Invigorating

The Indonesia-EU Partnership

Towards a ComprehensiveEconomic Partnership Agreement

Table of ContentsABBREVIATIONS 1FOREWORDBYTHECO-CHAIRS 3SUMMARYOFTHETERMSOFREFERENCEFORTHEVISIONGROUP 4CONCLUSIONSANDRECOMMENDATIONS 81. OurVision:InvigoratingTheIndonesia-EuEconomicPartnership 142. RationalesForAnAmbitiousNewEconomicPartnerships 153. TheStartingConditions:GeneralFeatures 184. ArchitectureOfTheCepa 205. MarketAccessInGoods 22

5.1. Tariffs 235.2. TechnicalBarrierstoTradeandNonTariffMeasures 235.3. SPS–SanitaryandPhyto-SanitaryMeasures 245.4. RulesofOrigin 255.5. Safeguardsmeasures 25

6. MarketAccessInServices 267. Investment 27

7.1. AttractfurtherEUFDItoIndonesia:Pre-Establishment/facilitation 287.2. Investmentprotectionpost-establishment 287.3. InvestmentPromotion 28

8. CooperationAndCapacityBuilding 299. PublicProcurement,InfrastructureAndPublicPrivatePartnership 3110. IntellectualPropertyRights:GeographicalIndicationsAndEnforcement 3311. CompetitionPolicy 3412. Sustainability:EnvironmentAsACompetitiveAdvantage 3513. Governance/DialogueStructure 3714. CommunicationStrategy 38

ANNEXES 41ANNEXI :PRODUCTS/SECTORSOFSPECIALIMPORTANCE 42ANNEX2 :POTENTIALGAINS/ECONOMICANALYSIS 44ANNEX3 :INDONESIA–EUDEEPENINGFRIENDSHIP 48

BACKGROUNDNOTESONSEVERALISSUES 54

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Abbreviations ACP Africa,CaribbeanandPacificcountriesASEAN AssociationofSouthEastAsianNationsBIT BilateralInvestmentTreatyCEPA ComprehensiveEconomicPartnershipAgreementDDA DohaDevelopmentAgreementECAP EUASEANProjectontheProtectionofIPREIB EuropeanInvestmentBankEIBD EUIndonesiaBusinessDialogueEPA EconomicPartnershipAgreementEQI ExportQualityInfrastructureFDI ForeignDirectInvestmentGATS GeneralAgreementonTradeinServicesGI GeographicalIndicationsGSP GeneralizedSystemofPreferencesIIGF IndonesianInfrastructureGuaranteeFundIPR IntellectualPropertyRightsMERCOSUR CommonMarketArgentina,Brazil,ParaguayandUruguayMFN MostFavoredNationNTMs NonTariffMeasuresPCA PartnershipandCooperationAgreementPPP PublicPrivatePartnershipREACH Registration,Evaluation,Authorization&RestrictionofChemicalsubstancesRoO RulesofOriginSPS SanitaryandPhytosanitarymeasuresSVLK SistemVerifikasiLegalitasKayu–IndonesiaTimberlegalitySystemTBT TechnicalBarrierstoTradeTRIPS TradeRelatedIntellectualPropertyRightsUNECE UnitedNationsEconomicCommissionforEurope

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FOREWORDBYTHECO-CHAIRS

ThehistoryoftherelationsbetweenEuropeandIndonesia

goesbackseveralcenturiesandhasbeencharacterizedby

complementaryaspectswherenaturalresourcesabundant

IndonesiaprovidedthebasicinputstoEuropeancountries

inexchangefortheircapitalandtechnology.

However, this stereotype of a North-South relation no

longerreflectstherealityofaworldwheredemographic

and economic growth has shifted to the East while the

mature economies of the West are pursuing slower

economic growth alongside bringing public finances

undercontrol.

Against this background, when the Indonesian President

Susilo Bambang Yudhoyono met with the European

Commission President José Manuel Barroso in December

2009theydiscussedwaysofenhancingbilateralties.The

twoPresidentsagreedthatthebilateraltradeandinvestment

relationshiphasgreatpotential,andontheneedtoexplore

ways to strengthen these links. They therefore tasked a

jointVisionGrouptoexaminehowtoincreasetradeand

investmentbetweenIndonesiaandtheEU.

ForsixmonthstheGroupworkedinatrulyjointfashion,

openlydiscussingalloftheissuesrelevanttotheIndonesia

-EU partnership including the potentially sensitive ones.

Theoutcomeofthesediscussionsisincludedinthisreport

and especially in the recommendations that have been

submittedtopoliticaldecisionmakers.

We believe that our joint Vision for invigorating the

Indonesia-EUpartnership,afterbeingadequatelydiscussed

with the main stakeholders in both regions, should be

promptlyfollowed-upbythepolicymakerstocontributeto

ensuringeconomicgrowthandbenefitstobothpartnersin

aglobalisedworld.

DjismanSimandjuntakandJacquesPelkmans

Co-chairsoftheVisionGrouptoenhancetradeandinvestmentbetweenIndonesiaandtheEuropeanUnion.

TOTHEREADER

IndonesianPresidentSusiloBambangYudhoyonoandEuropeanCommissionPresidentJoséManuelBarrosoagreedinlate2009toexaminehowcommercialrelationsbetweentheEUandIndonesiacouldbedeepened.Tocarryforwardtheirdecision,theytaskedaVisionGroupofeminentpersonsfrombothIndonesiaandtheEUtoproducerecommendationsonhowtotakerelationstothenextlevel.ThisistheVisionGroup’sfinalreporttothetwoPresidents.Itservesasabasisforpublicconsultationandfordefiningparametersforpossiblefuturenegotiations.

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SUMMARYOFTHETERMSOFREFERENCEFORTHEVISIONGROUP

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President Susilo Bambang Yudhoyono met EuropeanCommission President José Manuel Barroso in December2009discussingwaysofenhancingbilateraltiesbetweenIndonesiaandtheEuropeanUnion:Thetwoleadersdecidedto setupa “VisionGroup” to examinehow to increasetradeandinvestmentbetweenthetwopartners.ThisGroupconsistsofeminentpersonsincludinggovernmentofficials,

businessandacademia.

TheSpecificObjectivesoftheVisionGroupare:

• ToprovideastrategicviewofEU-Indonesiatradeandinvestment relations and identify on what basis EU-Indonesiatradeandinvestmentrelationshipcanbestbeenhancedinaninnovativeway.

• To identify opportunities for fostering trade andinvestmentbetweenEUandIndonesia,bearinginmindthe market characteristics and potential, evolution ofbilateralflowsandthechallengesforrealisationofthispotential

• Inthiscontext,toexplorethefeasibilityofanEconomicPartnership Agreement and Free Trade Area betweentheEUandIndonesia.

• To provide recommendations to the Government ofIndonesia,theEU,businesscommunity,andacademia

onhowtorealizethistradeandinvestmentpotential

MeMbers IndonesIa

• Indonesian Government: Muchtar (Head of R&DDepartment of Ministry of Trade); Agus TjahajanaWirakusumah (Secretary General of Ministry ofIndustry);MartaniHusseini,(DGMinistryofFisheries);AchmadKurniadi(ViceChair,InvestmentCoordinationBoard BKPM); Zaenal Bachruddin (DG, Ministry ofAgriculture)

• Business: Chris Kanter (Vice Chair APINDO) andMaxi Gunawan (Head of Permanent Committee forInternationalInstitutionalCooperationKadin)

• Academic: Djisman Simandjuntak (Executive Directorof Prasetya Mulya Business School); Denni PuspaPurbasari (Economist – Gajah Mada University);AriantoA.Patunru(HeadoftheInstituteofEconomicManagementofUniversityofIndonesia)

MeMbers eU

• Government:LucianCernat(EuropeanCommission/DGTrade Chief Economist); Julian Wilson (Ambassador/HeadofDelegationEUDelegationinJakarta);LaurentLourdais (European Commission DG AGRI); TadasBriedis(EuropeanCommisisonDGSANCO).

• Business: Erik Versavel (MD of ING CommercialBanking);PascalKerneis (BusinessEurope)andJakobSorensen(MaerskandchairofEuroCham)

• Academic:Prof.JacquesPelkman(CEPSandCollegeofEurope)

Project GroUP jakarta

TheProjectGroupprovidedtechnicalandlogisticalsupportand comprised of Raffaele Quarto from DG Trade inBrussels;WaltervanHattum,AsaLarssonandLiisElmikfrom the EU Delegation; Ibu Pradnya, Devy PanggabeanandNirwansyahfromtheMinistryofTradeandTerryLacey

andRaffaeloTarroniassupportingexpertconsultants.

The Vision Group presented its Recommendations toIndonesia’sMinisterofTradeMariPangestuandEuropeanCommissioner for Trade Karel de Gucht in Jakarta on4May2011.

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CONCLUSIONSAND RECOMMENDATIONS

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CONCLUSIONS

1. RelationsbetweenIndonesiaandtheEUaregenerallygoodandeconomicrelationshealthy.Nevertheless,thestatusquoisunsatisfactory,leadstounderperformanceand evermoremissedopportunities forbothpartnersinthelongerrun.Partnerscanprofitablybuildontherecent deepening in their relations expressed in thePartnershipandCooperationAgreement.

2. However, as a strategic response to the dynamismof world business and active bilateral and regionaleconomic diplomacy, an incremental approach willsimply not do. Serving the long-run goals of openeconomicdevelopmentandsustainablegrowthforthetwopartnersrequiresadecisivenewinitiative.

3. OurVision is that the Indonesia-EU partnership hasto be invigorated, in the pursuit of the objectives ofeconomicgrowth,jobcreationandpovertyreduction.

4. Going for deeper economic relations between the EUand Indonesia, andwith awider scope, is the logicalsequel of the steady stream of Indonesia’s political,institutional and economic reforms. It is also most

desirable for Indonesia achieving a sustainable high-growth path via much greater participation in globalvalue-chains,with localizedbenefits forsuppliersandthe economy at large. It is equally a logical follow-upto theEU’s tradepolicysince2006,seeking ‘deep’and ambitious economic partnerships with countriesor regions having significant potential. The EU isrediscoveringthenewIndonesiawithitslargepotentialintermsofsize,currentandexpectedgrowthrates,theongoingshifttowardsmanufacturingexports,emergingservices,increasingopenness(especiallyvis-à-visAsianpartners)andmacro-economicstability.ForIndonesia,itisastrategicprioritytoinvigorate itseconomicrelationswiththeEUasitssecondlargestexportdestinationandthe largest investor in thecountry.For Indonesia, theEUispromisingasthebiggesteconomyintheworld,intermsofGDP,tradeingoodsandservices,aswellasincomingandoutgoingstocksofFDI.

5. It is critical – especially for Indonesian decision-makers and stakeholders - to appreciate fully thata deep and invigorated economic relationship withthe EU is not costly in the short-run. Quite thecontrary, it will generate major economic benefits,quicklyincreasingovertimewiththeshifttohigher-valueaddedgoodsandincomingdirectinvestments.Indonesia and the EU are strongly complementaryeconomies, which means that direct competitiverivalry in markets, where Indonesian domesticfirms are active, will be rare or absent. Althoughadjustmentsintermoflessergrowthorrestructuringmight occur in the short run in a few product-markets,mostadjustmentswillconsistofupgradingand internationalising,withbetter quality ornewerproduct,hence,withhighlypositive results.TheEUexports very different products to Indonesia thanIndonesia to Europe. Indeed, in some sectors, thiscomplementarity will be directly helpful to expandIndonesian exports based on components from EUcompanies and this is likely tobebolsteredbyEUinvestments building on Indonesian comparativeadvantagesintheregionaswellasvis-à-visEurope.Under this a new initiative, complementarity will

CONCLUSIONSAND RECOMMENDATIONS

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11.Forthemarketsingoods,theVisionGrouprecommendsa move to zero tariff for 95% of tariff lines withat least 95% of trade value covered in a period ofmaximum9years.Thetimepathoughttoreflectfullythe different levels of development of the partners:theEUwouldhaveahigherinitialcommitmentandafasterdismantlingperiod.Abest-endeavourclauseonthe remaining 5% permits further progress in future.Safeguards and/or provisions on sensitive sectorsmay be incorporated. At the same time, credibilityand ambition would be negatively affected if suchprovisionsandtheirapplicationwouldnotremaintrulyexceptionalandsubjecttoobjectivecriteria.

12.Market access for goods also depends critically onovercomingoravoidingsanitary(SPS)andtechnicalstandards (TBT) issues and sometimes other nontariffmeasures(NTM)suchasonerousadministrativerequirements and excessive licensing. Thesequestionsshould first of all be addressed on the basis of theWTO SPS and TBT Agreements, adhered to by bothIndonesiaandtheEU.Whereexistingprovisionswouldstill be WTO inconsistent, the CEPA could be a firstrecourse to overcome it. On SPS and TBT questions,thethreeelementsoftheCEPAshouldberegardedascomplementary,inparticularcapacitybuilding.

13.For the purpose of the CEPA, capacity building isdefined as comprising three interactive levels: (i)permanent dialogues, both business to business andbusiness to government; (ii) technical dialogues andcommitments, illustrated by proven examples intimber, fisheries and civil aviation; and (iii) financialcooperation to support tangible outcomes followingsuggestions from technical committees of the JointAgreement. Under a CEPA, capacity building shouldgo beyond the already existing, substantial efforts ina range of sectors. It is critical for effectiveness thatcapacitybuildingisnotmerelyoutputoriented(thatisforexample,thatagreedeffortsactuallybeingundertakentomeetspecificobjectives),butoutcomeoriented(forexample, thet thecapacity tocomplywithEUhealth,safety and environmental requirements is sufficientlyimprovedforexportstoreachtheEUmarket).Capacitybuilding efforts should therefore be measurable, andcarefully targeted sectorally, for exampleon forSPSorTBTstandardsandsubsequentresultsandregularlymonitoredintheIndonesia–EUdialogues.

14.Combining facilitation and capacity building, it isworth studying or otherwise considering how amore

oftenbeaccentuatedbythecombinationoftradeandEUdirectinvestments.

6. As a guiding principle, due consideration should begiven to the different levels of development of thetwo partners. A deeper and wider partnership shouldtherefore allow for flexibility. Another horizontal andcrucialissueconsistsofsustainabilityandenvironment.Sustainability can, indeed should, be turned from anoftennegativeperceivedimpositionintoapromisingandprofitableopportunity.Thisistruebothforexportsanddirectinvestments.Forexample,exportsofsustainablyproduced timber and palm oil present enormousopportunities for Indonesia. Moreover, the greater theeffortsat sustainability, thegreater thebenefits forEUinvestorsandIndonesia.

7. It is also critical to involve stakeholders in thediscussionsonthenewpartnershippossibilitiesatanearlystage.

RECOMMENDATIONS

8. The Vision Group recommends the conclusion of anambitiousbilateralagreementbetweenIndonesiaandtheEU.

9. ThisComprehensiveEconomicPartnershipAgreement(CEPA) should be based on a free trade area as thefoundation in WTO terms, and have a triangulararchitecture: market access, capacity building andfacilitationoftradeandinvestment.TheambitionoftheCEPAwouldbepresent inall threeelements. It isthecomplementarityandinteraction,alsoovertime,ofthesethreeelementswhichwillengenderthedesirabledevelopment impact for Indonesia via higher-value-addedexportsand,atthesametime,turnIndonesiaintoamoreattractivemarketforEUgoodsandservicesaswellasapromisinginvestmentlocation.

10.Intermsofmarketaccess,itwouldconsistofadeepFTA. Thiswould imply access liberalisation in goods,services and direct investment, complemented by‘behind-the-border’ commitments covering a rangeof sanitary and technical regulations issues based oninternationally accepted requirements or standardswherefeasible.Itshouldalsoincludecommitmentsonintellectualpropertyrightsprotectionandcompetitionpolicy,takingnotethatIndonesia,asoneofonlyfewASEANcountries,alreadyhavinginitiatedsuchapolicy.Thisshouldbelinkedwithcapacitybuildingaswell.

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systematic alignment between EU standards andconformityassessmentsystemsandthoseofIndonesiacan be achieved. In particular, the Vision Grouprecommends that the CEPA should identify prioritysectors, every three years, where standards, testing,conformityassessmentandaccreditationcanbealignedandproposesolutions to facilitate improvedaccess tobothmarketswithinareasonabletime-frame.

15.For services, liberalisationwould have to be Doha-plus invariousways.TheVisionGrouprecommendsthe binding of existing, actual liberalisation as apractical starting point. Beyond that, both partnersshould commit in a CEPA to certain levels of newopenings in key services sectors so as to create newbusinessopportunities. Liberalisationforserviceswouldnaturally be linked with greater freedom to investlocallyinservicesinIndonesia(whilstintheEU,given‘nationaltreatment’,Indonesianinvestment,whichhasnowstarted,willfindfewobstacles).

16.The Vision Group recommends that the CEPA shouldinclude concrete measures to promote greencomponents in EU-Indonesia trade and investment,whilecreatinggrowth,valueandjobs.Thisshouldresultintheevolutionofacompetitive“green”businessmodelwhichbenefitsbothparties.Thiscanbeaplatformforfightingclimatechangeandprotectingtheenvironment.Capacity building and trade facilitation should bedesignedwithsustainabilityobjectivesinmind.

17.Market access should include wide opportunities toinvest locally.ForIndonesia,EUbusinessmightinvestinparticularsegmentsofthevaluechain,forre-exportbacktoEurope.Perhapsanevengreaterwin-winwouldresult from improving market access for EU directinvestment, using Indonesia as a production platformfor sales to the wider ASEAN Economic Community.GivenotheremergingFTAswith theEU in the region,andgivencompetitiveconditions,greatermarketaccesswouldbeaclearsignaltoEUinvestorstoexploresuchwin-winpossibilitiesinIndonesia.CurrentEUFDIlevelsinIndonesiaarerelativelylow.TheCEPAshouldincludemeasures and incentives to enhance the attractivenessofIndonesiaforEUFDIandthushelpincreaseEUFDIflows to Indonesia. Stimulated by the prospect of aCEPA,liberalizationofrestrictionsonforeignownership(equity caps), foreign business access and localcontent requirements – including public procurement– is expectedandshould stimulate increasedFDI. Thiswouldbeseenasanimprovementofdirectinvestment

incentives by European business which, nowadays,often refrains from investing given stringent equitycaps. Market access for direct investment (called pre-establishmentintheEU)canbeusefullycomplementedwith investmentprotection (post-establishment).Today,IndonesiahasagreedBilateralInvestmentTreaties(BITs)with17EUcountries.GiventheEULisbonTreatywithnew investment powers, the EU and Indonesia shouldaimtoconclude, inthemediumrun,onesingleBITtopromotelegalcertaintyforEUandIndonesianinvestors.

18.Effectivemarket access is alsodeterminedby the IPRregimesof the twopartners.Although IPRs are oftencrucial for the distinct competitive advantages of EUcompanies, given theEU’s level of development. Thisis already applicable to some Indonesian companies.and will become more relevant in the future. Withrespect to Geographical Indications, Indonesia isinterested in improving market access to the EU fora number of traditional quality food products byobtainingrecognitionasprotectedindications,therebymovingupthevalueadded/qualitylevelforitssalesinEurope.Similarly theEuropeanGIswill seekahigherlevel of protection in Indonesia. More generally, IPRlegislationinbothEUandIndonesiaisTRIPsconsistent.The ambition of the CEPA would thus be to improveimplementationandenforcementaswellastomaketheIPR-regimeTRIPs-plus,whererelevant.Thisshouldbeaddressedwiththehelpofcapacitybuilding.

19.Facilitationof tradeand investment should, inanyevent, build on current improvements in customsproceduresandautomation.DirectinvestmentfromEUcompaniescanbeprofitably linked to infrastructure,public works in infrastructure and public/privatepartnerships (PPP). The European-IndonesianBusiness Dialogue has made joint proposals whichwe strongly support. We recommend their urgentfollow-up to help lower the costs of logistics inIndonesia.Europeanbusinesshasthefunds,expertise/know-how and willingness to invest, based on suchproposals. Effective facilitation of and investmentsin infrastructure linked to globalisation is vital forprofitable incorporation of Indonesian and EU localestablishments into global value-chains. In this wayincreased investment will interact much better withmarket access and capacity building. It will equallyimprovethecompetitivenessofIndonesianexportstotheEU-esceciallyininmanufacturing-whereinternalandexternalcompetitionissharponpriceandquality.

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to improve Export Quality Infrastructure e.g. forfisheries and recommendations on energy and the‘greeneconomy’.

23.The CEPA should have solid ‘governance’ based ontrust, friendship and rules. The specific follow-upof the CEPA treaty in its various areas of policy andcapacitybuildingrequirespermanentcooperationandconsultation.Bothpartnersshould‘invest’intheproperworkingoftheAgreementinthisrespect.Nevertheless,no matter how ‘deep’ economic relations are or willbecome,differencesofopinionwillemergeunderanyagreement anywhere in the world. The Indonesia-EU CEPA will be no different. Differences of opinion shouldnotbeallowedtosimmer,letalonetoturnintotradeconflicts.Recentexperienceintimbershowsthatdialogue and concrete willingness to address issues,backedbytechnicalcooperation,canwork.Thepresentdialogue on palm oil – the top Indonesian exportproduct to theEU-and theEUREDdirective shouldbe pursued constructively. Dialogues and cooperationrepresent the spirit of working together which theVisionGrouprecommends.TheCEPAshouldexplicitlyincorporate this idea. Firm dispute settlement, basedon recognized international practice of today, shouldbeincluded.WithoutthatoptiontheCEPAwouldlosecredibility.However,givenacredibledisputesettlement,partnersshouldneverthelessemployothermechanisms,including intense dialogue and technical cooperation,beforeresortingtodisputesettlement.

24.TheVisionGrouprecommendsearlyconsultationwithstakeholderswhichisveryimportanttogeneratestrongand widely shared interest in a future CEPA and tocraft political support for it among business people,governmentofficials,politiciansandcivilsociety.

25.TheVisionGroupurgesthatpromptfollow-upbegivento its recommendations, notably that socialisation/consultationwillstartimmediately,aswellasscoping(pre-negotiation consultations) in accordance withprevailing procedures in respective parties. Indonesiaand the EU should strive for the (announcement of)negotiationstocommencesoonest.

26.Once negotiations are launched, the Vision Groupunderlines that, the ambition and credibility of thisnew and innovative initiative requires politicaldetermination to finish the negotiations rapidly,preferablywithintwoyears.

20.Furthermore, in order to increase the magnitude ofthe benefits of the proposed CEPA, on infrastructuredevelopment in Indonesia, the Vision GrouprecommendstofuturenegotiatorsoftheCEPAtodiscusspublic procurement, notably in public infrastructure.The parties should agree on setting up transparencyrulesandthenegociationofadditionallevelsofmutualaccesstotherespectivepublicmarkets.

21.It is recommended to open up possibilities for EUinvestors inpublicworks, especially in infrastructureand combined with public private partnerships(PPP), which are attractive for such investors. PoorinfrastructureisadeterrentforFDIandtheVisionGroupthereforerecommendstoensuretheexistingPPPmodelbecomesfullyfunctioningassoonaspossible;theexacttypeandlevelofGovernmentsupport (assetbuyback,minimum revenue, expected commercial returns, etc.)needstobeidentifiableinadvancewithclarityonrisk/returnparameters toattract foreignfinancial investors.We believe that the EIB can play an important rolein this including possible support for the IndonesianInfrastructure Guarantee Fund (IIGF) where additionalcapitalandcapacitybuildingarenecessary.TheVisionGroup recommends that theonestopshopconcept,asestablished in2009, shouldbe further improved-alsoin view of reducing the necessary licenses needed forinvestments-asasinglepointofcontactforinvestors,bothinIndonesiaandEUMemberStatesasadesirableexampleoffacilitation.

22.CapacitybuildingisalreadyincludedincurrentEU-IndonesiancooperationandtherecentlysignedPCA.Werecommendaclosecoordinationofprogrammeson thebottlenecksandcapacityproblems identifiedin this report, including specific SPS componentssuch as laboratories, recognition, technical andadministrativesupporttoSMEs(forexportpurposesto the EU) including improvements to technicalinfrastructureforstandardisation,testing,conformityassessment. The Vision Group recommends a broadrange of mechanisms to set forth a process ofcapacitybuildingthatmayeventuallyleadtomutualrecognition. Rapidandcarefulfollow-upwillclearlyrequireoneormoreandjointortechnicalcommitteesunder the CEPA. It will also be useful to involveEU business associations, linked with Indonesianbusinessassociations,sincetheyareinformedaboutEUrequirementsandcustomers’andconsumerneeds.Our report suggests building on existing efforts

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ANALYSIS AND FINDINGS

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RelationsbetweenIndonesiaandtheEUaregenerallygoodandeconomicrelationsarehealthy.Thereareneverthelessqualitativeandmeasurableindicationsthatthestatusquoissub-optimalforbothpartners:inthelastfewyearsithasbecome increasingly clear that this statusquohas led tounderperformanceintermsofmutualbenefitsandthereforecanbeimprovedforthefuture.AstrategicreflectionwithrespecttomediumandlongrunpoliciesofbothIndonesiaandtheEUindicatesthatthestatusquoisatbestlackinginambitionandfailstoexploitthesignificantpotentialforfurthereconomicdevelopment.

We live in a dynamic world economy in which globalcompanies,aswellascountriesorregionalgroupings,arecontinuouslyseekingnewopportunities.Companiesdothis,amongotherways,byre-arrangingvalue-chainsandthelocations of their constituent components, and by actingontherapidchanges inmarketaccessandFDIpromptedbythepersistentimpactofunilateral,bilateralandregionalopeningupofeconomiesallovertheworld.

The EU-Indonesian relationship has adapted tothis dynamic world to some degree in recent years,both bilaterally and via EU-ASEAN relations. Thesubsequent deepening of relations is supported by theEU’s Generalized System of Preferences (GSP), andunilateral (applied) tariff reductions by Indonesiaalongsideitsdomesticreforms.Wecanprofitablybuildon this deepening of trade relations, including on thePartnership&CooperationAgreement (PCA), signed in2009andcurrentlybeingratified.

However,asapolicyresponse to thedynamismofworldbusinessandinternationaleconomicdiplomacy,whathasbeendonesofarisinsufficient.Servingthelongrungoalsofeconomicdevelopmentandsustainablegrowth for thetwopartnerswillrequireamoredecisive,non-incrementalinitiative.OurVisionisthattheIndonesia-EUeconomicpartnershiphastobeinvigorated.

An ambitious deepening of economic relations betweenthe EU and Indonesia, whilst making them moreencompassing, is also the logical sequel to the steadystreamofprofoundpolitical, institutionalandeconomicreforms that Indonesia has undertaken since the late1990s.Itisalsoalogicalfollow-uptotheEU’snewtradepolicysince2006,seeking‘deep’andambitiouseconomicpartnershipswithcountriesorgroupshavingsignificantpotential.

Thisreportidentifieshowanewcomprehensiveagreementcanbuildonwhathasbeenachievedsofarandwhatitscomponentpartsshouldbe.SincetheVisionGroupwantsto be concrete in its delivery, the report suggests manyspecificcomponents,withoutgoingsofarastopre-judgetheeventualbilateralnegotiationswhichpolitical leadersmaywelldecidetoopen.

Our Vision:Invigorating the Indonesia-EU Economic Partnership

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aresultofthenewlyemergingbilateralstatusquoamidstcontinuousFTAactivitybyothertradingnationsorgroups.

This then leaves the choice between a relatively un-ambitious, “shallow” FTA as a defensive responseand a much deeper and more encompassing CEPA(Comprehensive Economic Partnership Agreement, akind of FTA-plus-plus) as an offensive strategy. ThisconstitutesthefirstrationalforaCEPA.

A second powerful rationale for a comprehensiveagreementbetweenIndonesiaandtheEUisalsofoundintherecentinternalandexternaleconomicpoliciesofthetwopartners,irrespectiveoftheeconomicdiplomacyinitiatives of other trading nations and groups. Havingsuffered from a deep negative growth in 1998 followingtheAsianfinancialcrisisof1997-1998,Indonesiaengagedsubsequently in comprehensive domestic reforms andreturned, to relatively high growth rates in recent years

Both Indonesia and the EU favour a finalisation of theDoha Round. Even so, the EU and Indonesia believethat active bilateral and regional economic agreementsare an unavoidable necessity while the Doha Round isuncompleted. Every concluded FTA or ComprehensiveEconomicPartnershipAgreement(CEPA)islikelytoinduce,inturn,oneormorenewFTAswithothertradingpartnersinresponsetothefirstone.

This highly dynamic process alters market access andopportunitiesallthetime.IthasgrownintoadecentralizedalternativetotheDohaRound.ForIndonesiaandtheEU,takingnoinitiativetoteamupfortheirmutualbenefitis thereforeapotentiallycostlyoption.Afterall, ‘doingnothing’ does not mean that market access and otheropportunitieswill remain the same: theycannotasothercountries and groups are signing new FTAs and CEPAs.The costs of such inertia increase over time as bilateralmarketsharesingoodsandservicesarelikelytodeclineas

Rationales for an Ambitious New Economic Partnership

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reaching almost 7% in the last quarter of 2010. Externaltrade also expanded at an accelerating rate despite the2008-2009 global crisis. This improvement in economicperformance is remarkable given the background of acomplex political transition to a much decentralizeddemocraticpoliticalsystem.

Aware of the need to catch up with more developedneighbors in Asia, accelerating development is a veryimportant priority for Indonesia’s policy making. Thegovernment has made great efforts in recent years tode-bottleneck infrastructural development, alongsidebureaucratic reform to mitigate or even remove inertiaand tomobilize support forneweconomicdevelopmentcorridors.Assumingsomesuccessinbureaucraticreform,the average medium-term growth rate in Indonesiacan rise to more than 7%. External trade and foreigninvestmentareboundtobenefitfromsuchanaccelerationandfacilitationofdevelopment.

BoostingtradewiththeEUandinvestmentsbyEuropeancompanies (now one of largest traders and investors)playsanimportantelementinIndonesia’sdevelopment

strategy to maintain a balance in external economicrelations aswell as to access job-creating investments,technologies,andcorporategovernanceandmanagementpractices.

TheEuropeanUniontradepolicystrategyissummarizedinits(2010)“Trade, growth and World affairs”communication,updatingandrefiningits2006strategy‘GlobalEurope’.TheEUhas a long traditionof openmarkets, both internallyto theEUvia the singlemarketaswellasexternallyviamultilateralism, regional and bilateral agreements andunilateral trade policies (such as the GSP1). The onlyexception is temperate-zone agricultural products, buteven in this segment, regional and bilateral agreementshave increasingly ‘softened’ access in this area and thisprocessmightwellcontinue,beitslowly,giventhevariousFTAsbeingnegotiated.ForIndonesia,thisexceptionseemsanywaytobeofmarginalrelevance.

TheEUhaspracticed (ever since the1957Rome treaty)“nationaltreatment”forincomingFDI.Forservices,itis

1 AswellasEBA,theEverything-But-Armsunilateralzerotariffsinitiativeforthe48leastdevelopedcountries.

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wouldamountto1.5%,withapositiveimpactonpovertyalleviationaswell3.

YetlargergainscouldbereapediftheIndonesianeconomycan be stimulated by opportunities and incoming FDI,accompaniedbyexpectedimprovementsininfrastructure,allowingIndonesiatobenefitfromitsdynamiccomparativeadvantagesandfromhighervalue-addedlocallytosupportsustainedhigher incomespercapita.EventhoughtheEUtoday is Indonesia’s second largest source of investment,it still represents only 1.6% of EU investment in Asia.ClearlywouldconditionspermittheinvestmentlevelsfromtheEUcouldbefargreaterasEuropeancompanieswouldfavorably consider Indonesia more often (than they dotoday)whensettinguporre-arrangingpartsoftheirvaluechainsinAsia.

Fourth, an additional attraction of an “invigorating”of the Indonesian-EU economic relationship is thatthe complementarity between EU and Indonesia isrooted deeply in differences in physical endowmentsand resources, and demographics. This fundamentalcomplementarity facilitates that the benefits of a CEPAbe shared more equitably and lessens the probability ofdisruptive trade imbalances arising, as may have beenseenwithotheragreementssignedby Indonesia recently.Moreover,theeconomiccomplementaritiesofthepartnershave the effect of significantly reducing – or, in manysectors,avoiding-adjustmentcostsfallingonworkersorSMEs.Althoughfromaneconomy-widepointofviewsuchadjustmentscanbejustifiedasanecessary(buttemporary)cost incurred when seizing new opportunities by bothsides, the actual benefit/cost ratios envisaged given thecomplementarityof thepartner economies is likely tobefarmorefavorable.

CEPA-stimulated FDI inflows from the EU are likelyto be directed in the short-run at tapping existingcomplementaritiesmorefully.However,theywillalsohelpdiversify Indonesia’s industries and exports, producinghighervalue-addedandimprovedtechnologyinIndonesia’skey sectors as competencies improve among Indonesianworkers and business people and the investment policyenvironmentcontinuestoimprove.

3 Seeannex2foramoredetailedanalysis

also farmoreopen (and committed) than theGATShasbeenabletoaccomplishuntiltoday.TheEUregardsmarketaccessandasolidanchoringinto‘globalizedvaluechains’viaIPRs,investmentliberalisationandlegalcertaintyforitsbusinessesascrucialforitslong-runeconomicgrowthrate.

The 2010 strategy says: “We should make good use of fast-growing regional trade in East Asia and pursue our strategic economic interests in that region, inter alia, by linking into the rapidly growing network of free trade areas …We will therefore seek to expand and conclude bilateral negotiations with ASEAN countries, beginning with Malaysia and Vietnam, and to deepen our trade and investment relations with the Far East”2.AnewambitionintermsoftheproposedIndonesia-EUCEPAfitsexactlytothisstrategy.

Third,asimpleandstaticsimulationmodelforbilateralliberalisation in goods and services shows positiveeconomicgainsforbotheconomies.ThepositivegrowthimpactofacomprehensiveagreementisfurtherenhancedbyfacilitationofinvestmentintheformofFDIandevenmoreascapacitybuildingandcomplementaryfacilitationmeasures improve the capability of Indonesia to exploitthesemutualmarketopenings:

Given a simple static simulation, results show that: (a)immediate bilateral tariff elimination would increaseIndonesian and EU welfare modestly – for Indonesia by0.1%ofGDP,fortheEUless;(b)onlyalimitednumberofsectors in Indonesiamight risksomeadjustmentpressureand the likely causes of lack of competitiveness pointtolimitedavailabilityoftechnology,lackofcapacityandinadequateinfrastructure–allofwhichsuggestsastrongcase for enhanced economic cooperation with the EU tohelpincreasecompetitiveness

However, given a dynamic simulation that better reflectsrealistic potential impact of a comprehensive agreement,with FDI coming into Indonesia helping local capitalaccumulation, the results then show: (a) that long–rungainswouldbe1.3%ofGDPforIndonesia(some€6.3billion in2010GDP terms); (b) that Indonesianexportswould increase by US$ 9.8 billion in the longer run,especially for light industries and transport equipment,andthattheIndonesiantradebalancewouldincreasebysomeUS$2billion;(e)theoverallriseinIndonesianwages

2 SeeCOM(2010)612of9November2010,Trade,GrowthandWorldAffairs,p.10

18

TheexistingEUandIndonesiaallianceisextensiveandimportant for both. A thriving economic partnership ispaving the way for a closer political relationship to thebenefitoffuturegenerationsofEuropeansandIndonesians.Political relations span fromelectionobservation,humanrights and inter-faith dialogues to support in conflictresolution such in the case of the Aceh peace process. .People to people contacts are at an all time high. Morethan amillion citizens travel between Indonesia and theEU each year. The EU provides 1000 grants per year toIndonesian students to study at European universities.ThankstothePartnershipandCooperationAgreement,theEU and Indonesia have started cooperating in new areasofimportancesuchascounter-terrorismandresearchandtechnology.Under the initiative on development throughtrade and investment, the EU and Indonesia mutuallybenefitfromrapidlydevelopingcommercialties.

TheEUisIndonesia’ssecondlargestforeigninvestor.Over700 EU companies are operating in Indonesia, providingdirectlymorethan500,000jobs,andindirectlyanincometomanymore.TheEUisIndonesia’ssecondlargestexportmarketingoodswithavalueof€14billionin2010.EUand Member States provide over € 700 million annuallyto Indonesiaacrossdiverseareas thatarevital for future

prosperitysuchaseducation,health,tradeanddevelopmentsustainability.

The relations between EU as a developed economyand Indonesia as an emerging economy are stronglycomplementary in nature, thanks to different resourcesendowment,percapitaincomesandwealth,andpercapitastockofintangiblecapital.Indonesia’sexportstotheEUin2010consistedmainlyofprimaryproducts(mostlypalmoilandmining),somemanufactures(includingelectronicandelectricalgoods)andtextiles.Ontheotherhand,EUexportsto Indonesia were mainly manufactures: in particularin machineries, chemical products and transportationequipment(aircraftandships).

Trade complementarity is also found in services andreinforcedbytheEU’sdirectinvestmentinIndonesia.Theremaybesomesimilarityinsomecategories,butthecurrentcomplementarystructureoftradebetweenIndonesiaandEUisonefeaturewhichisverypromisingfromthestandpointofsharingtheshort-termbenefitsofaCEPAequitably.

Complementarity is not the whole story about bilateralrelations.ShiftsareinfactexpectedtooccurunderaCEPAin that strengthened foreign direct investment, capacity

The Starting Conditions:General Features

3

19

theCEPAshouldincludeimprovementsintheinvestmentclimate. . With an improved environment business-to-businessdialogueandotherinteractionsasproposedunderthe auspices of the European IndonesiaBusinessDialoguewouldlikelyproduceprogressivegrowthintradeingoodsandservicesandindirectinvestmentflows.

Economic relations between the EU and Indonesia gofar beyond trade in goods, services and commercialinvestments.UnderthePCAandotherschemescooperationbetween IndonesiaandEUextends toareasasdiverseascompetition, intellectual property rights, and sustainabledevelopment. A CEPA provides a good opportunity tostrengthencooperationintheseandotherareas.

Thenetworkofbilateral,sub-regionalandinterregionalcooperation and trade agreements involving eitherIndonesiaortheEUmakesupanotherimportantfactorintheEU-Indonesiarelations.TheEUisstillevolvinginterms of geographical coverage. It has deep agreementswith several countries in Europe, including a CustomUnion with Turkey. The EU grants preferential accessunder theGSP todeveloping countries, includingquotaand tariff freeaccess to leastdevelopedcountriesunderthe ‘EverythingButArms’deal. Inaddition,preferentialaccess is provided for goods originating in the Africa,CaribbeanandPacific(ACP)countriesundertheEconomicPartnershipAgreements(EPAs).Morerecently,theEUhaseitherconcludedorisnegotiatingcommercialFTAswithChile,Mexico,andMERCOSUR.UndertheGlobalEuropeStrategy an FTA has been finalized with the Republicof Korea and negotiations concluded with Peru andColombia. Negotiations with Singapore, Malaysia, Indiaand Canada are well advanced. Likewise, the networkof preferential agreements already involving Indonesiahas expanded. ASEAN is evolving into an EconomicCommunity.ThroughASEAN,Indonesia’sFTAlinkshaveexpandedtoKorea,China,Japan,India,AustraliaandNewZealand.PreferentialagreementsarealsobeingexploredwithTurkey,Pakistan,Iranandothers.

To summarize, the initial conditions facing Indonesiaand EU are very promising for a successful CEPA. Anarchitecturethatincludesinnovativeelementscanproducesubstantialpositiveeffectsoneconomicdiversificationandoutput,employment,investmentandpovertyalleviation.Itisalsoveryimportanttokeepinmindthat,intheabsenceofaCEPA,both theEUand Indonesiawillbenegativelyaffected by trade and investment diversion arising fromFTAsbetweentheEUandIndonesiawithothercountries.

buildingandfacilitationwouldallowIndonesianbusinessto move up the ladder to higher skill-intensive andknowledge-intensive products. Such shifts would makethe EU-Indonesia relations more similar to trade amongdevelopedcountrieswhichisverylargelyintra-industryinnature.Nevertheless, high complementaritywould ensurethatCEPAwouldproducebalancedoutcomesintheshort-runthatwouldbeconducivetolonger-termrestructuringwhilekeepingadjustmentcostslow.

Trade in the real world is suppressed by a multitudeof factors of which trade and investment barriers are ofparticularrelevancetoaCEPA.Fortunately,thelastdecadeshavewitnessedrapidreductionofborderbarrierstotradein both Indonesia and EU. Through unilateral initiativesIndonesiahascuttheleveloftariffratesandrestrictivenessof non-tariff barriers and restrictions on foreign directinvestmenttoalowlevel.Moreover,about58%ofexportofindustrialproductsfromIndonesiatotheEUzero-dutyunder theGSP.On theotherhandapplied tariff ratesonIndonesia’simportsfromtheEUhavefallentoalowlevel,partlybecauseofthefactthatIndonesia’simportsfromtheEUconsistlargelyofcapitalgoods.

Non-tariffmeasuresconstituteamorechallenging taskfortheCEPA.Themoredauntingtaskrelates,particularlyTechnicalBarrierstoTrade(TBTs)andSPS.ManyIndonesianproductsareperceivedtohavebeenunsuccessfultoentertheEUmarketsbecauseoffailuretoconformtoregulatoryrequirements on health, safety or environment. Of theinnovative elements expected from the CEPA, capacitybuildingtoraisethecapabilityofIndonesianproducerslikefarmers(includingsmall,mediumandlargepalmoilplanters)fishermen,andfurniturefirmstocomplywithEuropeanstandardsisoneofthemostimportantfeaturesof aCEPA.Backed by financial support, such capacitybuilding could lead to substantial trade expansion withassociatedpositiveimpactsonpovertyalleviation.

DirectinvestmentisaveryimportantcomponentofEU-Indonesia relations. Currently this mostly concerns EUinvestment in Indonesia while the reverse flow remainslimited in size and highly fluctuating in nature. Theoverall trend in Indonesia’s investment policy has beentowardgreateropenness.However,someaspectsstillseemunnecessarily restrictiveandworrying in termsof reducedlegalprotectionofinvestors’rights,suchasrestrictionsonequityparticipation, considering the crucial importanceofdirectinvestmenttothegenerationofdynamiceffectstohelppropeltheIndonesianeconomyupthedevelopmentladder,

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Architecture of the CEPA

4

The Vision Group envisions an evolution in trade andinvestments which positively interacts with acceleratingdevelopment, especially through value creation in moreadvanced goods and services sectors. In turn, this isexpected to lead to poverty reduction and job creation,whilepursuingasustainableenvironmentforbothparties.

The Vision Group has endeavored to provide a“comprehensive”viewonallaspectsof theEU Indonesiaeconomic relationship, given that the economies of therespective partners are complementary, not just in thesensethattheyare“notcompeting”butalsothateachsidehas“uniquesellingpoints”whichcanandshouldbenefittheother.

This implies we do not just talk about tariffs and otherbarriers to market access, including direct investments,but also about infrastructuredevelopment, public privatepartnerships, possibily increased roles for export creditagenciesandlocalcontentrequirements.“Comprehensive”meanstoothateffortsarerequiredtomoredeeplyengageEuropeanbusinesseswithIndonesia.Boththelayoutofthisreport and the proposed architecture of the CEPA reflectthisapproach.

The basic architecture of an innovative ComprehensiveEconomic Partnership Agreement is constructed like apyramidbasedonthreemainpillars

1. Marketaccess2. Facilitationoftradeandinvestment3. Capacitybuilding

The CEPA has to be a comprehensive and integratedagreementpromotingtradeanddirectinvestmentaspartofanoverallrelationshipasincorporatedinthePCAbetweenIndonesiaandtheEU.

Moreover, the Vision Group recognizes the differencebetween the EU as a developed economy and Indonesiaas an emerging economy. It therefore recommends thatthedifferent stages of development are reflected in allelementsofCEPA.

This requires a new style of agreement incorporatingthe traditional provisions covering trade in goods andtradeinservicesalongsidefargreateremphasisonnewercomponents in such agreements designed to facilitateinwardinvestmentgeneratingvalue-addedfortheeconomythrough:

• Thepromotionofincreasedprivatesectorparticipationinservicesandnon-servicessectors.

• Improvedprotectionandimplementationofintellectualpropertyrights.

• A fundamental shift towards sustainabledevelopmentbackedbythecapacitybuildingneededtomakeitwork.

Given the considerable progress already achieved byIndonesiaandtheEUontariffreductionsandliberalisationof trade, now is the right time and context for an

CAPACITY BUILDING

FACILITATION (TRADE & INVT)

MAR

KET

ACCE

SS

ARCHITECTURE

21

ThecomprehensiveandambitiousconceptbehindtheCEPAisbasedontherecognitionofthreetrendsandeconomicrealities:

1. Increasedcross-borderflowsofgoods,services,capital,technologyandpeoplehavediminishedtheimportanceof traditional trademeasures, since great progress onliberalisationhasalreadybeenmade.

2. Drastic reduction in the costs of transportation andtelecommunication technologies stimulates economicprogress, nationally as well as internationally, ineconomicexchangesandovervaluechains.Economicdevelopment is increasinglymarket-led by consumersandtheprivatesectorandthetaskofgovernments isto help to adapt regulations to facilitate these newlyliberatedeconomicenergies.

3. The short term context is a system of asymmetriceconomic relations between more developedeconomiesandeconomiesintransitionleadinginthemediumtermtoafarmorebalancedglobaleconomicsystem with Indonesia playing a leading role as anemergingglobaleconomichubbasedinAsia,andwithAsiaprovidingamajor impetus forglobal economicgrowth.

Given these dramatic changes, the capacity of theIndonesian economy to exploit its comparative regionaland global strategic advantage depends upon the rateat which economic growth could be sustained by themobilisationofresources to improveproductionquality,servicesandstandards.Thisisnecessaryinordertomakegood use of the economic opportunities afforded by amuchdeepereconomiccooperationandtradeagreementwiththeEU.

The following chapters cover the main areas to beincluded in theagreement startingwithmarketaccess ingoods,servicesandinvestmentbutlookingalsoatpublicprocurement,IntellectualPropertyRightsandcompetition.TheVisionGroupalsodiscussedextensively someof theprioritysectorsforIndonesiaandtheEU,whichhavebeenincludedinannex1.

innovative agreement to bring momentum to Indonesianplans to strengthen and diversify its economy - using atrade and economic cooperation agreement to boost itscompetitivenessandinvestmentclimate.

To ensure maximum benefits from a comprehensiveagreementbetweentheEUandIndonesia,capacitybuildingand trade facilitation are the primaryvehicles to optimisemarketaccesswhilstimprovingtheoperatingandinvestmentclimate, building on the recently improved investmentperformance of Indonesia. The EU and Indonesia havealreadytakencapacitybuildingtoanewlevelbydevelopinga strong model to ensure opportunities for Indonesia areseizedandhurdlesencounteredinpenetratingtheEUmarketareremoved.Thisisarticulatedinthreekeyareas:

1. Dialogues to identify opportunities and removehurdles.ExamplesofthisaretheEUIndonesiaBusinessDialogue (EIBD) that allows business representativesfrombothpartnerstomeet,networkanddiscusspolicywiththeEUandIndonesiangovernment.Therearealsoregular government to government meetings wherethese issues are discussed. A key innovation here isthat business to business dialogues directly influenceresource allocation and have direct access to policymakerstocommunicatetheirneeds.

2. TechnicalCooperation.Technicalbodiesandinstitutionsinvolvedintheregulatoryprocessarebroughttogetherto identify specific actions that will help realiseopportunitiesorremovehurdles.Examplesofthishavebeendialoguesonfisheries tohelpensure Indonesia’sexports to the EU meet regulatory SPS requirements.AlsoagreementsonairsafetywheretechnicaldialoguehashelpedensureIndonesiancarrierscancontinuetoflyintoEurope.

3. Financial Cooperation. Financial support is providedbytheEUtohelpaddressparticularareasthatcomeupinthedialoguesortechnicalcommittees,ensuringthatIndonesiacantakeadvantageofopportunitiesinEU.Atpresent,theEUisprovidingover€50milliontohelpIndonesia meet international export requirement orstandardsandtoimproveitscompetitivenessthroughthesustainabilityofproductionmethods.

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Market Access in Goods

5

23

Different speeds should apply to different products ofdifferent “sensitivities”. The least sensitive ones shouldbeliberalisedfasterwiththegreaterpartsofcommitmentimplemented at the time of entry into force of theagreement. The most sensitive ones could be liberalisedmore slowly. This approach should be adopted to giveenoughtimetoIndonesiatoimproveitspreparednessformarketopening,allowingforahigherlikelihoodthatthebenefitsfromtheEU-IndonesiaCEPAwillbesharedmoreevenly.

Finally,safeguardsandprovisionsonsensitivesectorsmaybeincorporated.Atthesametime,credibilityandambitionwouldbenegativelyaffected if suchprovisionsandtheirapplicationwouldnotremaintrulyexceptionalandsubjecttoobjectivecriteria.

5.2. tbts and ntMs

Marketaccessforgoodsdependscriticallyonovercomingor avoiding sanitary (SPS) and technical standards(TBT) issues and sometimesothernon tariffmeasures(NTMs) such as onerous administrative requirementsandexcessivelicensing.TBTsaretechnicalregulations,standards, conformity assessment procedures andsimilar regulatory requirements (e.g. inspections,approvals)thatmightrestricttrade.NTMsareabroaderconcept encompassingallbarriers to tradeother thantariffsandariseinmanydifferentforms(quotas,customprocedures,etc).ThecostscreatedbyTBTsandSPSareahighburden,particularlyforSMEs.Overcomingtheirnegativesideeffectsthereforebecomesnecessary.

Key instruments in the TBT field supported by theVisionGroupare:

» PromotionandenhancedeffectivenessoftechnicalassistanceintheTBTarea.

» Greater harmonisation of technical regulations,standards and conformity assessment procedures,notably through greater use of internationalstandards.

» Pursuitofgoodregulatorypracticestopromotelessonerous and burdensome technical requirements,includinginthefieldofconformityassessment.

» Enhanced implementation of TBT transparencyprovisions with a view to ensuring that WTO

Nowadays, in trade relations – even between developedand developing countries – tariffs are not the importantchallenge. Effective market access means meeting allthetechnicalandsanitaryrelatedregulations,toensureaccessgoesbeyondsocalled‘nakedaccess’atbordersbutamounts to effective market access including provisionscoveringTBTs,SPSandNTMs.

5.1 tarIffs

ThescopefortariffreductionsinanEU-IndonesianbilateralcontextislimitedbytheexistingleveloftariffliberalizationespeciallywithintheframeworksofWTOandASEAN.

A simple comparative analysis of tariff lines shows thatthose are already relatively low. The simple average ofMFNtariffapplied,is5.3%fortheEU(2009)and6.9%forIndonesia(2007)TheVisionGroupthereforerecommendsamovetozerotariffsfor95%oftariff lines (coveringat least 95% of trade value) in a period of maximum9 years. A best-endeavour clause on the remaining 5%shouldpermitfurtherprogress.

Moreover, the Vision Group recognises that in anasymmetricalrelationshipthespeedofimplementationoftariffreductionstakes intoaccountthedifferent levelsofdevelopment. Still, as 60% of the tariff lines of the twopartiesarebetween0and5%and20%arealreadyatzero,gainsfromtariffmeasureswouldbeexpectedtobesmall.However, the positive impacts from simply dismantlingtariffs cannot take intoaccount thedynamicgains tobegenerated from, for example, increased investment, theliberalisationofservicesandthedismantlingofnon-tariffbarriers.

Below, an example is given of how an asymmetric tariff liberalisation could be implemented. Legend: T=time in years; Commitments: % of tariff removed

To T3 T6T9

25%

50%

75%

100%

Commitm

ents

EU INA

24

Membershaveaneffectiveopportunitytocommentonregulatoryinitiativesbytheirtradingpartners.

The EU pursues a range of bilateral and regionalinitiatives aiming to reduce TBTs. These initiativesinclude regulatory cooperation (to make regulatorysystemsmorecompatible)andtheprovisionoftechnicalassistancefordevelopingcountries.TheEUissupportingIndonesiainupgradingitsconformityassessmentandtesting framework with a view of upgrading exportquality infrastructure in selected sectors. This supporthasbeenongoingsince2005undertheTradeSupportProgrammes.

TheWTOSPSandTBTAgreementsadheredtobybothIndonesiaandtheEUshouldformthebasisfortacklingthese issues.Where existing provisionswould still beWTO inconsistent, theCEPA could be a first recoursetoovercome the resultingproblems.OnSPSandTBTquestions, the three elements of the CEPA should beregarded as complementary, in particular capacitybuilding.Concreterecommendationsinclude:

» IndonesiaandtheEUshoulddevelopco-operation,capacity building, and conduct consultations inthe field of technical regulations, standards andconformityassessmentproceduresinordertoensureeffective and least-cost adaptation of regulatoryframeworks. Such cooperation, capacity building,and consultations should include the participationofprivatebusiness(seechapter9oncooperation)

» A new step in the evolving relationship betweenIndonesia and the EU should be to establish aframeworkforjointeffortstoensurethattechnicalregulationsdonotcreateunnecessaryobstacles totradeandtostrivetofacilitatemutualrecognitioninthemostappropriateandcost-effectivemanner.Methodology should be effective and transparentand based upon identified steps, milestones, andjointmonitoringandreviewsofoutputs,outcomes,and impacts. In particular, “outcomes” reflects thecapacitytomeettherequirementsformarketaccess.Thus, implementation should take the form of aseries of tangible improvements such as, at eachstage, streamlined procedures with an increasedscopeformutualrecognitionoflaboratories,testingfacilities and certification processes. This wouldleadtoincreasedtransferoftestingandcertificationfunctions from the EU to Indonesian institutions

within mutually agreed regulatory frameworksand reduced cost of the use of export qualityinfrastructure(EQI)fortheprivatesector.

» The scope and quality of joint dialogue under afuture framework agreement should be such thatany perceived shortcomings in compliance shouldlead to further dialogue where explanations canbe sought and solutions identified. (See chapter13).ThesameconceptualapproachandproceduralstepscanbeappliedinrespectofSPSandNTMs,sothatthepartnerswouldrelyuponthestrengthandeffectivenessof their joint frameworkfordialogueto address outstanding issues and take mutuallyconstructivestepstohelpresolvingthem.

» The resolution of issues in relation to NTMs andTBTs should take priority in critical sectors suchasfisheries,palmoil,woodproductsandfurniture,agro-productsandprocessedfood.

» Indonesia and the EU should cooperate, with theparticipation of their respective industries, tofurther enhance competitiveness, and to build thedownstreamindustriesofprioritysectorsincludingcocoaandoilpalm(seeannex1).

5.3. sPs – sanItary and Phyto-sanItary MeasUres

The EU and Indonesia agree that the application ofsanitary and phytosanitary measures should aim toprotect human, animal or plant life or health in theterritories of the EU and Indonesia. Moreover, bothsides need to find ways to facilitate access to eachparty’smarkets,while respecting legitimateobjectivestosafeguardhuman,animalandplanthealth.ThetwopartnersshouldaimtopreventandeliminatebarrierstotradebyimprovingtransparencyandbringingcertaintyandconsistencytotheapplicationofSPSmeasures.

The EU and Indonesia should in particular seekto achieve transparency as regards sanitary andphytosanitary measures applicable to trade, workingtowards theestablishmentofmechanisms to facilitatetrade,includingpre-listingoffoodestablishments,andworkingtowardstherecognitionofdisease-freehealthandpest-freeareaswhenappliedbythepartiesforbothanimalandplantdiseases,whilemaintainingessentialborder checks. Moreover, both parties should foreseeappropriate arrangements to address market access

25

gathers and analyzes food safety informationcoming fromborder inspections and domesticmarketsurveillance.

5.4. rUles of orIGIn

Rules of Origin (RoO) should be facilitating, nothampering trade. The Vision Group encourages thefuturenegotiatorstotakealiberalviewonthiswithaviewtomaximizingbeneficialimpacts.TheCEPAshouldadheretoaRoOregimewhichistradeandinvestmentfriendly, also taking intoaccount theongoing reformofcurrentEURoOandplannednegotiationswithotherASEANmemberstates.

5.5. safeGUards MeasUres

Safeguards should be used as emergency measureonlywhenimportssurgeinamannerdisruptivetotheeconomy. Indonesia and the EU are advised to builda joint mechanism to decide on future safeguards,basedonobjectivecriteriaandshortexitperiods. Thisshouldbeseenalsoinlightofthedialogue/governancestructurediscussedinchapter13.

barriersand to facilitate the resolutionofdifferences.The EU applies control standards for food and foodproducthygiene,animalhealthandwelfare,andplanthealth. It also provides rules on appropriate labellingfor foodstuffs and food products. This policy followsaso-called‘FromtheFarmtotheFork’approachthatensuresahigh levelof safety for foodstuffsand foodproductsatallstagesoftheproductionanddistributionchains.ThispolicyisbasedoninternationalstandardsandinlinewithWTOSPSAgreements.

InordertoimproveunderstandingontheSPSmeasuresused by both parties, the EU and Indonesia shouldintensify cooperation aspects in the area of SPS andanimal welfare. Common EQI issues for IndonesianindustriesmarketingtheirproductsintheEUarerelatedtotestingandaccreditationas inthecaseoffishandagri-foods, food safety and SPS requirements. TheIndonesianNationalAgencyforFoodandDrugs(BPOM)iscooperatingwiththeEUtoestablishaNationalRapidAlertSystemforFoodproductsinIndonesia.Throughthisprogram,theEUisprovidingtechnicalassistancetostrengthennationalcapacitiesintheriskmanagementfor food safety through establishing a nationalRapidAlert System for Food in Indonesia. The mechanism

26

ServicesareofincreasingimportancetoEUandIndonesiatrade(representingin2010over16%ofoveralltrade). Theyarealsoanimportantcomponentsupportingtheefficienciesoftradeingoods.Astrongpartofthevalue-addedingoods,oncereachingconsumersorbusiness-to-businesscustomers,originates from services. In many manufactured goods,servicesmayaccountforone-thirdormoreofvalue-added:theexportofso-called“businessservices”are indeednowthe major part now of the international trade in services.Modern FTAs therefore incorporate significant marketaccessobligationsinbothgoodsandservices.

Inordertobecompetitiveinanylocation,oneneedstotakebothgoodsandservicesconditionsintoaccount.Inaddition,therearesolideconomicargumentsforservicesbestpractiseandexternalopeningunderaCEPAfortheperformanceofservicessectorsassuch,giventheirincreasinglyprominentrole in the economy – in Indonesia and the EU. This isfor example the case of information and communicationtechnology services which contribute to spreading digitaltechnology and allow SMEs to do business worldwidethrough e-commerce. This is evenmore so in the case offinancialservices,whichcontributetothefinancingoftrade

andthedevelopmentofthelocaleconomythroughlending.Insurance services are a back-boneof trade in goods, butalso to the social security and pension systems and thefinancingoflongterminfrastructureprojects.FortheCEPAto be meaningful in this respect, it should therefore besignificantlyaboveinitialofferspresentedinthecontextofDDAservicesnegotiations.BothpartiesshouldcommittobindundertheCEPAtheexistingcurrentlevelofpracticein the various services sectors, i.e. agree to consolidatetheir current level of opening to foreign economic actors.Moreover,bothpartnersshouldcommittocertainlevelsofnewopenings in key services, differentiated bymode andbysectors,insuchalegalformthattheyeffectivelycreatenewbusinessopportunitiesandlegalcertaintyforprovidersfrom the partners and for investors in services sectors.The principle of ‘asymmetry over time” (the EU openingimmediatelyorrapidly,andIndonesiaonscheduleswithalongertimehorizon),differentiatedbysectorsand/ormode,couldalsobeappliedhere.

Whereasconsumptionabroad(mode2)mightnotrepresentamajorproblembetweenthetwopartners,selected(andperhaps conditional) opening under cross border services(mode 1) and especially further commitments undercommercial presence abroad (mode 3) would need to benegotiated.TheVisionGroup isnotproposingadetailednegotiation agenda in this area as contacts betweennegotiators could explore in greater detail the optionsandtheirfeasibility.Still,strategicvisionmattersandtheVisionGroupsuggestafewareasandaspectsofserviceswhich might deserve attention (see annex 1 for details).These include investment restrictions in some Indonesianservicessectors,whichhavetobeinaccordancewithbestpractiseofamoderneconomy.TheirreformandopeningcouldgreatlycontributetothelongtermimprovementofinfrastructureintheIndonesianeconomy.

Market access in Services

6

27

In2009Indonesiaintroducedaone-stop serviceforforeigninvestors in many districts. While there are still someproblemswithitsimplementation,ithashelpedtospeedupthelicensingprocesstoestablishforeign-ownedcompaniesin Indonesia. It isnecessary toconductcapacitybuildingforgovernmentofficialsinchargeoflicensingproceduresand avoid a too high a turnover of trained officials.Indonesiashouldcarefullyconsiderthedeterrenteffectsofequityrestrictionsinaworldofmanychoicesoflocations.While an immediate change in theNegative List appearsunrealistic,anincrementalrelaxationduringatransitionalperiodwouldbefavouredbytheVisionGroup.

In respect of Indonesia’s investment in the EU, majorconcerns include compliance with various technical,sanitary and, environmental requirements, marketingstandards, product safety, packaging and labelling andsomeotherindustry-specificrequirements.Itwillperhapstake a relatively long while before direct investmentoverseasrisesinimportanceintheagendaofIndonesiancompanies.

The EU’s potential priority sectors for investment inIndonesiaincludesinfrastructure,chemicals,food,metal,

The EU is the leading FDI originator in the world, butIndonesiaisonlyamoderaterecipient:only1.6%oftEU’sFDItoAsiaoverthelasttenyearswenttoIndonesiaandtheEU’sFDIremainsheavilyconcentratedinChinaandHongKong.Nevertheless,Indonesiahostsaround700companiesofEUoriginwithaninvestmentofEUR50billionanddirectemploymentof500,000people;themultiplicationfactortoindirectemploymentisalsoveryhigh.

EUcompanieshaveagreatertendencytoinvestinIndonesia,ratherthansimplytrade.ThisisfavourableforIndonesia’stradebalancewiththeEU(€7billioninsurplusin2010).Investmentalsoprovidesemployment,technologytransfersandmutualprosperity.AsIndonesiatriestodampenshorttermcapitalinflows(“hotmoney”)infavouroflongtermcapitalinvestment,removingequitylimitationswouldbeapositivefactor.

The Vision Group has come to the conclusion thatinvestmentbetweentheEUandIndonesiacansignificantlyexpand.Easygains couldbemade, if issues suchasFDIlimits,protection,IPRenforcement,regulatoryconsistency,infrastructure,taxpolicy&localcontentrequirementsareeffectivelytackled.

Investment

7

28

manufacturingandservices(banking,expressdelivery,andlogisticsandconstruction).

7.1. attract fUrther eU fdI to IndonesIa: Pre- establIshMent/facIlItatIon

Limitationof foreignownership:allequitycapsandjoint-venturesrequirementsareconsideredbyinvestorsas an impediment to do business. The preferenceof foreign investors is to have control over theirinvestment.Ifaforeigncompanycannothavemajorityownership,itmeansthatitcannotruntheinvestmentastheywouldwish.Hence,itwillnotinvestinthesameway as in countries where this would be possible. Itwillnot transfer technology,know-howandother in-house company expertise, since itwould run the riskoflosingtheseessentialassetsofthecompany.Infact,joint-venture obligation and equity caps – measuresoften used by countries as tools aiming at sharingtheexpertisewith the localpartner–aremostof thetimemissingtheirgoalsandpromptinvestorstolookfor alternatives solutions in other more welcomingcountries.Theselimitationsstillexistinsomesectorson the current Negative List of Investment. However,thisListwillbereviewedregularlyandforsomesectorsmaybecomelessrestrictive.

Local content requirements: Global companies haveoften global product strategies that are establishedbeforeenteringonespecificmarket. If the localcontentrequirementsfixedbyacountryaretoostringenttoapointthatitwouldrequirethecompanytomodifyitsproductionorsupplychain,thisisperceivedasadisincentivetoinvestinsuchamarket.SeealsoChapter9onInfrastructure.

Transparency and clarity in the regulatoryframework:Sincetheearly1990sIndonesiahasmadesignificantprogress in respectofdecentralizationandregionalization, which in some instances has createdadditionallayersofdecisionmakingandcompetencies.The Vision Group advises to continue to ensure thatall levels of government, central, provincial anddistrictdecideandimplementdecisionsaboutFDIinacoordinatedandsimplifiedmanner.

Independence of regulatory bodies: Since theintroduction in Indonesia of the fair competition lawin the 1990s, significant progress has been madeto eliminate unfair competition. The Commissionoverseeingthislawisanindependentbody.TheVision

Groupadvisestoreviewregulatoryauthoritiestoensuretheycanoperateindependently.

Taxation climate: From the Vision Group perspective,IndonesiaandEUinvestorswouldbenefitfromatransparentandpredictabletreatywithallEUcountries.Infact,IndonesiahasratifiedDoubleTaxationAvoidanceAgreementswithasmanyas19outof27EUMemberStates.

7.2. InvestMent ProtectIon Post-establIshMent

As of April 2011, Indonesia has signed 66 BilateralInvestment treaties (BITs) with its counterparts, 16among them with EU Member States (Belgium -Luxembourg, Bulgaria, Czech Republic, Denmark,Finland,France,Germany,Hungary,Italy,Netherlands,Poland,Romania, theSlovakRepublic,Spain,SwedenandtheUnitedKingdom).

TheseBITsgivelegalprotectionforpost-establishmentphase of investment. The elements of this agreementcoverlegalguaranteesfor:

» Non-discriminatorytreatment

» Nationalization/expropriation

» Compensationforlosses

» Subrogation

» Transfer

» Disputesettlement

TheseelementshavebeenaccommodatedbyIndonesiaLaw Number 25 of 2007 concerning investment andareinlinewithinternationallyacceptedprinciples.TheVisionGrouprecommendsthattheEUandIndonesiawould conclude an ambitious investment protectionagreementcoveringallEUmemberstates4

7.3. InvestMent ProMotIon

Investmentpromotioneffortsneedtobeenhancedinordertoattractpotential investmentsourcesfromEUcountriesintoIndonesia.Infact,whiletheEUoverallisthesecondlargestinvestorinIndonesia,thisismainlythankstosomeoftheMemberStates.PromotionintheotherEUcountriescouldleadtofurtherinvestmentsinIndonesia.Similarly,theEUcouldpromoteIndonesianinvestmentstotheEUaswell.

4 AccordingtonewEUcompetenceoninvestmentprovidedforintheLisbonTreaty.

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economythroughreductionandeliminationtariffs,inordertofacilitateandboostthetrade,isnowcomplementedwithtargetedcooperationactivities.

Based on analyses conducted it has been indicated thatsome Indonesian products, mainly primary products andselected manufactured products are competitive vis-à-visEuropeanproducts. It has alsobeen shown that fulltradeliberalisationbetweenthetwosidesisexpectedtocreateeconomicwelfareandstimulateeconomicgrowth.However, it is important to note that, since the size andstrength of the economies is different and the relevantinfrastructure of the EU is more developed compared toIndonesia, it seems unavoidable that liberalisation of

ThankstotheopportunitiesopenedupbythePartnershipandCooperationAgreement, theEUand Indonesiahavestartedcooperatinginnewareassuchasonsecurityissues,research and technology, human rights, cooperation oncultureandeducation.

For the Vision Group, three pillars should underpinthe successful industrial cooperation between the twoeconomies:liberalisation,facilitationandcapacity building. Based on experience, capacity building is becoming acriticaltooltoanysuccessfulbilateraleconomicagreement,especiallyinimplementingeconomicagreementsbetweenan industrialised country and a developing country.Therefore, the conventional approach of liberalising an

Cooperation and capacity building

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tradewillbringtobearconsiderablecompetitivepressureon someof Indonesia’s industrial sectors. Therefore, it isproposedtosupporttheadjustmentofweakerIndonesiansectorsviatargetedcooperation.

Support for liberalisation is greatest when obtainingmutual benefits for both parties in a win-win situation.Ideally, both partners should define common interestsin order to face future world economic developmenttogether. An important aspect of capacity building isthat itcanbeundertakenimmediately,evenbeforeCEPAfinalisation, through existing programmes, such as theTradeCooperationFacilityandTradeSupportProgrammeII.TheVisiongrouphasunderlinedthattheCEPAconceptis already working for the benefit of Indonesia throughtheseexistingprogrammes.

Tariffratesofbothpartnersarealreadyrelativelylow.YetitisnoteasyforIndonesianproductstoentertheEuropeanmarketduetohighstandardsandtechnicalrequirements.Similarly, Indonesian SPS rules do not recognise EUfood safety standards, nor are EU technical laboratoriesrecognised to test for Indonesian technical standards.The Vision Group concludes that a key to the successof the CEPA that it must provide concrete means tobring industrial requirements, testing recognition andaccreditationofcertification,ontoanequalfootingand,ifpossible, toharmoniseallof themaroundonesetofinternational standards. This will facilitate the flow ofgoodsbetweenIndonesiaandEU.

Wherethekeytoindustrialcooperationismovingtowardsharmonisation of standards, CEPA will include specificactions to align to a common set of standards, basedon international rules, and recognition of conformityassessment and certification systems. An example ofan activity that would enhance cooperation, harmonisestandards and hence improve market access of the EUand Indonesia is the accession of Indonesia to the UN/ECE agreement for Indonesia’s automotive components.The UN/ECE deals with the standardisation of products,including automotive products for international trade.Theseinternationalstandardshavealreadybeenadoptedby55countrieswhileIndonesiaisnowpreparingitsadhesion.Activities leading to the accession of Indonesia to thisinternational agreement couldbe linked todisseminationprogrammesfortheIndonesianautomotiveindustry.

Providing informationonstandardsandtheir technicalsubstance from both sides is crucial to ensure that

companies from both partners , especially SMEs, cancomply with each other’s requirements and realise theopportunities offered under the CEPA. One concreteexample is to establish an EU-Indonesia helpdesk andstandard informationplatformoneachother’s regulatoryregimes.

Moreover, Indonesia would need to build up a strongcertification and laboratory system to be able to fulfiltechnicalregulationstoenableitsexporterstoaccessEUmarkets.Several sectorscouldbe targeted,notably: foodand beverages, chemical products, agro-based industries,electrical and machinery components. Similarly, EUproducts have difficulties accessing the Indonesianmarkets due to the prevalence of mandatory domestictechnicalrequirementsandthatEUlaboratoriesarenotrecognisedtoconducttestingtomeetthesestandards.Asa first step, thecooperationprogrammesshouldaimatabetterunderstandingofeachother’sregulatoryframeworksandsystemsinordertofacilitatemarketaccess.Astrongemphasis should subsequently be put onbuildingup theexportqualityinfrastructureofIndonesia.

Cooperation should not only focus on market accessbutalsothroughfacilitationofdirectinvestments,witha view to increasing the involvement EU firms inIndonesiatoenhanceaccesstohighertechnologiesandexportqualityinfrastructure.ThereisextensivescopeforcooperationandtechnicalexchangesinsectorswheretheEUpossessescuttingedgetechnologyandknow-how.ThiswouldfacilitateEUexportsandinvestmentswhilehelpingIndonesiatoaccessadvancedtechnologiesandtoupgradeassociatedhumanresources.Forexamplethedevelopmentpriorities of the Indonesia National Industrial Strategyincludeelectrification,foodsecurityandtherestructuringofcapitalgoods,identifyingleadsectorssuchas:

• Developmentofgreenproductsanduseofalternativeenergy(e.g.biomassandelectrification)

• Automotivesandaircraftindustries

• Telecommunication/electronicsproducts

• Pulpandpaper

• Textilesandtheapparelindustry

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First, a CEPA should discuss public procurement,notably in public infrastructure. The parties shouldagree on setting up transparency rules and negotiateadditional levels of mutual access to the respectivepublicmarkets.

Second,suchadialogueshouldcoverthemostimportantsupply constraints in Indonesia,which lie in its logisticsand infrastructure. This includes power, transportation,roads,andports.Forexample,transportationcostsarethehighest inASEAN. Indonesiadoesnot takeadvantageofitsuniquearchipelagicgeography;itdoesnothaveagoodinternational hub port. Domestic ports are also hinderedby sub-optimal performance due to lack of capacity or

Poorlogisticsandinfrastructurediscourageforeigndirectinvestmentandtrade.TheVisionGroupstronglyadvocatesthataCEPAwillnotrealizeanywherenearitsfullpotentialunlessitgoeshandinhandwithcomprehensiveprogressininfrastructuredevelopment.ThedirectlinkwithaCEPAcan be found in public procurement and local contentrequirements, both items which can hinder, slow downand diminish progress in large projects, either becauselocalcontentisnotavailableorbecauseglobalcompanieshave global product requirements. The Vision Groupargues that European industrial companies and financialinvestors are currently hesitant to deploy their extensiveresourcespendingfundamentalprogressonPublicPrivatePartnerships.Belowaresomesuggestionsonhowtodothis.

Public Procurement,Infrastructure andPublic Private Partnerships

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projectsastheyfailtocreateincentivesandcompetitivenessfor local and foreign companies. Local content is notnecessarilyavailableforcertainprojectssotherequirementbecomesimpracticalandasourceoflegaluncertainty.Suchpoliciesachievetheoppositeofwhatisintended.

The Vision Group advocates a direct and substantialinvolvement of the European Investment Bank (EIB)in Indonesia’s infrastructure development8. Anotherimmediate opportunity consists in participation in andsupportfortheIndonesianInfrastructureGuaranteeFund(IIGF)where additional capital and capacitybuildingarebothnecessary9.

TheVisionGrouprecommendstheIndonesianGovernmentputsinplaceasinglepointofentryforfirmsandtoreducethe complexity of the decision-making processes withregard to infrastructure projects, including dealing withcertainaspectsofregionalization.

The Vision Group also suggests a review of recentlyimplemented legislation which has improved the legalframeworkforcoreinfrastructuresectors,suchastelecoms,electricity,oilandgasandwater,butwhilealsocreatingsome additional barriers to infrastructure development.All European export credit agencies are open regardingIndonesia and there doesnot appear tobe a competitivedisadvantageforEuropeancompaniesinrespectofexportfinancing.ItisnotclearifEurope’sexportcreditagenciescollaboratesufficientlyonbidsinvolvingmultiplesuppliersandtheremayberoomforimprovmentonthis.Meanwhileexport credit agencies, especially from major industrialcountries such as China, Japan and Korea, are fiercelycompetitive.TheVisionGrouparguesthatjointmarketingeffortsarenecessarytocreatemoreproactiveinterestfromEuropeanexportersandtoattractEuropeancapital.

8 EIBsupportsviablepublicandprivatesectorprojectsininfrastructure,industry,agro-industry,miningandservices.UnderthecurrentmandateofEIB-coveringtheperiodthe2007-2013-theEIBisauthorisedtolendupto€1billionintoAsiaforfinancingoperationssupportingEUcooperationstrategies.TherearecurrentlynoEIBprojectsinIndonesia.

9 IIGFwassetupin2010asa100%StateOwnedEnterpriseandisdesignedtobeacredibleguaranteeprovider.Itactsasinsurancecompanyandcollectsinsurancepremiums.InitialcapitalwasRp1trillion($110million);plusanotherRp1trillioninjectedin2010;hencetotalinitialcapitalizationwas$220million.IIGFwasdevelopedwithassistancefromtheWorldBankwhichprovided$500millionofguaranteesupportandfromtheTemasekFoundationwhichprovidedS$474,000

poormanagement5.As a result there is a high degree ofdis-connectivity6. External rating agencies have recentlyupgraded Indonesia’s rating to BB+, one notch belowinvestmentgrade.7Allcitepoorinfrastructureasadownsiderisk to reach investment grade. However, Indonesia isexpectedtoreachinvestmentgradein2012,whichcouldbeaverygoodopportunitytoattractmoreFDI,especiallyintoinfrastructure.

Third,afullyfunctioningPublicPrivatePartnershipmodel(PPP) for infrastructure development including localcompaniesandinvestorsiscriticaltoachieveprogress.InDecember2010IndonesiaputinplacenewPPPlegislationandthefirstprojectsareunderway.Commonlyidentifiedobstaclesincludepoorplanning,coordinationandprioritization.Clarityonrisk/returnparametersneedtobecovered.

Fourth, Infrastructure projects will continue to requireGovernmentsupportintheformofguaranteesforassetbuybacks,toensureandunderpinminimumrevenueandexpectedcommercialreturns.Forthistoworkproperlyandtocreateincentivesforinvestors,theexacttypeandlevelofsupportneedstobeidentifiableinclearcutframeworks.Indonesia cannot afford to default on any of its supportobligationsnowthatitisonthewaytoattainInvestmentGrade. To takeonhighnumbersof full fledgedpaymentguaranteesputsthatobjectiveatrisk. Indonesiathereforeneedstobeveryselectiveonguaranteedeployment.

The Vision Group therefore argues that FDI and localcontentrestrictions(40%inprocurementofgoods,services,construction work, also for Public Private Partnerships)are hindering the progress of infrastructure development

5 Inastudyonlandtransportationcosts,LPEM-FEUI(2008)foundthatthetruckingcostsforatypicalgoodusingatypicaltruckinIndonesia(anumberofprovincesinSulawesi,Java,andSumatraweresampled)couldreachashighasUSD0.34perkilometre.ThisishigherthantheaverageASEAN,namelyUSD0.22perkilometre.AfollowupstudybyLPEM-FEUI(2010)triedtomeasurethetruckingcostinprovincesthatrelyonwater/seatransportationinadditiontolandmode.Itwashypothesizedthatforarchipelagiccountry,waterandseatransportationshouldbeanadvantage.However,thestudyfoundthatthecostcouldreachevenhigheratUSD0.50perkilometre.

6 Domesticdis-connectivityimpliessharpdifferencesinpricesevenforbasiccommodities,wherepricesinremoteareascanbedoublethoseofnationalaverages.Forexample,thepriceofmediumricewasaroundIDR4,000inJava,Kalimantan,Sulawesi,andNusaTenggarabutIDR10,000inPaniai,Papua.

7 Standard&Poor’s,8thApril2011.FitchRatings,6thApril2011

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Notsurprisingly,bothpartiesexpressedspecialinterestasregardsGeographicalIndications(GIs)sincetheyarebothrich in traditional knowledge, agriculture and foodstuffs.BothIndonesiaandtheEUhavealreadydevelopedasystemofprotectionfortheirGIs.Economicallyandculturally,GIprotectionisbecominganincreasinglyimportantissueforproducersandanimportantpartofdevelopmentstrategy.GIsarenotonlytobeseenasawaytograntafairfinancialreturnforhighqualityproductsbutalsoasawaytokeepfarmers and communities in rural areas and to managelandproperly.ProtectionofGIsisthereforealsoawaytodevelop parallel economic activities (such as processingindustriesand tourism) retainingvalueadded in targetedareastherebybenefitingregionaldevelopment.

TheVisiongrouprecommendsthatthelevelofambitionasregardsGIprotectionshouldbehigh.BeingpartofaCEPA,GI/protectionshouldgobeyondTRIPSobligationsforfoodstuffsandprovideforextensionoftheprotectionatleasttoTRIPSarticle23level(referredtoasTRIPS+).

To support Indonesia on these issues, the EU is alreadyproviding capacity building on IPR in the ASEAN regionthroughvariousprogrammes(ECAPIthroughtoECAPIII).However, further capacity building and facilitation maybe needed for Indonesia in order to accomplish effectiveimplementationofsuchIPRprovisions.Thiscooperationmayincludeexchangeof informationandexperienceon issuessuchasbestpractice,promotiondissemination,streamlining,management, protection and effective application ofintellectualpropertyrights,thepreventionofabusesofsuchrights,andthefightagainstcounterfeitingandpiracy.

Strong Intellectual Property Rights (IPRs) protection iscrucial to stimulating entrepreneurship and fosteringa creative economy. Counterfeit products are a threat topublichealthand safetyandagoodprotectionof IPR iskey to research and development. Furthermore, tradeand direct investments are attracted by high standardsof IPR protection. Improving the legal frameworkand strengthening enforcement (border measures anddomestically) constitute principal incentives for investorsaswellasfornewentrepreneurs.

ItisalsointheinterestofinvestorsandcompaniesthatbothpartiesprovideforasystemofadministrativeprotectionofIPRs, avoiding costly and burdensome legal action beforeCourts.Forthesereasons,aCEPAshouldincludeafullanddetailedchapteronIPR,theobjectivesofwhichshouldbeto:

• Facilitate the production and commercialization ofinnovativeandcreativeproducts,andtheprovisionofservices,betweentheParties.

• Increasethebenefitsfromtradeanddirectinvestmentthrough the adequate and effective protection ofintellectualpropertyrightsandtheeffectiveenforcementofsuchrights.

With bothparties complyingwith theTRIPSagreement,theIPRchaptershouldcoverallcategoriesof intellectualproperty namely: copyright and related rights, patents,trademarks, designs; layout-designs, geographicalindications, protection of undisclosed information andplantvarietyrights.

IPR: GIs and Enforcement

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Competitionpolicy is anecessarymeans to create equal,non-discriminatory, and level playing fields in the twoeconomies.Fairnessinbusinessactivitieswithoutdistortingcompetition is welfare enhancing to consumers in theeconomy. Fair competition will induce greater efficiencyandproductivity,inturnresultinginhigherincomelevelsandhighergrowthtrendsinthemediumrun.Competitionpolicy should be effective in addressing unfair businesspracticesthatdistortcompetition.

Manycountrieshave established competitionpolicybasedonwidely agreed principleswhilst adjusting its aplicationonto localconditionsandtothebusinessclimate intheirown economy. The trading partners will therefore havedistinctiveideasandapproachestowardscompetitionpolicy

To ensure that companies effectively have equal accessto each other markets, the Vision Group argues that theCEPAbetweenIndonesiaandtheEUshouldincludesomedisciplines that both parties would agree to implementthroughtheirrespectivecompetitionlaws.Theymight,forinstance,agreetoprohibitandsanctioncertainrestrictivepracticesandtransactionsinvolvinggoodsorserviceswhichdistortcompetition, tradeand investment, suchascartelsormonopolisticabusesbycompaniesandanti-competitivemergers and/or acquisitions. Thiswould imply that anti-competitive practiceswill not be tolerated by the partiesandwouldbesubjecttoeffectiveenforcementaction,whentheyleadtoharmingconsumersandhigherprices.Howeverin a longer term perspective, some sectoral exemptionsfromcompetitioncouldbereconsidered.Competitionlaw

shouldalsoapplytostate-controlledenterprisesasthismayhelpinfosteringgreaterefficiency.

It would be important that the agreement would containprovisions thatprohibit certain typesof subsidiesand stateaids, which are considered to be particularly distortingtherebyaffectingtradeandinvestmentbetweentheparties,intheletterandspiritoftheWTOAgreementonSubsidiesandCountervailingmeasures,andpossiblygobeyondit.

Recognizing that competition policy could contribute tocreatingaconducive,stable,andpredictabledevelopmentfor trade, which is particularly important for small scaleinvestors who decide on investing in Indonesia, it isimportant to establish closer cooperation in the field ofcompetitionpolicy,suchas:

• Exchanging information concerning the relevantimpositionofcompetitionpolicymeasures.

• Include provisions in the CEPA on consultations anddialoguesonallmattersrelatingtocompetitionpolicy.

• Enhancing capacity building such as providingtraining,education,humanresourcesdevelopment,andtechnicalassistance,andpossibleexchangeofstaffortraineeships.

• Exploringthemeritsandscopeofpossiblecooperationbetween the Competition Supervisory Commission ofIndonesiaandtheEuropeanCommission.

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Competition Policy

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concerns(thesecondpillar),andwhichfinallyincludestheimportanceofeconomicgrowth(thirdpillar)asthebasistomeetenvironmentalandsocialgoals.

TheEUsharesthissamestrategyofsustainablegrowthasembodiedintheTreatyestablishingtheEuropeanUnionaswellasvariouspoliciesandlaws.

TheVisionGroup argues that sustainability is a politicalnecessitybutalsoaninevitabilitydrivenbyconsumertastes

IndonesiahaslongrecognizedtheimportanceofimprovingtheeconomicandsocialfabricoftheNationasaprerequisiteforachievingenvironmentalgoals.ItisbestexpressedbyPresidentSusiloBambangYudhoyonowhohasemphasizedtheimportanceofpro-poor,pro-job,pro-growthandpro-environmentpoliciy. For the Indonesiangovernment, theobjective of “Sustainable Trade in Indonesia” is initiallyassociatedwithtradethatshouldnotharmtheenvironment(thefirstpillar)andthishasbeenextendedtoembracesocial

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Sustainability:Environment as a Competitive advantage

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increasinglydemanding“environmental friendlyproductsandservices”.Itwasidentifiedthat,ifembracedandalwaysput alongside growth objectives, this approach can alsoproduce win-win solutions which combine sustainabilityand profitability. Namely, sustainability can be turnedto profit and to advantage in our trade and investmentrelations.

The Vision Group identifies that a CEPA should includeconcrete measures to promote the greening of EU-Indonesia trade and direct investment while creatinggrowthandjobs.

In thepublic sector,partnerswillbeencouraged toworkwiththeGovernmentofIndonesiaMinistryonSustainableTrade by addressing the above three elements from thetradeperspective.

A CEPA should, therefore, also include structures thatensure any sustainability policy neither accidentallyimpedes tradenor restrictsgrowthor job creation.Therecent example of laws against illegal logging is a goodcaseinpointwherethisenvironmentalconcernwasjointlytackled by Indonesia and the EU but in a manner thatactivelyincreasesandenhancesIndonesia’scompetitivenessandaccesstotheEUtimberandtimberproductmarket.

Both Indonesia and the EU passed laws against illegallogging. This was not enough: legal timber might findproblems entering the EU if buyers and authorities wereunsureifitwaslegalornot–threateningjobsandgrowth.For this reason, the EU and Indonesia have agreed aVoluntary Partnership Agreement, effectively a form ofmutual recognition, through which local SVLK legalityorigin certificates will be accepted by EU authorities asproofoflegaloriginandwillbeallowedintotheEU.Thisassumes the Indonesian authorities implement the newSVLKeffectively.ThisisthetypeofactiontheVisionGroupargues should be incorporated in theCEPA– acceptanceof an environmental policy (combating illegal felling ofIndonesia’sforests)butbydesigningactionsthatnotonlysecurethe€700millionofexistingtradeinwoodproductsfrom Indonesia to EU but also gives Indonesia a chancetoexpanditsmarketintheEU,takingmarketsharefromother countries who do not have a similar scheme andcannotofferthesamelevelof“legality”assurance.Othersectors where such an innovative pro-environment, pro-growth,pro-jobsandpro-poorapproachcanbedevelopedincludepalmoilandfisheries.

Consumers are increasingly demanding environmentallysustainableproductsandservicesacrossallareas.Industryischangingitsoperationstomeetthismarkettrend.EuropeanbusinessesalreadyhavehighlevelsofcompliancewiththeUNCorporateSocialResponsibilitydefinitions.Anumberofgloballeadershaveintegratedenvironmentalconcernsincorporatecultureandresponsibility.Thishasresultedintheuse of cleaner production technologies, selected sourcingof raw materials with favourable carbon footprints andingeneral embracinga culturewhich is environmentallyfriendlybyreducingenergyconsumption;andoptimizinglogistics etc. We recognize that the main driver behindthiscorporatechange ismarketdrivenasconsumersandcorporatecustomershaveincreasinglyshownapreferenceto source from environmentally friendly companiescombinedwithgrowingawarenessof shareholders to theglobalchallengesfaced.

Together Indonesia and the EU can drive thistransformation enabling Indonesian manufacturing tomoveupthevaluechaininasustainablemanner,brandinggoodswithhighervalue thanks tobeing sustainableandgrowingthebusinessopportunitiesforbothparties.

Capacitybuildingandtradefacilitationshouldbedesignedwiththesesustainabilityobjectivesinmind.Specificallythereshouldbea frameworkofmutualunderstandingofthevalueoflong-termsustainabilityoverridingshort-termeconomic gains; for example converting power plants tousemore sustainable sourcesof fuel, transformingCrudePalmOilproductionbyreducinggreenhousegasemissions,implementingproductionmethodsandcertificationwhenrelyingonstandardswhichenablegoodstocompetewithqualityandlowcarbonfootprints.

Inshort,theVisionGrouprecommendsthatCEPAshouldinclude concrete measures to promote green elementsin EU-Indonesia trade and investment, while creatinggrowth,valueandjobs.Thismustevolvetoacompetitivebusinessmodelwhichbenefitsbothparties.Thiscanprovideaplatformforfightingclimatechangeandprotectingtheenvironment.

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hasprovidedagoodexample..Thankstothejointworkandleadership of Indonesia’sChamber ofCommerce (KADIN)and the European chambers, supported by Ministers ofTrade,IndustryandEconomicCooperation,aconcreteandworkablesetofrecommendationsontrade,investmentandbusinesswereagreedandarecurrentlybeingimplementedandfollowedup.

The CEPA should have solid ‘governance’ based ontrust, friendship and rules. The specific follow-up of theCEPA treaty in its various areas of policy and capacitybuildingrequirespermanentcooperationandconsultation.Nevertheless,nomatterhow‘deep’economicrelationsareorwillbecome,differencesofopinionwill emergeunderanyagreementanywhere in theworld.The Indonesia-EUCEPAwillbenodifferent.Differencesofopinion shouldnotbeallowedtosimmer,letalone,toturnintotradeconflicts.The recent experience in timber shows that dialogueand concrete willingness to address the issues, possiblywith technical cooperation, can work. The CEPA shouldexplicitly incorporate this idea. Firm dispute settlement,based on recognized international practice of today,shouldbe included.Without thatoption theCEPAwouldloosecredibility.However,givenandbackedbyacredibledisputesettlementprocedure,partnersshouldneverthelessemployothermechanisms,includingintensedialogueandtechnicalcooperation,beforeresortingtotheuseofdisputesettlementarrangements.

To secure the good functioning of a CEPA, effectiveinstitutions, institutionalised and continuous dialoguesinvolving governments and business should be put inplace. The strong dialogue that Indonesia and the EUcurrently have is proposed to be institutionalised underthe Partnership and Cooperation Agreement. This wouldincludeannualministerialmeetingsaswellasatechnicalWorking Group on Trade and Investment which wouldmeet twice a year, fed by sectoral dialogues (currentlyinvestment,pharmaceuticals,food&beveragesandindustry& environment). These meetings should incorporatebusinessand /orworkwith the recommendationsof theinstitutionalisedEUIndonesiaBusinessDialogue.

Thiscombinationofbusinessandgovernmentdialogues,technicalexpertcooperationandfinancialcooperationisadeliberatestrategytoensureIndonesiaseesandobtainsadvantagesfromtheEU-Indonesiacommercialalliance.ThishasbeenafeatureofEU-Indonesiarelationsandwillremainacornerstoneoffuturerelations.Someexamplesin palm oil, timber and fisheries where this deliberateconstructivestrategyisbeingpursuedtodayhelptoprovethepoint.

The Indonesian government has shown impressivecommitmentsineachoftheaboveareasandinpromotingconstructive dialogue with the EU. The successful EUIndonesiaBusinessDialogueinJakartainDecember2010

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Governance/Dialogue Structure

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Communication strategy

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ThecommercialtiesbetweentheEUandIndonesiaarestrongandrelationsarepositiveandconstructive.Butperceptionslagbehindcurrentrealities.SoconsultationonandsocialisationoftheCEPAinIndonesiaandtheEUwillbecrucial–explainingtheexistingscaleandcomplementarynatureofrelations,howCEPAisdifferentfromotherrecenteconomicagreementsandhowitwillbringrewardstobothsides.SomekeyelementsoftheCommunicationsStrategyareasfollows:

• Communicate Early and consistently for Positiveresponses.ThemostimportantlessonfromIndonesia’sexperiences is that meaningful and comprehensivecommunicationsanddialoguemustbeginattheearlieststagesofbuildinganewbilateralorregionalrelationshipinorderforallstakeholderstofeelinvolvedandmakepositive contributions. Governments risk negativereactions if there is little roomfor suchcontributionsbecausedecisionshaveeffectivelyalreadybeenmade.

• Communicate the Innovations in CEPA: Theconsultation must show the stakeholders the distinctand very largely positive features of CEPA. It shouldemphasizethreefundamentalpositiveoutcomes:

» A Dynamic Approach to Growth, developmentand Jobs, showing how CEPA creates growth, jobs,development and capacity building in non-technicaltermssopeoplecansee theclearvalueaddedof theCEPA.

» Boosting competitiveness in the Wider StrategicContext of Integration, showing how CEPA willstrengthen Indonesia’s competitiveness in ASEANandEastAsiaandhelptoavoidthatEUagreementswithotherASEANneighbours result inadecliningshareofEuropeantradeandinvestmentforIndonesia.

» Turning Sustainability into a competitiveadvantage for Indonesia and EU. Too often,sustainabilityisseenasanegativeissue.Countrieshaving embraced sustainabilityhave found that itisbecomingasourceofgrowthandjobs.CEPAwillhelpIndonesiaandtheEUtoexploitsustainabilityasasourceofgrowthandprofit.

• CommunicatehowcapacitybuildingundertheCEPAwill help ensure Indonesia obtains benefits: CEPA’scomprehensive and dynamic structure of dialogues,technical committees and financial cooperation(detailedelsewhereinourreportas“capacitybuilding”)

willhelpcompaniestodealwithproblemsandrealiseopportunities.

• CompensatingforthecostsofAdjustment:thecostsofadjustmentforthosecompanieswhichmighthavetorestructureintheshortrun(somewhatnegatively,named“losers”)areprobablyratherlimitedgiventhecomplementary nature of this CEPA. Nevertheless,be open about this possibility and identify suchsubsectorsorcompaniesasearlyaspossiblesothatthenecessaryadjustmentpoliciesandcompensationpackagescanbecommunicatedattheoutset.Earlyidentification will help develop a more balanceddebateandassessmentamongall stakeholders. It isalso likely to induce such companies to anticipatethe effectsofCEPAandadapt theirbusinessbeforesuch costs might fall upon them. Indeed, givencomplementarity, “losers” might in fact often onlyseetheirgrowthaffectedsomewhat,withouthavingtocutcapacityorfireworkers.Capacitybuildingaswellasphased implementationandexemptionswillassure this aspect is addressed tomaintain positivereturnsfromCEPAforbothparties.

• Stakeholder Dialogue and Engagement. Thecommunication strategy will target all stakeholders inEUandIndonesia,payingspecialattentiontoParliament(andtheEuropeanCouncilintheEU),specificMinistersand Government Officials in Agencies affected bythe CEPA, chambers of commerce and the BusinessCommunity,theAcademicCommunity,theMedia,civilsociety(includingConsumersanduniongroups).Directdialogue,classicalmedia(newspapers,radioetc),internetandsocialmediawillbeusedtoprovideinformationandpromotedialoguewiththesestakeholdergroups.

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PRODUCT SECTORS OFSPECIAL IMPORTANCE

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Reality of trade and investment policies differ betweensectors for reasons related to the stage occupied by anindustry its life cycle, the prominence of an industryin relation to the issues of sustainability, TBTs, SPSS,environment, illegal trade and some other issues. TheVisionGroupfindsitappropriatetosingleoutafewsectorsofproductsinviewoftheprominenceattachedtotheminthe Indonesia-EU relationswithout intending toargue infavorofanactiveindustrialpolicy.

Regardingmarketaccess(goods,servicesandinvestments)mentionedinthereport,theGroupproposestoconsideranumberof sectors of special importance. Some examplesareprovidedbelow.Note that thesearediscussedalso inchapter9oncapacitybuilding.

Palm oil employs workers from more than 3.5 millionIndonesian households. Exports are surging. The EU isIndonesia’ssecondlargestpalmoilmarket.However,there

PRODUCT SECTORS OFSPECIAL IMPORTANCE

ANNEX I

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EU’s tough food safety standards. A technical dialoguehas been going on for the last three years to strengthenfoodsafetytestinganddatacollectioninIndonesiasoastoimprovethesafetyoffisheryexports.FinancialsupportisbeingprovidedtohelpIndonesiastrengthenitsnationalsystemfortesting.AndthenumberofshipmentsthatarerejectedintheEUforfoodsafetyreasonshasreducedasaresult.

The pharmaceutical sector in Indonesia is particularlypromising for EU business and the Vision Group wouldsuggest removing the decree 1010 (obliging localmanufacturing before selling products), increasing theFDI cap to 100% and ensuring better data exclusivity.These measures would greatly incentivize new EU directinvestmentscomingtothissectorinIndonesia,whichhavebeenstalledsincethe75%capwasintroducedin2007.

IntheFood&Beveragesarea,particularlybeef,dairyandalcohol,EUbusinessisexperiencinganumberofmeasuresthat restrict (potential) imports, such as pre-listing ofestablishmentsandrecognitionofEUfoodsafetystandards.

Moreover on courier services and EDS, the IndonesianPostallawisrestrictingdoor-to-doordeliveryandmaintainsrestrictive treatmentof foreign firmsand investors; localcontent intelecom, (wirelessbroadband)alsorestrictsEUbusinessinvolvementinkeysectors.

IngeneraltheVisionGrouprecommendslinkingIndonesianandEUbusinessassociations,tosupportbusinessdialoguesand to follow-upwith financing to helpmaterialise thepotential.

areconcernsinIndonesiaoverpossibleconsumerboycottsand on assuring fair access to the trade preferencesundertheEU’sRenewableEnergyDirective.TheEUandIndonesiahaveastrongdialogueontheissue,involvingbothindustryandcivilsociety,to:

• Re-assure Indonesia that the EUmarket remains open.ThereisnorestrictiononIndonesia’sexportsofpalmoil.GrowthinEUmarketdemandforCPOhasbeenstrong.

• Facilitatediscussionbetweenindustryandcivilsocietytopromotebettermutualunderstandingsocivilsocietyis aware of CPO industry concerns and industry canadapt to changing consumer tastes in the EU wheresustainability issues are increasingly important toconsumers.

• Technical dialogues to ensure technical thresholdsfor obtaining EU trade preferences for palm oil as arenewableenergysourcearesetfairly.Scientificdata,findingsanddialoguewillthenfeedintofuturerevisionofthresholds.

WoodandpaperproductsareanotherkeyexportareaforIndonesiatotheEU.IndonesiahaslongwantedtheEUtostrengthenitscontrolsagainsttheimportofillegaltimberproductsintotheEU.Indonesiawasoftheviewthat,aslongassuchtradecontinuedintotheEU,iteffectivelypromotedillegaltimberinginIndonesia.HoweverIndonesiadoesnotwantanyEUactiontoreducetheEUmarketforIndonesiantimberandpaperproducts.Inresponse:

• TheEUfirstpassedalawrequiringimportersintheEUtoguaranteethe legalityof thesourceof their timberandpaperimports.

• The EU and Indonesia have signed a VoluntaryPartnershipAgreement(VPA)thatwillassureaccessforlegalIndonesianexports.IfIndonesiaisabletocrediblyimplement its national legality system (SVLK), suchSVLKcertificateswillbesufficienttoguaranteeaccessintotheEUmarkets.

• The EU has provided €40 million in financialcooperation to support the timber sector in Indonesiaandwillprovideafurther€10milliontohelpindustryandcivilsocietytoimplementtheSVLKlaw.

In the area of fisheries, Indonesian exporters to the EUfound it hard to comply and prove compliance with the

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Estimatingex-antetheoveralleconomicimpactofatradeagreementisanimportantstepindefiningpolicypriorities.In this endeavour, computable general equilibrium (CGE)models are most suited in offering a sense of the likelyeconomic resultsofanFTA.This section summarizes themainresultsoftwoseparatesimulations:(i)ashortterm,staticassessmentofafutureEU-Indonesiatradeagreement;(ii) a longer-term, dynamic analysis, taking into accountthesynergies thatcanbecreatedbetweennewtradeandinvestmentopportunities.WhilethestaticassessmentyieldsthegainsforIndonesiainthemagnitudeof0.1%ofitsGDP,thedynamicanalysistakingintoaccountaccumulationofinternationalinvestmentflowsbringsthegainsto1.3%.

I. effects of the eU-IndonesIa fta: short-terM assessMent

OneofthemostwidelyusedCGEmodelstoestimateex-antethelikelyimpactofatradeagreementisthestandardstaticGTAPmodel.TheunderlyingGTAP7databasecoversbasicallythe entire world and contains detailed macroeconomicinformationforeachcountry,thusallowingcapturinginter-sectoralandinter-countryeffectsatradeagreementislikelytoinduce.BeforesimulatingthenewtradeagreementbetweenIndonesia and the EU, a baseline againstwhich results arebenchmarked needs to be generated. The baseline takes

into account Indonesian and the EU’s bilateral FTAs withthirdcountriesthathavebeenimplementedsince2004.Thepolicyscenarioassumestariffonlyfullliberalization,i.e.theeliminationofalltariffsintradeingoods.

Oneofthemostimportantconclusionsofthisanalysis isthatalthoughtradeagreementsneedtimetofullydelivertheir economic impact, even in the short run such atrade agreementwould increaseboth Indonesianand theEU overall welfare. Given the tariff-only liberalizationassumptionsandtheshort-termtimespan, theadditionaleffect on the Indonesian GDP is relatively modest.Nevertheless, an additional 0.1% (524 million euro,basedontheestimated2010GDPofIndonesia)couldbegeneratedannually.GiventhemuchlargersizeoftheEUeconomyanditsdiversifiedeconomicandtradestructure,the overall positive impact on EU GDP growth will alsoberelativelysmallinpercentageterms.Overall,IndonesiangainswilloriginateprimarilyinmorefavourabletermsoftradefollowingtheFTA.

ThedetailedCGEdisaggregationintoeconomicsectorsinIndonesiaalsoallowsabreakdownofeconomiceffectsbysector.WhileseveralsectorswillclearlybenefitasaresultoftheFTA,alimitednumberofeconomicsectorswillbesubjecttoadjustmentpressureintheshortrun.Whilethe

POTENTIAL GAINS/ECONOMIC ANALYSIS

ANNEX 2

45

database, which is benchmarked to year 2004.11 For thepurposeofthisexerciseitwasassumedthatthefutureEU-Indonesia tradeagreement enters into force in2015.Thetimehorizonofthesimulationswassetto2030,afterwhichallorthevastmajorityoftheeffectsofanFTAimplementedby 2015, should take place. Several results point out theimportanceof a longer-termassessmentof the economiceffectsofafutureEU-Indonesiatradeagreement.

Insteadofstatic0.1%additionalGDPgrowthforIndonesia,long-term dynamic gains are in the range of 1.3% ofIndonesianGDPin the longrun.This translatesroughlyin therangeof6.8billionofeuro (basedonestimated2010GDPof Indonesiaestimate).Due tosizeandothereconomicasymmetries,theeffectontheEUGDPremainsinpercentagetermsmuchsmaller.

Intermsofsectoraleffects,theoutputofIndonesianlightindustries is going to be 5% higher, than in a situationwithouttheFTA(seefigure1).Theproductionoftransportequipmentandpartsaswellastheprovisionofservicesarealsogoingtoincreaseby2%and1%,respectively.Theonlyeconomicsectorwhichshowsaslightoutputdeclineof0.3%isfuels.However,overallthesesectoraleffectssuggestthattheIndonesiaeconomyillbecomemorediversified,relyingmoreonmanufactured rather thanprimaryproductsandexports.

Figure 1: Effects on production in Indonesia and in the EU by sectors and countries, in %, cumulative changes in 2030 as

compared to the baseline

11 Inordertobringthedatabaseclosertothecurrentyear,anumberofadjustmentshadtobemadeontheoriginal2004data.Thus,thebaselinescenarioincludesanumberofimplementedEU’s,IndonesianandASEANFTAs,phasingouttheMulti-FibreAgreementetc.Thepolicyscenariois,forcomparabilitypurposes,thesameastheoneperformedundertheshort-termanalysis,i.e.tariffonlyEU-IndonesiaFTA.

natureofcomplexandfairlyaggregateCGEmodelsdoesnotallowamoredetailed sub-sectoralanalysis, this suggeststhat possible short-term adverse impact on certain smallandmediumsizedenterpriseswouldrequireaccompanyingsupportmeasures.Amongthelikelysourceofthisnegativeimpact is the limited availability of technology, lack ofcapacity and inadequate infrastructure in Indonesia.Therefore,thereisacaseforsupportingdomesticpoliciesinIndonesiaandenhancedcooperationwiththeEU,includingareorientationofEUtechnicalassistanceinordertomitigatetheseadjustmentcosts.Inthelongerterm,astheanalysisdescribedinthenextsectionsuggests,thenewinvestmentopportunitieslikelytobecreatedbyacomprehensivetradeagreement,will also alleviate these costs and createneweconomicopportunitiesformostsectors.

TheoverallconclusionisthattheFTAisexpectedtocreatebetter welfare and give an additional boost to economicgrowth in both partners.However, in the short-run, it isimportant toensure thatadjustmentcostsareadequatelyaddressedbyotherdomesticpoliciesandthroughbilateralcooperationinkeyareas.

II. lonGer-terM, dynaMIc assessMent of a bIlateral trade aGreeMent

Whilesomeeffectsareclearlyvisibleintheshort-term,tradepolicyalso leads to significant economic transformationsin the longer-term.Tocomplement this short-term, staticanalysis described above, CGE simulations were alsoperformed using a dynamic GTAP model. The dynamicmodel gives the possibility of introducing internationalcapitalflowsandthetimedimensionintotheexistingstaticframework. Inotherwords, thedistributionof theeffectsovertimeinthisdynamicCGEmodelisobtainedthroughtheaccumulationofcapitalandthroughcapitalflowsamongcountries being influenced by changes in profitabilityrates.10 This last feature seems tobeparticularly relevantfor Indonesia, aiming at hosting more technologically-advancedforeigninvestment.

Theunderlyingdatabaseonwhichtheanalysisisperformedis, like in the static analysis, based on the same GTAP7

10 Themodelgivesachoiceintermsofvariouspolicyparametersunderlyingtheallocationofinvestmentandsavings.Forthepurposeofthisanalysisitwasassumedthatcapital(bothsavingsandequity)isrelativelymobileamongdevelopedcountries,whileforthedevelopingcountriesthesearesavings,whicharerelativelyunrestricted,whilethesourcesoffoundingforthelocalfirmsaremorelimitedandskewedtowardsacquisitionofcapitaldomestically.

-1 0 1 2 3 4 5 6

light

transport eq.

services

other manufacturing

agri&food

chemicals

minerals

fuels

%

IndonesiaEU27

46

Figure 2: Effects on Indonesian trade values by sectors, in millions of 2004 US dollars, cumulative changes in 2030 as compared to the baselin

In terms of effects on trade volumes, Indonesianexport of light industries and transport equipment isestimatedtoincreaseconsiderably.Andasthesesectorsconstitute together a large share of total Indonesianexports,whenmeasuredinconstantprices,Indonesianexportsofgoodsandservices in2030 isgoing tobehigherbyUSD9.8billion(ascomparedtoasituationwithouttheFTA).Importsof(inparticular)chemicals,transport equipment and agricultural products andprocessedfoodarealsosettoexpandbyaroundUSD7.7 billions. Therefore, the overall Indonesian tradebalance in the longrunwill improvebyaroundUSD2billion.

III. beyond a shallow fta

Moreover, there are grounds to believe that if a deepand comprehensive trade agreement is going beyondsimple tariff dismantling, is implemented, the economicgains are going to be even more substantial. A typicalEU FTA contains many provisions going beyond tariffliberalization,suchasapproximation/mutualrecognitionof standards, enhancing competition, liberalisation ofbarriers to trade in services, opening up procurementmarkets etc. These provisions usually lower non-tariffbarriers to trade and enhance trade creation leading tobiggeroverallwelfaregains.

Forinstance,thedynamicresultsofthesimulatedFTApointoutanincreaseby2%innewFDIinflowsintoIndonesiaintheshortandmedium-run(2016-2020)andbyover4%ofnewFDIinflowsintoIndonesiaby2030(ascomparedtothesituationin2030simulatedwithouttheFTA).

Possible additional effects, which can be brought aboutby the liberalisation of barriers to trade in services areperhaps the most interesting in this case. Recent studyexploringconsequencesof the removalof restrictionsonservices by developing countries (CIE, 2010) pointed outthattheeffectsofsuchanactiononIndonesiawouldbeintherangeof0.1%ofitsGDP.Mostlikely,suchmovewillstimulatesubstantialadditionalFDIflows,inparticulartothefinancialintermediationsector.

Iv. costs of doInG nothInG

OnemaythinkaboutotherpossiblescenariosfortheEU-Indonesia trade relations. In case no FTA is concludedwhilesomebilateralagreementsaretakingplacewithotherpartners,tradediversionismostlikelygoingtodominateanyothereffectswithadverseconsequencesforIndonesia.Ontopofthis,theGSPsystemundergoingchangesisalsogoing to impact upon existing trade flows. Stating howlargewelfarechangesthesemightbeisbeyondthescopeofthisexercise.Neverthelessitisusefultorememberthatthechanges simulatedhere showonlyonepossibledirectionofevents.

v. trade and Poverty redUctIon

SincethepossibleFTAraisesconcernsaboutitsimpactonpoverty,weturnnowtothetopicofhowtradeinfluencespoverty andwhat kindof effects canbe expected in thecaseoftheFTAbetweentheEUandIndonesia.ThedynamicGTAP simulations described above suggest an overallrise in the Indonesian wages of 1.5% as a result of atradeagreement.This isa strong indication that incomelevels in Indonesia, including for thepoorer segmentsofthepopulationwillbepositivelyaffected.Returnstoland(important for the rural population) will increase in thelongrunaswell,butthechangeisgoingtobesmaller.Itisalsoimportanttoemphasizethatothersupportingpolicieswillcertainlyhaveastrongimpactonpovertyreduction,alongsidetheimpactoftradepolicy.

Economic literature on the link of trade and povertysuggeststhatcontrarytothegeneralperceptionthattrademayharmthepoor,tradeisingeneralpovertyalleviating(seeWintersetal.forasurveyofappliedstudies).Whethertrade liberalisation has a positive impact on povertydepends therefore on the development of markets forunskilledlabourandoftencomplementarydomesticreformsare needed to enhance the ability of poorer households

-1000 1000 3000 5000 7000

agri&food

minerals

fuels

chemicals

transport eq.

light

othermanufacturing

services

millions of 2004 US dollars

Indonesian exports total Indonesian exports to the EU

-1000 1000 3000 5000 7000

agri&food

minerals

fuels

chemicals

transport eq.

light

othermanufacturing

services

millions of 2004 US dollars

Indonesian imports total Indonesian imports from the EU

exPort IMPort

47

to exploit potentially beneficial changes (cf. Hertel andReimer,2005).Moreover,countriesmayneedtostrengthensocial protection to mitigate adjustment effects of tradeliberalisation(cf.Wintersetal.,2004).

In the case of Indonesia ex-ante analysis has foundtrade liberalisationgenerally reducespovertywithmoreliberalisation entailing a stronger reduction in poverty.RobilliardandRobinson(2005),forexample,findthatfullmultilateraltradeliberalisationwouldreducethenumberofthepoorbyaround1.3millionpeople.SincethemajorityofthepoorinIndonesiareceiveincomefromagricultureand transfers (Hertel etal.,2003), significant reductionsin poverty will be driven by this strata. Henceforth fortradeliberalisationtobepoverty-reducinginIndonesiaitshouldbenefitthesepartsofsociety.Hartonoetal.(2007)

examines the poverty implications of the EU-IndonesiaFTA as opposed to some other FTAs. They find that anIndonesia–EU FTA would benefit Indonesia relative toother FTAs (i.e. FTAs with India or Singapore) in termsofrealGDPgrowth,increasesinhouseholdincome,andwelfare. Moreover, an Indonesia – EU FTA is supposedto reduce poverty with increases in average householdincome disproportionately benefitting unskilled labourandruralareas.

Taking all the above into account, one should expectthe full EU-IndonesiaFTA,with all the tariffs eliminatedacross-the-board,tohavetheeffectofalleviatingpoverty.Nevertheless, the inclusion of additional provisionsreducingNTBsseemsdesirableaswellasothereffectivelytargetedsupportmeasures.

48

eU and IndonesIa: lonG hIstory, stronG Present and Great fUtUre...

Deep economic integration over a very wide spectrumof policies and legal obligations, and with the politicalacceptance of centralized common institutions, has beenthe foundation for European growth and stability formore than50years. Today,EUcitizens from27MemberStates can travel, work and live without any constraintsinside a market of 500 million people. Business enjoysgenuinefreemovementofgoods,services,capital;(tosomedegree)workersandcodifiedtechnologyandcanestablishitself anywhere in the Union. The world benefits fromEuropeanintegration.Indonesia’sgovernmenthasasinglecounterpartfortrade,not27individualstates.IndonesianexporterstoEuropemeetoneEUstandard,not27differentstandards.IndonesianvisitorstoEurope’s“Schengen-area”needonevisaandcantravelthroughoutthe“Euro-zone”usingonecurrency.

Indonesia has developed rapidly into a strong, stabledemocracyaswellasanemergingglobaleconomicpower.ItisaG20membershowingleadershiponissuesofglobalimportancesuchasclimatechange,financialstabilityandpeace.InIndonesia,theEUhasfoundanimportantstrategicpartner that shares its values of development, diversityand democracy. Today it is a friendship that includesco-operation on education, climate change, emergencyresponse, justice, tradeandinvestment-allbasedonthecorevaluesEUandIndonesiashare.

bIlateral eU and IndonesIa allIance – eqUal Partners and MUtUal benefIt

The existing EU and Indonesia alliance is extensive andimportantforboth whereathrivingeconomicpartnershipis paving the way for closer political relationship to thebenefitoffuturegenerationsofEuropeansandIndonesians.

INDONESIA – EU DEEPENING FRIENDSHIP

ANNEX 3

49

In the political cooperation area, cooperation has beenexpanding for two decades. This has ranged from fromelectionobservationduringthelate1990’s,throughhumanrights and inter-faith dialogues and even to support onconflictresolution.ThegovernmentofIndonesiarequestedsupport from the EU to assist in its conflict resolutionstrategy in Aceh. The EU provided the Aceh MonitoringMission and facilitation of negotiations by PresidentAhtisaari.

Intheareaofdiversity,peopletopeoplecontactisgrowingeveryyear.Students,businessmenandtouristsareboostingthesepeopletopeopleflowstowardsthemillionperyearlevel.Ineducation,theEUprovidesabout1,000grantstoIndonesianstudentstostudyatEuropeanuniversitiesperyear.

ThankstotheopportunitiesopenedupbythePartnershipandCooperationAgreement, theEUand Indonesiahavestartedcooperatinginnewareassuchasonsecurityissueslikecounter-terrorism,suchasonresearchandtechnology,suchasonhumanrightsdialogue.

Intheareaofdevelopmentthroughtradeandinvestment,the EU and Indonesia mutually benefit from huge-scalecommercialtiesbetweenthetwoeconomies:

1. TheEUisIndonesia’ssecondlargestinvestor.Over700EU companies are operating in Indonesia, providingmore than500,000 jobs.Thisnumberwill increaseasIndonesia’s economy continues on its path to rapidgrowth.

2. The EU is Indonesia’s second largest export market.Indonesia’s exports to EU currently stand at EUR 14billionbutaresettoexpandasIndonesiancompaniesmoveupthevalue-chain.

In thedevelopment through financial cooperation area,the EU and its Member States provide over EUR 700millionannuallytoIndonesiaacrosssectorsvitalforfutureprosperity such as education, health, trade and climatechange:

1. The EU and its Member States are supportingIndonesia’s climate change initiatives with US$1.5billion, including projects encouraging forestryconservation and sustainable management. EUspecificallysupportsIndonesia’sREDD+strategy,MRVsystem,andresiliencetoclimatechangeimpacts.The

EUassistsIndonesia’seffortstocombatillegalloggingand ensure credible legal verification through tradepoliciesandco-operationwithgovernmentagencies,theprivatesectorandcivilsocietyandtheEUpromotesenvironment friendly consumption and productionthroughprojectsinvariouseconomicsectorssuchasthebatikindustry

2. TheEUand itsmember states havebeen leaders insupporting Indonesia after natural disasters. TheEU was the largest donor to the Multi Donor TrustFund for Aceh and Nias to support reconstructionefforts after the  2004  Indian Ocean  tsunami. TheEU has also provided significant financial supportfor humanitarian and long-term reconstructionassistance following the earthquake and tsunami intheMentawai Islands, theMerapi volcanic eruptionand in theaftermathof theYogyakartaandCentralJavaearthquakes.

3. Since 2010, EU has provided funds directly to theIndonesian state budget to support Indonesia’s ownpoliciesandprioritieswithineducation.EUco-fundswithAustraliaa$1billionprogrammetoincreaseknowledge,competitivenessandtowardsequalopportunitiesintheeducationsector.TheEUissupportingimplementationofminimumstandardstoimprovethequalityofbasiceducationinIndonesia.

an eMerGInG Global allIance: IndonesIa and eU toGether MakInG a dIfference

Given that the EU and Indonesia share the same viewsand approaches to common global problems, EU andIndonesia are natural allies in the global domain andcooperation through bodies such as the UN or G20 isexpandingrapidly.

1. InWTO,EUandIndonesiaareworkingforfairerglobaltradeandareengagedinnegotiationstosecureafairerresultintheWTO’sDohaDevelopmentRound.

2. In the G20, EU and Indonesia  worked to achieve apositiveagreementontackling the2008globalfinancialcrisis.

3. Inclimatechangeareas,EUandIndonesiahavepledgedto reducegreenhousegas emissions: theEUbyup to30%by2020andIndonesiaby26%by2020.

50

Major soUrce for InvestMents In IndonesIa … bUt so MUch More PotentIal

Thegreatest strengthof thecommercialalliancebetweentheEUand Indonesia lies in thegreater tendencyforEUcompanies to invest in Indonesia, rather than simply totrade with it. This assures Indonesia that its favourabletradebalancewithEUwillcontinue(€7billioninsurplusin2010)butalsothatthecommercialalliancewiththeEUwillproducefargreaterlocalvalueaddedforIndonesia:

1. Employment– existingEU investmentsgenerateover500,000jobsinIndonesia.However,themultiuplierrateismuchlarger:oneEUinvestorrecentlycommissionedan independent study to see the additional indirectemploymentbenefitsofitsinvestmentintheIndonesiaeconomy – in addition to having some 10,000 directemployees,thestudyidentifiedthat150,000Indonesianwereemployedinwholesaleandretailsectorsassociatedwiththatcompany’sproducts.

2. Technology transfer. By expanding investment,European companies bring the technologies to theIndonesian market – adding further intellectual andcapacity value locally. For example, a company inBandung formed a partnership with Airbus and nowproduces locally in Indonesia the struts that bind thewingsoftheAirbusA380tothefuselage.

3. Mutual prosperity: European investors are the secondlargestinIndonesiaencompassingoilandgas;mining;

services;foodproducts;metalandmachinery;chemicalsand manufacturing. EU Member States companiesrecognisetheadvantagesof Indonesiafor investment,which include: economic growth (soon predicted toreach 7%); a strong middle class; a stable politicalenvironment;thatIndonesiaisthelargesteconomyinadynamicASEANandAsianregion;itsinfrastructureopportunities; production networks and network ofFTAs;alsotheavailabilityofnaturalresourcesanditslarge labour force - and its increasingly competitiveadvantages thathelpposition Indonesia positively inrelationtoChina.

conclUsIon – a frIendshIP that coUld Grow even fUrther

EUandIndonesiarelationsarealreadystrongandgrowinghealthily across the board. Trade and investment tieshave always underpinned this alliance, thanks largely tothe fact that there is great complementarity between thetwo economies. The EU and Indonesia do not make thesame products and do not compete with each other. EUcompanies tend to invest in Indonesia rather thansell toIndonesia.ThesetiescontinuetobringmassiveadvantagetoIndonesia–ahealthytradesurplusandinvestmentsbyEUcompaniesinIndonesiacreatingjobsandtransferringtechnology. These ties also bring advantage to the EU –withgreatproductscomingtotheEU,whileEUinvestingcompanies continue to build their activities. Trade andinvestmentwill continue tounderpin this alliance in thefuture.

51

52

53

BACKGROUND NOTES

54

1. MAINPRODUCTSTRADED

TradeflowsbetweenIndonesiaandtheEUcomplementeachother.Indonesia’sexportstotheEUlargelyconsistofagriculturalproducts,fuel&minerals,textile&clothing;and(semi)manufacturedgoods.

EU exports to Indonesia mainly consist of high-tech machinery, transport equipment, manufacturing goods,chemicals,andprocessedfoods.EUproductsareimportantforthedevelopmentoftheIndonesianinfrastructureandupstreamindustryandforconsumerdemand.

IndonesianexportstoEU-2010 %oftotal

1 Animalorvegetablefatsandoils 14.7%

2 Machinery,electronics,&electrical 14.51%

3 Textilesandtextilearticles 10.9%

4 MineralProducts 9.2%

5 Footwearandheadgear 6.7%

6 Miscellaneousmanufacturedarticles 5.8%

7 Plastics;rubber 8.9%

8 Preparedfoodstuffs;beverages,tobacco 3.6%

9 Productsofthechemical 6.6%

10 Woodandarticlesofwood 4.0%

TradecomplementaritiesbetweenIndonesiaandtheEUarereflectedinthelistoftoptenproductstradedbetweenIndonesiaandtheEU.Outoftengroups,fivearehighlycomplementary.ForIndonesiatheseare:animal/vegetablefats&oil,mineralproducts,footwear&headgear,miscellaneousmanufacturedgoods,andwood&woodproducts.ThefivegroupsoftheEUare:transportequipment,metals,paper,opticalproducts,andanimalproducts.Theotherfivegroupsaresimilarataggregatedlevelbutcomplementarywhentakingatamoredisaggregatedlevel.In machinery, electronics, and electrical products, Indonesia largely exports office equipment and householdelectronics,whiletheEUexportsindustrialmachineryandhigh-techcomponentsforthedownstreamindustry.

EUexportstoIndonesia-2010 %oftotal

1 Machinery,electronics,&electrical 42.9%

2 Chemicalproducts 16.3%

3 Transportequipment,aircraft,ship 10.6%

4 Basemetalsandarticlesofbasemetal 7.6%

5 Paperorpaperboard 6.9%

6 Plastics;rubber 4.4%

7 Liveanimals;animalproducts 3.5%

8 Optical,photocineprecisioninstruments 2.6%

9 Preparedfoodstuffs;beverages,tobacco 2.6%

10 Textilesandtextilearticles 2.8%

IINDONESIA–EUTRADERELATIONS

This background note is to support the Vision Group and its discussions. It does not express official government views. This applies to all following Background Notes.

55

2. DEVELOPMENTS

EventhoughthetradevaluebetweenIndonesiaandtheEUisgrowinginabsoluteterms,inrelativetermsitisreducingas Indonesia increasingly imports fromChina, IndiaandJapan.TheEU is Indonesia’s second largestexportdestination(13%share)andthefourthlargestsourceofimports.FortheEU,Indonesiaisthe19thlargestimportsource(1%share)andthe35thlargestexportdestination(0.5%share)fortheEU.TheshareoftheEUasanIndonesianexportdestinationincreasedfrom15%in2006to18%in2010andtheshareoftheEUasasourceforIndonesianimportsdroppedfrom14%in2006to8%in2010.

Inabsoluteterms,tradebetweentheEUandIndonesiaincreasedovertheperiod2005-2010–withapositivetradebalanceforIndonesia.

Source:BPS(TheIndonesianCentralBureauofStatistics)

EU’stradewithAsia(2010,Eurostat)

Rank Country MEUR %oftotal

2 China 394966 13.9%

6 Japan 108558 3.8%

8 India 67778 2.4%

9 SouthKorea 66563 2.3%

12 Singapore 42591 1.5%

14 Taiwan 38850 1.4%

16 HongKong 37877 1.3%

17 Australia 36590 1.3%

22 Malaysia 31926 1.1%

24 Thailand 27168 1.0%

31 Kazakhstan 20107 0.7%

32 Indonesia 20043 0.7%

36 Vietnam 14068 0.5%

42 Philippines 9107 0.3%

45 Bangladesh 8200 0.3%

48 Pakistan 7456 0.3%

ASEAN 146693 5.2%

10062.211818.8

13124.5

15049.813533.4

17069.8

5811 60037650

10529.58649.2

9767.2

4251.25815.8 5474.5

4520.3 4884.2

7302.6

3000500070009000

1100013000150001700019000

2005 2006 2007 2006 2009 2010

ThedevelopmentofIndonesia-EUTradeRelation(inUS$million)

IndonesianExporttoEU IndonesianImportfromEU TradeBalance

56

1. INTRODUCTION

Indonesia is the largest economic power in SouthEastAsia. The country has achieved remarkable success inits economic development over the last decade. Even though being hard hit by the Asian economic crisis in1997, Indonesia managed to recover and demonstrate a positive economic growth record in the last decade.TheGovernmentofIndonesiaenvisionshighandinclusiveeconomicgrowthasameansofachievingsustainedprosperity for its people and the protection of its natural resources and environment in its National Long-TermDevelopmentPlan2005–2025.Toachievethatobjective, Indonesiawillneedtoachievehighexportandinwardinvestmentgrowthrates.Indonesiaishighlycompetitiveonprimaryproductsandsomemanufacturingcommodities.

The EU is the largest trading blocworldwide. It exported goods and servicesworth 2.5 trillionUSD in 2010,equivalentto16%oftheEU’sGDP.Theseexportsinclude1,814.6billionUSDexportsingoods,699.6billionUSDofexportsincommercialservices.TotalEUimportsamountedto2.5trillionUSDin2010,ofwhich1,974.1billionUSDingoods,602.1billionUSDincommercialservices.

On9November2010,theEUadoptedapaper“Trade,GrowthandWorldAffairs”,proposingastrategytoreducetradebarriers,openglobalmarketsandgetafairdealforEuropeanbusinesses.ThestrategyalsorecognisesthatEuropeisthelargestsourceofforeigndirectinvestmentabroadandthatitattracts29%ofglobalforeigndirectinvestment.ItisintheEU’sinteresttokeeptheworldtradingsystemopenandfair.TradehelpsEuropetokeepitsedgeininnovative,high-valueproductsandservicesthatgeneratesustainable,qualityjobs.

2. INDONESIA’STRADEPOLICY

Inordertoenhanceandmaintainthepositivetradebalancewithitstradepartners,Indonesia’smaintradepoliciesandstrategiesareasfollows:

(1)Enhancingthecompetitivenessofnon-oilexportsproductstodiversifyitsexportmarketsandincreasediversity,qualityandimageofexportproducts.Currently,Indonesiahas10mainexportcommodities,namelytextileproductsandtextiles,electronictools,rubberanditsby-products,palmoil,timberandforestproducts,footwear,automotivetools,shrimps,cocoa,andcoffee.Indonesiaisalsodevelopingotherpotentialexportcommodities,suchasleatherproducts,medicaltools,herbalplants,fishandfisheryproducts,spice,andjewellery.Amongservices,Indonesiaisfocusedonconstruction,informationtechnology,andlabour-relatedservices.

(2) Improvingthebusinessclimateforexternaltradebyimprovingservicesinlicensingandnon-licensingrelatedtoexternaltrade.

(3) Increasing Indonesia’s roleandcapacity in international tradediplomacy tominimise tariff andnon-tariffbarriersinexportsmarketsbyincreasingparticipationatvariousinternationalforumsandnegotiations.

(4) Improvingdistributionnetworkstosupportthedevelopmentofthenational logisticssystem,strengtheningtheinternalmarketandtheeffectivenessofthegoodsmarket,andimprovingtheeffectivenessonmonitoringandbusinessclimate.Thispolicyisembodiedinthelongtermplanfordevelopingtheeconomiccorridors,strengtheningthenationalconnectivitysystem,andacceleratinghumanresourcecapacitydevelopment.

3. EU’STRADEPOLICY

TheEuropeanCommissionusestradepolicytohelpexitthecurrentcrisisandtocreatetherightenvironmentforastrongEUeconomy.Specifically,theCommissionproposes:

IITRADEPOLICY

57

1. tocompleteitsambitiousnegotiatingagendaattheWTOby2011andwithmajortradingpartnerssuchasIndiaandMercosurandlaunchnewtradenegotiationswithseveralASEANcountries.CompletingthisagendawouldincreaseEuropeanGDPbymorethanonepercentperyear;

2. todeepentraderelationswithotherstrategicpartners,suchastheUS,China,RussiaandJapan,wherethemainfocuswillbeontacklingnon-tariffbarrierstotrade;

3. tohelpEuropeanbusinesses,inparticularSMEs,accessglobalmarketsbysettingupamechanismtoredressthebalancebetweenopenmarketsintheEU(forexampleinpublicprocurement)andmoreclosedmarketswithourtradingpartners;

4. tostartnegotiatingcomprehensiveinvestmentprovisionswithsomeofEUkeytradingpartners;

5. tomakesure trade is fair,andEUrightsareproperlyenforced, translatingpromiseonpaper intoconcretebenefits(i.e.improvemarketaccess,IPRetc.);

6. toensurethattraderemainsinclusivesothatthebenefitsgotothemany,notthefew.EUaimstosetupanewframeworkofrulesfortradepreferencesfordevelopingcountries.

4. FORMOREINFORMATION

http://www.kemendag.go.id

http://trade.ec.europa.eu/doclib/docs/2010/november/tradoc_146955.pdf

58

1. INDONESIA–ANIDEALINVESTMENTLOCATION

TheInvestmentCoordinatingBoardofTheRepublicofIndonesia(BKPM)encouragesinvestmentin‘remarkableIndonesia’-targetingtotalinvestmentsfor2011of26.4billionUSD.Indonesiaispromotedforitsdemocraticrule,economicpotential,naturalresources,largeandgrowingdomesticmarketandyoungandtechnicallytrainedworkforce.Indonesiaistheworld’sfourthmostpopulouscountry,aG-20memberandhasagrowingmiddleclassandastrategicgeographicalpositionintheregion,especiallytowardsotherASEANcountries.

TheUNCTAD‘WorldInvestmentProspectsSurvey’identifiesIndonesiaaspartofthetoptenattractivedestinationsforforeigndirectinvestment(2009-2011).Indonesiaisclosetoreachinginvestmentgradebythebeginningof2012,asindicatedbytwomajorratingagencies(S&PandMoody’s)thatrecentlyupgradedtheirrankingofIndonesia.

2. SUPPORTEDBYINCREASEDINTERESTANDFIGURES

AccordingtoBKPM,total realised investment (bothdomesticandforeigndirect investment)amountedto23.0billionUSDin2010,a54.2percentincreasefrom2009.FDIinIndonesiaisbecomingincreasinglygeographicallydiversified,withinvestmentrealisationoutsideJavaincreasingby174percentfrom2009to2010.TheEUremainsIndonesia’ssecondlargestsourceofFDI(afterSingapore)andthistrendisexpectedtocontinuethroughout2011.

ShareofFDIrealisationinIndonesiabycountryoforigin:

Country 2005 2006 2007 2008 2009 2010

Singapore 24% 8% 36% 10% 40% 31%

EU 9% 31% 10% 13% 18% 17%

Japan 13% 15% 6% 9% 6% 4%

SouthKorea 5% 8% 6% 2% 6% 2%

Source:BKPM.

3. INCLUDINGFROMTHEEU

ItisestimatedthatEU’stotalinvestmentinIndonesiaamountsto66billionUSD,withover700EUcompaniespresentinIndonesia,employingover500,000people,butthereispotentialformuchlargerfigures.EUinvestorsfocusonsustainabledevelopment,fairemploymentconditionsandhighqualityproducts,servicesandtechnologicalsolutions.

Source:BKPM.

IIIINDONESIA-EUINVESTMENTS

821.2

1871.6

1018.7

1972.6

2776.5

0

500

1000

1500

2000

2500

3000

2006 2007 2008 2009 2010

FDItoIndonesiafromtheEU(MUSD

59

DatacollectedfromaninvestmentsurveyconductedbytheEUDelegationinJakartadisplaysthatthemainsectorsof EU investment include electronics, construction, chemical and pharmaceutical industry, power generation,miningandmanufacturingofnon-metallicmineralproducts.

4. …BUTNOTACCORDINGTOITSPOTENTIAL

However, althoughEU is theworld’s largest sourceof investments, only1.6%EU investment toAsiagoes toIndonesia. Even though Indonesia’s population represents 45% of all ASEAN countries, it only receives 10%ofFDIdesignatedtoASEANandonly7%ofEUinvestmentstoASEANgotoIndonesia.EUcompaniespreferinvestmentsinotherASEANcountriesmainlyduetobettertradeandinvestmentclimate,fewerrestrictionsonforeigninvestmentandevenmorerapideconomicgrowthrates.

Source:Eurostat.

Indonesia,618;1.6%

RestofASEAN,8991;23.3%

RestofAsia,29055;75.1%

AverageEUFDItoAsia1999-2009-EURM/%

60

1. INDONESIA’SINVESTMENTPOLICY

Sincethe1998Asianfinancialcrisis,thequalityofinfrastructureinIndonesiahascontinuedtodeteriorateasaresultofthedecreaseinpublicspendinginrealterms,aswellasduetomanyprivatesectorinfrastructureprojectsbeingdelayedorcancelled.ThishasalreadydecreasedthesupplycapacityoftheIndonesianeconomyandreducedpotentialgrowthtopre-crisislevels.

TheIndonesiangovernmentthereforeprioritisesdevelopingphysicalinfrastructurewhichcanbeintegratedintothedomesticeconomyincludingtheconstructionofroadsnationwideandinter-islandtransportationsystemstointegratethedomesticeconomy.Indonesiaalsoseekstoensurethedevelopmentofdomestic“soft”infrastructure,includingimprovedbureaucracy,simplificationofinvestmentlicensing,reductionofthecostofdoingbusiness,legalcertainty,andsimplificationofregulations.Deregulationtoeliminateinstitutionalhurdlestodomestictradeflows;actionsagainstnon-competitivebehaviourwithinthedomesticeconomy;andimprovementsinthedomesticclimatefordoingbusinessshouldbegiventhehighestpriorityineconomicpolicy.Severalofthoseprioritieshavebeenimplemented,includingsimplifyingbureaucraticproceduresintrade,simplifyingdocumentation,operatingportsona24-hour,sevendaysaweekbasis,andharmonisingnational,regionalandinternationalregulations

2. THELATESTDEVELOPMENTOFINVESTMENTPOLICYREFORM

Indonesiahasestimatedthat its total infrastructureneedsfrom2010to2014arearoundUS$21.3billion.Thestrategyoninfrastructuredevelopmentinfive-yearnationaldevelopmentplan2010–2014consistsof:

1. EnhancingPublicPrivatePartnerships:

• Shiftingtheroleofthegovernmenttobecomeafacilitatororpromoter.

• Focusonservicesustainabilitythroughefficientandeffectiveinvestment.

2. Connectivity:

• Developinginfrastructurewhichacceleratestheflowofgoodsandinformation.

3. EconomicCorridors:

• Encouraging industrialisation through regional the development of centres in six Priority EconomicCorridors.

3. EU’SINVESTMENTPOLICY

TheEUistheworld’sbiggestplayerinthefieldofForeignDirectInvestment(FDI).Bytheendof2009outwardstocksofFDIamountedto4.9trillionUSDwhileEUinwardstocksaccountedfor3.6trillionUSD.

TheLisbonTreaty’sattributionofEUexclusivecompetenceonFDIintegratesFDIintothecommoncommercialpolicy. Until now, the Union and the Member States have separately built around the common objective ofprovidinginvestorswithlegalcertaintyandastable,predictable,fairandproperlyregulatedenvironmentinwhichtoconducttheirbusiness.ThoseinvestmentsaresecuredviaBilateralInvestmentTreaties(BITs).Theyestablishthetermsandconditionsforinvestmentbynationalsandcompaniesofonecountryinanotherandsetupalegallybindinglevelofprotectioninordertoencourageinvestmentflowsbetweentwocountries.AmongstotherthingsBITsgrantinvestorsfair,equitableandnon-discriminatorytreatment,protectionfromunlawfulexpropriationand

IVINVESTMENTPOLICY

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directrecoursetointernationalarbitration.Withaviewtoensuringexternalcompetitiveness,uniformtreatmentforallEUinvestorsandmaximumleverageinnegotiations,acommoninternational investmentpolicyshouldaddressallinvestmenttypesandnotablyassimilatetheareaofinvestmentprotection.TheUnionshouldfollowtheavailablebestpracticestoensurethatnoEUinvestorwouldbeworseoffthantheywouldbeunderMemberStates’BITs.

Throughinvestmentnegotiations,whichinprinciplewouldbeconductedaspartofbroadertradenegotiations,theEUshouldseektoobtainbindingcommitmentsfromitspartnersthatguaranteeandprotectthefreeflowofallformsofinvestment.Stand-aloneinvestmentnegotiationswouldalsoremainanoption.Intheshortterm,theCommissionwillseektheadaptationofnegotiatingdirectivestoenlargethescopeofnegotiationsforanumberof countrieswithwhom tradenegotiationsareongoing,where strong interests exist andwhere requestshavebeenformulated.While theprinciplesandparameters forsuchnegotiationswillbe inspiredby ‘bestpractices’thatMemberStateshavedeveloped,thisCommunicationalreadysubmitssomebroadcontoursofthescopeandstandardstheUnionshouldbesettingthroughinternationalinvestmentnegotiations.

EU investmentpolicy is focusedonprovidingEU investorsand investmentswith legalcertaintyanda stable,predictable,fairandproperlyregulatedenvironmentinwhichtoconducttheirbusiness.TheEU-KoreaFreeTradeAgreementisthemostrecentexampleofanagreementthatreflectsEUinvestmentpolicynegotiations.Itsmainprinciplesare:i)focusonlong-terminvestment,ii)improvedmarketaccess,iii)fosteringtransparencybyclarifyingtheregulatoryframework;iv)itaimsatfreeingtheflowofpaymentsandinvestment-relatedcapitalmovements,andv)itseekstofacilitatethemovementofinvestment-relatednaturalpersons.

4. FORMOREINFORMATION

www.bkpm.go.id

http://ec.europa.eu/development/icenter/repository/tradoc_118805_en.pdf

http://trade.ec.europa.eu/doclib/docs/2008/november/tradoc_141470.pdf

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1. WHATISAIDFORTRADE

“Aid for Trade” (AfT) is development assistance provided in support of the efforts of developing countries todevelopthebasiceconomicinfrastructureandtoolstheyneedtoexpandtheirtrade.TheintentionbehindtheAfTInitiativeisnottocreateanewglobaldevelopmentfundfortrade,butrathertoexpandfinancialresourcesdevotedtotradeaspartofexistingdevelopmentstrategies.AfThasabroadscope,encompassingbothaiddirectlyhelpingbeneficiariesformulateandimplementtradepoliciesandpractice(“TradeRelatedAssistance”),andaidsupportingdevelopingbeneficiaries’widereconomiccapacity to trade,e.g. invest in infrastructureandproductivesectors(“widerAfT”).

TheEUisoneoftheleadingprovidersofAidforTrade.On15October2007,theEUCounciladoptedtheEUAfTStrategyaimedatsupportingdevelopingcountriestofurtherintegrateintotheglobaltradingsystem.ThestrategyisajointEUpolicyinitiative,providingforadoubleandcomplementaryfocusonmoreresourcestoAfTandbetterimpactondevelopmentobjectives,especiallywithaviewtopovertyreduction.TotalAfTcommitmentsoftheEUhaveconstantlyincreasedovertheperiod2004-2007,toreach€7.2billionin2007.

EUAfT isdeliveredasotherEUaid, followingagreedAidEffectivenessprinciples.Thismeansgoing throughpolicydialogue,needsassessments,inclusionofprioritiesintonationalandregionaldevelopmentstrategies(suchasPovertyReductionStrategyPapers),andformulationofresponsestrategiesonthisbasis.Thisistheonlywaytoensureownership,coherentprogrammesandsustainability.

2. SUPPORTTOINDONESIA

2.1. EUDelegation

EUcooperationwithIndonesiaisfocusedontradepolicyissuesandimprovementofinfrastructureforIndonesianexports,insectorswhereneedshavebeenidentifiedbytheGovernmentofIndonesia.Futureco-operationwillalsofocusonexportqualityinfrastructureissuesandsupportingimprovementinregulatoryissuesaffectingthetradeandinvestmentclimate.

TheEUDelegationsupporttoimprovementoftradeandeconomicconditionshasbeenaconstantpriorityareaofcooperationfortheEUwithIndonesiaandtotaldisbursementsofassistancehasamountedtoEUR20millionduringtheperiod2006-2009.EUR9.3millionisallocatedtoimproveIndonesia’spublicfinancialmanagementsystemsandisimplementedthroughaMulti-DonorTrustFund.Inaddition,majorcooperationinitiatives,suchas theEU-IndonesiaTradeSupportProgramme II (EUR15million)address theneed to strengthen thequalityinfrastructurethatensurescomplianceofIndonesianexportstointernationalstandards.Finally,theupcomingEU-IndonesiaTradeCooperationFacility(EUR12.5million)willsupportthereformprogrammesofthegovernmenttoimprovetradeandinvestmentclimate,coveringimportanttopicssuchastradeandinvestmentpolicy,technologytransferandintellectualpropertyrights.

TheEUhasalsosupportedtheIndonesianbusinessassociationsandchambersofcommerce,whicharekeyactorsintheimprovementoftradeandinvestmentclimateinthecountry.Thissupporthasbeenchannelledthroughgrantprogrammes suchas theSmallProjectsFacility,whichwillbecontinued in2011witha similar schemedirectedtothecivilsocietyorganisationsinvolvedinthetradeandinvestmentsector(EUR2.5million).

There is also an important EU-ASEAN cooperation programme that aims at supporting ASEAN EconomicIntegration.Therearesixon-goingorabouttostartprojects,amountingtoEUR38.7million,coveringareassuchascustoms,standards,IPR,singlecivilaviationmarket,statisticsfortradeandinvestmentandothertrade-relatedaspects.Newprogrammeswhichwillstartin2011supportASEANFTAnegotiatingprocess(EUR2.5million)andtheASEANEconomicIntegrationSupportProgramme(EUR15million).

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2.2.EUMemberStates

EUMemberStatesarealsoactiveinthefieldoftradeandinvestment.

TheNetherlandsassiststheMinistryofMarineAffairesandFisheriestoimprovesanitaryconditionsforfisheriesexports.TheNetherlandscontributesUS$10milliontotheMultiDonorFacilityforTradeandInvestmentClimatefortheperiod2008-2013.Inaddition,afacilityforimprovingtheinvestmentclimateinIndonesia’sregionsisimplementedbytheBeneluxChamberofCommerceinIndonesia(INA),amountingtoIDR8billion.

Germany supports SME development, including improving export skills, together with multilateral and otherbilateraldonors.TheseprogrammeshavedisbursedoverEUR130millionduring2007-2009.

TheCzechRepublicfinancedaregionaltransportinfrastructureprojectinYogyakarta,totallingEUR280,000overthepastthreeyears.

Spainhas a facility of supporting commercial projects, primarily in the infrastructure sector, implemented bySpanishcompanies.Thefacilityhasrunsince2004andamountstoEUR210million,whereof50%isthroughasoftloanand50%oncommercialterms.In2008aregionalprogrammecommencedtoenhancethelivelihoodoffishermen.TheprogrammeamountstoEUR1.8millionforIndonesiaduringfiveyears.

SwedensupportsanumberoftradeorganisationsinSwedenandIndonesiainatextiletradepromotionprogramme.Anexpandedprogrammeforothersectors(furnitureandfoodproducts)isbeingplannedandexpandedcooperationaround policy issues affecting international trade is being discussed. Sweden finances an air transportationprogrammeforeasternIndonesia.Corporatesocialresponsibilityisanotherprioritisedareawithdiscussionsbeinginitiated.Theindicativebudgetfor2010–2012isaroundSEK3million(aroundEUR0.4million).

3. FORMOREINFORMATION

http://ec.europa.eu/development/icenter/repository/tradoc_118805_en.pdf

http://trade.ec.europa.eu/doclib/docs/2008/november/tradoc_141470.pdf

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1. INTRODUCTION

Investmentineducationiscrucialforacountry’seconomicdevelopment.EducationisthemainfocalsectorforEUcooperationwithIndonesia.AnumberofprogrammesareinplacetosupporttheimprovementofIndonesia’seducationsystem.

2. ERASMUSMUNDUS

TheErasmusMundus(EM)scholarshipprogramme,fundedbytheEuropeanCommission(EC),hasawardedover7,000scholarshipsforstudentsandscholarsfromallovertheworldsince2004.266IndonesianshavereceivedtheErasmusMundusscholarships.Altogether,theEUandtheEUMemberStatesprovidesome1,000scholarshipsayeartoIndonesianstudents.ThisisinadditiontothenumberofIndonesianstudentsgraduatingintheEUwhofinancetheirownstudies.TheErasmusMundusMasterCourse(EMMC)isopenforgraduatestudentstoundertakeEMMCinatleasttwoormoreuniversitiesintwoormoreEUcountries;andscholars/academicians/researcherstoconductteachingandresearchperiodsofthreemonthsattwoormoreuniversitiesintwoormoreEUcountries.ErasmusMundusJointDoctorate(EMJD)degreeoffersfellowshipscoveringuptothreeyearsofdoctoralactivities.

ErasmusMundusAction2–PartnershipsamongHigherEducationInstitutions(formerErasmusMundusExternalCooperationWindow)isafundingopportunitytosupporttheestablishmentofcooperationpartnershipsbetweenHigherEducationInstitutions(HEIs)inEuropeandothercountries.

3. THEEDUCATIONSECTORSUPPORTPROGRAMME(ESSP)

TheEUcontributesover€200million(+anexpectedsecondphaseof€144million)totheeducationsectorfortheperiodof2010-2015withtheobjectiveofsupportingkeypoliciesandstrategiesintheeducationRenstra2010-14toensurenation-wideaccessto,qualityof,andgoodgovernanceinbasiceducationservices.

Activitiesunderthisprogrammeinclude:

- An initial contribution of €180million over 2010-12will be channelled as sector budget support. Part oftheEUbudget support isaperformance-basedcomponentusedasan incentivemeasureagainstachievingagreed results related to increasing access to education, achieving education quality standards and schoolaccreditation,anddevelopingcapacityofschoolprincipals,supervisorsandkeydistrictofficialsinmanagingthedeliveryofbasiceducation.

- Acomplementarytechnicalcooperationcomponentof€20millionover2010-15providestheGovernmentwith technical expertise and access to international knowledge and best practices to implement necessaryreformstoachieveitseducationobjectives.

4. BASICEDUCATIONSECTORCAPACITYSUPPORTPROGRAMME(BE-SCSP)

TheEUcontributed€20milliontoimprovethecapacityoflocalauthoritiesandschoolstodeliverqualitybasiceducationandtoimprovedistrictandprovincialplansandbudgetsforbasiceducation.Activitiesincluded:

- Component1(implementedbytheADB)hasassistedtheGovernmentwithdefiningMinimumServiceStandardsforbasiceducationwhichdefinetheminimumconditionsthatneedtobeprovidedbydistrictsandschools/madrasahforqualityteachingandlearningtooccur.ThesestandardsarenowenactedintoMinisterialDecree15/2010.

VIEDUCATIONCOOPERATION

65

- Component2(implementedbyUNICEF)hasassistedwiththeidentificationanddisseminationofgoodpracticesinbasiceducationthathaveproventobeeffective,efficientandaffordableinincreasingthequalityofbasiceducation.Theprojecthasdirectlytargeted12districtsand505primaryandjuniorsecondaryschools,butanadditional2,500schoolshavereplicatedthegoodpracticesusingdistrict/schoolsownresources.

5. THEBASICEDUCATIONSECTORCAPACITYSUPPORTPROGRAMME2(BE-SCSP2)

- TheEUcontributes€17.5million(+€22millionfromtheNetherlandsgovernment)in2008-2012tosupporttheGovernmenteffortstoimprovethedeliveryofbasiceducationservicesin50districtsof9provincesthroughtargetedcapacitybuildingandstrengtheningofsystemsatlocalgovernmentlevel.

6. NON-STATEACTORSANDLOCALAUTHORITIES(NSALA)INDEVELOPMENTPROGRAMME-EDUCATIONSECTOR

ComplementingEU’sbilateralassistanceintheeducationsector,8projectsarecurrentlybeingimplementedbynon-stateactorsstartinginthebeginningof2009withatotalamountofEUfundingofEUR1.4million.Theseactionsaimatimprovingaccesstoqualitybasiceducation,fullyinlinewiththeEducationRenstra.Themainthemesoftheprojectsarecapacitybuildingofeducationstakeholders;advocacytoincreaseregionalgovernment’sbudgetallocationfortheeducationsector;promotionofbudgetmanagement,reporting,monitoringandtransparencyofeducationbudgetattheregionalandschoollevels;engagementofcivilsocietyinimprovingqualityandaccesstoeducation;improvingthequalityandincreasingaccesstoinclusiveeducation;andthepromotionofgoodteachingandlearningpractices.

7. FORMOREINFORMATION(ONERASMUSMUNDUS)

http://eacea.ec.europa.eu/erasmus_mundus/results_compendia/selected_projects_action_1_master_courses_en.php

http://eacea.ec.europa.eu/erasmus_mundus/results_compendia/selected_projects_action_1_joint_doctorates_en.php

http://eacea.ec.europa.eu/erasmus_mundus/funding/2011/call_eacea_41_10_en.php

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1. INTRODUCTION

ThesecondEU-IndonesiaBusinessDialoguetookplaceinNovember2010inJakarta.Itwasanexcellentexampleof an integrated dialogue where business and government discussed various opportunities between IndonesiaandtheEU.Eightrecommendationswereformulatedattheendofthemeetingwhicharegiveninthefollowingparagraph.DuringthefirstVisionGroupmeeting, theserecommendationswerepresentedto theVisionGroupmembersassomeofthefollow-uprelatedspecificallytotheVisionGroupwork.Follow-upmeetingstookplacewithbusinessandgovernment,mostrecentlywithViceMinisterMahendraSiregar,tolookatwaysofimplementingtherecommendations.

2. RECOMMENDATIONS

AspresentedbytheIndonesianChamberofCommerce(Kadin)

1. EUandIndonesiatofocusmoreonopportunities

a. developavisiontoensureourtradeandinvestmentrelationsreachthenextlevelofgrowth

2. EUandIndonesiashouldpavethewaytowardsacomprehensivepartnershipagreement

3. EU and Indonesia to put in place amechanism to improve transparency and consultation ongovernmentregulations

4. EUandIndonesiatoimproveregulatorycooperationthroughimprovedcommunicationandtechnicaldialogues

a. businessshouldbeintegratedinthisdialogue

5. EUtosupportIndonesiathroughcooperationandtechnicalassistance:

a. Tomakeregularimpactassessmentsondraftregulations

b. Capacitybuildingforimplementingregulations

c. ToimplementinternationalstandardsinkeysectorssuchasUNECEstandardsfortheautomotivesector

d. TodevelopbetterunderstandingofEUlawsandregulationsincludingSPSmeasures,REACH,FLEGTandRED

e. CapacitybuildingtohelpmeetEUregulatoryrequirements

f. Todevelopcapacitybuildingprogramsfornewmarketopportunitiesincosmeticsandherbalproducts

6. Indonesiatocutredtapeinareassuchasmandatorycertificationandregistrationsystemforindustrialandfoodproducts

a. GivespecificattentiontoeasingrequirementsonSNI

b. FacilitateregistrationandlabellingofagrofoodproductsinIndonesian

VIIEU-INDONESIABUSINESSDIALOGUE

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7. Indonesiatoimprovetheinvestmentclimateinkeyareasincludinginfrastructure,medicalandpharmaceuticalsandensurebetterprotectionofIPR

a. Reviewthenegativelistrelatedtothepharmaceuticalsector

b. Enforcingastrongeragendaonpublic-privatepartnerships(PPPs)anditsregulatoryframework

c. Implementationoflandacquisitionandgovernmentguaranteefundspoliciesshouldbedonedealtsoonsandeffectively.

8. EstablishmechanismsandprocessesforbusinessandgovernmentcooperationinIndonesia.TostrengthenthecommunicationontradeandinvestmentchallengesandopportunitiesbetweentheGoIandthebusinesssector,representedbyKadinandtheEuropeanchambersinIndonesia,itisrecommendedthat:

a. SpecificfocalpointstobenominatedintheMoT,BKPMandotherrelevantagenciesandinthebusinesssectortoprepareandhandleissues

b. Aregularandstructuredmechanismforconsultationtobeestablishedbetweenbusinessandgovernment,facilitatedbythefocalpoints,whichwillprovideaclearandconstructiveinterfaceforconsultation.

3. FORMOREINFORMATION

www.eibd-conference.com/

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1. INTRODUCTION

TheEuropeanCommissionpublishedtheForestLawEnforcement,GovernanceandTrade(FLEGT)ActionPlanin2003,whichsetsoutarangeofmeasuresavailabletotheEUanditsMemberStatestotackleillegalloggingandrelatedtrade.IndonesiaisakeypartneroftheEUinthecontextoftheFLEGTActionPlan.Inparticular,IndonesiaisthefirstAsiancountrytohaveconcludedthenegotiationofaVoluntaryPartnershipAgreement(VPA)withtheEU.Actionsinotherconsumercountries,suchastheamendmenttotheLaceyActbytheUSAin2008toprohibitcommerce in illegallysourcedplantsreflect thefact that fundamentalchanges thatwillbenefitproducersandtradersoflegalandsustainabletimberaretakingplaceinconsumermarkets.

TimberisanimportanttradablegoodandcrucialfortheEUindustry.Figuresshowanincreaseintheworldtradeof27%inthelastyears,ofwhichthebulkgoestotheEU,whichimportsreachedalmost100billionEurosin2010(includingtradebetweenEUmemberstates).Despitetheimpressivemarketgrowth,Indonesia’sexportshaveremainedrelativelysmall–meaningopportunitiesarenotfullygrasped.

2. EU’SILLEGALTIMBERREGULATION

EU’s“IllegalTimberRegulation”buildsonacomprehensivepublicconsultationandimpactassessmentprocess.IthasbenefitedfrominputsreceivedfromIndonesianstakeholdersduringthisprocessandtheregulationwasadoptedinOctober2010.Itsaimistocounterthetradeinillegallyharvestedtimberandtimberproductsthroughthreekeyobligations:

(1) ItprohibitstheplacingofillegallyharvestedtimberandproductsderivedfromsuchtimberontheEUmarket;

(2) ItrequiresEUtraderswhoplacetimberproductsontheEUmarketforthefirsttimetoexercise‘duediligence’;Onceonthemarket,thetimberandtimberproductsmaybesoldonand/ortransformedbeforetheyreachthefinalconsumer.Economicoperatorsinthispartofthesupplychainhaveanobligationto:

(3)Keeprecordsoftheirsuppliersandcustomers.

TheRegulationcoversawiderangeoftimberproductsincludingsolidwoodproducts,flooring,plywood,pulpandpaper.Exceptionsarerecycledproducts.FLEGTtimberisconsideredtomeettheduediligencerequirements.FLEGTtimber (i.e. timber producedunder a FLEGTVoluntaryPartnershipAgreement between the country concernedandtheEU)issubjecttoindependentlyverifiedlegalitycontrolswhichprovideagoodlevelofassuranceastothelegalityofthetimber.ThissourceoftimberisthereforeexemptfromtheadministrativerequirementsoftheRegulation. Indonesianexporterswill thereforebenefit fromanadvantageon theEUmarketonce theVPA iseffectivelyimplemented.TheapplicationoftheRegulationwillstartfrom3March2013toallowsufficienttimeforEUoperators,timberproducersandMemberStates,aswellastradingpartners,toprepareforitsimplementation.

3. EU-INDONESIAVPANEGOTIATION

AVPAisabindingagreementbetweentheEUandaPartnerCountrybywhichtheyundertaketoimplementacredible timber licensing scheme toeliminate illegally-produced timber fromaPartnerCountry’s internationalanddomestictrade.ThecredibilityoftheVPAreliesonthedevelopmentofaLegalityAssuranceSystem(LAS).ThepurposeoftheLASistoprovideareliablemeanstodistinguishbetweenlegalandillegallyproducedforestproducts. Issuance of licenses by Partner Countries requires a system for ensuring that only legally-producedtimberislicensedforexport.Thismustincludechecksofforestoperationsandalsocontrolofthesupplychainfromharvestingtoexport.

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Indonesia is the largest timber exporter country to have concluded the negotiation of a VPA. The successfulconclusionwasannouncedinJakartaon4May2011byEUTradeCommissionerMrDeGuchtandIndonesianForestry Minister Mr. Hasan. There are currently five countries developing the systems agreed under a VPA(Indonesia, Ghana, Cameroon, Central African Republic, and Republic of Congo) and six countries that arenegotiatingwiththeEU.

ThestartoftheEU-IndonesiaVPAnegotiationwasofficiallyannouncedin2007.Negotiationsstartedin2009,followingtheadoptionofIndonesia’snewtimberlegalityverificationsystem(SVLK)andthereleaseoftheproposalontheillegaltimberregulationbytheEuropeanCommission.TheagreedLASwillbesubjecttoanindependenttechnicalevaluationtoconfirmthatthelicensingschemeisfullyoperationalbeforetheVPAisimplemented.

Expectedimpactandbenefits

• EnhancedreputationofIndonesiantimberproductsaswellassecuredandeasieraccesstotheEUmarketinthecontextoftheEU’sillegaltimberregulation.

• ContributiontoimprovedforestgovernanceandlawenforcementinIndonesia

• ContributiontoIndonesia’sresponsetoclimatechangeinthelanduseandforestrysector.TheimportanceofcombatingillegalloggingtoIndonesia’sclimatechangeresponseisacknowledgedbytheGoIinseveralclimatechangepolicyandprogramdocumentssuchastheLetterofIntentconcludedwithNorwayaswellasBappenas“YellowBook”andtheClimateChangeProgramLoanmatrix,allreferringtomeasuresrelatedtocombatingillegallogging.

• Increasedrevenuecollectionfromthetimbersector.

• SupplyoflegaltimbertoEUbuyers.

EUandmemberstates(UK)aresupportingtheFLEGTimplementationinIndonesiathroughavarietyofcooperationprogrammes,worthEUR15millionandareintheprocessofidentifyingnewareasofsupport.

4. MOREINFORMATION

http://ec.europa.eu/environment/forests/illegal_logging.htm

http://ec.europa.eu/environment/forests/timber_regulation.htm

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1. INTRODUCTION

The EC Regulation no.1907/2006 established a single integrated system for the Registration, Evaluation andAuthorisationofChemicals(REACH).ThepurposeoftheREACHRegulationistoensureahighlevelofprotectionofhealthandtheenvironmentaswellasthefreecirculationofsubstancesontheinternalmarket.TheRegulationenteredintoforceon1June2007.

The features of REACH which is of most direct impact to business are those pertaining to the ‘Registration’and‘Authorisation’process.‘Registration’concernstheprocessbywhichinformationonchemicals,producedorimportedaboveacertainthreshold,willneedtobesubmittedforregistrationinacentraldatabase.‘Authorisation’relates to theprocedurewherebysubstances thataredeemedtocausegreatconcernwillneed tobeexpresslyauthorisedbeforetheycanbemanufacturedorimportedintotheEU,andwouldneedtobeprogressivelyreplaced,wheretheyarefoundtocauseunacceptableriskstohumanhealthandtheenvironment.

TheREACHRegulationdoesnotapplytobusinessentitieswhicharenotestablishedintheEU.RegardingsubstanceswhicharemanufacturedoutsidetheEUbutthatareimportedintheEU,theobligationtomakesurethattheyareincompliancewithREACHfallsprimarilyupontheirimporters.Non-EUoperatorscannotdirectlyaccesstheregistrationsystem.ManufacturersofsubstancesthatareestablishedoutsidetheEUandexporttheirsubstancestotheEUmay,onavoluntarybasis,appointanonlyrepresentativetoconducttheregistration.

TheobligationtoregistersubstancesmanufacturedorimportedintheEUwillbeimplementedgradually:

• November2010:Registrationdeadlineforsubstancesmanufacturedorimportedinquantitiesof1000tonesandabove,aswellascarcinogens,mutagensandsubstancestoxictoreproductionaboveonetonneperyear,andsubstancesclassifiedasverytoxictoaquaticorganismsabove100tonnes.

• June2013:Registrationdeadline forsubstancesmanufacturedor imported inquantitiesof100 tonnesandmore.

• June2018:Registrationdeadlineforsubstancesmanufacturedorimportedinquantitiesofonetonneandmore.

AstudycarriedoutbytheGovernmentofIndonesiain2009indicatedthat522Indonesiancompaniesmainlyfromfurniture,chemical,metal,textile,leatherandpaperindustrieswouldbeaffectedbytheregulationofREACH.ThestudyshowedthattheaveragereadinessofIndonesianindustriestomeetREACHrequirementswas42.6%.

2. EXEMPTIONOFPALMOILDERIVATIVES

Interestedpartieshavethepossibilitytocommentatvariousstagesoftheprocessofidentificationofsubstancesthatwillrequireanauthorisation(allinformationabouttheconsultationprocessisavailableatECHA’swebsite).

AnnexesIVandVoftheREACHlegislationsetoutsubstancesandgroupsofsubstancesthatareexemptedfromregistration,evaluationanddownstreamuserprovisionsofREACH.TheCommissionadoptedareviewoftheseAnnexesinOctober2008toincludeanumberofadditionalsubstancestobeexemptedfromregistration.Thelistofthosesubstancesthatwillnotneedtoberegisteredwasexpandedtoincludecertainvegetableandanimaloils,fatsandwaxes,aswellascertaintypesofglassandceramicfrits.TheAsian,includingIndonesian,OleochemicalManufacturerswere included in this process. EUCommissioner for TradeMr. deGucht informed theMinisterofTradeofIndonesiaMrs.MariElkaPangestuoftheexemptionofpalmoilderivativessuchasfattyacidsandglycerolunderAnnexV,REACHinhisletteronJune7,2010.

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3. TECHNICALCOOPERATION

TheREACHlegislationisaccompaniedbyguidancedocumentsfordomesticEUproducersandimporterstoensuresmoothoperationofthesystem.TheEuropeanUnionDelegationinJakartahasalsotranslatedthemostimportantbrochuresaboutREACHintoIndonesian.IssuesassociatedwiththetechnicalandpracticalimplementationoftheREACHRegulationareprimarilyamatteroftheEuropeanChemicalsAgency,whichhasahelpdesk.

During the Third Working Group on Trade and Investment between Indonesia and the EU on December 1st2010,Indonesiaexpresseditsconcernsregardingits laboratorycapacityandthecoststocompanies,especiallySMEs,wholacknecessarytoolsaswellasexpertisetocomplywiththeREACHregulation.Indonesia–EUtradeandcooperationprogrammes started in2011underwhichcompliancewithREACHcouldbediscussedaspartof thecooperationprogrammesmanagedby theMinistryofTradeof Indonesia,but thatwould requirebetterunderstandingoftheconcretechallengesIndonesiancompaniesfacerelatedtotheREACHregulationandthattheissuesrelatetoexportqualityinfrastructure.

RegardingSMEs, the amountof information that is required in the contextof registration is related to lowertonnageranges.Additionally,significantreductionsinfeesandchargesforSMEs(upto90%),havebeenforeseenintheRegulation.

4. FORMOREINFORMATION

http://ec.europa.eu/environment/chemicals/reach/reach_intro.htm

http://echa.europa.eu/

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1. INTRODUCTION

TheTBTAgreement,negotiatedduringtheUruguayRound,isanintegralpartoftheWTOlegalframework.KeyprinciplesunderlyingtheTBTAgreementare(1)nondiscrimination;(2)proportionality–measuresshouldnotbemoretraderestrictivethannecessarytoachievetheobjectivespursued;(3)harmonisationthroughtheuseofrelevant international standards; and (4) transparency,notably throughanobligation tonotifydraft technicalregulationsandconformityassessmentprocedurestotheTBTCommitteeatanearlystageandtakeaccountofcommentsfromotherWTOmembers.

This means that technical standards should be aligned with international standards and should not imposeunnecessaryburdensfortraders.Technicalstandardsshouldnotbeusedasabarriertotrade.Legitimateuseoftechnicalstandardsinclude:nationalsecurityrequirements;thepreventionofdeceptivepractices;protectionofhumanhealthorsafety,animalorplantlifeorhealthortheenvironment.Inassessingsuchrisks,relevantelementsofconsiderationare, interalia:available scientificand technical information relatedprocessing technologyorintendedend-usesofproducts.

2. EU’SPOLICY

Technicalrequirementsarisethroughallsectorsoftheeconomy.Theirimpactontradearisesthroughthecostsof(1)adjustingproductsandproductionfacilitiestocomplywithdifferingrequirementsindifferentmarketsand(2)demonstratingcompliancewiththeserequirements.Theimpactontradeoftechnicalrequirementscanbeverysignificantandattimesexcessive.

TheEUtakesarisk-basedapproachtoitsprocedurestoassessconformitywithitsrequirements.Inmanysectorsdeemed of low-risk, the EU offers the option of a Supplier’s Declaration of conformity. The EU believes thatmandatingcertificationforlow-riskproductsmayleadtodisproportionatelyburdensomeobligationsoneconomicoperators.AcentralEUobjectiveintheTBTfieldistofacilitateexportsbyEUmanufacturersbyreducingtechnicalbarriers which unnecessarily restrict trade in world markets. The EU also promotes greater harmonisation oftechnicalregulations,standardsandconformityassessmentprocedures.

In the EU, standardisation is a voluntary process of developing technical specifications based on consensusamongall interestedparties (industry includingSmallandMedium-sizedEnterprises,consumers, tradeunions,environmental Non Governmental Organisations, public authorities, etc). Overall, the EU strives to develop abetter regulatory environment forbusinesses.This initiativeaimsat simplifyingexisting regulations, reducingadministrative burdens and using impact assessments and public consultations when drafting new laws andregulations.

3. INDONESIA’SPOLICY

StandardisationisasupportingelementofTBTthathasanimportantroleinoptimisingtheutilisationofresourcesindevelopmentactivitiesinIndonesia.GovernmentRegulationNo.102of2000regardingNationalStandardisationsetsouttheNationalStandardisationSystem(SSN),whichiscoordinatedbytheNationalStandardisationAgency(BSN)assistedbythetechnicalMinistriesinimplementation.

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TheimplementationofNationalIndonesianStandards(SNI)ismostlyvoluntary,meaningthattheactivitiesandproductsthatdonotmeettheprovisionsoftheSNIarenotprohibitedfortrade.Thus,toensuretheacceptanceandwidespreadutilisationofSNI,theapplicationofnormsofopennesstoallstakeholdersandconsistentwiththedevelopmentofinternationalstandardsisaveryimportantfactor.However,forthepurposesofprotectingtheconsumerhealthandsafety,nationalsecurityandenvironmentconservation,theGovernmentcanimposecertainmandatorySNI.

TheenforcementofmandatorySNIisdonethroughtheissuanceoftechnicalregulationsbygovernmentinstitutionsoragencieswhichareauthorisedtoregulatetheactivitiesandthecirculationofproducts.Inthiscase,theactivitiesand products that do not meet the provisions of the SNI are prohibited from being traded. This provision isuniversallyappliedbothtoproductsmanufactureddomesticallyandimportedproducts.

4. COOPERATION

The EU pursues a range of bilateral and regional initiatives aiming to reduce TBTs. These initiatives includeregulatorycooperation(tomakeregulatorysystemsmorecompatible);mutualrecognitionagreements(toeliminatecostsarising fromunnecessaryduplicationof technicaland /orcertification requirements);and theprovisionof technicalassistancefordevelopingcountries.TheEUiscontinuouslysupporting Indonesia inupgrading itsconformityassessmentandtestingframeworkwithaviewofupgradingtheexportqualityinfrastructureinselectedsectors.Thissupporthasbeenongoingsince2005undertheTradeSupportProgrammesIandII.

5. MOREINFORMATION

http://ec.europa.eu/enterprise/tbt/

http://www.wto.org/english/tratop_e/tbt_e/tbt_e.htm

http://www.bsn.go.id

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1. INTRODUCTION

Strongintellectualpropertyrights(IPR)protectioniscrucialtoprotectingandstimulatingentrepreneurshipandfosteringcreativeeconomy.Counterfeitproductsarea threat topublichealthandgoodprotectionof IPR isakey to research and development. Furthermore, trade and investments are attracted by high standards of IPRprotectionwhichinreturnstimulatemoreinnovationandthusnationaldevelopment.Thisallservestoachievegoalsandbenefitsofintegrationintotheglobalsystem.Countrieswithinadequateprotectionareoftenvulnerabletopatent,copyright,andtrademarkinfringementsthathindertradeflows,technologicaltransfersandeconomicdevelopment. Improving the legal framework and strengthening enforcement are important cornerstones forinvestorsaswellasfornewentrepreneursstimulatedbytheeconomicpolicyaimingatencouragingcreativityandinnovation.

Protectionandenforcementof intellectualpropertyarecrucial for theEU’sability tocompete in theglobaleconomyasEuropeancompetitivenessbuildson the innovationandvalueadded toproductsbyhigh levelsof creativity. Intellectual property rights such as patents, trade marks, designs, copyrights or geographicalindicationsarebecomingincreasinglyimportantforEuropeaninventors,creatorsandbusinesses.Theserightsenable them to prevent unauthorised exploitation of their creations and distinctive signs, or to allow suchexploitationinreturnforcompensation.OneofEU’sobjectivesistoseesuchstandardsrespectedbyitstradingpartners.TheEUworksintheWTOtoimprovetheprotectionandenforcementofIPrightsandtocontinuouslystrengthentheAgreementonTrade-RelatedAspectsofIntellectualPropertyRights(TRIPs).TheEUnegotiatesIPRprovisionsinitsbilateraltradeagreementsandwasinvolvedinthedevelopmentoftheAnti-CounterfeitingTradeAgreement(ACTA).

2. INDONESIANFRAMEWORK

The Government’s Medium Term National Development Plan includes culture, creativity and technologicalinnovationaspriorities.InthestrategicplanoftheMinistryofTrade,themainpriorityintheshorttermistoincreaseexportperformancethroughmarketandproductdiversification,includingservicessuchasdesignandinformation technology and asmeans to protect Indonesia’s traditions and rich cultural heritage. IPRplays acrucialparttoenhanceandprotectthesesectorsanditsinnovationpotential.Inparticular,IndonesiasupportsthedevelopmentofGeographicalIndications(GIs)andtheEUsupportedtheprocessofregisteringIndonesia’sfirstGIin2008(Kintamanicoffee).

Following its 1994 ratification of the WTO Agreement, Indonesia has taken steps to develop and issue newintellectualpropertylaws,createabetterframeworkforprotectionofintellectualpropertyrightsandprovideabetterenvironmentforthedevelopmentofintellectualpropertyandinventions.Still,lessthan10%ofallpatentsregisteredinIndonesiaaredomesticinventions,whichisonereasonforaneedtofocusonincreasingawarenessontheimportanceofintellectualpropertyrights.OverthepastdecadetherehasbeensignificantprogressinthedevelopmentofIndonesia’sintellectualproperty(IP)lawsandtheimplementationofthoselawsbytheDirectorate-Generalof IntellectualPropertyRights (DGIPR).Rightholdersconsiderthat Indonesiahasanacceptable legalframeworklargelyinlinewithWTOTRIPSagreementandcontainingstrongpenaltiesforinfringements,althoughsomeissuesofconcernremain.Firstly,IndonesiahasnotinitslegislationonpatentsimplementedTRIPSArticle39.3ondataexclusivity.Secondly,awellknowntrademarkhastoberegisteredinIndonesiainordertoenjoyprotection.

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Cooperation and coordination between government agencies needs improvements, particularly related toenforcement.TheestablishmentandfurtherstrengtheningofaNationalTaskForcecreatedin2006shouldhelpremedythissituation.IndonesiahasaninterestinimprovingthesemattersnotonlyinordertoenhanceinnovationandprotectitsownIPRs,butalsoasaresponsetodemandsfromtheinternationalcommunityasawayoffulfillinginternationalcommitmentsandtherebybetterintegratingintotheglobaltradingsystem.

3. TECHNICALCOOPERATION

TheregionalEU-ASEANprogrammeonIPR,ECAP,startedin1993.ThecoreobjectiveoftheECAPprogrammehasbeentofostertrade,investmentandtechnologyexchangesbetweenEuropeandASEANaswellastofosterintra-ASEANtradeandinvestment.ECAPIassistedASEANinstrengtheningsystemsfortheprotectionofindustrialpropertyrights,whereasECAPIIcoveredtheentirespectrumofintellectualpropertyrights,particularlyenforcement.The third component, ECAP III,was launched in the first half of 2010. ECAP III aims at further harmonisingand upgrading systems for intellectual property generation, protection, administration and enforcement inASEAN,includingintheASEANSecretariat,andbuildsontheprevioustwoprogrammes.Itwillfocusaroundfivecomponents,e.g.IPRenforcement,promotionofIPeducation,continuedsupporttotheimplementationofgeographicalindicationaswellasawarenessraisingactivities.

ECAP III will be complemented by a bilateral programme for Indonesia under the Trade Cooperation Facilityset to commence in early 2012. This follows a strong wish from the Indonesian Government of a dedicatedprogrammefocusingonIndonesiaspecific issues.ThepurposeistocontributetoincreasinglegalcertaintyforinvestorsandtradersandenhancingthecompetitivenessofIndonesia’sgoodsandservicesthroughbenefittingfromastrengthenedprotectionofintellectualpropertyrights.Itisproposedthattheprojectcentresaroundthreeareas:i)Supporttherevisionofthelegalframeworksoastofurtherharmoniseitwithinternationaltreatiesandbestpractices,ii)Strengthenenforcementandadministrationoflegislationthroughbettercoordinationbetweengovernment agencies and more efficient administrative procedures, iii) Support the creation of an IP culturethroughawarenessbuildingactivities.

Thereisalsosomebilateralco-operationbetweenIndonesiaandtheEUMemberStates.TheNationalInstituteofIntellectualPropertyRightsofFrancehaspreviouslybeenengagedinadialoguewithDGIPRongeographicalindications,formalisedthroughacooperationagreement.TheSwedishIPofficehasthroughSIDAprovidedfundingforbasicIPtraining,implementedbyWIPO(WorldIntellectualPropertyOffice).

4. FORMOREINFORMATION

http://www.dgip.go.id/ebscript/publicportal.cgi

http://ec.europa.eu/trade/creating-opportunities/trade-topics/intellectual-property/

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1. INTRODUCTION

RulesofOriginareusedtodeterminethecriteriatodecidewhethergoodswerereallyproducedormanufacturedinthebeneficiarycountrytowhichthepreferentialtarifftreatmentisgranted.Tobeconsideredasoriginatinginthebeneficiarycountryconcernedandthustobeabletobenefitfromthepreferentialtreatment,goodsmustbewhollyobtained(e.g.grown,mined)thereor,wherethisisnotthecase,haveundergonesufficientprocessingthere.Therulesoforigindefine“sufficientprocessing”bywayofalistoforigincriteriathatvaryfromproducttoproduct.

2. RULESOFORIGININFREETRADEAGREEMENTS

Free tradeagreements (FTA) should includeanagreementonROO.ROOareused todeterminewhethergoodstradedbetweenpartiesqualifyforaccesstothetariffundertheagreement.Theyarenecessarytoensurethatthebenefitsreciprocallynegotiatedundertheagreementaccrueprincipallytothepartiestothatagreement.Generally,toqualifyforpreferentialtarifftreatmentunderanFTA,agoodmustfallintooneofthreecategories.

• Thefirstcategorycoversgoodsthatarewhollyobtained–thatis,whollysourced,producedormanufactured–intheterritoryoftheFTAparties.

• ThesecondcategoryinvolvesproductsmanufacturedintheterritoryoftheFTApartiesentirelyfrommaterialsthatthemselvessatisfyaROO.

• Thethirdcategoryinvolvesproductsusingnon-originatingmaterialsbutproducedinsuchawayastosatisfyaprescribedROO.

To qualify for preferential tariff treatment as originating goods on the third category, goods must undergosubstantialtransformation.

• Changeintariffclassificationmethodrequiresagood,afterproduction,tobeclassifiedunderasufficientlydifferent tariff classification of the Harmonized Commodity Description and Coding System from theclassificationofthenon-originatingimportedcomponentmaterials.

• Value added method prescribes a threshold proportion of the value of a good that must be derived frommaterialsandprocessingwithintheterritoryofanFTAparty.

• ProcessingmethodrequiresspecificmanufacturingorprocessingoperationstobeundertakeninanFTAparty’sterritory,suchasachemicalreaction.

3. REVISEDRULESOFORIGINUNDERTHEEUGSPREGIME

TheEuropeanCommissionon18November2010adoptedaregulationrevisingrulesoforiginforproductsimportedunderthegeneralisedsystemofpreferences(GSP).Thisregulationrelaxesandsimplifiesrulesandproceduresfordevelopingcountrieswishing toaccess theEU’spreferential tradearrangements,while ensuring thenecessarycontrolsareinplacetopreventfraud.Thenewrulesoforiginapplyfrom1January2011.

TheRegulationadoptedbytheCommissiontodaywillconsiderablysimplifytherulesoforiginsothattheyareeasierfordevelopingcountriestounderstandandtocomplywith.Thenewrulestakeintoaccountthespecificitiesofdifferentsectorsofproductionandparticularprocessingrequirements,amongstotherthings.

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Theproposalalsoputsforwardanewprocedureformakingoutproofsoforigin,whichplacesmoreresponsibilityontheoperators.From2017,thecurrentsystemofcertificationoforigincarriedoutbythethirdcountryauthoritieswillbereplacedbystatementsoforiginmadeoutdirectlybyexportersregisteredviaanelectronicsystem.Thiswillallowtheauthoritiesoftheexportingcountrytore-focustheirresourcesonbettercontrolsagainstfraudandabuse,whilereducingred-tapeforbusinesses.

Theunderlyingprinciplesforthenewregulation,namely,simplificationanddevelopment-friendliness,werelaiddown in aCommunicationon the futureof rules of origin inpreferential trade arrangements adoptedby theEuropean Commission on 16 March 2005 following a wide-ranging debate initiated by a Green Paper of 18December2003.TheCommunicationsetoutanewapproachtorulesoforiginandenvisagedthatthefirstconcreteapplicationshouldbetotheGSP.

4. FORMOREINFORMATION

http://ec.europa.eu/taxation_customs/customs/customs_duties/rules_origin/index_en.htm

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1. INTRODUCTION

Today,customsarefacingnewchallenges:theymustensurethesmoothflowoftradewhilstapplyingnecessarycontrols,guaranteeingprotectingthehealthandsafetyofcitizens.Toachievethecorrectbalancebetweenthesedemands, customs procedures and control methods must be modernised and co-operation between differentservicesmustbereinforced.Themodernisationofcustomsshouldrelyontwopillars:amoderncustomscodeandacomprehensivecustomscomputerisedsystem.Botharenecessaryinordertoachievetradefacilitationcorrectlyandefficientlycontroltheirinternationaltradeaswellastofightagainstillicitactivities.

TradeFacilitationincludesmeasurestosimplifyandmodernisecustomsandotherimportandexportproceduresandrequirements.Aspartoftheongoingroundofmultilateraltradenegotiations,theDohaDevelopmentAgenda(DDA),WTOMembersagreedin2004tolaunchnegotiationsonTradeFacilitationinordertoimproveWTOrulesandtechnicalassistanceinthisarea.

Forbusiness,tradefacilitationpromotestransparencyandcutsredtape.Forgovernments,thebenefitsarealsohigh.TradeFacilitation strengthens security throughmore effective controls, improves the investment climateand promotes higher customs revenues. Revenue loss from inefficient border procedures in some developingcountriesmayexceed5%ofGDP.Inaction,intermsofnotmodernisingcanbeverycostly.Insteadofgainingnewopportunities,countriesloseexistingonestomorereformmindedcounterparts.

2. INDONESIA’SPOLICY

Oneof Indonesia’smainstrategies insupporting its tradedevelopment is topromotetradefacilitybywaysofenergizinglicensingservicetopublic,debottleneckingbarriers,securingforeignmarketaccess,anddevelopingspecialeconomiczones.

Indonesiahas launched itsnewonlinesystemcalled IndonesiaNSWfor itsexport-importactivities.ThemainpurposeforhavingaSingleWindowforacountryoreconomyis to increase theefficiencythroughtimeandcostsavingsfortradersintheirdealingswithvariousgovernmentauthoritiesforobtainingtherelevantclearanceandpermit(s)formovingcargoesacrossnationaloreconomicborders.TheASW-INSW(AseanSingleWindow–IndonesiaSingleWindow)isIndonesia’snationalcommitmentwithinASEANcooperationandalsotofulfilWorldCustomsOrganisation(WCO)recommendation.

A licensingpermit system integratedwith INSWiscalled Inatrade that isbeingdevelopedunderprinciplesoftransparency,singlesubmission,integration,procedurestreamliningandtraceability.

InresponsetothechallengefacedbyIndonesianexporters,theGovernmentofIndonesiaformedaNationalTeamtoPromoteExport and Investment (PEPI). The forum is expected tohold a constructivedialogueand to seeksolutionsamongstakeholders.

3. EU’SPOLICY

Toeffectivelyassumetheexpandedroles,EUcustomspursueacontinuousdialoguewithstakeholders. In thiscontext, consultation with the business sector has been enhanced. Trade associations are regularly invited toseminarsandworkinggroupstogivetheirinputtothedevelopmentofnewpolicyandlegislativeinitiatives.Forexample,theTradeContactGroup,inwhichallmajorplayersintheinternationalsupplychainarerepresented,hasbeenestablished.

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TheEU’sobjectivesare tosecureaframeworkofrules thatwould (1) increasethetransparencyofandensureeffective consultation on trade regulations; (2) simplify, standardise and modernise customs and other tradeprocedures; (3) improve theconditions for transit;and (4)makeasignificantcontribution to thedevelopmentdimension,includingthroughenhancingtechnicalassistance.

AnewEUcustomslegislationwasadoptedattheendof2006concerningsecurityofthesupplychain,introducingaframeworkforbetterriskanalysisofgoodscrossingEUborders.TheregulationisaimingatincreasedsecurityforshipmentsenteringorleavingtheEUandprovidinggreaterfacilitationforcompliantoperators.From1January2008,reliabletraders(AuthorisedEconomicOperators)respectinghighstandardsecuritycriteriabenefittedfromtradefacilitationmeasuresandfrom1January2011, theelectronicexchangeofadvance informationbetweentradersandcustomsauthoritiesonallgoodsenteringorleavingtheEUwasintroduced.Theregulationalsorequirescustomsauthoritiestoexchangeinformationelectronicallyonexportsinordertospeedupexportprocedures.ThislegislationisconsistentwiththecommitmentstakenbymostCustomsadministrationsthroughouttheworldinrelationwiththeadoptionin2005of theWCO“SAFEframeworkofstandardstoSecureandFacilitateGlobalTrade”.

4. COOPERATION

TheEUisprovidingsubstantialsupporttoASEANcustomsintegrationthroughitscooperationprogrammeAPRISII.TheprojecthasdevelopedanASEANDataModelasrequiredfortheASEANSingleWindow.Acargocustomsclearancemodelhasbeendevelopedandpilottestedintwocountries.TheprotocoldesigningtheASEANCustomsTransitSystemandalltechnicalappendiceshavebeencompletedandendorsed.

Indonesia’sCustomsandExcisedepartmenthasbeenoffered toparticipate in capacitybuildingand technicalexchangeundertheumbrellaoftheTradeCooperationFacilitystartingin2012.

5. FORMOREINFORMATION

http://www.insw.go.id

http://inatrade.depdag.go.id/

http://ec.europa.eu/taxation_customs/index_en.htm

http://www.wcoomd.org/home.htm

http://www.wto.org/english/tratop_e/tradfa_e/tradfa_e.htm

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1. INTRODUCTION

1. Moretrademeansmoreeconomicgrowth.Externaltradeandinvestmentboosteconomicgrowth.Tradepolicycanhelpthistohappen.

2. Trademeansmorejobs.Tradealsoleadstohighersalariesandimprovedlivingstandards.

3. Increasedtradeoffersagreatervarietyofgoods,atlowerprices,toconsumers.

4. Trade helps to reduce poverty. A World Bank study, which used data from 80 countries over four decades,confirmsthatopentradeboostseco¬nomicgrowthandthattheincomesofthepoorriseone-for-onewithoverallgrowth.Allthingsbeingequal,countrieswithopeneconomiestendtogrowfasterthanthosethattradeless.

5. Tradeallowscountriestoprocurethebestproductsandservicesfor itscitizens internationally.Thismeansgovernmentandlocalauthoritiescanspendlesspublicmoneyontheproductsandservicestheypurchase.

6. Tradeandinvestmentflowsspreadnewideasandinnovation,newtech¬nologiesandthebestresearch,leadingtoimprovementsintheproductsandservicesthatpeo¬pleuse.

7. Tradebringspeopletogether.Itdevelopsandsecureseconomictiesbetweennationsandcontributestopoliticalstability.

8. Tradeandinvestmentboostscompetitionaswellascompetitiveness.Itallowsbusinessestoaccessinputsatthelowestprices,allowingthemtocompeteontheworldmarket.

9. Tradeagreementscanmakeiteasiertodobusiness.Forexampleencouragingtheuseofinternationalstandardsforindustrialproductsreducesthecostsofdoingbusinessandpromotesinternationaltrade.

10.Trademakesiteasiertoexchangeinnovativeorhigh-technologyproducts.Forexample,internationalrulesonintellectualpropertyprotectknowledgeandallowthetransferoftechnologytoothercountries.

2. THEBENEFITSOFTRADEFORINDONESIA

(1)Economic growth performance. Indonesia was able to survive the global financial crisis in 1997 and hasmaintainedaremarkablerecordofeconomicgrowtheversince.SomeinternationalinstitutionshavestartedgroupingIndonesiatogetherwiththeBRIC(Brazil-Russia-India-China),aclubofemergingmarketswhosetotalGDPisprojectedtosurpassUSandUKby2030.

3. THEBENEFITSOFTRADEFORTHEEU

(1)Economicgrowth:Completingtheongoingfreetradenegotiationsandmakingsignificantfurtherprogressinourrelationswithstrategicpartnerswouldlead,by2020,toalevelofEUGDPmorethan1%higherthanitwouldotherwisebe.

(2)Consumerbenefits:awidervarietyofproductsandlowerpricesbringsgainstotheaverageEuropeanconsumerintherangeof600Eurosperyear.

(3)Laboureffects:Morethan36millionjobsinEuropedepend,directlyorindirectly,ontheEU’sabilitytotradewiththerestoftheworld.Foreigninvestmentisalsoanengineforjobcreation:intheEU,morethan4.6millionpeopleworkforUSandJapan-majorityownedcompaniesalone.

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82

1. INTRODUCTION

IndonesiaandtheEUsignedaPartnershipandCooperationAgreement(PCA)inNovember2009.ThePCAwasthefirstofitskindbetweentheEUandASEANcountries.Itisnowintheprocessofratificationbyboththe27EUMemberStatesandIndonesia,whichshouldbecompletedbytheendoftheyear.ItopenedanewerainbilateralrelationsofIndonesiaandtheEU,basedonsharedprinciplessuchasequality,mutualrespect,mutualbenefit,democracyandruleoflaw.

TheAgreementaimsatstrengtheningpolitical,economicandsectoralcooperationacrossawiderangeofpolicyfields, includingtrade,environment,energy,scienceandtechnology,andgoodgovernance,aswellas tourismandculture,migration,counterterrorismandthefightagainstcorruptionandorganisedcrime.ThePartiesoftheAgreementundertooktoholdacomprehensivedialogueandpromotefurthercooperationbetweenthemonallsectorsofmutualinterest.Theireffortswillinparticularbeaimedat:

a) establishingcooperationbilaterallyandinallrelevantregionalandinternationalforaandorganisations;

b) developingtradeandinvestmentbetweenthePartiestotheirmutualadvantage;

c) establishingcooperationinalltradeandinvestment-relatedareasofmutualinterest,inordertofacilitatetradeandinvestmentflowsandtopreventandremoveobstaclestotradeandinvestment;

d) establishingcooperationinothersectorsofmutualinterest,notablytourism,financialservices;taxationandcustoms;macro-economicpolicy; industrialpolicyandSMEs; informationsociety;scienceandtechnology;energy; transport and transport safety; education and culture; human rights; environment and naturalresources,includingmarineenvironment;forestry;agricultureandruraldevelopment;cooperationonmarineand fisheries; health; food safety; animal health; statistics; personal data protection; cooperation on themodernisationofthestateandpublicadministration;andintellectualpropertyrights;

e) establishingcooperationonmigrationissues,includinglegalandillegalmigration,smugglingandtraffickinginhumanbeings,

f) establishingcooperationonhumanrightsandlegalaffairs;

g) establishingcooperationoncounteringtheproliferationofweaponsofmassdestruction;

h) establishing cooperationon combating terrorismand transnational crimes, suchas themanufacturingandtraffickingofillicitdrugsandtheirprecursorsandmoneylaundering;

i) enhanceexistingandencouragepossibleparticipationofbothPartieswithinrelevantsub-regionalandregionalcooperationprogrammes;

j) raisingtheprofilesofbothPartiesineachothers’regions;

k) promotingpeople-to-peopleunderstandingthroughcooperationofvariousnon-governmentalentitiessuchasthink-tanks,academics,civilsociety,andthemedia,intheformofseminars,conferences,youthinteractionandotheractivities.

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ThroughtheestablishmentofaJointCommitteeandanumberofsectoralworkinggroups, thePCAwillsteercooperationandensureacomprehensiveandmoreintensivedialoguebetweenIndonesiaandtheEU.FindingsandrecommendationsfromtheJointCommitteewillfeedinthemeetingsatMinisteriallevel.

2. COOPERATIONONTRADEANDINVESTMENT

GeneralprinciplesofthecooperationontradeandinvestmentbetweenIndonesiaandtheEU,laiddownintheAgreementincludethefollowing:

• ThePartiesshallengageinadialogueonbilateralandmultilateraltradeandtrade-relatedissueswithaviewtostrengtheningbilateraltraderelationsandadvancingthemultilateraltradesystem.

• ThePartiesundertaketopromotethedevelopmentanddiversificationoftheirreciprocalcommercialexchangestothehighestpossiblelevelandtotheirmutualbenefit.Theyundertaketoachieveimprovedmarketaccessconditionsbyworkingtowardstheeliminationofbarrierstotrade,inparticularthroughthetimelyremovalofnon-tariffbarriersandbytakingmeasurestoimprovetransparency,havingregardtotheworkcarriedoutbyinternationalorganisationsinthisfield.

• Recognizingthattradeplaysanindispensableroleindevelopment,andthatassistanceintheformoftradepreferencesschemeshaveprovenbeneficialtodevelopingcountries,thePartiesendeavourtostrengthentheirconsultationonsuchassistanceinfullWTOcompliance.

• TheParties shall keepeachother informedconcerning thedevelopmentof tradeand trade-relatedpoliciessuch as agricultural policy, food safety policy, animal health policy, consumer policy, hazardous chemicalsubstances,andwastemanagementpolicy.

• ThePartiesshallencouragedialogueandcooperationtodeveloptheirtradeandinvestmentrelations,includingtheprovisionoftechnicalcapacity.

3. LINKTOBILATERALTRADEAGREEMENTS

TheEUisoftheviewthatanybilateraltradeagreementformspartofthepoliticalrelationshipwiththirdcountriesandshouldbeintegratedinabroaderPartnershipandCooperationAgreement.ThereforeanappropriatelinktothePCAwouldneedtobemadeinanyfuturetradeagreement.

4. FORMOREINFORMATION

http://eeas.europa.eu/delegations/indonesia/documents/eu_indonesia/eu_idnpca_en.pdf

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In the lastdecade, theexpansionof international trade in fisheryproductshasexceeded thegrowth in total fishproductionintheworld.ThisrapidexpansionreflectsthelargeincreaseinconsumptionofmarineproductsintheEUandUSmarketsaswellasmanyotherregionsintheworld.Amongthesefast-growingmarkets,theEuropeanUnionisnotonlytheworld’slargestmarket(accountingfor25percentoftheworld’stotalimports),butitisamongthefastestgrowingmarketsforhigh-valueimportslikeshrimp,tuna,bassandbream.Theprospectsforthesemarketscontinuetobefavorable.Overall,theoutlookfortheglobalfisherymarketisrobust,andEUfishimportsareexpectedtogrowby8percentannuallyinthemedium-term.

ThereisconsiderablescopeforIndonesiatoincreasetheamountoffisheriesthatitexportstotheEUmarket.Indonesiaaccountedforonly1.4percentoftotalEUimportsfromthirdcountriesin2010.IfitweretoexpanditsshareofexportstotheEUmarkettothesameproportionastheEuropeanUnion’sshareofworldimports,Indonesia’sforeignexchangerevenuefromitsfisheryexportswouldmorethandouble.

ForIndonesia,therapidexpansionoftheglobalfisherymarketandtheEuropeanUnion’sstrongmarketforhigh-valueimportsoffersanumberofexcellentopportunities.

• Indonesiahasa costadvantage in itsproximity to largemarineand fishery resourcesand its abundant laborsupply,whichhelpstooffsetshippingcoststotheEUmarket.

• Indonesia’sfisheryindustryhasthechancetoreversetheEUmarketsharelossesitsufferedinthelastdecadebecauseofexternalcompetitionfromlargeexporterslikeEcuadorandChina,aswellastheinternalinertiainaddressingtestingandaccreditationhindrancesandtradeimpediment.

• Secondly, Indonesia’s exports could be increased in terms of traditional exports and diversified into variousotherfishspeciesandprocessedproductsthatareinhighdemandabroad,forexample,themainexportsfromaquacultureareshrimp(unfrozen,frozenandcanned),crabs (unfrozen,frozenandcanned), froglegs (freshorchilled),ornamentalfish(freshwaterandmariculture),mollusks(scallopsandsnails),includingcaptureproductsliketuna,jellyfishandcoralfishaswellasfishfatandoilandshrimpcrackers.

• A third opportunity lies in aquaculture growth and development, where opportunities exist for community-basedeconomicactivitiesandruraldevelopment,alongwithgreaterforeignexchangeearningsfromexportedaquacultureproducts.Giventhattwo-thirdsofIndonesia’sterritoryconsistsofmarineandinlandwaterswithanabundanceofnaturalresources,thedevelopmentofaquacultureandsustainablecapturefisherieshasthepotentialtomakethefisheriesindustryaleadingenginesofgrowthanddevelopmentforthecountry.

Thefisherymarketishighlypricecompetitive,andsomecountrieshaveacompetitiveadvantagebecauseofpreferentialtariffratesunderfreetradearrangements(FTAs)withtheEuropeanUnion,likethoseundertheunilateralinstrumentofGSPplus,ortheEverythingButArms(EBA)arrangementthatincludeduty-freeandquota-freeaccessforproductsoriginatinginLeastDevelopedCountries(LDCs).IndonesiaisaGSPbeneficiarywithpreferentialdutiesonfisheries.

ForEUfisheryimports,theaverageMFNtariffrateis10.8percent,witharangeof0to23percent;theaverageGSPrateis7.1percent,witharangefrom0to19.5inthecaseofsomeproductslikefresh,chilledorfrozensardines,sometunaslikelong-finnedandyellow-fintuna,andskipjackorstripe-belliedbonito.Forcrustaceans,anadvaloremtariffof11.1percentappliestothirdcountries,witharangeof6to18percent;thepreferentialtariffrateforGSPrecipientcountriesis5.1percent,witharangeof2.1to14.6percent.Between2003and2008,Indonesiawasthebeneficiaryofanannualtariffquotaof2,832.5tonsofcannedtunaexportstotheEuropeanUnion.Thedutyapplicablewas12percent.Since2009,theapplicabletariffhasrevertedtothatofthemost-favorednation(MFN)atarateof20.5.

XVIFISHERIES

85

TheMinistryofMarineAffairsandFishery(MMAF)hasbeenappointedbytheEuropeanUnionastheCompetentAuthorityforfisheryproductsinIndonesia.TheeffortsoftheMMAFinrecentyearstoimprovethequalityrelevantelementshavebeenverysuccessfulandhaveleadtoadrasticreductioninthenumberofrapidalertsissuedbytheEuropeanUnion.

Source:Eurostat.

17%

48%

35%

Indonesia'sfisheriesexportstotheEU

Fresh,chilledorfrozenfishCrustaceans,molluscsPreparedfish,crustaceans,molluscs

0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%

050

100150200250300350400

2001 2003 2005 2007 2009

Fisheries

Indonesia'sexporttotheEU,mlnUSDIndonesia'simportfromtheEU,mlnUSDIndonesia'sshareintheEUimports,%

86

Indonesia’sautomotivesindustryhaspotentialtobecomeabigplayerontheworldmarket.Duringthelast5years,Indonesia’smarketandproductionofcarsandmotorcycleshasgrownaround7-8%ayear.

IndonesiaisinaverystrongpositiontobecomethelargestcarmanufacturerinASEANbecauseofitsstrongdomesticdemand,skilledlabour,andgrowingcomponentindustry.ThelargesizeoftheIndonesianpopulationandthelowlevelofcarownershipinthecountrysuggestthereisalotofpotentialforexpansionfortheautomotiveindustry.Forexample,in2007,onlyoneineverythirty-fivepeopleinIndonesiaownedacar,comparedwithoneinfourteeninThailandandoneinseveninMalaysia.

Automotives industry in Indonesia consists of several assemblers of various types of cars and motorcycles andhundredsofcomponentproducers.Indonesiaisaproductionbaseformulti-purposevehiclesandlightcommercialtrucks.Domesticmanufacturers serveas theassemblers for foreign,primarilyJapanese,motorvehiclecompanies.Ingeneral,themainactivityofIndonesianautomotivecompaniesisassembling,eitherintermediategoods(partsofmotorvehicles)orfinalgoods(carsandmotorcycles).

Investment in production facilities, geared in part towards the exportmarket, has become increasingly common.Vehicleexportvolumes,primarilytoMalaysia,ThailandandJapan,arerelativelylow,butarebeginningtorise,asIndonesia’simportanceasaproductionbasewithintheSoutheastAsianregionincreases.ToyotaAstra,asubsidiaryofJapan’slargestcarmakerToyota,accountsforabout90percentoftheIndonesiancarexports.

European carmakers are under-represented in Indonesia. Indonesian auto industry consists of mostly Japanesemanufacturers.AccordingtotheAssociationofIndonesiaAutomotiveIndustriesGaikindotherewasonlyoneEuropeancar manufacturer in Indonesia, Mercedes-Benz, who belonged 100% to German Daimler AG and manufacturedMercedes-Benzcars in Indonesia (annualcapacity20,000units). Japanesecarsalsodominate thedomesticmotorvehiclesmarket.Outofthe750000carssoldinIndonesiainayear,only5000areEuropean(mostlyMercedesBenzandBMW).

Thefutureofcarsliesinenvironmentallyfriendlinessandenergysaving.IndonesiaplanstofollowinthefootstepsofThailandbyofferingincentivesfortheproductionoffuel-efficientcars.Europeancarmanufacturershavetheknow-howandstate-of-the-arttechnologyformoderncarproductionandtheyarewillingtoinvestinIndonesia.

TheEuropeanAutomotiveIndustryisaleaderintheglobalautomotivemarket,withintegratedautomobileoperationsthatcombineresearch,design,development,productionandsales.Ithasadenseworldwidenetworkofjointventures,production and assembly sites. Europe is the world’s largest vehicle producer with an output of over 15 millionpassengercars,vans,trucksandbusesperyear,or25%ofworldwidevehicleproduction(Chinaproduces23%,NAFTA14%,Japan13%,SouthKorea6%,andIndonesia0.9%oftheworld’stotal).Leadinginhigh-qualityproducts,theindustrysellsandproducesvehiclesinallmajorworldmarkets.

TheautomotivesectorisEurope’slargestprivateinvestorinR&D.AccordingtotheEUIndustrialInvestmentScoreboard,thesectors‘automobilesandparts’and‘commercialvehiclesandtrucks’representedR&Dinvestmentof46billionUSDin2008.In2008,almost6,300patentswerefiledbytheEuropeanautomotiveindustry.Theymadeup55%ofallautomotiveapplicationsattheEuropeanPatentOffice.23%ofautomotiveapplicationscamefromJapan,16%fromtheUS,1%fromChina/Taiwanand1%fromSouthKorea.

VolkswagenhasexpressedinterestinmakingIndonesiaitsproductionbase.VolkswagenofficialshavestatedthattheywouldbuildafactoryinIndonesiain2012forafullcarmanufacturing,whilein2010theyalreadystartedassemblingitsMPV,Touran,incooperationwithIndomobil.

XVIIAUTOMOTIVES

87

Inaddition,GermanpremiumbrandAudihaschosenIndonesiaasitsnextAsianproductionbase,afterChinaandIndia.Audiexpectscarsalesinthecountrytogrowby15%in2011,andthepremiumsegmenttodoubleby2015.AssemblyoftheA41.8-litreTFSIandA62.0-litreTFSIhasalreadystarted,incooperationwithlocalfirmGarudaMataramMotor,asubsidiaryoftheIndomobilGroup.Audiisaimingtoachieveassemblyof2,700unitsby2015.

In2010theEUimported58billionUSDofmotorvehiclesandvehiclesparts.TheEUmostlyimportedcarsfromJapan,Turkey,USA,andSouthKorea.Indonesia’sshareintheEUimportswasonly0.2%.

Source:Eurostat.

0.0%

0.5%

1.0%

1.5%

2.0%

0

100

200

300

400

2001 2003 2005 2007 2009

Motorvehicles

Indonesia'sexporttotheEU,mlnUSDIndonesia'simportfromtheEU,mlnUSDIndonesia'sshareintheEUimports,%

85%

14%

Indonesia'smotorvehiclesexportstotheEU

PartsformotorvehiclesPartsformotorcyclesandbicyclesMotorcycles

88

Rapidlyexpandingservicessector iscontributingmore toeconomicgrowthand job-creationworldwide thananyothersector.Theservicessectoraccountedforthree-quartersofthegrossdomesticproductfortheEuropeanUnion(EU)and53%forIndonesiain2010.

Indonesia’stradeinserviceswiththeEuropeanUnionhasincreasedduringthelast6years,butthetradedeficithaswidenedduetoanincreaseintheimportsofdifferentbusinessservicesfromtheEU.Indonesia’sservices’exportstotheEUamountedto2billionUSDandimportsfromtheEUreached3billionUSDin2009.IndonesiahasremarkablepotentialtoincreaseitsservicesexportstotheEuropeanUnionandconvertthetradedeficitintoatradesurplus.

Source:Eurostat.

Indonesia has a comparative advantage vis-à-vis the European Union in labour-intensive services: tourism,transportation and construction.Newpotential export opportunities are also emerging in communication, IT andbusinessservices.In2009IndonesiamostlyexportedtotheEUtourismandtransportservices,whentheEUmainlyofferedtoIndonesiabusiness,transportandITservices.

Source:Eurostat.

XVIIISERVICES

0

500

1000

1500

2000

2500

3000

2004 2005 2006 2007 2008 2009

Services

Indonesia'sservicesexportstotheEUin2009,mlnUSD

Indonesia'sservicesimportsfromtheEUin2009,mlnUSD

38%

6%

20%

5%

3%

15%

3%

3%

Indonesia'sservicesexportstotheEUin2009

Personaltravel BusinesstravelSeatransport AirtransportOthertransport BusinessservicesGovernmentservices Comm.servicesConstructionservices FinancialservicesITservices Insuranceservices

39%

15%

11%

7%

5%

5%

5%

4%

Indonesia'sservicesimportsfromthe

EUin2009

Businessservices ITservicesSeatransport AirtransportRoyaltiesandlicenses PersonaltravelFinancialservices GovernmentservicesInsuranceservices ConstructionservicesComm.services BusinesstravelOthertransport

89

Indonesiacould increase itsexport revenues fromtourism,both leisureandbusiness travel. Indonesiaattracted7millionforeigntouristsin2010thatspentaround$1,000each.Around59%ofallvisitorstravelledtoIndonesiaforholiday,while38%forbusinesspurposes.ThreequartersofIndonesia’svisitorscamefromtheAsia-Pacificregion,withSingaporeandAustraliaamongthetopcountriesoforigin.Onlylessthan1millionEuropeansvisitedIndonesiain2010,spendingaround1500USDeach.

Maximisingexportrevenuesfromtourismisdependentonthenecessaryandefficientinfrastructurebeinginplace.Tourists rely on efficiently operating transport, telecommunications and financial services. Indonesia needs todeveloptheseessentialservicesforthebenefitoftourismbutalsoothersectors.EuropeaninvestorsareinterestedininfrastructuredevelopmentinIndonesiaandIndonesiacouldbenefitfromtheirknowledgeandfinancialresources.Thearchipelagoofmorethan17,500islandshasbeaches,mountainsanddive-spotsamongitsdiverseattractions,buttourisminfrastructureoutsideBaliisoftenpoor.IndonesiaisalsowellbehinditstinyneighbourSingapore,whichattractsaround10milliontouristsayear,andMalaysia,whichseesaround20millionforeigntouristarrivalseveryyear.

AirtrafficbetweenIndonesiaandEuropeisexpectedtoincrease.GarudaIndonesiahasmanagedtore-establishitsfootholdintheEuropeanaircargomarketin2010andplanstoexpanditsnetworkinEuropeinthecomingyears.

TransportationsectorinIndonesiabenefitsfromstrongeconomicgrowthandtradeflows.TheEUisthemostimportantforeigninvestorinthetransportationsectorinIndonesia,providing50%oftotalFDI.Duringthelastsevenyears,theEUhasinvested3.2billionUSD(1.2billionUSDin2010)inthetransportation,storage,andcommunicationsectorofIndonesia.

90

ThereisremarkablescopeforcooperationbetweenIndonesiaandtheEUinthepharmaceuticalsector.CombiningvastnaturalandhumanresourcesofIndonesiawiththeknow-howandtechnologyofEuropeaninvestorswouldresultinanincreaseinthecompetitivenessofpharmaceuticalcompaniesinIndonesia.

TheEUisabigandgrowingmarketforIndonesianpharmaceuticalproducts.EUpharmaceuticalsmarketistheworld’ssecondlargestaftertheUSA.Around590billionUSDwasspentonmedicinesin2007inEuropeandthisamountwilllikelycontinuetoincreaseasthepopulationages.Overall,in2007,themarketforprescriptionandnon-prescriptionmedicinesforhumanuseintheEUwasworth189billionUSDatex-factoryand293billionUSDatretailprices.TheEUmarket(extraEUimports)hassubstantiallygrown,2timesduringthelast10years.Around80%ofpharmaceuticalsimportstotheEUcomefromSwitzerlandandtheUSA.Indonesiaonlyprovided0.02%ofEUimportsin2010.

Source:Eurostat.

XIXPHARMACEUTICALS

63%

20%

13%4%

Indonesia'spharmaceuticalsexportstotheEU

MedicamentsforretailsaleAlkaloidsofcinchonaandtheirderivativesMedicamentscontainingvitaminsforretailsaleOther

91

HerbalmedicineisoneareawhereIndonesiacouldcreateacompetitiveadvantageintheEUmarket,followingincreasedinterestin‘alternativemedicines’intheEU(andgrowingimportsofrelatedproducts),coupledwithawelldevelopedindustryinIndonesiaandavailabilityofresources.Typicalingredientsforcommonrecipesincludevarietiesofginger;spicessuchasnutmeg,cardamom,cuminandcloves;certainchillies;andfruitslikepapayaandbanana.TheavailabilityofrawmaterialstomaketraditionalherbalmedicineisrelativelyabundantinIndonesia.TheresultsofstudiesconductedbytheIndonesianInstituteofScienceshowedthat30,000ofthe40,000availablespeciesofworldmedicinalplantsarefoundinIndonesia.

ManycountriesinAsia,likeIndia,Singapore,andThailandbenefitfrommedicaltourism.Indonesiacouldalsobecomeamedicaltourismdestinationinthefuture,ifitwouldinvestingoodqualitymedicalservicewiththehelpofFDI.

ThemarketsizeofpharmaceuticalproductsinIndonesiaisestimatedtobearoundUS$3.9billionin2010,withanimpressiveaverageannualgrowthof10%inthelastfiveyears.Thecountrypossesseshugemanufacturingcapabilities.TheIndonesianpharmaceuticalindustryconsistsofchemical-pharmaceuticalandnon-chemicaltraditional(herbal)medicinemanufacturers.Themarketconsistsof170localcompaniesincludingfourstateownedcompaniesand32foreigncompanies.Outoftheestimated32multinationalpharmaceuticalscompaniesoperatinginIndonesia,therearearound20Europeancompanieswithanactivepresence.

Indonesiahasexportedpharmaceuticalproductsforalongtime.Indonesiamainlyexportsquinineanditsderivatesaswellasherbalmedicines.ExportsofquinineanditsderivativesmainlygotoGermany,USA,Singapore,UK,Vietnam,Spain,andCanada.ExportsofherbalmedicinemostlygotoPakistan,Iran,andHongKong.

92

In Indonesia the processed foods industryhas steadily increased its contribution to the total output value of theIndonesianeconomy. Its shareof theeconomy’s totalvalueadded rose from13percent tomore than16percentduringthedecade.Itsimpactonthegrowthandemploymentofothersectorshasbeenlargebecauseofupstreamanddownstreamlinkagestoprimarysectorandinputactivitiesandservice-relatedindustries.Thecommoditycompositionofexportsisfairlyevenlydistributedamongcereal,flourandstarchpreparations;vegetableandfruitpreparations;andothertypesoffoodpreparations.

The geographic composition of Indonesia’s exports of agri-foods is highly concentrated on the ASEAN regionalmarket.Aroundhalfofindustry’sexportsaredirectedatneighboringcountries,especiallythePhilippines,Malaysia,Singapore,VietnamandThailand.TheEUandU.S.marketseachabsorbabout15percentofIndonesia’sagri-foodexports.TheshareofexportsdestinedforcountriesinEurope,theUnitedStatesandJapanissmallcomparedwiththesizeandagri-foodabsorptionofthosemarkets.TheEuropeanUnion,forexampleistheworld’slargestmarketforthesetypesofproducts.

InEuropeprocessedfoodsarebecominganincreasinglyimportantpartofconsumerexpendituresaspeoplelookformoreconvenientwaystostoreandpreparefood.Consumersspend12percentoftheirincomeonfoodconsumptionanddomesticproductionsuppliesabout90percentoftheEUmarket.Themainsub-sectorsareprocessedfruitsandvegetables,cereal-basedproducts,processedmeatsanddairyproducts.EUdemandforqualityagri-foodproductsisgrowingrapidly,andsourcingfromnon-EUproducersisoutpacingintra-EUsourcing.

The European Union’s fruit subsector is the most dependent on foreign supplies (about one-fourth of domesticutilization).Forthatreason,importsoffruitstendtopredominateintheEUimportsofprocessedagri-foods.Fruitandvegetablejuicesarethelargestprocessedagri-foodimportedintotheEuropeanUnion,accountingforover18percentofallagri-foodimports.ThefruitandvegetablejuicesubsectorhasoneofthefastestgrowingmarketsintheEuropeanUnion,andIndonesiahasanabundanceoftropicalfruitsandvegetablesthatplacesitinaprivilegedposition.Atpresent,Indonesia’sexportsaresmallcomparedtoitspotential.

AnotherpotentialexportarticlefromIndonesiatotheEUisprocessedmeat.ProcessedmeatimportsintotheEuropeanUnionhavegrownbyanaverageannualrateof13percentayear,outpacingallotherfoodgroupsbyasignificantmargin.

An important growth area is organic food ingredients and food products. Europe has been unable to supply itspopulationinthissub-sector.

Five countriesdominate third country competition in theEUmarket for agri-foods:Brazil, Turkey,China,UnitedStatesandThailand.Togetherthesecountriesaccountforone-halfoftheEuropeanUnion’simportsoffoodproductsfromnon-EUsuppliers.AsacountryhavingasimilarprofiletothatofIndonesia,ThailandhasbeenhighlysuccessfulinexpandingitsexportstotheEUmarketbecauseofitsgoodinfrastructure,favorablegovernmentpoliciestowardsforeign investment, tax incentives,andsuccessfulpromotionofSMEfoodprocessors. Indonesia’sshareof theEUmarketismodestandthereisconsiderableroomforgrowth.However,tradebalancewiththeEUhasbeenpositiveovertheyears.

XXAGRI-FOODS

93

Source:Eurostat.

Two-waytradeofagri-foodsbetweenIndonesiaandtheEuropeanUniongenerallytakesplaceindifferenttypesofproducts.Eachtradingpartnerisspecializinginthetypesofproductsinwhichithasacomparativeadvantage.

DutyratesforIndonesianexportersshippingprocessedagri-foodproductstotheEUmarketsvaryacrossindividualproductswithineachcategory.Formeatpreparations,anadvaloremtariffof16.9percentappliestothirdcountries,andapreferentialtariffrateof12.4percentappliestoIndonesia.Forprocessedcerealsandstarches,anadvaloremtariffof6.4percent+24.6EUR/100kgandanon-preferentialtariffquotaappliestothirdcountries,andapreferentialtariffrateof7.4percentappliestoIndonesia.Forpreparationsofvegetables,fruit,nutsorotherpartsofplants,anadvaloremtariffof10.9percentappliestothirdcountries14.4percent(nopreferentialrate).

0.0%

1.0%

2.0%

3.0%

4.0%

0

50

100

150

200

2001 2003 2005 2007 2009

Agri-foods

Indonesia'sexporttotheEU,mlnUSDIndonesia'simportfromtheEU,mlnUSDIndonesia'sshareintheEUimports,%

50%

14%

13%

5%

2% 16%

Indonesia'sagri-foodsexportstotheEU

Fruits,nuts Bread,pastryFruitjuices PastaSauce Other

94

ElectronicsisIndonesia’slargestcontributorofforeignexchangeearningsfrommanufacturedexports.Itaccountsfornearlyone-fifthoftotalmanufacturingexports,withconsumerelectronicsleadingindustrialelectronicsbyatwo-to-oneratio.Theindustrycontributesaround6percenttoIndonesia’sgrossdomesticproduct.

Developmentoftheindustrydatesbacktothe1970swhentheJapaneseestablishedjointventureswithIndonesianfirmstoaccessthedomesticmarketintheperiodofimport-substitutionpolicies.WhenIndonesiaadoptedanexport-orientedindustrializationstrategyinthe1980s,foreignelectronicscompaniesusedthecountryasoneoftheirexportbases,benefittingfromlowproductioncostsinIndonesia.

StrengthsofIndonesia’selectronicsindustryinclude:

• Wellfunctioningsupplychainsgovernedbyinternationalcompanies.

• CompetitivecoststructurerelativetoEUproducers.

• Flexibleproductionsystems.

• Availabilityofseverallaboratorieswithincreasingcapabilities.

TheEUmarketoffersgoodopportunitiesforIndonesia’selectronicsasEUconsumerdemandforelectronicproductsisstrongandgrowinginallsub-sectorsandtherearerelativelylowmarketaccessrequirementsforthirdcountryproducts.

TheEuropeanUnionisanetimporterofelectroniccomponents,withimportsvolumeofUS$240billionin2010.TheEuropeanUnionisIndonesia’slargestexportmarketforconsumerelectronicproducts,followedbytheUSandASEAN.Indonesia’sexportsofconsumerelectronicsareconcentratedonafewbasictypesofproducts.About70percentofexportsareintheformofsound-recordingandvideo-recordingapparatus.Televisionandradiosaccountforaround10percentofexportseach.Thereisasmallamountofrefrigeratorsandheatingunitsexported.Otherminorexportsareelectricshaversanddishwashers.

Indonesia’sshareoftheEUconsumerelectronicsmarkethasbeenstableinrecentyears,andthereisconsiderablescopefor increasingIndonesia’smarketshare.Recently, theindustry’soutputhasbeguntosurgeagainasmultinationalelectronicsenterprisesrelocatetheirproductionfromChinaduetorisinglabourcosts.

ChineseproductsdominatetheEUmarketofconsumerelectronics.Almost60percentofallnon-EUimportsoriginatefromChina.AlthoughIndonesiaistheseventhlargestnon-EUsupplierofconsumerelectronicsintheEU,itsmarketshareisrelativelysmall.Indonesiaprimarilysuppliesvideorecordingequipment(25%oftotalEUimports),radioandtelevisiontransmitters(18%),andradioandtelevisionparts(11%).

XXIELECTRONICS

95

Source:Eurostat.

0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%

0200400600800

1,0001,2001,400

2001 2003 2005 2007 2009

Electronics

Indonesia'sexporttotheEU,mlnUSDIndonesia'simportfromtheEU,mlnUSDIndonesia'sshareintheEUimports,%

20%

15%

9%8%6%

5%5%

32%

Indonesia'selectronicsexportstotheEU

VideorecordingapparatusRadios,camerasElectricaltransformersPartsofradiosandcamerasElectricaccumulatorsElectricalcircuitsapparatusElectronicintegratedcircuitsOther

96

Oneof the fastestgrowingsegmentsof theglobalcosmeticmarket isproductswithnatural ingredients.Recentdatasuggests thatEUandUSconsumptionofcosmetics thatusenatural ingredients isgrowingby8percentayear,comparedwithagrowthof5percentforall typesofcosmetics. Indonesiahasoneof themostbiodiverseenvironmentsintheworld,withaccesstoalargevarietyofnaturalcosmeticingredients.Thecountyhasalongtraditionofproducingnaturalcosmeticsusingitsvastplantresources.Approximately700companiesproduceawidevarietyofcosmetics.

ExportsoftheindustryinIndonesiaareconcentratedintheASEANregion,andaremainlyintheformofessentialoilsandbeautymakeuppreparations.Intheareaofend-useproducts,Indonesiaexportsbeautymake-uppreparationsintheformofperfumesandtoiletwaters,andhairproducts.Intheareaofingredientsusedintheproductionofnaturalcosmetics,Indonesiamainlyexportsessentialoilsofgeranium,whichaccountsforover70percentofessentialoils,resinoidsandterpenicby-products,andessentialoilsofvetiver,whichaccountsformostoftheremainingexportsinthiscategory.

Indonesiaonlyexports10percentofitsnaturalcosmeticproductsandingredientstotheEuropeanUnion,eventhoughtheEuropeanUnionistheworld’slargestmarket.ThecosmeticmarketoftheEuropeanUnionisnearlyaslargeasthecombinedmarketsoftheUnitedStatesandJapan.CommongrowthpatternsareoccurringthroughouttheEuropeanUnioninsuncareproductstoprotectagainstrisingconcernsaboutskincancer.Inaddition,theagingpopulationofEuropeisgeneratinggrowingdemandforanti-agingcreamsandanti-celluliteskincareproducts.Thereisalsogrowingdemandfornaturalandorganicproductsacrossallagegroups.

Source:Eurostat.

BecauseofstrongandrisingconsumptionofcosmeticproductsintheEuropeanUnion,importshavegrownrapidlyinthelasttenyears,averagingnearly10percentayear.Thelargestproductcategoriesaremake-upandskincareproducts.TheEuropeanUnionimportsnearlyUS$7billionworthofcosmeticsannually,three-fourthsofwhichcomefromChina,SwitzerlandandtheUnitedStates.Amere0.8percentcomesfromIndonesia.Nonetheless,thegrowingconcernofend-usersaboutthepresenceofpossibleharmful‘synthetic’ingredientsoffersIndonesiaaconsiderableopportunitytoimproveitspresenceintheEUmarketandelsewhere.

ForIndonesianexportersshippingcosmeticproductstotheEUmarkets,thefollowingarethespecificmarketaccessrequirements:

XXIICOSMETICS

0.0%

1.0%

2.0%

3.0%

4.0%

0

50

100

150

200

2001 2003 2005 2007 2009

Cosmetics

Indonesia's export to the EU, mln USD Indonesia's import from the EU, mln USD Indonesia's share in the EU imports, %

86%

9% 5%

Indonesia's cosmetics exports to the EU

Essential oils Make-up and skin care preparations Other

97

1. Tariffs:Forcosmetics,anaverageMFNrateof2.5,andanaveragepreferentialtariffrateof0.2percentapplytoIndonesia.

2. Specific requirements on technical standards applicable to cosmetic products cover (a) health and marketingconditions for cosmeticproducts; (b)marketing requirements fordangerous chemicals, pesticides andbiocides(whenintendedtobeusedinplantprotectionproductsand/orbiocides),andprohibitionofproductscontainingfluorinated greenhouse gases (when used with aerosols for entertainment and decorative purposes containinghydrofluorocarbons);and(c)rulesoforigin.

98

The textile, clothing and footwear industry is expected to remain a major contributor to Indonesia’s economy.Indonesiastillhasacomparativeadvantageinlabour-intensiveindustries.Somecompanieshavealreadyshiftedtheirproduction fromChina to Indonesiadue to rising labourcosts. IndonesianTextileAssociationexpects Indonesianshareontheglobaltextilesmarkettorisefrom1.8percentin2011to2.5percentin2014.ThecompetitivenessofcertaintextilesinIndonesia,suchasfibreandyarn,hasrecentlyincreased.

Indonesia’s textileandclothingindustry isvertically integratedandinvolvedinalmosteverysectorofthetextilesupplychain— fromtheproductionofman-made fibres,particularlypolyester,nylonandrayon;man-madeandcotton yarn spinning; and weaving and knitting; to dyeing, printing and finishing; and apparel manufacturing.Indonesia’stextileandclothingindustryconsistsofaround3000companies.Indonesiaisoneoftheworld’slargestsyntheticfibremanufacturers.

Indonesia isamongtheTOP10textilesandclothing importers in theEUbutstill, there isscopefor increasing itstextilesandclothingexportstotheEuropeanUnionmarket.In2010theEUimported111billionUSDoftextilesandclothing,and19billionUSDoffootwear.EachpersonintheEUisestimatedtouseanaverageof34kilogramsoftextilesayear(around6kilogramsinIndonesia).

XXIIITEXTILES,CLOTHINGAND FOOTWEAR

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2001 2003 2005 2007 2009

Textiles,clothingandfootwear

Indonesia'sexporttotheEU,mlnUSDIndonesia'simportfromtheEU,mlnUSDIndonesia'sshareintheEUimports,%

99

Source:Eurostat.

In2010exportstotheEUrepresented19percentofIndonesia’stotaltextileexportsofaroundUS$11billion.TradeliberalisationwiththeEuropeanUnionwouldenableIndonesia’stextileproducersfurtherexpandtheirmarketshareintheEuropeanUnion.Potentialexportproductsincludegarmentsformen,womenandchildren,butalsoindustrialtextiles for automotives industry, and special clothes formedical and constructionworkers. Indonesia could alsobenefitfromspecialisationonacertainsegmentoftextilesandclothing.Forexample,clothesforMoslemsorwithethnicdesigncouldhelptoincreaseitsshareontheglobalmarket.

IndonesianFootwearAssociation’s(Aprisindo)officialBinsarMarpaungsaidinJakartaPostonMarch18th,2011thattheIndonesia’sfootwearindustrycouldseeitsexportstotheEUjump20percentifaFTAwasimplemented.TheEUwasthesecond-largestexportdestinationforIndonesia’sfootwearproductsin2010.ExportstotheEUcontributedtoaround35percentofIndonesia’stotalfootwearexportsof$2.4billion.

TheEuropeanUnionisalsosourceoftechnology,know-howandchemicalsforIndonesiantextilecompanies.TheEUcontinuestodominateglobalmarketsforup-marketandhighqualitytextiles,clothingandfootwear.Technologicalupgradewouldleadtohighercompetitivenessandmarketshareintheworld.

37%

26%

19%

9%9%

Indonesia'stextiles,clothingandfootwearexportstothe

EU

FootwearNotknittedclothingKnittedclothingMan-madestaplefibresOther

100

101

102

GovernmentofIndonesiaMinistryofTrade

Jl.M.I.RidwanRaisNo.5JakartaPusat10110

DelegationoftheEuropeanUnion

IntilandTower,16thFloorJl.Jend.Sudirman32,Jakarta10220IndonesiaTel. :(+6221)25546200Fax :(+6221)25546201E-mail :delegation-indonesia@ec.europa.euhttp://delidn.ec.europa.eu