INDEF: Not Just Tariffs, ART Can Shake the Domestic Economic Structure

JAKARTA - The Head of the Center for Macroeconomics and Finance at the Institute for Development of Economics and Finance (INDEF), M. Rizal Taufikurahman, assessed the shift in the United States (US) tariff policy from a reciprocal scheme to a global tariff of around 15 percent reflects a change in the direction of the trade policy of the Uncle Sam's country.

According to Rizal, the previous Agreement on Reciprocal Trade (ART) was designed based on the old rules. The policy change, he said, triggered uncertainty for Indonesian exporters, among others through contract renegotiation, shipment delays, and increased compliance costs.

For countries with open economies such as Indonesia, the uncertainty of rules is often considered to have a greater impact on trade flows than the tariff itself.

Rizal explained that Indonesia's trade relations with the US are asymmetrical. Indonesia exports more labor-intensive manufacturing products, while imports from the US are dominated by food commodities and industrial raw materials.

"Restrictions in the US market are putting pressure on the domestic manufacturing industry, while opening imports is putting pressure on agriculture and livestock. Thus, ART has a direct impact on the domestic market structure, not just on exports," he told VOI, Sunday, February 22.

From the macroeconomic side, he projected that the potential decline in exports to the US could narrow the trade surplus and reduce foreign exchange reserves. This condition risks increasing pressure on the rupiah exchange rate and triggering imported inflation, given Indonesia's dependence on imports of raw materials and food.

"The impact is not large on GDP, but it is significant for price stability and production costs," said Rizal.

He assessed that the fastest effect would be seen in the labor market. The export-oriented labor-intensive industry, he continued, tends to respond to the decline in demand by reducing overtime hours, stopping recruitment, and not extending workers' contracts.

As a result, the pressure of tariff policies is first reflected in the decline in workers' income and the increase in urban unemployment compared to the slowdown in overall economic growth.

On the other hand, the increase in food and raw material imports can indeed reduce prices in the short term. However, this policy risks weakening domestic production capacity in the medium term.

"When import dependence increases, price stability is vulnerable to global turmoil. The livestock sector is the most sensitive because most production costs come from feed," he said.

Rizal emphasized that the main problem in ART is not only about the amount of tariffs, but rather the limited national policy space. Quota restrictions and trade arrangements are considered to reduce flexibility in maintaining price stability. Meanwhile, import licensing restrictions hinder the timing of goods entry, and investment-related provisions and SOEs have the potential to limit industrialization strategies.

Without protection for domestic added value, trade liberalization is feared to run faster than the readiness of national production capacity.

"The government's response should focus on implementation. Clarification is needed on the status of the new tariff, strengthening trade defense instruments, protection of labor-intensive industries, diversification of export markets, and increasing agricultural and livestock productivity. Support must be based on improving competitiveness, not price compensation," he said.

He added, in the initial stage of this policy, it may benefit consumers through lower prices. However, pressure on domestic producers has the potential to increase. Without a comprehensive industrial policy, price stabilization is considered only temporary and production resilience can weaken, thus increasing dependence on imports in the long term.