The Impact of New Trade Agenda to
Macroeconomic Performance of Indonesia
and Japan in Short and Long Term
Amalia Adininggar Widyasanti1
Abstract
The swings of global trade in recent decades have been resulted from the global economic crisis and unfavorable condition of global situation. Deterioration of private demand
(i)Japan should focus on improving technological innovation to realize the implementation of society 5.0 and industry 4.0 as scheduled; (ii) Indonesia should facilitate more investment to its economy and provide more government investment to induce accumulation of capital stock in the future. Furthermore, efficiencies and technological adoption should also be main concern of the Indonesian government to induce productivity of the economy and help mitigate the global risks in the long run.
Keywords: trade, macroeconomy, Indonesia, Japan
JEL Classification Code: F17, F47, F62
1Amalia Adininggar Widyasanti is a PhD graduate from Department of Economics, University of Melbourne, Australia. She is currently a Director of Macroeconomic Planning and Statistic Analysis at Ministry of National Development Planning (BAPPENAS)
Contact Address:
Email: winny@bappenas.go.id; awidyasanti@gmail.com
Phone:
The author appreciates inputs, suggestion, and discussion towards this paper from Prof. Nakamura and Prof. Kawasaki (Graduate Research Institute for Policy Studies, Tokyo, Japan) and Prof. Kuwahara (Cabinet Office, Japan) during her research visit on 1 – 8 July, 2017 in Tokyo, Japan.
Disclaimer: Views and opinions expressed in this paper are the author’s own and not reflected or represented the institution policy and decision.
182Buletin Ekonomi Moneter dan Perbankan, Volume 20, Nomor 2, Oktober 2017
I. INTRODUCTION
The growth of world trade in recent decades has been quite volatile. The upswings and downswings of global trade growth were resulted from changes of global political and economic situation. For example, the global financial crisis happened in the mid
1.1. The Global Economic Crisis
The history tells us that the crisis hit the global economy in a cyclical pattern, which was about once in each
Furthermore, the U.S. economy was slowing down and dipped into recession in 1991. The federal budget deficit increased) as the economy contracted and unemployment increased (by
1.8million workers). The recession ended in March 1991, but the economy was experiencing a jobless recovery, where unemployment was stagnant.
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Source: Oxford Economics and Trade map (authors’ modification)
Figure 1. Dynamics of Global Economic Growth and
Global Trade Growth
The Impact of New Trade Agenda to Macroeconomic Performance |
183 |
of Indonesia and Japan in Short and Long Term |
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In
The financial crisis of
In
1.2. Trade Performance of Asian Countries
There are various achievement in trade performance of Asian countries. China’s trade has been surpassing the US trade within the recent years. Its share of exports in goods and services to the world achieved more than 10 percent in 2012, while the US share to the world export tended
184Buletin Ekonomi Moneter dan Perbankan, Volume 20, Nomor 2, Oktober 2017
to decline. A remarkable achievement of China’s trade was to increase its share of goods and services export from 0.6 percent in 1980 to 10 percent within just 32 years.
On the contrary, Japan’s share to the world’s goods and services exports has been declining. Its share in 2016 was only 4.2 percent, decreasing from about 7 percent in 1984. Meanwhile, the share of Indonesia to the global trade was flat, which is around 1 percent of the total world exports, and it seems that Vietnam will overtake Indonesia’s position in the global market soonest.
Another phenomena to point out is that Indonesia’s and Japan’s export growth was moving in the same direction. Both countries were experiencing a negative growth of export during the recent global economic crisis in
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1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 |
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1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 |
Figure 2. |
Figure 3. |
Export Value of Some Asian Countries |
Export Growth of Indonesia and Japan |
Indonesia and Japan has a close trade relationship. Japan is Indonesia’s main export destination, where 11.1 percent of Indonesian exports were directed to Japan. On the other hand, Japan is also Indonesia’s main import sourcing, as Japanese products share about 10 percent of Indonesian imports. Indonesia and Japan trade are complementary each other, as both countries have different comparative advantage each other.
Indonesia is the main world supplier for Palm Oil, Coal, and Jewelries. On the other hand, Japan is the main world supplier for Machineries, motor cars, as well as parts and accessories of vehicles. Japan main export markets are US, China, and Korea; while Indonesian main export markets are China, US, and Japan.
The Impact of New Trade Agenda to Macroeconomic Performance 185 of Indonesia and Japan in Short and Long Term
Table 1.
Top Export Products of Indonesia and Japan to the World Market
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Top 5 Export Products to the |
Value of |
Share in World |
Ranking in the |
Main Export |
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Exports, USD |
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world |
Exports |
world export |
Markets |
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million (2016) |
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Indonesia |
Palm Oil and its fractions |
14.4 |
51.7% |
1 |
China(11.6%) |
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US (11.2%) |
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Coal |
12.9 |
17.3% |
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Japan (11.1%) |
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Petroleum gas |
7.0 |
4.0% |
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Singapore(7.8%) |
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India(7%) |
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Petroleum Oil |
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0.8% |
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Jewellery |
4.1 |
4.3% |
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Japan |
Motor cars |
91.9 |
13.2% |
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US(20.2%) |
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China(17.6%) |
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Parts and accessories |
31.7 |
8.8% |
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Korea(7.2%) |
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Electronics |
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4.5% |
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Taipei(6.1%) |
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Hongkong(5.2%) |
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Machines |
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30.8% |
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Ships and boats |
12.2 |
16.4% |
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Indonesia runs a trade surplus with Japan, because Indonesia supplies a lot of raw materials to Japan for its industrial process. The top import products of Japan supplied by Indonesia are petroleum gas, coal, copper, oil, and wires. On the other hand, Indonesia imports industrial products from Japan, such as: parts and accessories, iron products and steels, machineries, motor cars, and piston engines.
Table 2.
Bilateral Imports of Indonesia and Japan
IMPORTS
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Indonesia from Japan |
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Japan from Indonesia |
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USD 13.0 mio |
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Top 5 products: |
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Parts and accessories |
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Petroleum gas |
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Coal |
15% |
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31% |
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Copper |
17% |
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Motor cars |
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24% |
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Petroleum oil |
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Piston engines |
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Wire |
10% |
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1.3. The New Trade Pattern and Global Agenda
In recent years, the economists have been noticing that there are some changes in global trade pattern. The relationship between global growth and global trade is getting weaker. WTO (2017) reported that weak international trade growth in the last few years largely reflects continuing
186Buletin Ekonomi Moneter dan Perbankan, Volume 20, Nomor 2, Oktober 2017
weakness in the global economy. The potential of trade to strengthen global growth can remain exist if the movement of goods and supply of services across borders remains strong. However, it is tended that policymakers attempt to address higher restrictions on imports. In this situation, trade cannot help boost growth and may even constitute a drag on the recovery.
WTO (2017) emphasized that the volume of world merchandise trade in historical time has tended to grow about 1.5 times faster than world output. Furthermore, in the 1990s it grew more than twice as fast. However, since the financial crisis, the ratio of trade growth to GDP growth has fallen to around 1.0; and the ratio fell down to 0.6, which is the first time drop below 1.0 since more than 20 years ago. The ratio is expected to partly recover in 2017, but it remains a cause for concern. The risks of trade to be going to unpredictable direction in the near future will be due to the lack of clarity about government action on monetary, fiscal and trade policies.
20
15
10
5
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% Change and Ratio
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World Trade Volume Growth (left)
World GDP Growth (left)-2
1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016
Source: adopted from Word Trade Report 2017, WTO
Figure 4. Ratio of world merchandise trade
volume growth to world real GDP growth,
Furthermore, Trump’s presidency and his trade agenda has added to higher uncertainties to the global trade. President Donald Trump has been seen as a protectionist; as he cancelled US trade deal in TPP. He also argued that US companies are the victims of the globalization. He pledged to impose tariff on Chinese imports as much as 45% and on goods imported from Mexico as much as 35%. Furthermore, in early April 2017, Trump announced the 16 countries that were put in his trade hit list. Those countries are: China, Japan, Germany, Mexico, Ireland, Vietnam, Italy, South Korea, Malaysia, India, Thailand, France, Switzerland and Indonesia, with eight out of 15 of them being in the
Trump’s reason to put those countries into the trade hit list was because those countries are the top most import sources creating US trade deficit (Figure 4). The US trade deficit was the largest with China, followed by Japan. Those countries created a trade deficit to the US as
The Impact of New Trade Agenda to Macroeconomic Performance |
187 |
of Indonesia and Japan in Short and Long Term |
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much as US$
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Source: Trademap (author’s modification) |
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Figure 5. US Trade Deficits with 16
Main Import Sources (USD Billion)
25
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[CELLRANGE],
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Source: Trade Map (modified by author)
Figure 6. Share to US Imports and Average Growth of US Imports from Each Country
However, a different conclusion emerges from a closer reading of Donald Trump’s business interests, which was written in his trade agenda published in the 2016 Annual Report on the Trade Agreements Program by the Office of the United States Trade Representative (USTR). Another look at American trade negotiation history, it is also a possibility that the US will use the large trade deficits to have a further negotiation with its trading partners to open up their markets.
This paper studies the possible impact of new trade agenda into the Indonesian and Japanese economy that may occur through trade channels; and provides some policy recommendation to mitigate such global risk for Indonesian and Japanese economy. There are two scenarios of new trade agenda studied in this paper. Those are: (i) Trump Trade Agenda when implementing 45 and 35 percent tariff to China and Mexico; (ii) Trade Hit List when imposing tariff to the 16 countries in the trade hit list. Impacts of both scenarios are examined in short run and long run.
188Buletin Ekonomi Moneter dan Perbankan, Volume 20, Nomor 2, Oktober 2017
II. THEORY
There has been an extensive discussion in the literatures on the role of international trade in fostering economic growth. The nexus of trade versus growth is not a new debate. Were (2015) mentions in his paper that Smith (1776) explained trade as a vent for surplus production and a means of widening the market. Adam Smith proposed that trade affects economic growth through two channels. The first channel is that trade can reduce dimension of the internal market. The second channel is by increasing the extension of the market, improving the labour division and increasing productivity. He postulated that division of labour does not depend merely on technological feasibility, it greatly depends on the extent of the market as well and the size of market depends on the availability of stock and the institutional restrictions placed upon both domestic and international trade. Smith’s theory of international trade and growth was known as classical theory.
Post classical international trade theory was proposed by Marshall (1890). He acknowledged that economic progress of nations is very much linked to the study of international trade. The expansion of the market created by trade will lead to the increase of global production and originated the increase of internal and external economies, which then resulted in increasing income for the economy. However, the topic has remained a key subject of debate in research and policy discourses, leading to ample theoretical and empirical literature on the link between trade and economic growth.
The renewed interest in the role of trade is largely underpinned by the latest wave of globalization that has been characterized by not just intensive trade integration and trade openness, but has also been associated with technological revolution.
Furthermore, WTO (2014) detailed an explanation on how trade affects
Trade
Source: WTO (modified by Author)
The Impact of New Trade Agenda to Macroeconomic Performance |
189 |
of Indonesia and Japan in Short and Long Term |
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Channel 1: |
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Channel 3: |
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Institutional Framework |
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Figure 7.
Trade Channels to Growth
Empirically, Were (2015) analyzed the differential impact of trade on economic growth and investment based on
This paper goes one step further and explores how international trade can affect output growth differently in the
III. METHODOLOGY
The paper uses GTAP model, which is essentially a computable general equilibrium model, with sector and country disaggregation available at GTAP version 7. The standard GTAP Model is a multiregion and multisector with a perfect competition and constant returns to scale. Bilateral trade is provided through the Armington assumption. Innovative aspects of this model include2:
•The treatment of private household preferences using the
•The Government demand follows the
2 The GTAP model explanation was obtained from: https://www.gtap.agecon.purdue.edu/models/current.asp
190Buletin Ekonomi Moneter dan Perbankan, Volume 20, Nomor 2, Oktober 2017
•The explicit treatment of international trade and transport margins. Bilateral trade is handled via the Armington assumption.
•A global banking sector which intermediates between global savings and consumption.
Endowment factors are disaggregated into Land, Unskilled Labour, Skilled Labour, Capital, and Natural Resources.
The
The
EXPAND(i,r) = qcgds(r) - qo(i,r)
When EXPAND(“Capital”,r) is zero, then output of capital goods will equate the change of investment level (qcgds(r), and therefore capital stock (kb(r)) will also be changed.
However, the setting of long run closure in this paper is also referring to Walmsley (1998), where the trade balance (DTBAL(r)) is endogenous to ensure the transmission of trade policy in the
rorc(r) = rore(r)
Aside from this, RORDELTA is set to 1, representing the situation where global saving across investment is allocated in such away the expected rates of return will equate across
3RORDELTA is a binary coefficient which determines the mechanism of allocating investment funds across regions. When RORDELTA = 1, investment funds are allocated across regions to equate the change in the expected rates of return (i.e., rore(r)). When RORDELTA = 0, investment funds are allocated across regions to maintain the existing composition of capital stocks.
4Francois et.al (1996) fixes the trade balance; therefore the percentage change in each region current and expected rates of return do not equate across regions in the
The Impact of New Trade Agenda to Macroeconomic Performance |
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of Indonesia and Japan in Short and Long Term |
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regions (composition of global net investment is changed, but the expected global rate of return does not change).
rore(r) = rorg
IV. RESULT AND ANALYSIS
The simulation is divided into two groups. First is the scenario when Trump implements import tariff to China and Mexico, as he promised during his election campaign. At this stage, China and Mexico do not undertake any trade retaliation. Second is the scenario when Trump only implement import tariff to countries in the hit list. These countries get 15 percent tariff to all products they export to US market. Both scenarios are examined within
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Simulation |
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Trump Trade |
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Figure 8.
Simulation Scenarios
192Buletin Ekonomi Moneter dan Perbankan, Volume 20, Nomor 2, Oktober 2017
Closures of the short run and long run scenarios
exogenous |
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pop |
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pop |
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psaveslack pcgdswld |
psaveslack pcgdswld |
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profitslack incomeslack endwslack |
profitslack incomeslack endwslack |
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cgdslack tradslack |
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tradslack |
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ams atm atf ats atd |
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ams atm atf ats atd |
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aosec aoreg avasec avareg |
aosec aoreg avasec avareg |
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afcom afsec afreg afecom afesec afereg |
afcom afsec afreg afecom |
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aoall afall afeall |
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afesec afereg |
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au dppriv dpgov dpsave |
aoall afall afeall |
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to tp tm tms tx txs |
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au dppriv dpgov dpsave |
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qo(ENDW_COMM,REG) ; |
to tp tm tms tx txs |
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Rest Endogenous ; |
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qo("UnskLab",REG) qo("SkLab",REG) |
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qo("NatRes",REG) |
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EXPAND |
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cgdslack(REG) ; |
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Rest Endogenous ; |
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Note: |
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• In the |
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endogenous. Trade balance is endogenous |
exogenous. Trade balance is endogenous |
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qo("capital",REG) |
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qo("capital",REG) |
: endogenous |
Expand(i,REG) |
: endogenous |
Expand(i,REG) |
: exogenous |
Cgdslack |
: exogenous |
Cgdslack |
: exogenous |
Dtbalr(REG) |
: endogenous |
Dtbalr(REG) |
: endogenous |
psaveslack |
: exogenous |
psaveslack |
: exogenous |
REAL_RET(r) |
: endogenous |
REAL_RET(r) |
: endogenous |
• RORDELTA = 0 |
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• RORDELTA = 1 |
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4.1. Trump Trade Agenda
(45 percent import tariff for China and 35 percent import tariff for Mexico)
The simulation results show that the implementation of Trump’s trade agenda, in which 45 percent import tariff applied to Chinese products and 35 percent import tariff applied to Mexican products, will not significantly effect global economy nor Indonesian and Japanese economy in the short run. Countries that will be
The Impact of New Trade Agenda to Macroeconomic Performance 193 of Indonesia and Japan in Short and Long Term
Table 3.
Effects of Trump Trade Agenda to Some Economies
|
|
|
Short Run |
Long Run |
|
|
Change in GDP (%) |
|
|
1 |
Indonesia |
|
|
|
|
0.0 |
0.3 |
||
2 |
EU_25 |
|
0.0 |
0.1 |
3 |
Japan |
|
0.0 |
0.1 |
4 USA |
|
|||
5 |
China |
|
||
6 |
Mexico |
|
||
7 |
RestofASEAN |
|
0.1 |
0.7 |
8 |
RestofASIA |
|
0.0 |
0.2 |
9 |
RestofWorld |
|
0.0 |
0.3 |
TOTAL WORLD |
|
0.0 |
||
|
|
Change in Welfare (EV) |
|
|
Total Welfare (World) |
|
|
||
|
||||
Source: Author’s simulation |
|
|
|
The reason is that Mexico relies much on the US market for its exports. Around 81 percent of its exports are directed to US. It shows that high dependency of Mexico on the US market has made it very vulnerable to any shock from the US economy, particularly when there is a trade shock. On the other hand, the impact of Trump Agenda is less to China than to Mexico, because it is only 18.4 percent of Chinese exports directed to US. This is in line with the empirical findings of Shivarov (2014) that countries with higher export diversification – either diversification in main trading partners or products
|
Table 4. |
|
|
Market Concentration Index |
|
Country |
|
Market Concentration Index (2015) |
China |
|
0.07 |
Mexico |
|
0.55 |
Indonesia |
|
0.06 |
Japan |
|
0.09 |
|
|
|
194Buletin Ekonomi Moneter dan Perbankan, Volume 20, Nomor 2, Oktober 2017
To Japan and Indonesia, even though US is one of their main export destination, but it is only 11.2 percent of Indonesian export directed to the US and 20.2 percent of Japan export directed to the US.
Furthermore, it is important to note that the agenda will not be good to the global economy in the long run, as the world GDP will be declining and the total welfare loss of the global economy will be higher. The global supply of capital goods for net investment will be declining, and this will be the main reason that affects
Table 5.
Effect of Trump Agenda to the Global Economy
|
Description |
Short Run |
Long Run |
- |
Global supply of capital goods for NET investment |
||
- |
Volume of world trade |
||
- |
Global net rate of return on capital stock |
0.0 |
|
- |
Value of world trade |
||
- |
Demand in the omitted |
||
- |
Supply in omitted |
||
|
|
|
|
Trump’s trade agenda will definitely hurt the economy of China, Mexico, and USA in the
Innovation through the market size is decreasing in the
The Impact of New Trade Agenda to Macroeconomic Performance 195 of Indonesia and Japan in Short and Long Term
Table 6.
Change in Trade Balance of Some Countries in Short Run and Long Run
Country |
Short Run |
Long Run |
Indonesia |
298.2 |
49.0 |
Japan |
3676.3 |
438.0 |
USA |
2626.8 |
|
China |
||
Mexico |
586.8 |
|
|
|
|
However, Trump’s trade agenda does not seem to create a negative effect to the Indonesian and Japanese economy, particularly in the long run; if both countries are able to utilize the market opportunities in particular in the US Market. There are possibilities of trade diversion and trade creation effects for Indonesia and Japan. In the short run, Indonesia and Japan can get a trade diversion effect, as import restriction applied to China and Mexico can provide market opportunities in the US because US domestic industries are not yet ready to fulfill all its domestic demand. Furthermore, since the US market opportunities are big enough, then Indonesia and Japan may have some room to get trade creation effects. This will result in an increase of Indonesian and Japanese trade surplus in the short run (Table 6).
In the long run, the US industries can adjust to the situation and able to adapt to the domestic market opportunities, leaving the smaller trade surplus to Indonesia and Japan. In the long run, US can have a smaller trade deficit by reducing the amount of imports for its domestic demand. For Indonesia and Japan, the market opportunities created from trade diversion and trade creation effects can generate a capital accumulation in the long run. Indonesian and Japan trade competitiveness
Table 7.
Percentage Change of Capital Stock in Each Country in the Long Run
|
Countries |
Capital Stocks |
Terms of Trade |
|||
|
Short Run |
|
Long Run |
Short Run |
Long Run |
|
|
|
|
||||
1 |
Indonesia |
|
0 |
0.6 |
0.4 |
0.3 |
3 |
Japan |
|
0 |
0.3 |
0.7 |
0.8 |
4 |
USA |
|
0 |
1.8 |
1.7 |
|
5 |
China |
|
0 |
|||
6 |
Mexico |
|
0 |
|||
|
|
|
|
|
|
|
196Buletin Ekonomi Moneter dan Perbankan, Volume 20, Nomor 2, Oktober 2017
4.2.Trade Hit List
(15 percent import tariff for countries in the trade hit list)
Simulation of Trade Hit List scenario is undertaken by imposing 15 percent tariff of US imports from the 16 countries in the Trade Hit List. The simulation is conducted to assess the short run and long run effects, in particular to Indonesia and Japan.
The simulation results show that the implementation of 15 percent tariff to the trade hit list countries
–is negative, meaning that there are still a welfare loss even though the global GDP does not change much in the short run.
The trade hit list agenda will disadvantage the global economy and all countries in the trade hit list for the long run. The long run GDP will decrease. Furthermore, the global welfare loss in the long run is higher than that of the short run. Another interesting result is that global trade will be shrinking and global net investment will also decrease in both short run and long run. It is important to highlight that all global macro indicators are worsened in the long run. A decrease of net investment in the short run may cause the decrease income. Furthermore, it will result in a decreased demand of savings, which means reducing the capability to increase the capital stock in the long run. When the capital stock is declining, the long run growth will also reduce.
Table 8.
Effects of Trade Hit List Agenda to the Global Economy in Short Run and Long Run
|
Description |
Short Run |
Long Run |
- Change in World GDP |
0.0 |
||
- |
Global supply of capital goods for NET investment |
||
- |
Volume of world trade |
||
- |
Global net rate of return on capital stock |
0.4 |
|
- |
Value of world trade |
||
- |
Demand in the omitted |
||
- |
Supply in omitted |
||
- |
Equivalent variation for the world (change) |
||
|
|
|
|
The negative impact of the trade hit list agenda will be experienced by Indonesia and Japan in the long run, as well as most of economies in the trade hit list. However, Indonesia will get a worse effect than Japan will.
|
|
The Impact of New Trade Agenda to Macroeconomic Performance |
197 |
||||||
|
|
|
|
of Indonesia and Japan in Short and Long Term |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 9. |
|
|
|
|
|
|
|
|
The Impact of Trade Hit List Agenda to Change in GDP of Some Countries |
|
||||||
|
|
Country |
|
Short Run |
|
Long Run |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
GDP |
|
Investment |
GDP |
|
Capital Stock |
||
|
|
|
|
|
|||||
1 |
Indonesia |
|
0.0 |
|
|
||||
2 |
Germany |
|
0.0 |
|
|
||||
3 |
Japan |
|
0.0 |
|
|
||||
4 USA |
|
|
|
||||||
5 |
China |
|
|
|
|||||
6 |
Mexico |
|
|
|
|||||
7 |
Ireland |
|
|
|
|||||
8 |
Vietnam |
|
0.2 |
|
0.2 |
|
0.0 |
||
9 |
Italy |
|
0.0 |
|
|
||||
10 |
Korea |
|
0.0 |
|
|
||||
11 India |
|
|
|
||||||
12 |
Malaysia |
|
0.0 |
|
|
||||
13 |
Thailand |
|
0.0 |
|
|
||||
14 Canada |
|
|
|
||||||
15 |
France |
|
0.0 |
|
|
||||
16 |
Taipei |
|
0.0 |
|
|
||||
17 |
Switzerland |
|
0.0 |
|
|
||||
18 |
RestofWorld |
|
0.0 |
|
0.1 |
|
0.2 |
||
Total World |
|
0.0 |
|
|
|||||
|
|
|
|
|
|
|
|
|
|
When Indonesia and Japan get trade restriction from the US, its export to US will decline. This will be transmitted to the Indonesian and Japan economy through trade channel, affecting private demand to go down. When private demand goes down, it will affect imports to decline and the industrial outputs will also be affected.
To Indonesia, the implementation of trade hit list agenda will impact only some sectors in the short run, such as: Processed Food, Light and Heavy Manufacturing, Utilliy and Transportation. However, all sectors will hurt from this agenda in the long run. The output of capital goods industry will also decline, both in the short run and long run.
198Buletin Ekonomi Moneter dan Perbankan, Volume 20, Nomor 2, Oktober 2017
Table 10.
Economic Performance of Indonesia by Sectors After the Implementation of Trade Hit List Agenda
|
|
Private Demand |
Exports |
Import |
Industrial Output |
||||
|
|
|
|
|
|
|
|
|
|
|
|
Short Run |
Long Run |
Short Run |
Long Run |
Short Run |
Long Run |
Short Run |
Long Run |
1 |
GrainsCrops |
0 |
|||||||
2 |
MeatLstk |
3.5 |
4.2 |
0.3 |
|||||
3 |
Extraction |
2.3 |
1.3 |
0.6 |
|||||
4 |
ProcFood |
||||||||
5 TextWapp |
4.7 |
3.7 |
2.2 |
1.5 |
2.7 |
1.9 |
|||
6 |
LightMnfc |
||||||||
7 |
HeavyMnfc |
||||||||
8 |
Util_Cons |
2.2 |
1.6 |
||||||
9 TransComm |
|||||||||
10 OthServices |
0 |
||||||||
11 Capital Goods |
|
|
|
|
|
|
To Japan, the implementation of trade hit list agenda will impact only some sectors in both short run and long run. Those sectors are: Processed Food, Light and Heavy Manufacturing, as well as services. The output of capital goods industry will also decline, both in the short run and long run, but the decline is smaller than that of Indonesia. The smaller decline of capital goods output in Japan than in Indonesia has resulted smaller decline of capital stock. This condition has made the impact of trade hit list to Japan economy is smaller than that of Indonesia in the long run.
However, the simulation results show that Vietnam will not be
Table 10.
Economic Performance of Japan by Sectors After the Implementation of Trade Hit List Agenda
|
|
Private Demand |
Exports |
Import |
Industrial Output |
||||
|
|
|
|
|
|
|
|
|
|
|
|
Short Run |
Long Run |
Short Run |
Long Run |
Short Run |
Long Run |
Short Run |
Long Run |
1 |
GrainsCrops |
0.0 |
0.0 |
2.0 |
0.8 |
0.6 |
0.4 |
||
2 |
MeatLstk |
4.6 |
2.9 |
0.9 |
0.5 |
||||
3 |
Extraction |
1.1 |
0.6 |
||||||
4 |
ProcFood |
0.4 |
0.0 |
||||||
5 TextWapp |
2.6 |
2.5 |
0.7 |
0.5 |
|||||
6 |
LightMnfc |
||||||||
7 |
HeavyMnfc |
0.4 |
|||||||
8 |
Util_Cons |
5.1 |
5.0 |
||||||
9 TransComm |
0.6 |
0.2 |
0.0 |
||||||
10 OthServices |
0.0 |
||||||||
11 Capital Goods |
|
|
|
|
|
|
Source: GTAP Simulation
The Impact of New Trade Agenda to Macroeconomic Performance |
199 |
of Indonesia and Japan in Short and Long Term |
|
As the new trade agenda will cause some downside risks to the Indonesian and Japanese economies, the governments would better to take some policy actions in order to mitigate the
To Indonesia, some policy options could be: (i) increasing investment to Indonesia through a better investment climate. In the model, this policy option is represented by providing a decrease of risk premia6 in Indonesia, as it can represent the investor valuation on how the improvement in investment climate undertaken by the government of Indonesia can influence their investment decision; (ii) Improving the investment climate and improving productivity of unskilled labour. For this policy option, the simulation is undertaken by providing two shocks, i.e. a reduced risk premia and an increase productivity (technological change) in primary input of unskilled labour7.
V. CONCLUSION
The new trade agenda – represented by Trade Trump Agenda and Trade Hit List Agenda
When Trump Trade Agenda is implemented to China and Mexico, there will be no significant impact to both Indonesian and Japanese economy in the short run. Indonesia and Japan will get trade creation and trade diversion effect from this agenda. For Indonesia and Japan, the market opportunities created from trade diversion and trade creation effects can generate a capital accumulation in the long run. These capital accumulation and increase of market opportunities would be the reasons of the long run effects to Japan and Indonesian economies.
If Trade Hit List Agenda is implemented by the US; Indonesia and Japan will get disadvantages, particularly in the long run. When Indonesia and Japan get trade restriction from the US, its export to US will decline. This will be transmitted to the Indonesian and Japan economy through trade channel, affecting private demand to go down. When private demand goes down, it will affect imports to decline and the industrial outputs will negatively be affected.
5All simulations in the policy options of both Indonesia and Japan are using the
6A change in the risk premia is represented by implementing a shock on cgdslack (Malcolm, 1998), following the equation of rore(r)= rorg + cgdslack(r). This equation states that the percentage change in the rate of return on investment in region r is equal to the the percentage change in the global rate of return plus a risk premia.
7The technical change on primary input of unskilled labour is implemented by imposing a shock on technical change variable in traded commodities in Indonesia, which is: afeall(“SkLab”,TRAD_COMM,”Indonesia”)
200Buletin Ekonomi Moneter dan Perbankan, Volume 20, Nomor 2, Oktober 2017
In summary, any new trade restriction agenda will affect the global economy, particularly in the long run. The welfare loss will also happen in the short run and long run, but the loss will be higher in the long run.
Looking at the long run effect of this new trade agenda, Indonesia and Japan should focus on the policy to mitigate the impact in the long run. It is suggested that Japan and Indonesia could focus on the following policies:
a.Japan: technological innovation can help Japan to increase its productivity and mitigate the global risks to its economy in the long run. Japan has to be able to implement its government plan on Industry 4.0 to ensure the innovation process in place. Furthermore, considering the ageing society in Japan, an increase in labour supply can be managed by encouraging women to participate into the labour force and increase the pension age. Encouraging family to have more children will also benefit to ensure the labour supply in the future, whilst at the same time the government should provide more facilities for child care and
b.Indonesia: the readiness of technological innovation in Indonesia is not as advanced as what Japan has planned. However, it does not mean that Indonesia cannot mitigate the global risks in the long term. Indonesia can focus on attracting more investment to induce capital accumulation in the long term, as the simulation results show that capital accumulation can support the long term growth and mitigate the global risks. Furthermore, increasing total factor productivity can be another focus of Indonesia, such as: intensifying infrastructure development, enhancing regulatory efficiencies in particular for businesses, as well as improving labour market efficiency.
The Impact of New Trade Agenda to Macroeconomic Performance |
201 |
of Indonesia and Japan in Short and Long Term |
|
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202Buletin Ekonomi Moneter dan Perbankan, Volume 20, Nomor 2, Oktober 2017
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