Tuesday, July 3, 2007

Japan Indonesia EPA Part 1 - Japanese Market and Indonesian Commodities

Japan and Indonesia plan to sign the EPA on August this year. Japan is the most important trade partner and long term investor in Indonesia. Its investment covers many sectors from agriculture, manufacturing, mining, oil and gas, and infrastructure with cumulative value is reaching US 28 billion in 2007. However, Indonesia is not among the top three of Japan’s FDI destination country particularly after 1997 crisis. China has become the most attractive destination in Asia for FDI followed by Vietnam and Thailand.

This EPA eventually is ready to sign after two year of preparation and negotiation between two parties. It covers comprehensive scope from investment, trade, customs, intellectual property right, and competition policy. This EPA will also bring Economic and Technical Cooperation in for capacity building, improvement in technological capacity, enhancing product quality and improving labor skills.

It is really sound good and promising but why should this EPA work any better than the existing agreements/conditions?
To answer this simple question, I suggest that we have to carefully analyze some key factors that will determine whether this EPA would boost local trade and create larger markets to attract trade and investment.

Japanese Market and Indonesian Commodities
Japanese market is well known as a tough market for trading foreign product and services. To compete in Japanese market, a foreign company must have a strong partnership with local distributor and to get this partnership with local distributor is very difficult. This is a link of ‘world-wide glass maker Guardian story’ when they failed to penetrate the Japanese market.

Historically, there are only a few Indonesian companies that have strong market in Japan and most of it is energy-related products. In other sector such as plantation, fishery, agricultural and manufacturing – trading transactions and market value is considered small and has no significant impact to Indonesian economic.

I would say that, the most predictable product that could gain improvement in Japanese market would be energy related products which in fact it is already there long before EPA is signed. Japan's level of dependence on coal and LNG has grown significantly in their energy supply as the impact of additional coal-fired and LNG power plants.

Japan needs only high quality coal supply due to strict environment policy and Indonesia is one of few places in the world that still have abundant reserve of high quality coal and Japan has no natural gas resources. No wonder why Japanese government urged Indonesian government to put the agenda of LNG supply guarantee as part of EPA.

This EPA would also open a new market for Indonesian skilled labor. Japan demographics imply not only an aging population but also a declining one. With smaller labor force expected in the future, the proportion of working-age people will diminish over time. There will be greater need for health care, construction and manufacture workers. However, the major challenge is language.

In Japan, Philippines people ranks fourth in number, accounting for 10% of the foreign population. The competitive advantage of Philippines worker is English while most of Indonesian skilled labor only has limited ability in foreign language. To compete with workers from Philippines, there are only two choices either mastering in English or mastering in Japanese language. Both will lead to the question of who will provide affordable even free English and Japanese lessons to most of workers who are interested to work in Japan. I don’t think we need EPA for sending unskilled labors.

So do you think this new EPA would lead to boost local trade and create larger markets to attract trade and investment in both countries particularly for Indonesia?

While I still believe that EPA remains an important step to regional integration, I doubt that it will give instant impact to Indonesian companies and skilled workers.


Anonymous said...

Cool! This is my first time visit to your English blog! It's absolutely out of this world! Too bad, doctoral economics is way beyond my ken, but I'd try to comment on yours the best I can. I'd like to comment on the Indonesian workers which are not adept in English as you mentioned. In my opinion, it should not hamper their overall performance, maybe a little! I think most Japanese are not skilled in English either, aren't they? If the Indonesian workers are not too flourishing in the market, it must be attributable to something else low-grade! That's only in my humble opinion! :D So what would I hear from you on this?

Unknown said...

Hello Socrates! Since i am from India, i can understand your concern of qualifying ourself as a cheap labor. But this mentality is of agriculture and industrial imperialism era. World is changing. We have to come out of it; on our own. In India, we are trying. Why don't you?

Socrates Rudy Sirait, PhD said...

Hi Spektrumku, sorry for late respone, been so busy moving to a new place. Well, it is true that most Japanese people do not speak English, but the thing is they sell technology, capital and know-how. We speak English better compare to them, but what we sell only technical skills and manpower - meaning that communication skill is essential. In Japan, everything is written in Kanji.
Low grade? Not really, I would say the main issue is discipline.

To Ravi:
Hi Ravi, thanks for adding me. Agree, need to improve the quality of people. We are trying to improve our quality. What Indonesians are concerning at present is the speed of the changing/improvement process. Govt & People must be define as top down combine with bottom up. Which part should be top down and which part should be bottom up? More efficient the system, more we could expect better result.

Anonymous said...

Hi Socrates,

I agree with your statement, "While I still believe that EPA remains an important step to regional integration, I doubt that it will give instant impact to Indonesian companies and skilled workers."

There are many things Indonesians must improve. Since I live and work in the United States, I can feel that we as Indonesians who work in Indonesia are very slow. Less productive and inefficient. Not only skilled labor, also as unskilled labor, we are also as not as productive compared to Mexican immigrants here. They work like crazy. They will do whatever they asked to do. They like to have overtime.

Of course, by the time Indonesian workers work outside Indonesia, they have to learn fast and adapt themselves to this new environment. That's is the only way to survive.