The heterogenous impact of tariff and NTM on total factor productivity of Indonesian firms

Indonesian government has been working hard in engaging with the world market as average tariff keeps on decreasing. However, it seems to follow the global trend, that is, relying on Non-Tariff Measures (NTM) to regulate its market instead to protect its industries. This paper inspects whether these measures are actually hurt firms by limiting their access to better quality and cheaper foreign inputs. This paper builds from Amiti and Konings (2007), inspecting the impact of trade policy shocks to firm’s Total Factor Productivity (TFP). This study finds that tariff and NTMs are hurting firms TFP significantly and causing less employment. The impact is less severe for bigger firms, confirming heterogenous effect of trade policy. The result suggests unintended consequences of protectionism in Indonesian market. Moreover, as the country is looking to boost foreign investment, more protectionism may be regulated to keep markup in the domestic market high as an incentive for foreign investors.