Doesn’t Always Take Two to Tango: Unilateral Trade Policies and Indonesia

The current obsession with trade negotiations (okay, maybe it’s mostly our obsession) may have obscured the fastest, often easiest way for governments to make their domestic economies more competitive:  governments can act on their own to create more favorable trade environments. 

In the past, many Asian governments were at the forefront of making unilateral changes to their domestic economies.  Singapore and Hong Kong, for example, slashed applied tariffs to zero absent external demands for them do so.  Others opened or liberalized sector after sector to promote inward investment or spur domestic competition.

But much of this unilateral spirit of reform appears to have dissipated.  Governments now prefer to wait to make changes until some foreign partner requests reform.  It may appear to be easier to make politically and economically hard choices with a foreign party to absorb some of the “blame” for any short-term pain. 

One government official said me a few years ago, “Yes, we know that a 2% tariff is really just a nuisance.  It probably costs us more to collect the tariff than the revenue it generates.  It is an administrative hassle for firms.  But if we get rid of it, what will we use as a bargaining chip when we engage in trade negotiations?”

I tried to argue that eliminating nuisance tariffs does not automatically mean that no one will do a free trade “dance” with you in the future.  Singapore did not get more than 20 active FTAs by stripping away 2% tariff levels for preferred partners in an FTA.  There is more to a trade deal than tariff reductions, after all, and win-win outcomes can be achieved in a whole range of sectors and issue areas.

One particularly promising area for unilateral reforms can be found in regulations.  For most companies today, the biggest headaches are not tariff levels or official customs procedures or registering for protection of intellectual property rights.  Instead, the hassle factors that are most pertinent to firms tend to be regulatory in nature.

Such regulations may include rules for licensing of all sorts.  Such rules may mean that you can import this item, but only if you first hold a valid permit for doing so or you may invest in a sector but only after appropriate licenses for operation are in place.   Other regulatory barriers could be rules that require goods be transshipped through only one port or only after inspection of paperwork or goods by specific ministries.

This is not to argue that regulations are not needed or necessary.  Government, as always, retains the right to regulate in the public interest and to safeguard the interests of human, animal and plant life and health. 

However, the thicket of regulations in many markets clearly extends well beyond what is strictly necessary in many countries around the region.

For example, nearly every firm that speaks to us can relate some good stories about nightmare regulations in Indonesia.  These range from the large to the small hassles, time and cost needed to try to comply with the rules.  The forest of regulations ensnares firms in nearly every sector and applies to both big and small companies.

The Indonesian government of Joko Widodo (Jokowi) has recognized some of the problems.  The National Development Planning Minister Sofyan Djalil just highlighted more than 2700 regulations and presidential and ministerial decrees that were “inimical to economic activity.” 

That is surely an impressive number of identified obstacles to trade and economic growth. 

Partly in response, Jokowi has begun rolling out a three-part package of unilateral economic reforms to tackle the problems of excessive regulation.  The first package was revealed with great fanfare last week.

It includes the drafting of 91 new regulations and 89 regulations to be amended. 

It could be argued that the creation of nearly 100 new regulations is not a particularly promising way to start clearing away 2700 existing, identified problematic rules.  But, of course, much depends on which rules are being tackled and whether or not the first set of reforms gets at some of the key obstacles to growth or simply nibble around the edges.

Indonesia has ample room for improvement.  It ranks 114 of 189 on the World Bank’s ease of doing business (well below most other ASEAN members) and has been hit by a sharp decline in the value of the rupiah and reduction in the amount of inward foreign direct investment.  Arianto Patunru and Sjamsu Rahardja highlight some selected non-tariff measures and local content requirement rules imposed in Indonesia since 2009.

Last week’s announced policy changes are largely intended to push up demand and not, as Chris Manning has argued, to increase competitiveness of domestic companies.  Changes include greater collaboration between central and local governments around price controls for products like beef, changes in banking to allow easier foreign currency account creation, and the provision of funds to citizens by raising the tax-free thresholds for the poorest citizens as well as newly expanded cash-for-work schemes.  The reform policies are not completely worked out yet, so it is not entirely clear what will be on the table, nor the level of implementation to be expected.

This package of reforms are meant to be overseen by a new economic policy deregulation center set up at the Office of the Coordinating Economic Minister.  The office will also assist with the roll out of two additional packages of reforms due in the next few months. 

The Jakarta Post responded with an editorial to urge the government to take the new deregulation center seriously.  It could implement reforms urged by the OECD in 2012 to evaluate regulations across ministries and to improve regulatory outcomes.

The consequences of successful reform could be quite substantial.  Indonesia’s large, youthful population and ample natural resources provides a platform for significant rewards.  McKinsey and Company has suggested that the country might become a Group of Seven economy by 2030.

As our conversations with companies have revealed, getting there will require unilateral reforms.   The announced regulatory changes are important, but must go substantially deeper and further for the real payoff to occur. 

*** Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

How Oreo Could Become Best Friends with the Marlboro Man

Last week I wrote about how lobbyists should be an important part of the policy landscape, particularly for trade issues.   Companies, consumer groups and others need to pay careful attention to what governments across Asia are doing.  The consequences of inattention could be significant.

As an example, one deeply problematic regulatory issue that appears to be spreading across the region is the introduction of plain packaging.  While initially targeted at cigarettes, the momentum seems to be building for the use of plain wrappers for other products as well, including alcoholic beverages and even ordinary food items. 

The results would be a disaster for companies both big and small and potentially a nightmare for consumers.

Let’s start with understanding plain packaging for cigarettes.  Under an Australian plan, cigarettes were singled out for special treatment.  The intention was to reduce the number of Australians who smoke cigarettes.  By limiting the marketing and branding of cigarettes, the government hoped to reduce the incentives for taking up the habit.

Changing labeling for cigarettes is not new.  Many governments around the region have special rules around packaging.  In Singapore, for example, packets require graphic and gory photographs of the damage caused to smokers (and their offspring).  Advertising for cigarettes, like in many markets, is heavily restricted.

Cigarette companies have managed to live with these rules.  The key issue for companies has been to have clarity.

But plain packaging is a whole different level of regulatory influence.  Under plain packaging, every element of the product is made to look identical to every other product.  For cigarettes, imagine that the carton is Army green.  The Marlboro name is written in courier font.  Every pack of cigarettes inside the carton has the same green wrappers with courier font.  Even every cigarette stick inside looks identical between brands. 

Thus a consumer cannot tell what cigarette is being sold, bought or smoked very easily at all.  From a glance, the Marlboro looks like a Salem which also looks like a generic product. 

The purpose of this change in packaging was to get consumers to stop smoking.  It is not clear whether this objective will be met.  What is likely to happen instead is that consumers will continue to use cigarettes but may shift preferences between brands over time.  Absent clear quality differences, some consumers will likely migrate to cheaper products.

This is, of course, deeply problematic for companies that have spent a lot of time and money building up brands.  As a result, Philip Morris sued the government of Australia for invalidating the intellectual property embedded in their packaging.  While this case is not yet resolved, Ireland has also passed plain packaging legislation for cigarettes.

Governments have the right to regulate in the interest of health.  Philip Morris would likely argue that they are fine with the various regulations on packaging and advertising prior to the plain packaging rules.  These new rules, however, took a legal product and changed the regulations in ways that did not automatically appear to confer health benefits but could be very damaging to the company’s brands.

Leave aside for the moment whatever you think of cigarette smoking or the use of investor state dispute settlement as a means to resolve this dispute.  Of greater interest for this blog post is the likely spread of this regulatory measure if the cigarette case gets resolved in favor of the government.

One of the lobbyists from Philip Morris has been arguing for several years that plain packaging would spread to other sectors.  But no one seems to have taken her comments very seriously.  However, looking at the ground in Asia, it appears she was right and companies from across the spectrum should be deeply concerned. 

Government officials in Indonesia have already said that they will use plain packaging on alcoholic beverages with high levels of alcohol content.  But really, why stop there?  If plain packaging is required for strong spirits, it might as well be required on all alcoholic beverages. 

Imagine trying to shop for wine in a world of plain packaging.  If every bottle on the shelves has an identical shape with labels in Army green and brands listed in courier font, how will a consumer find the best product?  How will a consumer find any new brand?  How will a company reach new consumers?

Will the change in packaging result in less wine being drunk?  Will fewer people become impaired if all the labels look the same?  It is not at all clear that plain packaging would, in fact, resolve public health concerns related to alcohol use.

Consumers are still likely to buy wine.  What I suspect will happen is that consumers will reach for brands and products they know.  They will shun anything unfamiliar, making it nearly impossible for new companies to grow or for existing companies to expand product lines.  While major brands will be affected, the change could be most problematic for smaller firms and new entrepreneurs.    

Now think about this brave new world if the plain packaging mania spreads to food products or even to just processed food products.  Already, officials in Malaysia have apparently commented on their intention to proceed in this sector. 

Imagine if every Oreo cookie looks like very other biscuit—no more blue packaging as it could also end up Army green.  No more happy Oreo logo.  Every single cookie inside the packet could also lose identifying markers—no Oreo stamp on the cookie and no raised design on the chocolate cookie at all.  How will Oreo distinguish their products from others on the shelf?

Again, would plain packaging keep consumers from eating Oreos?  Would customers be healthier if food labels were identical and Army green? 

I’m sure that many will rush to say that there is no public health reason for plain packaging on food.  But I suspect that a creative government could come up with something.

The point is that this sort of regulatory behavior is likely to spread, particularly in the absence of clear information from companies and consumer groups about how such rules will affect the marketplace.   

As I said last time—government is going to make policy.  The extent to which those policies are helpful or not may depend on having information from companies and others about the implications of different policy decisions on real-world behaviors in the marketplace.

***Talking Trade is a blog by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***