Indonesia Runs Into Trouble with the WTO

Indonesia is earning itself a wide range of powerful critics who have gone to the World Trade Organization over its increasingly restrictive trade policies, with the United States, Japan, Australia, Korea, Canada, the European Union and New Zealand all expressing concerns about the country's restrictions on food products.

With those complaints simmering, last Friday Jakarta backed away from from imposing limits on horticultural products in the face of a US challenge filed with the WTO in January, Trade Minister Gita Wirjawan said.

The US said it was requesting consultations over alleged trade restrictions by the Indonesian government, with US Trade Representative Ron Kirk saying in a prepared statement that "Indonesia's opaque and complex import licensing system affects a wide range of American agricultural exports. It has become a serious impediment to US agricultural exports entering Indonesia, reducing Indonesian consumers' access to high-quality US products."

A request for consultations is considered the first step toward seeking retaliatory measures with the WTO. The US said it had asked the WTO to strike down import restrictions imposed by Indonesia on horticultural products including fruits, vegetables, flowers, juices and other horticultural products as well animal products.

Indonesia is a major US trading partner, with more than US$28 billion worth of goods exchanged in 2011. The trade balance is sharply in Indonesia's favor, with US$8.01 billion in imports from the US and US$17.9 billion in exports, giving Jakarta a positive trade balance of US$9.98 billion.

The threatened WTO action is the first crack over Indonesian knuckles over a long list of irritations that other countries have been enduring. Indonesia last November instituted a food security measure that has driven up the price of food across the board by about 15 percent, playing a major role in pushing up overall inflation in Indonesia by 5.6 percent.

The country has been the focus of investor concerns for months as officials have constricted the ability to operate on the part of multinationals, particularly in the extractive industries such as oil and gas and minerals, where billions of US dollars in investment have been stalled for months. (See Indonesia Trade Law Worries Multinationals)

A government official who monitors trade issues said protectionist measures in resources and agriculture are "a disaster," adding that "This could send us in reverse."

According to the WTO website, the US in 2012 expressed concern about what it said was an "expanding web of trade restrictions in Indonesia," citing import licensing requirements on many products including livestock, textiles and apparel, electronics, household appliances and food and beverages.

The US also complained that disguised pre-shipment inspection requirements and local content requirements including in the energy sector were resulting in trade restrictions.

The European Union also complained to the WTO, over the same issues, saying trade restrictions have effectively stopped some imports, and expressed particular concern over the regulations affecting horticulture and animal products. It urged Indonesia to clarify the new measures to the WTO. The other nations followed suit.

Indonesia, however, told the WTO that its trade policies need to address the needs of millions of poor people in the country. It said it was reviewing some of the regulations, noting its recent decision to postpone the implementation of some measures, according to the WTO website. It said it would continue its dialogue with other members on this issue in various WTO committees "There will be revisions on trade ministry regulations and agriculture ministry regulations on horticulture importation," Gita Wirjawan told Reuters. "We will not impose quantity restrictions on imports anymore."

A spokeswoman for the U.S. Trade Representative's office said they were "reviewing the announcement and seeking details" and had no additional comment, Reuters said.

Indonesia's bid for food security in beef has resulted in prices higher than Tokyo, one of the most expensive cities in the world for beef. The price of garlic is up by eight times the normal price, with a delay in issuing recommendation letters for importers to obtain revised import licenses under the new food law resulting in garlic being stockpiled in ports and unable to make it to market. Chilies, a crucial ingredient in Indonesian cooking, have more than tripled in price.

While tariffs have been brought down from 20 percent to 5 percent over the intervening years and import monopolies and licensing have been largely abolished, corruption in the food process is endemic and debilitating despite abolition of the licensure procedures. As the WTO complaint notes, inspection and licensing procedures have resulted in de facto trade violations.

At the root of the problem today is the new Food Law, passed on Oct. 18, 2012, and signed by President Susilo Bambang Yudhoyono in November, that was intended to institutionalize self-sufficiency in food production and "food sovereignty" as overarching food security policies, according to the US Department of Agriculture's Foreign Agricultural Service.

Among its provisions, Article 14 states that "Sources of food supply are from domestic production and national food reserves. In the case of shortage of food supply from those two sources, food can be fulfilled by importation, as needed." Another provision, Article 24, limits the export of food, saying exports "can be carried out by taking into account the needs of domestic food consumption and national interest. The export of staple food can only be carried out after the fulfillment of domestic consumption and national food reserves."

In recent months, officials have drafted new trade and industry laws that have concerned American and European multinationals operating in the country because of fears they will constrict investment and cut further into market access in a country increasingly in the grip of economic nationalists.