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Why (and How) Indonesia must Reduce its Economic Dependence on China

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Indonesia and China relationship is perhaps one of the most important diplomatic relations in the Indo-Pacific. As the world’s most and fourth-most populated countries in the world, one would argue that Indonesia and China relationship is extremely important, even though there are many frictions in the relationship, most notably the South China Sea dispute. As a consequence, many experts in Indonesia believe that the Indonesia-China relationship must be augmented. I, however, beg to differ. Behind the strong rhetoric of friendship, cooperation, and other diplomatic jargons lie an unmistakable sign of economic dependency on China. As I have argued on the opinion page of Foreign Policy Community Indonesia chapter Universitas Gadjah Mada in 2021, Indonesia are in a state of chronic economic dependency on China and this dependency must be reduced to enhance Indonesia’s independence, especially in safeguarding the Indonesian territory. Things, of course, have changed since last year, one of the biggest changes being the Russian invasion of Ukraine in February 2022, and I believe my arguments must be updated. Still, the relevant evidence supports my argument that there must be a diminution of Indonesian dependency on China.

Indonesia-China Economic Relationship: Interdependence or Dependence?       

Firstly, one needs to remember that the current economic relationship is not of interdependence, but of dependence, meaning that Indonesia depends on China for its economic relations while the vice-versa is not necessarily true. According to the data published by the Observatory of Economic Complexity, China is the destination of nearly 30% of Indonesian exports while it is the origin of 18% of Indonesian imports in 2020. However, in the same year, Indonesia is the destination for only 1,54% of Chinese exports while it is the origin of only 2,1% of Chinese imports. Economic interdependence, by its very definition, means that two parties must be more or less equally dependent on one another. Seeing the data above, it is clear that Indonesia depends heavily on China for its trade while the vice-versa is not the case.

However, one could argue that Indonesia has many raw materials that China needs, such as nickel ore, that are necessary to fuel China’s growth and technological innovations. Again, the data does not corroborate this claim. Indonesia is the source of only 7,74% of China’s nickel ore, material that is heavily important in making electric cars and is touted by many Indonesian experts, politicians, and media as Indonesia’s leverage on world affairs. Furthermore, given that Indonesia exports nearly 90% of its nickel ore to China in 2020, one must ask the question whether China is dependent on Indonesia for its nickel ore or is it Indonesia that depends on China for nickel ore exports.

In addition, Indonesia is also fairly dependent on China for its foreign investment. According to the Investment Coordination Board of Indonesia, China is now the third-biggest foreign investor in Indonesia, behind Japan and Singapore. Admittedly, the Indonesian dependence on Chinese investment is not as chronic as Indonesia’s trade relationship with China. Still, there are some possibilities that the number of Chinese investments in Indonesia could be higher as some Chinese investment to Southeast Asia (including Indonesia) are routed through Singapore, resulting in a statistical distortion. However, Indonesia’s dependence on Chinese investment could grow as Indonesia and China has signed numerous investment development cooperation deals under the umbrella of the Belt and Road Initiative or other bilateral investment deals.

What is the Problem?   

One might ask why one must worry about Indonesia’s economic dependence on China? One answer is heavily relevant: China increasingly does not have hesitation to use its economic relations with other countries as a political economic weapon to achieve China’s objectives, often at the expense of its economic partner. In 2017, for example, when the South Korean government agreed to install the US-made Terminal High Altitude Area Defense (THAAD) missile defense system to defend South Korea against North Korean missiles, China retaliated by embargoing outgoing Chinese tourists to South Korea as China believed that the THAAD can theoretically be used to target Chinese missiles, thus mollifying Chinese nuclear second strike capability. More recently and blatantly, China put in place an unofficial embargo on Australian exports to China after the Australian government called for an investigation into the origins of the COVID-19 pandemic. Kishore Mahbubani succinctly describes the effects of Australian economic dependence on China:

Australia is the most vulnerable [among the countries of the Quadrilateral Security Dialogue]. Its economy is highly dependent on China. Australians have been proud of their remarkable three decades of recession-free growth. That happened only because Australia became, functionally, an economic province of China: In 2018–2019, 33% of its exports went to China, whereas only 5 percent went to the United States.

This is why it was unwise for Australia to slap China in the face publicly by calling for an international inquiry on China and Covid-19. It would have been wiser and more prudent to make such a call privately. Now Australia has dug itself into a hole. All of Asia is watching intently to see who will blink in the current Australia-China standoff. In many ways, the outcome is pre-determined. If Beijing blinks, other countries may follow Australia in humiliating China. Hence, effectively, Australia has blocked it into a corner.

And there are several points of friction in the Indonesia-China relationship that can lead China to wield its political economic weapon against Indonesia. The most notable one is the Indonesia and China dispute on the waters around the Natuna Islands. In this case, Indonesia’s legal Exclusive Economic Zone (EEZ) claim overlapped with the Chinese illegally-claimed nine-dash line. While Indonesia and China have successfully managed their dispute for years, China has gotten more and more brazen in recent years in upholding its illegal claim. In an unprecedented move, Reuters reported in December 2021 that China had sent a letter requesting that Indonesia withhold its oil and gas drillings in the Indonesia’s EEZ region that overlapped with China’s nine-dash line. Furthermore, in another unprecedented move, China protested Indonesia’s military exercises with the United States Army, even though the exercises took place primarily on land and far away from the South China Sea. Thus, it is increasingly clear that China is ever more willing to protest activities that are within the boundaries of Indonesia’s sovereignty. It is fortunate that China does not employ its extensive political economic leverage against Indonesia. However, given the increasing willingness to use its political economic relations as a weapon, it is not an irrational thought that China can one day impose an embargo on Indonesian exports to China unless Indonesia acquiesce to Chinese demands in the South China Sea or on other areas.

In spite of this, one can argue that the increasing Indonesia-China trade is essential for the maintenance of peace between Indonesia and China. In this iteration, if there is a high level of economic interdependence between Indonesia and China, then the parties involved will rethink the hostilities in fear of losing its economic benefits. There are some pitfalls with this argument. As I have explained previously, the economic relationship between Indonesia and China is not of interdependence, but of dependence. Secondly, even if Indonesia and China have economic interdependence, “high levels of economic interdependence do not make war impossible and thus do not free states from having to worry about what powerful rivals might do to upset the balance of power” as Stephen Walt argued in The Hell of Good Intentions: American Foreign Policy Elite and the Decline of US Primacy. This is because states will always pick political and security goals first over prosperity and economic goals. Indeed, the decades leading up to the First World War was widely considered as the belle époque of globalization, with trade and immigration moving at an extremely high level. In recent years, the high amount of Ukraine-Russia trade does not prevent the latter from invading the former in 2022 and 2014.

Logically speaking, if China is really sincere in upholding its economic relationship with Indonesia, then China should have abandoned its illegal claims over the South China Sea (at least the part where its claims overlapped with Indonesia) and not do provocative acts such as requesting that Indonesia suspend its gas and oil drillings in Indonesian EEZ. These moves would be logical as these frictions could escalate and destroy the hard-won Indonesia-China economic relations. Instead, evidence points to the contrary: China’s diplomatic doublespeak means that China continues to employ highfalutin rhetoric on trade and economic relations with Indonesia while doing political, military, and pseudo-military moves that can damage those trade relationship. Therefore, any Indonesian policymaker and expert must ask an inconvenient question: Is China really sincere in upholding its good relationship with Indonesia?

What Must be Done?

Therefore, what must be done to lessen Indonesia’s economic dependence on China? The word count imposes a barrier to explaining each solution in detail. However, several solutions can be glossed over. One solution is to impose a barrier to the export of Indonesian raw materials. This will allow Indonesia to hit four birds with one stone: break away from the chain of dependency of manufactured goods imports and become more independent, create Indonesian manufacturing jobs, invigorating Indonesian domestic industry, and inviting more foreign investment to build manufacturing plants in Indonesia. The Indonesian government’s ban on exporting raw nickel ore is a step in the right direction. This can set an example to break Indonesia’s dependency on foreign countries, with the Indonesian President Joko Widodo declaring in December 2021 that the government will continue to impose barriers in the export of other raw materials, including bauxite. Thus, the production plants must be built physically in Indonesia and that there must be a technology transfer mechanism so that Indonesia can operate and develop the industries independently in the future.

Secondly, Indonesia can also search for alternative market in ASEAN by utilizing the benefits enshrined in the ASEAN Free Trade Area (AFTA) rules. One might argue that ASEAN does not provide the necessary materials to Indonesia compared to China. Yet, it is important to note that many companies are now adopting the China+1 strategy to lessen their dependence on the Chinese economy and industry by opening up factories in other countries, most notably in Thailand and Vietnam. Indonesia will be able to utilize the tariff reduction that are signified in the AFTA rules if Indonesia source its manufacturing goods imports from ASEAN emerging industrialized countries. While this may seem inefficient and redundant, this step is extremely important to hedge the political risks and prepare for the possibility that China could use its economic relationship with Indonesia as a political economic weapon. If China bans a certain material from being exported to Indonesia, at the very least Indonesian industry would not be 100% crippled as they can still depend on imports from ASEAN countries. ASEAN countries can also be seen as a market potential for Indonesian exports to lessen Indonesia’s dependence on the China market, with an economic gravity model research identifying that Laos, Malaysia, Brunei Darussalam, and Thailand still have market potentials that can be exploited by Indonesian companies.

Other solution that Indonesia can implement is to take advantage of the recently-implemented Regional Comprehensive Economic Partnership (RCEP). The RCEP is way bigger and more ambitious compared to the AFTA, with the ASEAN countries, Japan, South Korea, China, Australia, and New Zealand being members of the RCEP. Even though the RCEP includes China, it also includes other more developed economies such as Japan, South Korea, Australia, and New Zealand. As such, under the umbrella of the RCEP, Indonesia can increase its exports to these countries as the tariff and non-tariff barriers have been dropped significantly. Furthermore, Indonesia can also attract more high technology investment from Japan, New Zealand, Australia, and South Korea as the RCEP provides the framework for a more “enabling investment environment in the region.” This step is also necessary to lessen Indonesia’s dependence on Chinese investment.

Finally, it is vital that the government reduce its dependence on Chinese investment by looking for other sources of investment, such as Indian, Russian, Saudi Arabian. Emirati, Qatari, or even Turkish investments, as well as looking for opportunities in the G7-made Build Back Better World Initiative and also investment opportunities under the umbrella of the Quadrilateral Security Dialogue. However, one could argue that gaining investment from the West is quite difficult as Indonesia must fulfil certain anti-corruption, human rights, and environmental standards. Still, these standards are worthy goals to pursue as stringent anti-corruption, human rights, and environmental standards will benefit the Indonesian people, especially those living near the construction site, in the long run. In addition, to ensure that the investment generates a reasonable return to make the project seem attractive to Western investors, Indonesia must do well to assess the usefulness and the projection of the benefit that the project will bring. Infrastructure project mishaps, such as the Kertajati International Airport in West Java, must be averted and white elephant infrastructure projects must be avoided.

               To conclude, while Indonesia and China hailed its achievement in diplomatic relation, one must also see the growing signs of Indonesian economic dependence on China. This is a big problem as China continues to use its economic relationship with other countries as a political economic weapon to achieve Chinese goals, often at the expense of its partner. Thus, it is important for Indonesia to be able to withstand this coercion by diversifying its economic relations. The solution that can be implemented by Indonesia includes restricting the export of raw materials, utilizing the ASEAN Free Trade Area, and taking advantage of the RCEP. The solutions offered are by no means exhaustive. However, it provides several ideas into what Indonesia can do to lessen its economic dependence on China so that Indonesia can remain independent in upholding its national security, sovereignty, and territorial integrity.





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High import tariffs lead to baby formula shortage in US: Report | World News

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With only four major manufacturers of formula in the United States today-Mead Johnson, Abbott, Nestle, and Perrigo, some 40 percent of the nation`s baby formula has been out of stock recently, causing new mothers to hunt from store to store to feed their infants. “One reason the market is so concentrated is tariffs up to 17.5 percent on imports, which protect domestic producers from foreign competition,” said The Wall Street Journal last week, citing the Donald Trump administration`s efforts to protect domestic formula producers by imposing quotas and tariffs on Canadian imports in the United States-Mexico-Canada Agreement trade deal.

“America`s baby-formula shortage illustrates how bigger government can make big business bigger, thereby limiting competition and choice,” said the newspaper, noting that this is especially worth noting as Democrats push to expand entitlements and government control over the private economy.

It also illustrates that global trade has its uses, and there are costs to the faddish drive to produce everything in the United States, according to the report. “Members of both parties in Congress want to subsidize domestic production, but this can create its own supply-chain vulnerabilities,” said the report, adding that “globalization nowadays may be a dirty word, but having diverse suppliers is an economic strength.”

 

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India will provide 25% of global workforce and contribute 15% of world GDP by 2047: Scindia

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Union Minister Jyotiraditya Scindia has said that India has to focus on “building capability, capability and capability” as the country is on the road to providing “25 per cent of the total global workforce and contributing 15 per cent of global gross domestic product by 2047”.

“India has shown that the Indian way of globalisation will show the path for globalisation that will be balanced, decentralised, symmetrical and pivoted on territorial integrity,” Scindia said at the India Ideas Conclave here on Saturday.

Speaking on India @2047 at the conclave organised by India Foundation, the minister said if democracy was prospering in different parts of the world, “some level of the credit should come to India”.

According to Scindia, there are eight pillars for the India model, which “had shed the socialist straitjacket and myopic ideas and replaced them with Atmanirbhar Bharat”.

The BJP-led government has been transforming the country by empowering the people through direct benefit transfer, the minister said. Scindia said that in the past eight years, $200 billion was distributed among 950 million people—$86 per person, adding that central schemes would benefit every citizen and the per capita income would rise above Rs 4 lakh by 2047. This was Rs 53, 000 in 2010-11.

According to the minister, the second pillar is infrastructure development focusing on the streamlining of logistics for urban areas and on last-mile connectivity for rural areas. Technology will be the third pillar. “Technology today is all pervasive—India has moved a long way in it. The amount of digital transactions happening in India is equal to the GDP of 21 countries,” he said. India’s power is that it has a billion people with their biometrics digitised and there are a billion bank accounts, he said.

According to Scindia, the fourth pillar will be the “paradigm shift” in the GDP position. With production-linked incentive schemes in place in sectors like telecom, semiconductor and drones, 35 per cent of India’s GDP will be from manufacturing, 10 per cent from the agrarian sector and 55 from the service sector, he said, adding that the transformation of the tier-two cities into tier-one cities would further strengthen the economy. The minister listed the rise of the urban economy as the fifth pillar.

Scindia said demographic power would be the sixth pillar and India would provide 25 per cent of the global workforce. While diplomacy and diaspora, which Union minister said Prime Minister Narendra Modi had reinvented to India’s advantage, will be the seventh pillar and India’s global standing will be the eighth one. “The geopolitical climate is incrementally favourable to India, thanks to our foreign policy,” he said.





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NatWest’s Sir Howard Davies: ‘I’m quite pessimistic. Brexit was a significant mistake’ | Banking

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Sir Howard Davies is a worried man. He is worried about political polarisation. He is worried about the long-term impact of Brexit on the City of London. And he is worried by the pushback against globalisation.

One thing he is not especially worried about is the health of the bank he chairs, NatWest, which in its former guise as Royal Bank of Scotland was on the edge of collapse during the global financial crisis of 2008.

Davies has been chair of NatWest for seven years and the turning point in the bank’s fortunes, he says, was paying a $4.9bn (£3.6bn) fine to the US authorities in 2018 for its role in the sub-prime mortgage crisis. Until that point, NatWest had been “scrambling behind the sofa” to find capital, but now it is in better financial shape than many comparable European banks and has been able to expand. It has, he says, been “a game of two halves”.

The footballing metaphor is telling because Davies has another concern. As a lifelong Manchester City fan, he fears his side will be pipped to the Premier League title by Liverpool in Sunday’s last round of matches. To mitigate the


CV

Age 71

Family Married to a lapsed journalist. Two sons, one left, one right.

Education Bowker Vale primary; Manchester grammar school; Memorial University of Newfoundland; Merton College, Oxford; Stanford business school.

Pay “The usual answers are ‘enough’ or ‘no comment’, but £750,000 is published in NatWest’s accounts.”

Last holiday Cycling along a section of the Rhine path. “One day I will complete it.”

Best advice he’s been given “Always show you could do your boss’s job if required.”

Biggest career mistake “Agreeing to be director of the LSE. It ended in tears.”

Word he overuses “Guardiola, as in ‘we’ve got Guardiola’, sung to the tune of Glad All Over.”

How he relaxes Playing cricket, and listening to pianist Brad Mehldau: “Not usually at the same time.”


potential agony, he has staked £100 at 8-1 on Liverpool adding the title and the Champions League to the FA and Carabao cups they have already won.

It’s an “emotional hedge”, he admits, as he discusses a career spanning half a century in which he has worked at the Foreign Office, the Treasury and the Bank of England, and been Britain’s top financial regulator, director general of the CBI, a management consultant, and the head of the inquiry into UK airport capacity.

Asked which of his many jobs he has enjoyed the most, he picks none of the above but plumps for running the Audit Commission (subsequently scrapped by David Cameron’s government), which looked into whether local authorities were providing value for money.

“It was a riveting job. I found you could make significant improvements to local services, where the variations were absolutely enormous. It was really interesting and rewarding, and you could actually see you were making a difference.”

Far less enjoyable was the end of Davies’s stint as director of the London School of Economics after concerns were raised about the school’s decision to accept funding from a foundation controlled by the son of Muammar Gaddafi.

Davies says he never asked for money himself and thought there was something not quite right about the arrangement, but accepts that he should have spotted the potential for trouble. “There is no doubt I made a mistake. I should have stopped it and I didn’t.”

His latest project is a book – The Chancellors, published by Polity Press – about the Treasury’s role in the running of the economy under every chancellor from Gordon Brown to Rishi Sunak.

Davies was made head of the Financial Services Authority by Brown when supervision was hived off from the newly independent Bank of England in 1997, and he later faced criticism for failing to clamp down heavily enough on the City during the buildup to the crash of 2008. “At the time, people moaned about financial regulation being too tight and that I was judge and jury in my own court,” he says. “I was accused of being an overmighty regulator who was getting in the way of ‘animal spirits’. There was never any criticism in the other direction.”

Asked which of the recent chancellors he has most time for, Davies picks Alistair Darling, whose three years at the Treasury between 2007 and 2010 were dominated by the banking crash.

“Alistair had terrible hand to play. He had no money, a financial crisis and his predecessor as his boss. There wasn’t anything Alistair knew that Gordon didn’t. Yet he was completely unflappable.”

When he started writing the book, Davies was convinced he would conclude that the Treasury should be broken up into separate finance and economic departments, the model preferred by most other European countries. He has since changed his mind. “A bit of check and balance in our system is a very good idea,” he says. “If we divided responsibilities and had a department of economic affairs and a ministry for the budget, they would separately be less powerful than the Treasury is together and that would give No 10 free rein. That would be a mistake.

“This prime minister hated the Treasury partly because of its pro-EU views, or perceived pro-EU views, and role in the referendum. But when he got himself in a hole, who else but the Treasury could bail him out?”

If Davies is upbeat about the prospects for NatWest, he is less positive about what the future has in store for the UK. “I am quite pessimistic actually. Brexit was a significant mistake. You don’t solve the problems of the left-behind by damaging the one area of the country that’s been writing the cheques. London is paying large amounts of tax and will be damaged by Brexit over time.

“I worry about political polarisation. The same thing is happening in France [Davies teaches in Paris] and in the US. It is possibly less bad here than in the US or France, but I sense a kind of bitterness in public life which doesn’t create a good environment for rational solutions to problems.”

Davies says that when he first came to London from Manchester in the 1970s the capital was “gloomy” and “monochrome”, yet subsequently became a vibrant, multi-racial city. He fears the pendulum could now be swinging in the other direction. “China is separating from the US and there is this war [in Ukraine]. London has been the beneficiary of globalisation and if it goes into reverse, maybe the global city is past its peak.”



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