The US-China Trade War: What does it Means for Indonesia?

Admin   |    13 December 2018

Tensions have been rising between the U.S and China ever since President Trump came into office almost 2 years ago. In the last 6 months threats between the two countries have escalated, with each side imposing tariffs on the other which are now coming into effect. Earlier in September, the Trump administration applied a 10% tariffs on 5,745 Chinese imports worth about $200 billion a year - focusing on a broad array of industries. China then retaliated by collecting taxes of 5 to 10 % on 5,207 American goods worth about $60 billion a year. In total so far, the US has imposed tariffs on $250 billion worth of Chinese exports, and has threatened a further $267 billion. China has set tariffs on $110 billion worth of US goods, and is threatening measures that would hurt US businesses operating in China, as well as qualitatively discouraging Chinese consumers from buying US branded goods as they did with Korea over the THAAD missile system installation (Chinese stoped buying Korean cosmetics and Automobiles in national protest) . While they had initially called a truce during the G20 summit in Argentina, the arrest of Huawei’s CFO on fraud charges greatly angered the Chinese public and the situation seemingly continues to be getting worse.

Despite the obviously negative implications this will have for global sentiment, the current climate of uncertainty presents a number of  longer  term opportunities for other countries looking to boost exports at China’s expense. Many global manufacturers are likely to relocate their production facilities away from China, which is likely to benefit ASEAN countries, and especially Indonesia. Recently Pegatron, Apple’s second largest component assembler, announced it would move some of its production facilities away from China and into Indonesia. Pegatron is preparing to shift production of non-iPhone products hit by U.S. tariffs on Chinese exports to a rented factory on Indonesia's Batam Island within the next six months. According to sources from Nikkei Asian Review, the products – which include set-top boxes and other smart devices – accounted for around $1 billion in annual revenue. Investment would start within the month, with full production expected by the middle of 2019. Pegatron's move highlights the growing pressure on many manufacturers who have expanded in China in recent years and now find themselves squeezed by trade tensions, the country's rising wages, as well as labour shortages.

This move is incredibly rare for Pegatron, since compared to other Taiwanese peers such as Foxconn Technology Group, Wistron, Inventec and Compal Electronics – which all have had facilities in Southeast Asia for years – the manufacturer has been reluctant to invest in manufacturing capacity outside of China. Batam was chosen for its strategic location as part of the free-trade zone in the Indonesia-Malaysia-Singapore Growth Triangle. Pegatron’s move to Batam will also help Indonesia’s growing economy as it will provide job opportunities for approximately 8,000 to 10,000 workers.

According to BCA’s Chief Economist David Sumual, the government should take advantage of the growing trade war to boost dollar income to help strengthen the Indonesian currency which has been struggling to regain its footing after its initial drop earlier this year. Specifically, he explained that the government should take advantage of the trade war by simplifying  the process of investing into Indonesia. As we have explained in other articles, there is certainly evidence the government is taking heed.

“There is a window of opportunity where we must improve the ease of doing business in Indonesia. Easing the approvals of licenses and land acquisition, are among the key issues, as well as the consistency of our regional policies, and how to invite FDI (Foreign Direct Investment) that is export oriented," he said to detikFinance on Thursday (12/06/2018).

In line with that sentiment, President Joko Widodo (Jokowi) has also urged Indonesian business owners to take advantage of the trade war between the United States and China. He expressed this during the opening  speech of “the Kompas” CEO Forum event at JCC Senayan, South Jakarta, Tuesday (11/27/2018).

"How do we as CEOs respond to a global situation such as this? the first thing is to not forget nor be afraid, we must remain optimistic and opportunistic. There are always opportunities in trouble, usually (for) CEOs with foresight," Jokowi said.

So while the current situation isn’t ideal for global trade sentiment, the longer term implications for ASEAN countries, particularly Indonesia, are very encouraging. Foreign Capital inflows into Indonesia through FDI into sectors like Electronics goods manufacturing, textiles and many other industries that China has flourished in over the last few decades are likely to increase. We have a number of assets for sale at that will benefit from this theme, in our view.