:

For Indonesia, Japan is a trade partner and biggest foreign investor. Indonesia, in turn, is likely to benefit substantially from expanded Japanese investment in its flagging oil industry–complementing the government’s efforts to expand domestic production and refining capacity. To Japan itself, Indonesia is a major energy supplier and a basis for its manufacturing sector.

The EPA signed by Indonesia and Japan consists of many sectors and had showed essential increase in trade relation between two countries. However, the main advantage that can Indonesia get by the EPA beside the huge amount of capital flow is the technology transfer from Japan.

Pre-existing Policy

Japan-Indonesia Economic Partnership Agreement (EPA) came into force on July 1, 2008. Indonesia’s first such bilateral trade agreement appropriately takes effect during the 50th anniversary of bilateral diplomatic relations.

In October 2013, Indonesian Government agreed to evaluate the EPA due to criticism that EPA did not succeed to benefit both countries equally.  The results of the evaluation would become the basis for the renegotiations of the agreement.

Policy Options 1: Indonesia-Japan develop new cooperation mechanism i.e environmentally friendly projects

Indonesia and Japan has a deep historical relationship. In the future Indonesia should continue its EPA with Japan, but with specific adjustment in order to prevent the unfairness. Thus new focus in EPA should be benefiting two parties.

Jakarta needs Tokyo’s help in promoting the use of green technology to effectively manage its mineral resources and overcome the threat of environmental degradation. The government called for continued assistance from Japan to help Indonesia achieve its target of reducing greenhouse gas emissions by 26 per cent from “business as usual” levels by 2020 in its efforts to mitigate the impact of climate change. In the other hand, Japan is committed to minimize carbon emissions by 25 percent before 2020. Such target will be achieved through boosting investments in environmentally friendly projects at home and abroad. This mechanism is an incentive for Japanese companies to increase investments in low-carbon projects in Indonesia

Indonesia and Japan also have signed a bilateral deal in September 2013 to soothe the way for Japanese companies to directly get carbon credits and projects. Known as a joint crediting mechanism (JCM), it bypasses the Kyoto greenhouse protocol’s Clean Development Mechanism, in which the United Nations must screen and sign off on each company’s participation in it. The new agreement will help Indonesia cash in more rapidly on Japanese companies’ attempts to offset their own industrial carbon emissions by gaining credit for helping avoid emissions elsewhere in the world.

In summing up the agreement, the Japanese government has already run feasibility studies in the options it has which include renewable energy, forestry, energy conservation, transportation, carbon storage and waste treatment.

Advantage:

  • New mechanism will enhance the volume and quality of Japanese investments in Indonesia.
  • Indonesia will benefit from Japan’s investment particularly in projects aimed at reducing carbon emissions (Katori, 2013), Japan has adequate technologies to support the new investment scheme. In this light, the development of new mechanism will support technology transfer and capacity building in Indonesia.
  • Indonesia will then hopefully have the capacity for emission reduction since it is the third largest emitters after US and China.
  • Japan will get credit for its efforts to reduce carbon emissions (as part of its contribution to developing country)

Disadvantage

  • The result of this policy will only be seen in the medium or long run.

Policy Option 2: Indonesia terminated the EPA completely and all future cooperation should be conducted in each issue, not under umbrella agreement like EPA.

Advantage

  • Less complicated in the making process

Since the beginning of Indonesia-Japan relation, both countries had established hundreds of bilateral agreement. Thus, building issue based agreement will not be a problem and less complicated than EPA.

Disadvantage

  • Difficult in linking the issue
  • Political implications from Japanese government

The EPA came into effect on July 1, 2008. That was the same year when Japan and Indonesia celebrate their 50th anniversary of bilateral diplomatic ties. This agreement thus highlights a longstanding economic relationship between Japan and Indonesia. Termination towards this cooperation would possibly jeopardize the diplomatic tie.

  • Moving backward relation

Since Indonesia and Japan already conducted many agreements before, the termination of EPA will indicate that the relationship between two countries is moving backward

Policy Options 3: Indonesia maximized the trade cooperation with ASEAN members and also ASEAN + 3 (China, Japan, and Korea)

Since its establishment in 1997, ASEAN+3 cooperation has deepened in many sectors, not only in economy, but also in political and security as well. This cooperation can be a very potential market for Indonesia. In the future, ASEAN+3 could be a stepping stone to aspire the raise of EAFTA (East Asia Free Trade Agreement).

Advantage

  • ASEAN could have stronger bargaining position, if all the member states could stay in one consensus
  • Since Japan, China, and Korea will deal with ASEAN as a whole, unfairness in trading could be prevented, or at least minimized.

Disadvantage

  • It would be very difficult for all ASEAN member countries to gather consensus about what commodity should be proposed for cooperation
  • Potential conflicts may arise with other countries in the region that have disputes with China, especially regarding South China Sea, and could hamper the cooperation.jepang

Preferred Policy Options:

From those three policy options above, the advise is that Indonesia should continue EPA with Japan with several adjustments and focusing more on environmental friendly mechanism.

By choosing this policy will provide Indonesia many opportunities because Indonesia will be able to get technology transfer from Japan in solving the environmental problem in Indonesia. In the future, hopefully Indonesia can produce environmental friendly product on its own. More important, Indonesian citizen will benefit the most from this policy because the quality of life in Indonesia will increase significantly.

The policy is a win-win solution for Indonesia and Japan because this policy can help Indonesia as developing country (3rd largest emitter) in reducing emissions, while also promoting Japanese exports of energy-efficient and low-pollution technology.

In addition, this policy should be taken because it is undeniable that Japan will always be Indonesia’s strategic partner, and also one of an undisputable major global power in Asia Pacific.

The policy can be implemented by first identifying the field of industry that urged the most in emission reduction. Then, the government needs to provide supporting data about the environmental indicator, such as amount of emissions produce; water and air quality, which can be used as policy basis.

Thus, in helping realizing this policy, Ministry of Foreign Affairs could propose and coordinate between Japanese government and related ministries in Indonesia, especially Ministry of Environment to establish an Memorandum of Understanding (MoU) of environmental protection and sustainable utilization of natural resources. This agreement serves to deal with various environmental issues, such as rehabilitating mining sites and heavily polluted areas. Through this agreement both Indonesia and Japan work together in strengthening global environmental protection efforts.

To ensure the fairness in this policy, there should be a timeline that can predict the amount of emission reduction in Indonesia. For Japan itself, the timeline serves to exemplify Japan’s commitment and contribution to Indonesia as developing countries as part of its responsibility in Green House Gas (GHG) reductions.

The implementation of this policy itself could be done after the election in April 2014. As Japan is currently Indonesian biggest investor, the elected government should speed up the implementation process. We do believe that Japan will react positively on this proposal since Indonesia is Japan’s biggest trading partner in the energy sector. In addition, cooperation with Indonesia has by far contributed the largest Japan energy supply. Regarding the propose emphasis on environmental issue, this would help Japan to maintain its commitment in lowering world carbon emissions.

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