U.S President Donald Trump talked to President's wif Iriana Widodo (Photo: President Office)

JAKARTA (TheInsiderStories)— With trade war rhetoric between key economies is intensified, Indonesia and other developing economies could be adversely affected.

So the main question is Indonesia prepared to withstand its impact, or even, can benefit from the situation?

The trade war between the United States and China seems to be a reality after the two countries throwing threats in recent months. The US registered 284 products worth US$16 billion which will be subject to tariff including semiconductors and various electronic goods.

US President Donald Trump also threatened the tariff of US$400 billion of Chinese goods if the Chinese government responds to US tariffs that will take effect this Friday (6/7). Trump also threatened Europe with a 20% tariff for imported cars.

Not only China, various countries have taken retaliatory measures against US tariffs on steel and aluminum. Canada, Mexico, the European Union and China have imposed or announced plans to retaliate, worth around US$75 billion in tariffs for US-made products.

The trade war will bring negative impacts to the developing countries, including Indonesia. The President of World Bank Jim Yong Kim warned Indonesia to prepare for the trade war.

“Indonesia just like any other economy has to be prepared, and we feel that Indonesian economy and the management of the economy is among the models for the entire world,” he said after the meeting with Indonesian President Joko Widodo on Wednesday (4/7).

The trade war potentially shifted the exports of the two countries to Indonesia. China potentially shifts the steel and aluminum exports to Indonesia, while the US will seek the new markets for fruits and soybeans.

The condition will worsen Indonesia’s trade deficit. According to the Central Statistics Agency data, Indonesia booked US$13.89 billion deficit in non-oil and gas trade balance deficit to China. Indonesia recorded US$21.32 billion in export to China, lower than the import from the country of US$35.51 billion.

In addition, the trade war potentially reduce the volume of the global trade that will hurt Indonesia’s export-oriented industries including palm oil, rubber, textile, food and beverage, and electronics. As a result, it will worsen the country’s trade deficit.

Furthermore, the trade war will exacerbate the rupiah exchange rate against the US dollar as the investors shift to the developed countries currencies. The weakening rupiah simultaneously increases imported raw material that will cause higher production cost. Not only hurt the local industries’ competitiveness, it also potentially harms the people’s purchasing power.

Given the implication of full-blown trade war could be extensive, the government does not seem to have definite anticipatory measures to minimize its impact. Especially when looking at persistent Indonesia’s trade balance deficit Indonesia booked US$1.63 billion in the trade deficit in May 2018.

The trade balance of January-May 2018 deficit of US $ 2.83 billion. The country recorded US$17.64 million in export in May 2018, much higher than the export of US$16.12 billion. As a result, the oil and gas trade recorded deficit of US$1.24 billion and non-oil and gas posted a deficit of US$0.28 billion.

Coordinating Minister for Economic Affairs Darmin Nasution earlier said the government has four anticipative steps to minimize the impacts of the trade war. First, the government ensures the current account deficit (CAD) is not widening.

However, it seems difficult to maintain the current account deficit as the Bank Indonesia’s Senior Deputy Governor Mirza Adityaswara earlier estimated the current account deficit is seen around 2.5 per cent to 3 per cent of GDP, higher than CAD in the first quarter of this year that reached US$5.5 billion or 2.15 per cent of GDP.

The second step, the government will discuss with the US government and China especially if there is dumping policy. Third, the government anticipates the impact of rising interest rates in the US against the movement of the rupiah exchange rate.

Fourth, the government ensures that vocational training and education is implemented as soon as possible. The education and training are highly important as the human resources enhanced by the infrastructure will significantly improve manufacturing industries.

The four anticipatory steps mentioned by Nasution are appropriate to minimize the impacts of the trade war, but it takes a long time to be implemented. Indonesia needs to find other strategic steps that can be implemented in the near future because the trade war is near at the hand.

Email: fauzulmuna@theinsiderstories.com