COVID-19 and Its Potential Impact on Indonesia-China Trade
The world is in turmoil due to the emergence of the novel coronavirus, also known as COVID-19. The virus first broke out in the People’s Republic of China (PRC), specifically in the city of Wuhan, Hubei province, at the start of the year just as the Chinese Lunar New Year was about to begin. As of this writing, the WHO reports 88,948 confirmed cases worldwide, of which 80,174 are in the PRC (see this for real-time statistics). The entire world faces high risk from COVID-19, including Indonesia.
COVID-19’s impact on the Indonesian economy
COVID-19 has forced the government to lock down several major cities that also serve as industrial hubs. People have had extended holidays, and many factories have had to temporarily close. The problem is that the PRC is an enormous and critically important country for the global economy, especially in terms of supply chains. Whatever happens to the PRC becomes everyone’s problem.
Wuhan is known as “Motor City”, home to factories of General Motors, Honda, Nissan, Peugeot Group, and Renault. Apple had to delay production of their latest iPhone because many parts are made in China. 80% of the world’s tin foil (the stuff inside cigarette packs or the golden wrapping on chocolate) comes from the PRC. The PRC is also a major supplier of pharmaceutical ingredients, and the FDA (the US equivalent of BPOM) has stated that coronavirus could disrupt drug and antibiotic supplies in the United States.
COVID-19’s impact has also been strongly felt in ASEAN, including Indonesia. The impact on tourism has already been widely discussed. The PRC is Indonesia’s number 1 trading partner, supplying about 24% of Indonesia’s total imports. In this blog, I will discuss further the direct impact on fulfilling Indonesian needs sourced from PRC imports.
Table 1 shows the top 15 import categories by HS Code 2-digit from the PRC. These fifteen categories represent 75% of total imports from the PRC, or 10% of Indonesia’s total imports from the entire world.
Table 1. Top 15 Indonesian imports from the PRC (2016-2018)
| HS | Product | Value (USD) | Share of total imports (%) | ||||
|---|---|---|---|---|---|---|---|
| 2016 | 2017 | 2018 | 2016 | 2017 | 2018 | ||
| 85 | Electrical machinery etc. | 6,402,698 | 7,869,419 | 10,061,357 | 41.49% | 43.88% | 46.91% |
| 84 | Machinery, parts etc. | 7,297,754 | 7,568,603 | 9,862,750 | 34.63% | 34.77% | 36.26% |
| 72 | Iron & steel | 2,099,248 | 1,969,594 | 2,169,071 | 33.97% | 24.67% | 21.17% |
| 39 | Plastics etc. | 1,157,847 | 1,354,452 | 1,749,920 | 16.54% | 17.52% | 19.00% |
| 29 | Organic chemicals | 1,088,642 | 1,250,802 | 1,540,740 | 22.72% | 21.21% | 22.25% |
| 73 | Articles of iron and steel | 819,808 | 702,805 | 1,499,319 | 27.96% | 26.75% | 38.57% |
| 07 | Edible vegetables | 511,293 | 606,252 | 526,879 | 73.47% | 73.87% | 71.36% |
| 54 | Man-made filaments | 685,937 | 807,116 | 965,376 | 48.57% | 52.89% | 55.32% |
| 76 | Aluminium and articles etc. | 389,105 | 597,834 | 881,213 | 27.40% | 31.89% | 40.56% |
| 28 | Inorganic chemicals | 554,205 | 627,526 | 833,354 | 36.93% | 38.79% | 40.52% |
| 08 | Edible fruit and nuts | 341,864 | 564,379 | 741,351 | 40.31% | 47.36% | 56.55% |
| 94 | Furniture | 456,621 | 561,263 | 707,565 | 62.97% | 63.80% | 68.57% |
| 55 | Manmade staple fibres | 499,247 | 564,028 | 667,428 | 37.66% | 41.91% | 44.93% |
| 38 | Miscellaneous chemical products | 450,683 | 572,947 | 635,029 | 23.58% | 26.08% | 23.78% |
| 90 | Medical or surgical instruments | 382,860 | 517,446 | 598,079 | 16.27% | 20.01% | 20.73% |
| 60 | Knitted or crocheted fabrics | 430,825 | 499,053 | 592,504 | 32.40% | 37.33% | 38.17% |
| 95 | Toys, games and sports requisites | 139,003 | 217,808 | 322,842 | 66.19% | 68.76% | 75.30% |
As shown in Table 1, many goods we import from the PRC are intermediate goods – raw materials and machinery. These include machines, iron and steel, plastics, and textile raw materials (fiber and yarn). We also import chemicals used as raw materials for various products such as medicine, food, and fertilizer. The PRC supplies about 30-50% of these goods, suggesting a significant impact on our production systems, though perhaps not as severe as for some other countries.
The product most likely to have a direct impact on the public is HS 07. The PRC supplies 71% of total imports in this category. Within HS 07, 93% is garlic. In other words, if something happens to the PRC, garlic supply will become scarce and very expensive. Additionally, imported children’s toys (75% from the PRC) will also be disrupted. While toys may not be as essential as garlic, Indonesian children may need to start loving domestic products.
This analysis doesn’t account for cascade effects, as it only shows direct imports from the PRC. If imports from other countries whose inputs come from the PRC are included, supply to Indonesia will automatically be disrupted. Hi-tech products like iPhones and other electronics very likely contain significant PRC components. Supply chains of Indonesia’s important trading partners like Japan, the United States, and South Korea are also closely linked with the PRC. Imports from these countries will likely be disrupted too.
Government steps to mitigate coronavirus impact
COVID-19’s impact on tourism has been immediate, probably because tourism is one of our few successful exports. The government reportedly has prepared IDR 47 trillion in incentives for tourism, including support for the aviation, hospitality, and influencer industries. However, there don’t appear to be any non-tourism measures planned beyond accelerating state and regional budget realization, which should be done quickly regardless of coronavirus.
Indonesia is indeed a country that trades relatively little, at only 60% of GDP. We’re often criticized for not joining the Global Value Chain trend like other countries. The upside is that when something happens to another country, the impact on us is smaller because our economy isn’t as deeply linked with others. In the world of international trade, Indonesia is something of an introvert. Being introverted has its advantages, it seems.
However, the impact on non-tourism sectors is, I believe, just a matter of time. The IHSG (stock market index) has reportedly declined due to coronavirus, with PT. ASTRA International as the main drag. Indonesia has also reported its first COVID-19 cases, which could have direct impacts on other sectors. And this doesn’t yet include psychological effects that could cause panic buying, which also needs to be anticipated. This means the government may need to start thinking about other solutions.
Some policies already implemented by the PRC include lowering lending rates and approving local governments to stimulate the real economy. PRC companies have been issuing coronavirus bonds to maintain cash flow. The PRC is also expected to further ease fiscal and monetary policy to stimulate business.
Currently, besides fiscal stimulus for tourism, Indonesia through Bank Indonesia has cut interest rates to 4.75%. However, the government has not yet seen the need for further fiscal and monetary easing. Perhaps because the non-tourism impact in Indonesia hasn’t been too large yet. I remain somewhat worried about raw material supply for industry, but especially about garlic supply for the people. Hopefully the Government can find a solution before it’s too late.
