USTR - 1996 National Trade Estimate-Indonesia
Office of the United States Trade Representative

 

1996 National Trade Estimate-Indonesia

In 1995, the United States trade deficit with Indonesia was $4.1 billion, $369 million more than in 1994. U.S. merchandise exports to Indonesia were $3.4 billion, up $545 million or 19.4 percent from 1994. Indonesia was the United States' twenty-ninth largest export market in 1995. Imports from Indonesia totaled $7.4 billion in 1995, a 14 percent increase over 1994 levels.

The United States stock of foreign direct investment in Indonesia was $5 billion in 1994, more than five percent greater than that in 1993. U.S. direct investment in Indonesia is largely concentrated in petroleum and manufacturing.

IMPORT POLICIES

In recent years, Indonesia has liberalized its trade regime and has taken a number of important steps to reduce protection. Since 1986, the Government has issued regular deregulation packages which have reduced overall tariff levels, simplified the tariff structure, removed import restrictions, replaced non-tariff barriers with more transparent tariffs, and encouraged foreign and domestic private investment. The most recent of these packages were issued in May 1995 and January 1996.

Tariffs

Indonesia's applied tariff rates range from 5 to 30 percent. A number of products are subject to import surcharges, as well. The May 1995 package laid out a scheduled process of tariff reform, which, in general, will extend Indonesia's commitments under the ASEAN Free Trade Area (AFTA) on an MFN basis. The May package committed Indonesia to reduce tariffs on items with protection (import duty plus import surcharge) of more than 20 percent or lower to 5 percent or lower by the year 2000. It stipulated that tariffs on items with protection of more than 20 percent will be reduced to no more than 20 percent by 1998 and 10 percent by 2003. All tariffs in the 10 to 35 percent range were reduced immediately by 5 percent; tariffs of 40 percent or more were reduced to 30 percent. Some products in the automotive, chemical, metal, and agriculture sectors were excluded. Tariffs on approximately 64 percent of Indonesia's tariff line items were reduced immediately (about 14 percent of the tariff lines were already free of duty). Overall, the package reduced Indonesia's imported-weighted average tariff by about 3 percent.

The January 1996 package incorporated a consolidation of the tariff code which reduced the total number of tariff lines by 22 percent, to a total of 7284. It also lowered tariffs on 428 items, primarily capital equipment, raw materials, and intermediate goods used by export industries.

As of the January package, slightly fewer than 16 percent of the tariff lines are not subject to duty, 31 percent of tariff lines are subject to 5 percent duty, 9 percent are subject to 10 percent duty, 10 percent are subject to 15 percent duty, 4 percent are subject to 20 percent duty, 18.5 percent subject to 25 percent duty, and 11 percent are subject to 30 percent duty. Tariff protection remains at more than 30 percent for only 1.3 percent of the tariff lines.

In Uruguay Round market access negotiations, Indonesia committed to bind 94.6 percent of its tariff items, for the most part at ceiling bindings of 40 percent. Exceptions to the 40 percent binding include automobiles, iron and steel, and some chemical products. In accordance with the WTO agreement on agriculture, Indonesia has agreed to tariffy its nontariff barriers on agricultural products.

Some of these exceptions are still heavily protected. For example, when the Government lifted the import ban on completely built-up cars in 1993, it replaced the ban with duties of up to 200 percent and import surcharges of 100 percent. The import levies were decreased in a subsequent deregulation package, but tariffs of up to 125 percent are still compounded by import surcharges of up to 75 percent on completely built-up models.

Indonesia committed to remove import surcharges on items bound in the Uruguay Round by the year 2005. The January 1996 package continued the reduction in the number of import surcharges to 77; 27 of those will be phased out in line with Indonesia's WTO commitments. In February 1996, however, the Government imposed a 20 percent import surcharge on propylene, and a 25 percent import surcharge on ethylene, products excluded from Indonesia's WTO tariff commitments.

As of the January 1996 package, Indonesia's average (unweighted) tariff is 14.2 percent, down from nearly 20 percent in 1994. Due to the recent consolidation of the tariff code, the level of the current average trade- weighted tariff is not yet clear.

All processed goods are subject to a 10 percent value-added tax. A luxury tax ranging from 20 percent to 35 percent is also levied on certain products.

Quantitative Restrictions

Many major bulk food commodities, such as wheat, rice, sugar, and soybeans, are subject to non-tariff barriers. The sole importer is the National Logistics Agency (BULOG), a state trading entity. Prices of these commodities are often higher than world market prices; sugar and soybean prices are about 40 percent higher than import parity prices. (Rice and wheat flour prices are currently fairly close to world market prices.) Wheat imports totaled approximately 3.6 million metric tons in the twelve-month period from July 1994 to June 1995. U.S. sales of agricultural commodities to Indonesia jumped sharply in 1995; wheat sales went from $7 million to $91 million; corn sales from $23 million to $74 million; and rice sales from $0.8 million to $30 million.

Other agricultural products are subject to local purchase requirements. The Indonesian Government announced that, effective April 1, 1996, it will lift the requirement that 20 percent of all soybean meal used by feedmills be purchased domestically, but a similar restriction remains in place for milk products. Under the Uruguay Round Agreement, the diary product protection must be phased out by 2003.

The June 1993 deregulation package replaced a previous ban on the import of built-up motor vehicles with extremely high import tariffs. Models which are not also assembled in Indonesia are subject to a 75 percent import surcharge, as well. Import duties on automotive components range from 65 percent to 0, and are inversely related to the degree of local content achieved by the manufacturer (auto trade will also be affected by the new "pioneer auto program," discussed in the investment section below). Significant import barriers,

including high tariffs and import licensing requirements, also exist in the motorcycle sector.

Import Licensing

The Government continues to reduce the number of items subject to import restrictions and special licensing requirements. As a result of the January 1996 reform package, 203 tariff lines still remain subject to restrictive import licenses, down from 261 in 1994 and 1,112 lines in 1990. The January package reduced restrictions on imports of 23 tariff lines, including seven categories of steel products.

For goods which continue to be regulated, the following import license categories exist (number of affected tariff codes in parentheses): registered importers -- alcoholic beverages (27), milk products (7), hand tools (6); producing importers -- soybean cake (1), salt (2), artificial sweeteners (3), propylene granules (2), iron and steel products (7), engines and pumps (5) tractors (3) knocked down electronic keyboards (1), and scrap materials (57); approved importers/sole agents -- motor vehicles (47); BULOG -- garlic (2), wheat (3), rice (4) flour (3), soybeans (2), sugar (7); state oil company PERTAMINA -- lube oil (3); clove marketing board -- cloves (2); PT Dahana -- explosives (4). In accordance with Indonesia's WTO commitments, the non- tariff barriers on items not controlled by state trading agencies will be removed over a ten-year period.

STANDARDS, TESTING, LABELING, AND CERTIFICATION

In May 1990 the Government of Indonesia issued a decree which states that the Department of Health must decide within one year of receipt of an application whether to grant registration for new foreign pharmaceutical products. In practice, registration can take much longer, although companies report the process is slowly improving. Foreign pharmaceutical firms have complained that copied products sometimes become available on the local market before their products are registered.

GOVERNMENT PROCUREMENT

Much of Indonesian government procurement is financed through foreign donor assistance, and each donor imposes its own procurement requirements. The Government enacted a new procurement law in 1994, but "economically weaker" groups and domestic goods and services continue to be given preference.

In carrying out construction and purchases, government agencies and state-owned corporations must use domestic goods and services to the extent they are available. Government procurement regulations stipulate a 15 percent price margin above the cost of imported goods and services at the project site. State-owned firms which have sold shares through the Jakarta stock exchange are exempted from many government procurement regulations.

Foreign joint ventures are not eligible to tender for government pharmaceuticals procurement. The requirement that doctors employed in government institutions prescribe only listed generic drugs also prevents the procurement of foreign pharmaceutical products; foreign companies, in general, are prohibited from competing in the generic drug market.

According to the regulations, foreign firms bidding on certain government-sponsored construction or procurement projects may be asked to purchase and export the equivalent in selected Indonesian products, but this is rarely carried out in practice.

LACK OF INTELLECTUAL PROPERTY PROTECTION

Since 1989, Indonesia has been on the "watch list" under the "Special 301" provisions of the 1988 Trade Act as a result of inadequate protection of patents, trademarks, and copyrights and limitations on motion picture market access (see the services section for additional information on film market access). The government often responds to U.S. companies which put forward specific complaints about pirated goods and trademark abuse, but the court system can be capricious, and punishment of pirates of protected intellectual property is very rare.

Patents

Indonesia's first patent law, enacted in November 1989, entered into effect on August 1, 1991. The patent law and accompanying regulations include product and process protection for both pharmaceuticals and chemicals. The industry has identified a number of areas of concern, including compulsory licensing provisions, a relatively short term of protection (14 years), and a provision which allows unauthorized importation of 50 specific products by third parties. In addition, concerns remain regarding Indonesia's law and regulations on working requirements and patent cancellation. The Government has prepared a new draft patent law, which should be presented to Parliament in early 1996. Its provisions, which are intended to bring Indonesia into TRIPs compliance, may address many of the U.S. companies' concerns.

Copyrights

In 1987, Indonesia enacted amendments to its copyright law which largely brought it into conformity with international standards for copyright protection. In March 1989, the United States and Indonesia signed an agreement to establish bilateral copyright relations effective August 1, 1989.

In several areas, the government has demonstrated that it wants to stop copyright piracy and that it is willing to work with copyright holders to this end. Enforcement of the ban of pirated audio and video cassettes has been reasonably good, especially in light of resource constraints. The courts, however, remain unpredictable in specific rulings involving IPR cases, which has made enforcement of IPR laws less effective. Pirated software and textbooks are still readily available. U.S. software companies estimate that software piracy rates in Indonesia are 99 percent, resulting in a $92 million annual loss. The Indonesian Government itself is estimated to be a large user of pirated software.

In general, while enforcement of the copyright laws and regulations has become a higher priority for the Government, substantial room still exists for improvement. In April 1995, the Government announced a plan to improve copyright enforcement, but implementation of the plan has been uneven. The Government will submit a new copyright law, intended to bring Indonesia into TRIPs compliance, to the Parliament by mid- 1996.

Trademark

A new trademark law came into effect in April 1993. The law sets forth substantial civil and criminal penalties for trademark infringement, unfair competition, and counterfeiting. Under the current law, trademark rights are determined on a first-to-file basis, rather than priority of use, the basis of the previous law. The new law offers protection for service marks and collective marks as well as setting forth a procedure for opposition prior to examination by the trademark office. It also includes well-known marks protection. In spite of the relatively strong law, U.S. companies have found it difficult to protect their well- known marks in Indonesia, where the judicial process can be very time consuming and unreliable. A new trademark law, intended to bring Indonesia into compliance with TRIPs, may be presented to Parliament by mid-1996.

Trade Secrets

Indonesian law does not explicitly protect trade secrets. Some relief for misappropriation of trade secrets, however, may be available through other Indonesian law. In accordance with its TRIPs obligations, the Government is preparing draft laws on trade secrets, industrial design, and integrated circuits to present to the Indonesian parliament in late 1996 or 1997.

SERVICES BARRIERS

Although the June 1994 Presidential Decree No. 20 opened many areas to 100 percent foreign-owned companies, services trade entry barriers continue to exist in many sectors. Foreign accounting firms must operate through technical assistance arrangements with local firms, and citizenship is a requirement for licensing as an accountant. Foreign agents and auditors may act only as consultants and cannot sign audit reports. Foreign law firms are not allowed to establish a practice in Indonesia. Attorneys are admitted to the bar only if they have graduated from an Indonesian legal faculty or an institution recognized as the equivalent.

Distribution

Foreign firms and joint ventures with a majority foreign share are not allowed to distribute products in the domestic market unless the foreign company manufactures the product in Indonesia (and even then, only at wholesale level, and only the goods produced domestically). An Indonesian agent or distributor must be employed for wholesale distribution if the foreign company does not manufacture in Indonesia. All retail distribution and sales must be handled by Indonesian firms or individuals. A number of U.S. companies have expressed concern that these restrictions increase costs and impede their ability to effectively market and service their products in Indonesia. Analysis has also shown that distribution barriers in Indonesia (which are more stringent than virtually anywhere else in ASEAN) reduce the efficiency of the Indonesian economy and increase prices for Indonesian consumers.

Financial Services

Insurance: A December 1988 package of regulations opened several insurance subsectors to foreign participation. (Only the life insurance subsector was previously open. A moratorium had limited the number of general insurance companies to existing numbers.) All foreign investment must be made through joint ventures; the minimum Indonesian ownership is 20 percent. Foreign joint ventures in the insurance sector must be capitalized at up to five times the level of domestic operations. In ongoing WTO negotiations in financial services, Indonesia has offered to phase out the differential capital requirement over time.

In January 1992, Parliament approved a framework law on insurance. The new law stipulates that the insured is free to choose his or her insurer except in the case of social insurance programs. The workers Social Security Act of 1992 states that only state-owned enterprises may carry out the Act's social insurance program.

All insurance in Indonesia must be purchased from either a domestic or joint venture company. The only exceptions are unavailability of coverage in Indonesia and total foreign ownership of the insured entity.

Banking: Any new foreign bank must be a joint venture between an Indonesian bank and a foreign bank from a country that offers reciprocity, with the Indonesian partner supplying at least 15 percent of the capital. The capital requirement for new joint venture banks is now about $49 million, twice the requirement for domestic banks. However, the central bank has issued a regulation that requires all foreign exchange banks, whether 100 percent domestic or foreign joint ventures, to raise their capital to $66 million by the year 2001.

Securities: Foreign security firms may only enter the Indonesian securities market in a joint venture with an Indonesian firm (the Indonesian partner must have at least 15 percent equity participation). Foreign joint venture firms are also subject to discriminatory capital requirements: paid in capital required for a foreign joint venture to obtain a license as a securities broker dealer, underwriter/broker dealer, or investment manager is twice that for a local firm.

Motion Picture Market Access

Indonesia prohibits foreign film and videotape distributors from establishing branches or subsidiaries. All importation and distribution is restricted by the film law to 100 percent Indonesian-owned companies. Importation and in-country distribution of U.S. films must be handled through a single organization, the European and American film importers' association (AIFEA). Annual import quotas apply to foreign films and videotapes. Duties, taxes, licensing and other necessary payments also act as barriers to the film industry.

In 1990, the Motion Picture Association of America opened a representative office in Jakarta. In 1991, the Government of Indonesia agreed to increase from five to six the number of importers in AIFEA, and to allow technical assistance agreements between the members of AIFEA and U.S. film companies. In 1992, after negotiations with the United States, the Government of Indonesia agreed to increase the number of AIFEA members to eight, and to issue licenses to three more video importers, also for a total of eight. In March 1994, President Soeharto signed implementing regulations for Indonesia's film law. Finally, in November 1994, the Ministry of Information issued Ministerial Decrees that have made it possible for U.S. Motion Picture Companies to sign agreements with video importers and distributors. A remaining concern is the quota on video imports which limits the number of foreign titles that may be marketed.

INVESTMENT BARRIERS

Indonesia is committed to increasing foreign investment. In recent years Indonesia has implemented several reform packages to reduce burdensome bureaucratic procedures and reduce substantive requirements for foreign investors. The most substantial of these was issued in June 1994. Although the central government has announced plans to reduce red tape, regional license requirements and other levies can also make investing difficult. The Indonesian President must personally approve every individual foreign investment project. In practice, this means that approval of investment applications can be delayed with little or no explanation.

In general, foreign capital investment is primarily governed by the foreign capital investment law, as well as by presidential and ministerial decrees. The Capital Investment Coordinating Board (BKPM) and other relevant agencies must approve all proposed foreign manufacturing investments in Indonesia. Investment in petroleum extraction, mining, forestry, and banking is covered by specific laws and regulations and handled by relevant technical agencies.

The June 1994 investment reform package liberalized investment requirements in a number of ways. Most foreign ownership limitations were abolished. The package opened several previously closed sectors, such as ports, power generation and transmission, telecommunications, shipping,, railways, and water supply, to foreign investment. The May 1995 package added advertising to that list. Joint ventures are still required in these sectors, but the amount of Indonesian ownership is not stipulated. The May 1995 package also opened the following sectors to 100 percent foreign investment: cooking oil, block board, unfinished and semi-finished rattan, boilers, motor vehicles, cigarette machines, gas lighters, prescription medicines, and aircraft repair. Only six sectors open to domestic investors now remained wholly closed to foreign investment. The 1994 reforms also eliminated divestment requirements, except for wholly foreign owned ventures. These must now divest an unspecified share of foreign ownership within 15 years.

Joint ventures with a majority Indonesian share, or in which Indonesians own 45 percent of shares and where at least 20 percent of total stock is sold through the Indonesian stock market, are treated as domestic companies for certain purposes. This includes the ability to borrow short-term working capital in rupiah from state banks.

Pioneer Auto Program

In March 1996, Indonesia announced a "pioneer" auto industry policy, intended to promote the establishment of an indigenous Indonesian auto industry. The program grants import tariff and tax preferences only to auto companies that meet certain requirements, including that they be fully Indonesian owned, use a unique Indonesian brand name, and meet specified domestic content levels within three years. The program could put foreign auto manufacturers in Indonesia at a severe competitive disadvantage, and may be inconsistent with Indonesia's obligations under the WTO.

OTHER BARRIERS

Indonesia's wood products sector remains heavily protected. Earlier government prohibitions on the export of raw rattan, logs, and timber (replaced with prohibitively high export taxes in May 1992) had the stated purpose of boosting domestic processing industries and protecting the environment. High export taxes on sawn timber have been in place since 1989. The Government of Indonesia's practices in the wood industry have acted as obstacles not only to entry in the Indonesian market but also in the third-country markets such as Japan and Europe where American finished and processed wood products compete with Indonesian products.

Some companies benefit from restrictive licensing regulations which severely inhibit competition in a number of areas in the domestic economy such as cement, fertilizer, and household gas.

 
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