(Photo: Donald Trump's Twitter)

JAKARTA (TheInsiderStories) – Good Morning. Starting today United States (U.S) officially impose import tariffs on Chinese products with worth of US$34 billion. In recent months, investors worried on the trade war between the U.S and China and creating panic in the financial markets.

U.S’s President Donald Trump also threatened the tariff of $400 billion of Chinese goods if the Chinese government responds to the policy even so threatened Europe with a 20 percent tariff for imported cars.

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

Commenting on the tariff imposing, China’s Ministry of Finance said it would not start a trade war with the U.S. At the same time, Chinese Commerce Ministry spokesman Gao Feng warned that U.S tariffs will hit international supply chains including foreign companies as the world’s second largest economy.

He stated, China will not be subject to threats and extortion and is committed to maintaining free trade and the multilateral system. Gao said, Chinese government will protect the legal rights of all foreign companies in China.

Foreign companies accounted for $20 billion or 59 percent equivalent, from $34 billion exports from China which will be charged new US tariffs. China itself plans to impose tariffs on hundreds of U.S goods, including soybeans, sorghum and cotton followed the Trump’s tariff policy.

In our view, the trade war will bring negative impacts to the developing countries, including Indonesia. The President of World Bank Jim Yong Kim in the meeting with President Joko Widodo on July 4, has warned Indonesia to prepare for the trade war. He urged Indonesia just like any other economy has to be prepared on the trade wars.

Furthermore, we look 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 U.S will seek the new markets for fruits and soybeans.

This condition will worsen Indonesia’s trade deficit. According to the Statistics Indonesia data, Indonesia booked $13.89 billion deficit in non-oil and gas trade balance deficit to China.

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 against the U.S 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 $1.63 billion in the trade deficit in May 2018. Indonesia recorded $21.32 billion in export to China, lower than the import from the country of $35.51 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 to 3 percent of gross domestic products (GDP), higher than CAD in the first quarter of this year that reached $5.5 billion or 2.15 per cent of GDP.

The second step, the government will discuss with the U.S 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.

How’s the market reaction? Yesterday, the Rupiah in the spot market fell 0.22 percent to Rp 14,394 per U.S dollar. While at Bank Indonesia rate also depreciated 0.30 percent to Rp 14,387 against the American dollar.

Several economist said, the weakening of rupiah is the effect of trade war. Furthermore, the rupiah weakening also affected by Indonesia’s persistent current account deficit, which this year is exacerbated by a trade deficit.

In the recent weeks, the local currency become one of the worst performing in Asia compared to the greenback. Unlike the Rupiah, a number of analysts predict the Jakarta Composite Index (JCI) may keep its strength but some projected a potential profit-taking take by investors.

Email: linda.silaen@theinsiderstories.com