Facing a Political Lock-In Situation with the ACFTA Which options for Indonesia? Ivan Lim, Philipp Kauppert, FES Jakarta, March 2010 • By signing a Free Trade Agreement with China, ASEAN expects to strengthen its bar­gaining position for international trade. Being one of the key members of ASEAN, In­donesia has been promoting ACFTA proactively. • For the supporters, ACFTA creates better opportunities for local business to export more goods to the important Chinese market and increases bilateral trade and invest­ment across the region. For the opponents, ACFTA has the potential to seriously damage domestic industries and lead to mass layoffs. • The Indonesian Government is urged to take preventive measures in anticipating and compensating the negative impacts of ACFTA. Those efforts include renegotiating several tariff posts, granting fiscal incentives for the affected industries, improving the national infrastructure and reforming the deficient Social Security System. Since 1 January 2010, the ASEAN 1 -China Free Trade Agreement(ACFTA) has become fully effective in introducing zero tariffs on 6682 tariff posts in 17 sectors, including 12 in manufacturing and 5 in agriculture, mining and maritime sectors. This has triggered a lively public debate in Indonesia; some voices em­phasize the opportunities, while others con­sider it as a threat to the Indonesian economy. The concern seemed plausible: the statistics of the Ministry of Trade showed that although the amount of total trade between Indonesia and China has more than tripled from US$ 8.7 billion in 2004 to US$ 26.8 billion in 2008 with a usual record of surplus, it indicated a deficit of US$ 3.6 billion for Indonesia in 2008. The political situation is unlikely to allow a complete renegotiation of the ACFTA. So fac­ing the initiated upcoming of the free trade agreement, this article will try to answer the following question: Is a win-win solution for Indonesia actually possible? By beginning with the introduction of ACFTA, its origins and mo­tivation from both China and ASEAN perspec­1 The Association of Southeast Asian Nations(ASEAN) comprises Brunei-Darussalam, Cambodia, Indonesia, Lao PR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Viet Nam. tives, this article will approach its initial ques­tion. It then follows with the perspective of Indonesia, focusing on its government, busi­ness organizations and trade unions. The conclusion shows some possible solutions offered by experts from various backgrounds and the government for those fearing the neg­ative impacts of the ACFTA implementation. 2 ACFTA, the third biggest free trade area be­sides the European Union and the Northern American Free Trade Agreement(NAFTA), is an agreement among the ten member states of ASEAN and China. It is predicted that the establishment of the ACFTA will create an economic region with 1.7 billion consumers, a regional Gross Domestic Product(G.D.P.) of about US$ 2 trillion and a total trade volume estimated at US$ 1.23 trillion. The removal of trade barriers between ASEAN and China is expected to result in lower costs of produc­tion through economies of scale, expanded intra-regional trade and increased economic efficiency. Simulations conducted by the 2 Ivan Lim is an International Business student at the German Swiss University of Jakarta and has worked for FES Jakarta during an internship. Philipp Kauppert is Deputy Resident Director of FES Jakarta. The opinions expressed reflect the views of the authors.