Joint Feasibility Study on

A Bilateral Free Trade Agreement Between

Australia and Indonesia

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 Outline Presentation
1. Background
2. Objectives of FTA Indonesia-Australia study
3. Assesment of FTA of Australia and Indonesia
Economic Approach
4. Indonesian Approach to FTA Agreement
5. Conclusion

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 I. Background
Australia and Indonesia agreed that the study would be
completed by mid-2008.

The trading relationship is already substantial.

Two-way bilateral trade amounted to some A$10.4 billion
(71,935 billion Rupiah) in 2006.

From Australia’s perspective, Indonesia is its 13th largest

trading partner. For Indonesia, Australia is its 12th largest
partner.
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There is substantial scope to strengthen the trade and
investment relationship, including by addressing
barriers to trade and investment in both economies.

Considerable opportunities exist to expand trade in

goods and services, as well as investment, Australia’s
investment in Indonesia, for example, is limited
compared with that in some other economies.

Its services exports to Indonesia have declined in recent

years, as have Indonesia’s services exports to Australia.

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II. Objectives of FTA Indonesia-Australia
Australia and Indonesia agreed that the feasibility
study would assess the prospects for building on the
progress achieved in the Australia-ASEAN-New
Zealand Free Trade Agreement negotiations.

According to the terms of reference, the study was

to examine the benefits and costs to Australia and
Indonesia of a WTO-consistent FTA that included:

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• comprehensive tariff liberalisation;
• enhanced bilateral trade by addressing non-tariff barriers;
• broad-based liberalisation of the services sector;
• potential for greater access to government procurement
contracts;
• addressing impediments to the two-way flow of investment;
• measures to strengthen intellectual property regimes;
• competition policy reform;
• improved customs procedures;
• measures to address technical barriers to trade, such as
differing technical regulations and standards; and
• capacity building.

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III. Assesment of FTA of Australia and Indonesia
Economic Approach

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 Outline Assesment of FTA of Australia and
Indonesia Economic Approach
3.1 The Australia-Indonesia economic relationship
• Merchandise Trade
• Sevices Trade
• Investment
• Movement of People
3.2 Complementary or competing economies?
• Comparative advantage index
• Bilateral trade intensity index
• Trade specialisation index
• Intra-industry trade index
• Trade complementarity index
3.3 Barriers to trade
• Tariff barriers to merchandise trade
• Non-tariff barriers to merchandise trade
• Barriers to services trade
• Trade liberalisation and dynamic productivity

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 3.4 Investment liberalisation
• Current barriers to investment
• Australia-Indonesia bilateral investment liberalisation
• What are the effects of investment liberalisation?
• Quantifying the impact of investment liberalisation
3.5 Assesing the economic impacts of liberalisation
• The economic model used
• The baseline
• Bilateral liberalisation undertaken by Australia and Indonesia
3.6 Macroeconomic effects of the liberalisation
• Macroeconomic effects - Australia
• Macroeconomic effects - Indonesia
• Bilateral Trade
3.7 Sectoral effects of the liberalisation
• Impact of liberalisation on Australian sectors
• Impact of liberalisation on Indonesian sectors
3.8 Other modelling simulations
• Slower paced trade liberalisation
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3.1 The Indonesia – Australia
Economic Relationship

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Bilateral merchandise trade

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Direction of Merchandise Trade 2006

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Composition of Bilateral Merchandise Trade 2006

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Top ten bilaterally traded goods 2006

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Bilateral services trade

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Composition of Bilateral
Services Trade 2006

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Australian Personal Service Imports
from Indonesia

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 Investment
Current bilateral investment flows — comprising portfolio, direct, and other
investment — are quite modest. In 2006 total Australian investment in
Indonesia was valued at A$3.1 billion, whereas Indonesian investment in
Australia totalled A$487 million.

In terms of foreign direct investment (FDI), Indonesia is not an important

source of FDI for Australia. It is estimated that in 2006 just 0.02 per cent (some
A$56 million) of Australia’s total inward FDI stock came from Indonesia.
Indonesia is the destination for a likewise small share (0.5 per cent) of
Australia’s outward FDI stock. In 2006, the Australian FDI stock in Indonesia
was valued at A$1470 million.

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 Movement of people
Composition of arrivals in Australia Indonesian visitor arrivals to Australia

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Australia’s exports of education related services to all countries 2006

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3.2 Complementary or competing economies?

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 Comparative advantage index 2006

The RSCA ranges from -1 to 1, where a value greater than (less than) zero reveals a country’s
comparative advantage (disadvantage) in the production of a good. 22
Example of RSCA at different levels of aggregation

Australia has a very strong (in excess of 0.9) for four of the five products groups that
comprise animal and animal products, whilst Indonesia has a comparative advantage in 23
fish and seafood products.
 Bilateral trade intensity index 2005

The trade intensity index takes values from zero, with no upper bound. Values greater than one
infers that trade between the exporting and partner country are intense relative to their trade with the
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rest of the world.
Trade specialisation index 2006

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Intra-industry trade index 2006

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Trade complementarity index

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Trade complementarity indices for select trading partners
2006

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3.3 Barriers to trade

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 Barriers to trade
Distribution of applied tariffs 2007

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Applied tariff barriers to bilateral merchandise
trade 2007

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 Trade Restrictiveness Indices
(MFN applied tariffs and NTBs)

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Non–tariff barriers to trade

Barriers to services trade via modes 1 and 4

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 Trade Liberalisation and dynamic productivity
Following the approach of Itakura, Hertel and Reimer (2003), dynamic productivity
gains arising from increased imports, exports and foreign direct investment due to
Australia and Indonesia undertaking bilateral trade and investment liberalisation
have been included in the economic modelling, specifically:
• increases in imports — productivity gain is a function of the percentage change in
relative prices of imports and local production and the ability of firms to absorb a
reduction in mark-ups (prices) in order to maintain output (the elasticity of
domestic price mark-up with respect to foreign prices, assumed to be 0.2);
• increases in exports — exporters are assumed to be 8 per cent more efficient than
domestically orientated firms, hence if the change in output exported exceeds the
change in output sold domestically, productivity of the sector rises (productivity
gain depends on relative changes in output exported/sold domestically and share
of output exported/used domestically; and
• increases in foreign direct investment — a 1 percentage point increase in FDI sees
an increase in productivity, with the productivity gain varying depending on the
Level of FDI, ranging between a maximum gain of 1.7 per cent at an FDI to GDP
ratio of zero, to a productivity gain of 0.01 per cent at an FDI to GDP ratio of 2.

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3.4 Investment Liberalisation

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Current barriers to investment
FDI restrictions in regional economies Service sectors

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Australia–Indonesia bilateral investment liberalisation
FDI barriers in Australia and Indonesia Service sectors

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 What are the effects of investment liberalisation?
Lowering investment barriers can have a number of impacts.
1. Increasing the allocative efficiency of investment. That is, investment can move
to areas where it has the highest marginal product of capital or can generate
the greatest value of production. This can happen by reducing discrepancies
in the marginal product of capital between different countries. Alternatively, it
can happen if investment is attached to particular skills and technology, in
which case these attributes are allocated more efficiently. Improvements in
allocative efficiency can drive up productivity.
2. Lowering the cost of investment through increasing the pool of available funds.
A reduction in investment barriers may effectively increase the supply of
funds for Australia and Indonesian investment and therefore lower the cost of
obtaining those funds. Note that there could also be increase in the demand
for funds through the impacts noted above.
3. Lowering the transaction costs of investment barriers. For instance, the
requirement to notify the Foreign Investment Review Board in Australia of a
proposed foreign investment imposes a (small) transactions cost on that
investment.

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 Quantifying the impact of investment liberalisation

Quantifying the impact of investment liberalisation on investment and

welfare is not an easy task. This reflects a number of factors.
• Isolating the impact of any investment liberalisation from the numerous
other events going on in the economy is inherently difficult.
• Quantifying the size of the liberalisation is difficult. Because each
liberalisation is different, as are countries’ starting positions, the most
robust work would need to quantify the differences in the extent and
patterns of liberalisation between different agreements. There has only
been limited research into quantifying investment barriers, and little to
quantify the extent of investment agreements on these barriers.
• There may be many other aspects of the economies that mitigate or
enhance the impact of investment liberalisation. For instance, the
structure and size of the economies and savings patterns could all be
important.

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Bilateral Australia–Indonesia FDI

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FDI stocks in Australia and Indonesia

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Assumptions used to condition the analysis

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Chart. 4.7 Investment barriers and FDI Service sectors

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3.5 Assessing the economic impacts
of liberalisation

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 The economic model used
CIEG-Cubed is the most appropriate global economic model currently available with
which to analyse the welfare implications of a trade and investment agreement. The
advantages of using CIEG-Cubed include:

• identification of trade flows between countries/regions;

• identification of investment flows between countries/regions;
• incorporates an integrated financial sector (comprising money, bonds, interest
rates, lending, borrowing, expectations, financial flows, and wealth);
• it is a fully dynamic model that can capture the time path of adjustment for each
of the economies/regions modelled;
• consumers and producers are allowed to borrow and lend money over time, with
decision influenced by the return on capital versus other assets;
• inclusion of adjustment costs and expectations; and
• identification of up to 57 sectors of production and 87 countries.

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The baseline

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Bilateral liberalisation undertaken by Australia and Indonesia

Results from the liberalisation simulation(s) are compared with the

baseline, with the difference being attributable to the bilateral trade and
investment liberalisation between Australia and Indonesia. Model results
are typically presented as a percentage change from the baseline
outcome and are presented for each year until 2030.

Australia and Indonesia have a vast range of liberalisation implementation

scenarios at their disposal. For example, trade barriers could either be
completely or partially eliminated; removed immediately or phased out
over 5 or 10 years; goods, services and investment could be covered, or
just goods; and so on. Furthermore, both countries need not adopt the
same trade liberalisation schedule.

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3.6 Macroeconomic Effects
of the Liberalisation

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Macroeconomic effects for Australia

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Australia’s production and welfare gains NPV

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Sources of Australia’s gains NPV 2008

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Changes in real GDP in Australia

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Changes in employment and wages in Australia

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Macroeconomic effects for Indonesia

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Indonesia’s production and welfare gains NPV 2008

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Sources of Indonesia’s gains NPV 2008

Changes in real GDP in Indonesia

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Changes in employment and wages in Indonesia

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Bilateral Indonesia-Australia trade

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3.7 Sectoral Effects of the Liberalisation

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Impact of liberalisation on Australian sectors 2020,
per cent deviation from baseline

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Impact of liberalisation on Indonesian sectors 2020,
per cent deviation from baseline

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3.8 Other Modelling Simulations

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Slower paced trade liberalisation
Main economic impacts under different phase-in scenarios

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Present value of economic impacts under
different phase-in scenarios NPV

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IV. Indonesian Approach to
FTA Agreement

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 Conclusion
• Australia and Indonesia already enjoy a wide-ranging economic relationship
that could be strengthened and further developed through a bilateral FTA. It
would also support bilateral trade and investment linkages, and play an
important role in integrating the two economies over the long term. A FTA
would build on the gains made under AANZFTA, thereby facilitating faster
regional economic integration, which is one of the main goals of AANZFTA.
In addition, a FTA would provide a solid platform for strengthened
engagement and cooperation across a range of non-economic issues.
• FTA would provide an opportunity to minimise transaction costs associated
with bilateral trade and investment. In particular, a FTA would be expected
to strengthen cooperation in a variety of trade related areas, including in the
areas of customs procedures, sanitary and phytosanitary measures,
technical regulations and standards, intellectual property rights and
electronic commerce.

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• A FTA would facilitate a more rapid integration of the
Australian and Indonesian economies, and in so doing
supplement regional efforts to promote economic
integration.
• A FTA would send a signal that both countries remain
committed to open trading relationships – an important
message during these current uncertain times. It could also
encourage investment from third countries. It would serve as
a vital symbol of the importance that Australia and Indonesia
place on our bilateral relations.

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• The study finds that a bilateral FTA ought to include
provisions that deal with tariff and non-tariff impediments to
trade and investment, trade-related domestic regulation,
cooperation to expand and enhance trade as well as
institutional arrangements that would facilitate
implementation of the FTA.
• This study has demonstrated that an Australia-Indonesia FTA
would provide worthwhile benefits to both Australia and
Indonesia in the short and long term.

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