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description Policy analysis public Center for Indonesian Policy Studies

Trade for Economic Recovery: Import Policies to Support Indonesia’s F&B Sector

Felippa Amanta, Krisna Gupta
Published 17 September 2022

Abstract

Food and beverage industry is one of the prioritized manufacturing sectors that can support Indonesia’s economic recovery and structural transformation post Covid-19 pandemic. In 2021, the sector contributed 6% of Indonesia’s national Gross Domestic Product and 20% of total exports to a value of $45.4 billion. The sector is dominated by micro- and small- medium enterprises and employs an aggregate of 4.6 million people, providing livelihood for many. However, the industry has experienced stagnating growth in the past two decades, particularly due to weak global value chain linkages.

This study provides two key takeaways from Indonesia’s food industry. Firstly, although the government often cites Indonesia’s downstream products to showcase Indonesia’s competitiveness in the food industry, the industry is dominated by palm oil related products. Indonesia is actually a net importer of food products if palm oil related goods are excluded from the trade statistics. Heavy reliance on the palm oil industry skews Indonesia’s global value chain dynamics toward forward linkages (exports of raw materials) with limited backward linkages (imports of raw materials to be processed further in the country). Palm oil products are less complex compared to types of final products of the food and beverage industry, and rely mostly on Indonesia’s climatic advantage. Given the different characteristics, it is important to distinguish the palm oil industries from the other processed food and beverage manufacturing industries, if Indonesia wishes to design its policy around increasing production complexity and improving domestic value added to its food and beverage industry.

The second point is the importance of importing value added to move toward a more complex value chain downstream. Due to natural limitations, the food and beverage industry needs imported inputs as they tend to combine various ingredients that may not be produced in one location. Moreover, various studies suggest imported inputs have also been associated with higher firm productivity and quality of products. This study finds that a 1% increase of intermediate input imports correlates with the growth of final good exports by 0.96%. Considering how important Indonesia’s domestic market is for downstream products, this result suggests how critical importing input is to the industry.

Indonesia should open itself to importing products that are more efficiently produced elsewhere. However, access to imported inputs, especially food and agricultural products, are limited by Indonesia’s complex and protectionist trade regulations. Non-tariff measures have proliferated in the sector covering almost 100% of animal, vegetable, and animal products. As a whole, non-tariff measures compound compliance costs and cause delays that inhibits firms’ access to a reliable stream of imported inputs, and hence disrupting production. Among the non-tariff measures, quantitative restrictions and import licensing system stood out as causing the greatest distortion to the market and significant restrictions to trade.

The quantitative restrictions and import licensing system are regulated in Ministry of Trade Regulations No. 25/2022 that outlines specific requirements to obtain Persetujuan Impor (import license) for each regulated traded product. For some products, such as dairy products, the PI application process requires firms to obtain recommendations from the provincial government and technical ministry. In addition, the Indonesian government also rolled out Neraca Komoditas in 2022 through Presidential Regulations No. 32/2022 that introduced a new trade licensing system based on an integrated supply-demand-stock database. The Neraca Komoditas promises a simplified import licensing system that eliminates the need for technical recommendations, but it presents potentially new problems for firms particularly around the reliability of the database and its focus on quantity of goods available as a factor in approval decision.

To facilitate firms’ access to imported input, the Ministry of Trade should lead a review and harmonize existing regulations that still present trade barriers to firms. The Ministry of Trade should also consider removing quantitative restrictions and allowing firms with API-P who have met the technical requirements to import without quantity limits. Last but not least, Neraca Komoditas should serve solely to inform broader strategic policy decisions rather than to decide import allowance for firms.

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