Indonesia and Australia officially to sign Free Trade Agreement called IA-CEPA in Jakarta today. Photo by The Ministry.

JAKARTA (TheInsiderStories) – Total international trade in 2017 reached US$34 trillion, consisting of $17.43 trillion in exports and $17 trillion in imports. This high volume of trade is certainly influenced by the openness of access to trade between countries, both in bilateral and multilateral relations, which has been increasingly prevalent lately.

In the midst of heated trade relations with the United States, for example, China chose the European Union as a trading partner by promising broad access to investors to China by eliminating discriminatory requirements for foreign companies. The trade value of the two developed countries reaches €575 billion ($648 billion) per year.

Likewise, the free trade agreement between the EU and Japan (JEFTA) in February agreed to remove import duties on almost all agricultural and industrial products and to open up the broad service and logistics sector. With this, open access to the Japanese market will potentially save up to €1 billion ($1.14 billion) for European companies.

We know that the impact of this trade agreement opens up access for international trade (exports and imports) that is easier and inclusive. According to availability data, international trade accounts for around 27 percent of the global economy. In 2017, global trade grew 10.5 percent. In 2016, he had contracted 4 percent. It has grown 2 percent in 2015 and 3.4 percent in 2014. This returns to the 10 percent annual average growth rate that occurred between 1961 and 2013.

As far as the world financial crisis in 2008, global trade grew 1.9 times faster than economic growth. But until 2017, trade grew more slowly than the global economy.

There are several factors in the slowdown in global trade flows. One of them is the protectionist actions of countries in dealing with other countries. For example, in 2015, countries added 539 trade restrictions, including tariffs, government subsidies for domestic industries, and anti-dumping laws.

However, with the openness of the global market marked by the signing of a number of advanced economic trade agreements, it will certainly have a significant impact on the global trade chain. Because, one of the main objectives of the trade agreement is to expand access to exports and imports with easy costs and procedures.

In fact, since the 1980s, bilateral and regional free trade agreements (FTAs) have been used by countries around the world to reduce barriers, open markets, and create new and higher standards in various fields such as investment, intellectual property, and now digital trade.

By reducing barriers to trade and investment, leaders in various administrations believe that overseas markets will develop, not only because of barriers but also because of increased trading volumes.

The US Economic Commission’s economic analysis, for example, found that in addition to positively influencing real GDP, employment, and wages, trade agreements increased the trade surplus or reduced the trade deficit with partner countries by 59.2 percent ($87.5 billion) in 2015 and tariff savings of up to $13.4 billion in 2014.

In addition, in 2015, the US enjoyed a surplus of goods and services worth $ 6.4 billion with 20 free trade partners, compared with a deficit of $489.8 billion with non-FTA countries. At present, the largest trade deficit of the United States is with China, which does not have trade agreements with the US and is not a party proposed for the Trans-Pacific Partnership.

In addition to boost manufacturing industries, trade agreements also open business services that can be traded (including legal services, consulting, financial services, accounting, architecture, engineering, health and education).

Technology companies and their workers will benefit through the opening of the service market, strengthening intellectual property protection, protecting cross-border data movements, and protecting the source code from expropriation by foreign governments.

Agricultural products will also benefit, such as openness between the EU and Japan. In addition, it covers the protection of labor and the environment that can be enforced, which sets the highest standard of international trade agreements.

The biggest gain recorded in the import sector from trade agreements was a jump in trade growth to 7.2 percent in 2017 from 1.9 percent in 2016. Demand for imports also increased in developed countries, although less dramatically, as the growth in trade in goods increased to 3.1 percent in 2017 from 2.0 percent in 2016.

Trade in merchandise exports grew by 3.5 percent in developed countries and 5.7 percent in developing countries and developing countries in recent years, up from 1.1 percent and 2.3 percent respectively in 2016. The strongest growth occurred in the country developed throughout 2017. However, exports and especially imports of developed countries also strengthened this year, especially in the second half of 2018.

With a good export performance, it can create jobs and encourage economic growth in a country. With exports, domestic companies have more experience in producing for foreign markets. With that, the company gains a competitive advantage in global trade. On the contrary, trade makes the company more efficient and productive.

Indonesia itself is being and has been aggressively ratifying trade agreements with export destination countries, for example with Australia, China, India, the EU, South Korea, Chile, Thailand, and more draft agreements waiting to be ratified.

With the existence of the trade cooperation agreement, it is estimated that it can open wide access for domestic entrepreneurs to play at the global level, so that it can increase export volume and simultaneously maintain a strong economic growth rate from the wider deficit in recent years.

More than that, global market openness helps Indonesia to exchange technology and knowledge with the countries where the cooperation is carried out. With that, domestic manufacturing and service production grows while being able to compete at the global level.

Written by Daniel Deha, Email: daniel@theinsiderstories.com