Indonesia's Trade Policy Amid COVID-19

April 15, 2020 · 8 min read
post Industry

Today I saw on Twitter some concern over a Kompas article. The article reported that Indonesia would continue exporting Personal Protective Equipment (PPE). The context is, of course, COVID-19: amid a pandemic, Indonesia itself needs a lot of PPE. How can we be exporting to other countries?

Why export bans aren’t as simple as they sound

The policy of banning exports sounds very intuitive: if we need it ourselves, why export? We should fulfill domestic needs first before exporting. We’re not the only country doing this either. The United States (US) once forced 3M, the well-known mask manufacturer, to ban mask exports. The EU did the same, banning exports of COVID-19-related goods.

Indonesia enacted its export ban through Ministry of Trade Regulation No. 31/2020. I wrote about it in another blog post. But that post probably still referenced the earlier restriction. The export ban has now been expanded to include thermometers and ethyl alcohol.

Of course, the intentions are good. I too am saddened seeing healthcare workers struggling for PPE. Whatever I write here doesn’t change the fact that the export ban has already been enacted, and some PPE exports were still cleared by Customs despite the ban. (Note: Customs falls under the Ministry of Finance, not the Ministry of Trade). This post offers some perspective on why the Finance Minister decided to continue exporting some PPE.

According to the article, the main reason is that the PPE orders were already bound by purchase contracts. Honoring contracts is obviously important. These contracts may have been made before the regulation was issued. They could also represent a small share of total PPE exports.

It’s also possible that our exporters are contract manufacturers (makloon) – basically selling sewing services. In contract manufacturing, the materials come from the buyer. They send materials to the seamstress, provide specifications, we sew it, then ship it back. We’re paid only for the sewing service, since the materials are theirs. Yes, this is exactly what happens when you get a blazer tailored or wedding outfits sewn. If the tailor suddenly says “oh, I’ll keep these clothes for myself – I’m getting married too, so I need them,” you’d be pretty annoyed.

But the two paragraphs above are speculation. I could be wrong. Please correct me. Those two paragraphs illustrate why some PPE exports continue.

Additional context: here’s a more complete answer about PPE exports from my friend Fathoni. Thank you, Mas Fathoni.

Additional update: confirmed that the PPE exports are indeed contract manufacturing (i.e., raw materials are imported). Check this article.

But beyond that, export bans in general do have their own potential problems.

General problems with export bans

In the 3M vs US case, the US ultimately agreed to let 3M continue exporting. The EU received much criticism for its export ban (including from PIIE (btw that PIIE article is great – lots of data)), until it eventually softened and relaxed its ban. There are many reasons. One is humanitarian. Right now, the whole world needs these goods, not just the US or EU. 3M said it wanted to continue helping countries in need, like those in Latin America and elsewhere.

The next problem is supply chain. Making proper, standards-compliant, quality PPE requires non-trivial raw materials. I don’t know the details, but according to this article, at least for masks, the raw materials are quite specialized. Of course we could substitute with cloth, but how could we let healthcare workers on the front lines use masks and PPE that aren’t medical grade?

Yes, while we’re skilled at sewing PPE and making ethanol, we’re not strong in other areas. We import about 80% of our masks from the PRC. Surgical gowns too – over 50% are imported from the PRC. And we haven’t even discussed other items like PPE raw materials, COVID-19 testing kits, and ventilators. Countries like South Korea, Japan, and the PRC continue to supply Indonesia with various essential goods. What happens if they refuse to export to us because we won’t help them make PPE? What if they too run short of PPE and can’t scale up production to help us?

In fact, the Ministry of Trade issued another regulation facilitating imports of these goods. Again, intuitively, import facilitation is good. But this depends entirely on our trading partners’ reactions. And we haven’t even discussed food imports. Currently, the only facilitated food imports are garlic and onions. Rice? Salt? Sugar?

Imports mean foreign exchange. If we need imports, we need foreign exchange to pay for them. Currently, BI and the Ministry of Finance are working to secure dollar reserves. BI still has decent reserves thanks to tight financial sector controls. The Ministry of Finance has started selling USD-denominated bonds. We already have a currency swap arrangement with the US Fed. But in times like these, the question “are our reserves sufficient?” will always haunt policymakers. Exports help Indonesia maintain dollar reserves and manage the rupiah exchange rate.

At the very bottom, I’ve tried to compile COVID-19-related goods based on WCO and GTA classifications. I’ve added columns showing Indonesia’s export-import policies, as well as export-import values from 2015-2019. You can see there that while we’re in surplus for PPE and ethyl alcohol, we’re heavily import-dependent for everything else.

We need the world just as the world needs us. One country recovering is pointless if other countries are still sick, at least until a vaccine arrives. Even when a vaccine is developed, we’ll most likely import it. Hopefully the producing country won’t ban its export.

This is truly a difficult choice. Very difficult. In tough times, saving yourself becomes an unavoidable option and solution.

I personally subscribe to the view that “if the problem isn’t trade, it shouldn’t be solved with trade policy.” If the problem is production, increase production. If the problem is healthcare facilities and workers, improve them. If the problem is distribution/logistics, improve logistics. Trade policy is difficult to use as the primary solution because trade policy can create new problems no less important to address.

The shortage of healthcare facilities and workers is a long-standing problem haunting Indonesia. It has appeared repeatedly in WHO publications and stories from colleagues specializing in health economics. Logistics also seems problematic. It’s hard to know precisely who produces what, which hospital needs how much of what, etc. Government data accuracy is often questioned. The demand-supply gap certainly increases incentives for hoarding.

The PRC has been dealing with this pandemic since early January. We had enough time to react, in theory. Now it’s too late. Difficult decisions must be made. Decisions made too late are always the hardest. Prevention is always better than cure.

So what should be done?

It’s no longer relevant to talk about prevention. How to cure, other than export bans?

Perhaps the best approach is to boost production. Right now, the main problem is excess demand – a gap between production and consumption. Usually, we bridge this gap through international trade: export surplus production and import shortfalls. But due to the global pandemic, the whole world is short. As a result, we can’t rely on other countries’ surplus – everyone is running short.

This is where production increase becomes the best solution. If everyone is short, let’s make more. Many countries are doing this by redirecting production at many factories: perfume factories making disinfectants, paint factories making masks, etc. To do this, governments must provide the right incentives. Cheap loans, long-term purchasing guarantees (at least enough to recoup the cost of capacity expansion), and so on. I discussed this approach in another post.

If so many Indonesian seamstresses can mobilize on their own just from netizen coordination without any government incentives, imagine if it were all coordinated! It would be so much more efficient!

If the solution is insufficient production, then international trade becomes even more important. Until now, Global Value Chains (GVCs) have been the solution for many countries because they’re efficient. Countries good at making materials cooperate with countries good at sewing. Countries good at software and semiconductors cooperate with countries good at materials and assembly. Indonesia is good at making PPE, so let’s scale up our sewing capacity for the whole world, while importing inputs and other goods like testing kits and ventilators from other countries. We need even more trade, not less!!

International cooperation becomes key. We must start negotiating with other countries. At minimum, talk to other countries’ leaders. Say we need their help, and they need ours. Sounds utopian?

The cooperative solution may not appeal to those who dislike depending on others. I personally can’t say whether we should or shouldn’t export. Let the policymakers deal with that. Hehe. I’m just offering a bit of perspective from the Finance Minister’s point of view. I’m guessing what she might be thinking. Hopefully this post helps a little. If you have comments, criticism, or suggestions, write below or mention me on Twitter.

Sorry, doctors and nurses. All I can do is write. Hopefully you all stay healthy and motivated. Hopefully we all stay healthy and motivated. Don’t forget to do whatever you can to reduce the burden on healthcare facilities and workers.

Stay at home if you can. Make it safer for those who can’t.

Covid-19 Industry