conditional policy diffusion: understanding the expansion ... · 2010. empirical evidence shows...

Conditional Policy Diffusion: Understanding the Expansion of Indonesia FTA Strategy

Fanny Siauw-Soegiarto

Doctoral Dissertation Prospectus Norman Paterson School of International Affairs, Carleton University

Advising Committee:

Dr. David Long (Professor of International Affairs and Associate Director, Ph.D. Program)

Dr. Dane Rowlands (Professor of International Affairs)

Dr. Merlyna Lim (Associate Professor School of Journalism & Communication and Canada

Research Chair in Digital Media and Global Network Society)

May 2019


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Prospectus Summary

Phenomenon:

• Indonesia has significantly expanded its free trade agreement (FTA) agenda since 2010 from

to 2 to 22 bilateral FTA initiatives in 2018. As of May 2018, Indonesia’s Ministry of Trade

reported 9 ongoing and 8 upcoming bilateral negotiations. It has also sent bilateral FTA

proposals to 10 different partners since 2015.

• Indonesia has been described as a reluctant participant in the past (Marks, 2015) as it did not

actively pursuit FTAs nor did it possess an overall FTA strategy (Pangestu, et al., 2015).

Prior to 2010, Indonesia only signed one bilateral FTA with Japan while three others were

signed as part of the Association of South East Asian Nation (ASEAN).

Puzzle:

The expansion of Indonesia FTA activities with unprecedented speed came almost two decades

later after start of the FTA proliferation in late 1990s. What makes this policy shift even more

puzzling is the expansion of its FTA activities has also coexisted with a continuation, and even

extension, of its protectionist economic policies.

Research Question

• Why did Indonesia dramatically and belatedly expand its adoption of FTA initiatives in

2010 while maintaining its traditional protectionist policies?

• What are the economic and geopolitical factors that have driven the rapid expansion of

Indonesia’s FTA strategy?

Motivation

• Indonesia is the largest economy in South East-Asia and it is the 4th most populous country

in the world, with half of its population under the age of 30. It has been projected to be the

4th largest economy in the world after China, the United States, and India, which makes

Indonesia as a highly desirable market and therefore FTA partner. In the past, Indonesia had

resisted the pressure from its ASEAN peers to join the FTA race.

• FTA proliferation is the most salient and persistent trend in the global trading system since

the establishment of the World Trade Organization in 1995.

Theory:

Policy Diffusion (Simmons & Elkins, 2004) & FTA Policy Diffusion (Solis & Katada,2009)

• Policy diffusion occurs when adoption of a foreign economy policy by a country generates

externalities that alter the material and reputational payoffs of other countries or when it

alters the information sets on the costs and benefits on the adoption of a foreign economic

policy.

• Temporal and spatial clustering of economic liberalization are evidence of policy diffusion in

international economic policies. Policy transition in international economic policies are often

influenced by the policies of a country’s sociocultural peers and/or its geographical partners.

• FTAs have inherent features that are conduits for diffusion. Formation of an FTA generates

externalities that cause altered payoffs and altered information sets to non-participating

countries through its trade creation and diversion effects.


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• Altered payoffs generated by trade diversion effects induce competitive FTA diffusion while

trade creation effects produce altered information that motivate emulative FTA diffusion.

Conditional Diffusion Hypotheses

In this dissertation, I argue that trade creation and diversion alone are not sufficient in inducing

FTA policy diffusion. The adopting state’s institutional and financial capacity to pursue and

negotiate FTAs and the sensitivity of the sectors affected by others are also critical determinants

of the probability of diffusion.

Analytical Framework

• Phase 1: Quantitative Analysis of Economic Factors

Examination of the economic impacts of FTAs using statistical and econometrics analysis.

The impacts of FTAs on Indonesian exports, as the most direct measurable indicator, at

aggregate level will be analyzed using gravity trade modelling which will be complemented

with historical time-trend analyses at sectoral level to refine the trade creation and diversion

effects. The sectoral analysis will identify sectors that are affected the most by FTAs.

• Phase 2: Process-Tracing Analysis of Indonesia’s FTA decision-making process

The quantitative evidence from the first phase will support the process tracing analysis of

FTA policy diffusion in the second phase to identify parties involved in the FTA decision-

making process. The quantitative evidence will also aid in determining the driving factors

behind selected FTA initiatives whether it has been driven by emulative or competitive

forces. Key-informant interviews will complement the process-tracing analysis.

• Phase 3: Structured case-study comparison

Case-study comparison of completed Indonesian FTA initiatives to assess the strength of the

conditional diffusion hypotheses. These include all FTA initiatives launched after 2010 that

have the signed FTA text published upon completion of negotiations. Assessment of the

completed FTA text will reveal if the identified motives and factors transpire in the text.

Contribution:

• The dissertation will develop an analytical framework that integrates international economic

and political economy theories to systematically assess the economic and geopolitical factors

affecting the domestic stakeholders involved in the FTA decision making process.

• The analysis provides the first comprehensive empirical examination of Indonesia’s FTA

strategy using both quantitative and qualitative analysis.

• The dissertation extends the policy diffusion framework of international economic policies

with the conditional diffusion hypotheses.

• The study will formulate a more precise measurement of FTA trade creation and diversion

effects in gravity trade econometrics modelling.

• As the Canadian government is preparing to launch FTA negotiation with the Association of

South of East Asian Nations, of which Indonesia is its largest economy, understanding the

process and factors that influence its FTA decision-making process will be beneficial.


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I. Introduction

Indonesia has significantly expanded its free trade agreement (FTA1) agenda since 2010. As

of May 2018, Indonesia’s Ministry of Trade reported 9 ongoing and 8 upcoming bilateral

negotiations. It has also taken the initiatives to send FTA proposals to 10 different partners since

2015 alone (Kemendag PPI, 2018). The intensification of Indonesia FTA activities is a marked

shift from its reluctance towards FTA in the previous decades.

Indonesia has been described as a reluctant participant in the past (Marks, 2015) as it did not

actively pursuit FTAs nor did it possess an overall FTA strategy (Pangestu, et al., 2015). Prior to

2010, Indonesia only signed one bilateral FTA with Japan while three others were signed as part

of the Association of South East Asian Nation (ASEAN). Starting in 2010, it starts to expand its

FTA strategy, launching two bilateral FTA initiatives per year up to 2016. It has intensified its

strategy further in the last couple years; doubling from two to four initiatives in 2017 and adding

seven new initiatives in 2018 alone.

Table 1. Indonesia In-Force FTAs

RTA Name Date of entry into force Type

ASEAN Free Trade Area (AFTA) 01-Jan-93 FTA

ASEAN - China 01-Jan-2005(G); 01-Jul-2007(S) FTA & EIA2

Japan - Indonesia 01-Jul-08 FTA & EIA

ASEAN-Japan 01-Dec-08 FTA

ASEAN - Australia - New Zealand 01-Jan-10 FTA & EIA

ASEAN - India 01-Jan-2010(G); 01-Jul-2015(S) FTA & EIA ASEAN - Korea, Republic of 01-Jan-2010(G); 14-Oct-2010(S) FTA & EIA Indonesia-Pakistan 01-Sep-2013 PTA

Source: WTO-RTA Database

Table 2. Cumulative FTA Numbers: Global vs Indonesia

Year Global in-force

FTAs Indonesia in-force

FTAs Indonesia bilateral

FTA Initiatives

1990 19 1 0

2000 79 2 1

2010 206 7 2

2018 293 8 22 Source: In-force FTAs are WTO -RTA database and FTA initiatives are from Indonesia Ministry of Trade

1 To account for all Indonesia’s FTA activities, the term FTA used in this dissertation refers to all types of bilateral and regional trade agreements (RTAs) that are notified to the World Trade Organization (WTO) and all other preferential trade arrangements (PTAs) that Indonesia made outside the WTO with other countries. In the literature, the term FTA has also been used interchangeably with RTA. 2The WTO classifies trade agreements that cover trade in goods only as Free Trade Agreement (FTA) or Customs Union (CU) as defined in Paragraph 8(a & b) of Article XXIV of GATT 1994; and agreement that include trade in services as an Economic Integration Agreement (EIA), as defined in Article V of GATS (WTO, 2019).


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Bilateral and regional FTAs have dominated the global trading system since the introduction

of the World Trade Organization (WTO) in 1995. The number of FTAs notified to the WTO has

increased by almost tenfold from 32 in 1995 to 311 as of January 2019. All of WTO members

have at least one operational FTAs with the enforcement of Japan-Mongolia FTA in 2016

(WTO, 2019). The prevalence of FTAs since the 1990 makes FTA proliferation as the most

salient and persistent change in international trade.

At first glance, Indonesia’s FTA expansion does not seem to be unusual. More than 90% of

the 37 early FTA announcements and 311 of the in-force FTAs notified to the WTO involved at

least one developing country, with a notable increase in participation from low and middle-

income countries. Competition for shares in the global value chain of production and flows of

global capitals are seen as the main reason for many developing countries such as Indonesia to

join the FTA race. However, Indonesia FTA expansion came almost two decades after the

beginning of the FTA proliferation in early 1990s and a decade later than when the FTAs started

to spread among the countries in the Asia Pacific region (Dent, 2003).

It has also joined the FTA race with an unprecedented speed since 2010. The increase from 2

bilateral FTA initiatives in 2010 to 22 in 2018 represents a cumulative growth rate of 1000%.

Indonesia’s bilateral FTA initiatives have grown 22 times faster than the global cumulative

growth rate of in-force FTAs notified to the WTO that has grown as much as 45% since 2010.

This dissertation examines the factors that triggered this significant change in Indonesia’s FTA

strategy and the processes that drive the rapid intensification of its FTA agenda since 2010. What

makes this policy shift even more puzzling is the expansion of its FTA activities has also

coexisted with a continuation, and even extension, of its protectionist economic policies.

Figure 1. FTA Proliferation Globally vs Indonesia

Source: calculated with FTA data from WTO-RTA Database and Indonesia’s Ministry of Trade (Kemendag RI)

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IDN in-force FTAs IDN bilateral FTA Initiatives Global in-force FTAs


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Why did Indonesia dramatically increase its FTA activity after 2010 despite its protectionist

economic policies? To explore this paradoxical policy shift, this dissertation adopts the policy

diffusion framework as the guiding analytical lens. As part of this analysis, the thesis examines

the economic and geopolitical factors affecting Indonesia’s FTA strategy, and evaluates how the

FTA policies of its peers and trade partners have affected Indonesian stakeholder before and after

2010. Empirical evidence shows that policy transitions in international economic policies are

often influenced by the policies of a country’s sociocultural peers or geographical partners.

Temporal and spatial clustering of economic liberalization are evidence of policy diffusion in

international economic policies (Elkins & Simmons, 2005). Policy diffusion occurs when

adoption of a foreign economy policy by a country generates externalities that alter the material

and reputational payoffs of other countries or when it alters the information sets on the costs and

benefits on the adoption of a foreign economic policy (Simmons & Elkins, 2004).

FTAs have inherent features that are conduits for diffusion. Formation of an FTA generates

externalities that cause altered payoffs and altered information sets to non-participating countries

through its trade (and investment)3 creation and diversion effects. The removal of economic

barriers through an FTA will tend to increase trade and investment between the FTA partners

and thus alter the information on the costs and benefits of FTA adoption for non-participants. At

the same time, trade and investment may be diverted from partners outside the FTA to members

of the FTA (Viner, 1950) and thus directly alter the material payoffs of FTA members’ partners

that are outside the FTA. Therefore, the trade creation and diversion effects of FTA generate

externalities that drive the proliferation of FTA. More specifically, trade creation leads to

emulative diffusion while trade diversion brings a competitive diffusion (Solis & Katada, 2009).

In this dissertation, I argue that altered payoffs and policy learning are necessary but not

sufficient conditions for policy diffusion. Trade creation and diversion alone are not sufficient in

inducing an FTA diffusion. The adopting state’s institutional and financial capacity to pursue and

negotiate FTAs and the sensitivity of the sectors affected by the FTA of others in the adopting

country also determine the probability of diffusion. The relationship between the adopting

country, in this case Indonesia, with its peers that have adopted FTAs earlier as well as its

relationship with the countries with which its trade partners are signing FTA agreements also

affect the probability of diffusion. Hence aside from altered payoffs and altered information sets,

the diffusion of FTAs is also dependent on the following four factors: the adopting state’s

financial and technical capacity; the psychological and competitive distance between Indonesia

and the countries adopting FTA earlier (Solis & Katada, 2009); and the political sensitivity of the

sectors affected. The probability of FTA diffusion is higher under the following conditions:

1. The higher the income and technical capacity of the adopting country to negotiate FTAs.

2. The closer the adopting country and countries signing FTA agreements earlier are in

psychological distance as measured by socio-culture and economic development.

3. The closer the competitive distance is between a country and the countries with which its

partners are signing FTA agreements. Competitive distance is measured by the similarity

3 FTAs particularly those that include investment chapters generate both trade and investment creation and diversion. From this here on forward, the trade and investment creation and diversion effects will be referred to as trade creation and diversion effects to represent both effects on trade and investment.


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in export structure by product and destination, which translates into higher competition

with that partner and that will lead to higher trade and investment diversion.

4. The more sensitive the sectors affected by trade and investment diversion from others

FTAs are, the higher domestic pressure to respond with a defensive FTA. In this case,

sensitivity is measured by the sector’s relative economic and political importance.

The analytical framework is divided into three phases and it employs both quantitative and

qualitative research methods. The first phase of the analysis is a quantitative assessment to

examine the evidence of the economic impacts of FTAs on Indonesian economy using statistical

analysis and gravity modelling. The quantitative evidence from the first phase will support the

process tracing analysis of FTA policy diffusion in the second phase. The final phase employs

qualitative structured case-study comparison of completed Indonesian FTA initiatives to assess

the strength of the conditional diffusion hypotheses. These include all FTA initiatives launched

after 2010 that have the signed FTA text published upon completion of negotiations. Assessment

of the completed FTA text will reveal if the identified motives and factors transpire in the text.

This dissertation contributes to the literature in four ways. First, the dissertation will develop

an analytical framework that integrates international economic and political economy theories to

systematically assess the economic and geopolitical factors affecting the domestic stakeholders

involved in the FTA decision making process. Second, the analysis provides the first

comprehensive empirical examination of Indonesia FTA strategy using both quantitative and

qualitative analysis. Third, the dissertation extends the policy diffusion framework of

international economic policies with the conditional diffusion hypotheses. Fourth, the study will

formulate a more precise measurement of FTA trade creation and diversion effects in gravity

trade econometrics modelling. The findings of this dissertation will also inform policy making as

Canada and ASEAN prepares to launch negotiation following the completion of the Canada-

ASEAN FTA joint studies (GAC, 2018). Understanding the motivation and the processes behind

the FTA strategy of Indonesia, which is the largest economy in ASEAN, will be beneficial for

the Canadian negotiating team when it meets its Indonesian counterparts at the negotiation table.

This prospectus is delivered in six sections. The following section analyses the puzzle

surrounding Indonesia FTA expansion. The third section reviews the hypotheses and theories

explaining FTA proliferation from the international trade and international relations literature. In

the fourth section, the theoretical framework and corresponding hypotheses are developed which

then followed by a method section that details the phases of analysis, quantitative models and

estimation technique, and data sources to be employed in this dissertation. Finally, the feasibility

and timeline of the project will be discussed briefly.


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II. The Puzzle of Indonesia’s FTA Expansion

Indonesia is the largest economy in South East-Asia and it is the 4th most populous country in

the world, with half of its population under the age of 30 (OECD, 2018). With a growing middle

class and a young population base, it has been projected to be the 4th largest economy in the

world after China, the US and India, which makes Indonesia as a highly desirable FTA partner.

In the past, Indonesia had resisted the pressure from its ASEAN peers to join the FTA race. It

had criticized Singapore, who was the early FTA adopter in the South-East Asia region, for

undermining the cohesiveness of ASEAN economic community with its FTAs (Marks, 2015).

For many developing countries, especially low-income countries, the potential loss of

government revenues from import tariff and duties due to barrier removals through an FTA has

been identified as one of the main challenges as a signatory (Massa & Stevens, 2015). This

potential loss of government revenues could partly explain Indonesia’s initial reluctant.

However, the loss of protection for domestic industries presents an even bigger challenge for

Indonesia which has had a long-standing protectionist regime. Indonesia’s long history of

colonialization has produced general sensitivity towards possible infringement of sovereignty.

This profound sense of nationalism is reflected through its approach to foreign economic policies

(Chandra, 2008). Safeguarding national sovereignty and interests is explicitly stated as the core

mission of its international trade negotiation directorate general (PPI) under the Ministry of

Trade (Ditjen PPI, 2019). Protection of domestic industries is one of the main objectives in its

long-term economic development plan which includes the promotion of infant industries and

import substitution measures among others (Bappenas, 2005).

Indonesia’s economy has performed well under its protectionist economic policies contrary

to the neoliberal believes that only economic liberalization generates economic growth in the

globalization era. Its GDP has grown by almost 10 times since the 1998 Asian financial crisis

from 95 billion USD to 1 trillion USD in 2017. In the same period, exports of goods and services

as percentage of GDP has fallen from 53% in 1998 to just over 20% in 2017 (World Bank, 2019)

Unlike most developing countries, its remarkable economic growth is a result of strong domestic

economic performance and consumption growth rather than an export-led industrialization.

Figure 2. Indonesia GDP & Export 1990-2017 (World Bank)

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Despite its protectionist stance, Indonesia is not immune to force of globalization that

demands liberalization of the domestic economy for participation in the global economy. Its

trade and investment are also not immune to the trade and investment diversions generated by

the FTA of others. The swinging of Indonesian trade and investment policies between openness

and protectionism demonstrates the challenge Indonesia has faced in maintaining its protectionist

regime while responding to the global push for liberalization. Attempts to open the market and

liberalize trade are often followed by a series of heightened protectionist measures - particularly

non-tariff – barriers (Soesastro & Basri, 2005; Pangestu, et al., 2015).

Between 2008 and 2015, roughly the same period when the Indonesian government started to

intensify its FTA initiatives, the estimated effective rates of protection (ERPs) of its non-tariff

measures on imports have increased by 300% (Marks, 2017). Economic nationalism and

protectionism have continued under Joko Widodo (Jokowi), whose presidency began in 2014

(Hill & Negara, 2018; Mietzner, 2015). A mercantilist approach to trade which emphasizes a

positive trade balance with exports exceeding imports remains a strong popular belief held by

many Indonesians. This mercantilist view was visible throughout the campaigns of the political

parties for the April 2019 presidential and general election in which one of the presidential

candidates and some of the political parties had promised to reduce or eliminate imports.

An example of a recent protectionist policy introduced by the government is the broad-based

import tariff increase in the last quarter of 2018. The global trade wars, rising US interest rates,

and a strong US dollar in 2018 stirred a turmoil in the global market that sent emerging markets

currencies spiralling downwards including Indonesian Rupiah. Compared to other emerging

market currencies affected, Indonesian Rupiah still performed relatively well with a depreciation

less than 10% towards the US dollar. However, the Indonesian government has used the

weakening of Rupiah as an opportunity to introduce a broad-based import tariff hike. Import

tariffs were raised up to 10% from 2.5% to 7.5% on 1147 goods to curb imports and encourage

import-substitution (Diela, 2018). Tariffs and a depreciated currency are substitute policies, with

both acting to deflect demand away from imports, so it is unnecessary for Indonesia to further

imposed higher import tariffs when the Indonesian Rupiah was already depreciating.

Furthermore, weakening of Indonesian Rupiah would have made its export commodities to be

cheaper and therefore more competitive in the global market. The increase in demand for

Indonesian exports would in-turn increase demand for Indonesian Rupiah which will raise the

value of Indonesian Rupiah. Although the increase of import tariffs can be considered as a

proactive policy in strengthening its currency, it also further underlines its protectionist stance.

On the investment side, the Jokowi government continues its nationalization effort to regain

control of sensitive sectors from foreign ownership while introducing new policies to promote

foreign direct investment (FDI) that allow foreign ownership up to 100% in less sensitive

sectors. In 2018, the Jokowi government signed an agreement with Freeport, an American-

owned mining company, after years of on-and-off negotiations to regain ownership of the

Grasberg mine which is the second largest cooper and gold mine in the world (Coca, 2017). This

deal was controversial as it obliged Freeport to sell 51% of its shares at a below-market price to

Inalum, Indonesia’s state-owned mining enterprise. Indonesia’s Minister of Energy and Mineral

Resources, Ignasius Jonan, had been quoted stating that the deal was made in accordance with

the current mandate to put national interest first and to maintain sovereignty of the state in

management of natural resources (Kumar, 2017).


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Evidently, Indonesia has not stepped away from its protectionist stance which seems to be at

odd with the rapid expansion of its FTA initiatives. By definition, an FTA is a reciprocal

preferential trading agreement between two or more countries to create a free trade zone where

trade barriers are lowered to increase flows of goods and services. Indonesia will face significant

pressures from its FTA counterparts to remove its protectionist measures in return for greater

market access and capitals to theirs while the economic gains are still uncertain.

The efficacy of FTAs in providing greater market access and further tariff reduction is

limited. The global trading system has operated in low tariff environment since the establishment

of WTO where the average applied tariffs for most countries are less than 10% and most

developed economies’ average applied tariffs are close to 0% (UNCTAD, 2018). Without

entering into an FTA, Indonesia has benefitted from preferential treatments as a developing

country in the WTO through the General Agreement on Tariffs and Trade (GATT) and the

General Agreement on Trade in Services (GATS). Under the WTO’s Generalized System of

Preferences (GSP), it also receives further tariff reduction from developed economies such as the

United States that provide preferential tariff treatments to its developing and least developed

partners (WTO, 2019). Consequently, gains in tariff reductions and market access are limited

except for access to sensitive sectors in other (*mostly wealthier) countries, which would likely

require significant concessions from Indonesia to open its protectionist regime.

The reduction of tariffs and greater market access through an FTA in an ultra-low tariff

environment could come at a significant price for Indonesia. The steady reduction of global

import tariffs since the establishment of WTO in 1995 has significantly reduced conventional

gains from tariff reduction in FTAs as more countries joined into WTO since 1995. This trend

has pushed more countries, particularly developed economies, to include additional terms to

justify the resources invested into the trade negotiation (Dent, 2006). These deep comprehensive

FTAs that extend beyond trade and investment also include clauses on human rights,

environmental and intellectual property protection. They are often referred to as WTO-plus,

gold-standard, or progressive FTAs and they are meant to level the playing field between

developed and developing economies (Hu & Vanhullebusch, 2014). The inclusion of these

progressive policies in FTAs poses a different challenge for developing countries such as

Indonesia as they effectively reduce the comparative advantage that developing countries have in

lower production costs from cheaper labour and the absence of labour rights, environmental

and/or intellectual property protection.

Evidence of these limited gains in FTAs is apparent through the diminishing trade gains that

have been shadowing the FTA proliferation. A survey of FTAs found that FTAs do not improve

the FTA members’ terms of trade significantly if at all (Baier & Bergstrand, 2007). Countries

such as the U.S., China, Japan, and Canada have signed FTAs to form strategic alliances or to

reaffirm regional dominance (Solis, 2009; Stallings & Katada, 2009). The economic gains of

these FTAs can be so small that it can be considered as rounding errors compared to the actual

size of the trade of the economies involved (Garcia, 2012 ; Guschin, 2015; Martin, 2015).

The individual performance of Indonesia’s current in-force FTAs to improve its trade balance

is also unconvincing, except possibly its limited goods-only FTA with Pakistan (Indonesia-


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Pakistan PTA4). Indonesia’s goods exports to Japan, its only bilateral FTA partner, has declined

since its enforcement in 2008 from 27.7 billion USD to 19.4 billion USD in 20185. While

Indonesia’s goods exports to Pakistan has increased by 74% after the FTA signed in 2013, from

1.41 billion USD to 2.46 billion USD in 2018, it only represents 1.4% of Indonesia’s total

exports. The trade surplus Indonesia has enjoyed with Pakistan will also soon be reduced as

Pakistan has requested an amendment for zero tariff to 20 of Pakistan’s primary exports to

correct the trade imbalances experienced by Pakistan since the signing of Indonesia-Pakistan

PTA in 2013 (Tribune, 2019). Goods export performance to its ASEAN FTA partners also

present a mixed picture with sharp decline to in goods exports to Australia and Korea and

increase of goods exports to India and China. Though the trade deficit in goods with China has

grown by over 23 times since the ASEAN – China FTA enforcement in 2005.

Table 3. Change in Goods Exports and Trade Balance following Enforcement of FTAs to 2017

RTA Name Date of entry into

force 2017 Share of Good Exports

Change following FTA enforcement till 2017

Exports

Trade Balance

ASEAN - China 01-Jan-2005(G); 01-Jul-2007(S)

13.7% 246% -2347%

Japan - Indonesia; ASEAN-Japan 01-Jul-08; 01-Dec-08

10.5% -36% -88%

Australia : ASEAN - Australia - New Zealand

01-Jan-10 1.5% -41% -2181%

New Zealand: ASEAN - Australia - New Zealand

01-Jan-10 0.3% 10% -4%

ASEAN - India 01-Jan-2010(G); 01-Jul-2015(S)

8.3% 42% 32%

ASEAN - Korea, Republic of 01-Jan-2010(G); 14-Oct-2010(S)

4.8% -35% -91%

Indonesia-Pakistan 01-Sep-2013 1.4% 69% 47%

Source: Calculated based on ITC Trade Map data

The efficacy of an FTA in delivering more trade is further called into question by the low

utilization rate of FTAs among firms (Hamanaka, 2013). Indonesia is also not an exception in

this regard; a survey of firms done in 2013 found that low awareness of FTAs and increased cost

of obtaining Rules-of-Origin (ROO) documentation discouraged firms that have led to low

utilization of the current in-force FTAs (Wignaraja, 2014; Ing, et al., 2014).

Trade diversion effects have been pointed as the main driver of FTA proliferation as it

creates a domino effect that generates formation of defensive FTA. Though Indonesia’s decision

to expand its FTA strategy may have been triggered by trade diversion effects from others’

FTAs, the pattern of its bilateral FTA initiatives does not suggest evidence of strong defensive

FTA strategy. Except with Japan, it does not have bilateral FTA in place with most of its top

export destinations. On the contrary, most of its prospective bilateral FTA initiatives are with

4 A PTA is a preferential trade arrangement, a limited trade agreement in goods. 5 Trade data is obtained from ITC Trade Map


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partners that account for less than 1% of its total exports except with the EU and South Korea.

Trade and investment creation and diversion effects alone cannot fully explain why Indonesia

did not respond to these forces earlier and why the sudden and rapid intensification of its FTA

initiatives from 2 to 22 only took place mostly in the later half of 2010 decade; since 2016.

Table 4. Indonesia FTA Bilateral Initiatives

Name of Agreement & Status Initiation Status 2018

Export

Share

United States-Indonesia Free Trade Agreement 1997 Stalled 10.2%

Indonesia-European Free Trade Association

Comprehensive Economic Partnership Agreement

2010 Signed

Dec 2018

0.5%

India-Indonesia Comprehensive Economic

Cooperation Arrangement

2011 Negotiation 7.6%

Taipei, China-Indonesia Free Trade Agreement 2011 Proposed 2.6%

Indonesia-Australia CEPA 2012 Signed Mar

2019

1.6%

Indonesia-South Korea Free Trade Agreement 2012 Negotiation 5.3%

Indonesia-Peru Free Trade Agreement 2014 Proposed 0.1%

Indonesia-Chile Free Trade Agreement 2014 Signed 2017 0.1%

Indonesia-Ukraine Free Trade Agreement 2016 Proposed 0.1%

Indonesia-EU Free Trade Agreement 2016 Negotiation 12.1%

Indonesia-Eurasian Economic Union 2016 Proposed 0.1%

Indonesia-Turkey Free Trade Agreement 2017 Negotiation 0.7%

Indonesia-SACU PTA 2017 Proposed 0.4%

Indonesia-Kenya PTA 2017 Proposed 0.2%

Indonesia-Nigeria (ECOWAS) PTA 2017 Proposed 0.2%

Indonesia-Morocco Free Trade Agreement 2018 Negotiation <0.1%

Indonesia-Mozambique PTA 2018 Negotiation <0.05%

Indonesia-South Africa Free Trade Agreement 2018 Proposed 0.4%

Indonesia-Sri Lanka Free Trade Agreement 2018 Proposed 0.2%

Indonesia-Tunisia PTA 2018 Negotiation <0.05%

Indonesia-Bangladesh PTA 2018 Negotiation 1%

Indonesia-Gulf Council Free Trade Agreement 2018 Proposed 2% Source: compiled with data from Asian Development Bank, Indonesia Ministry of Trade, ITC Trade Map and other sources

The rapid intensification of Indonesia’s FTA initiatives since 2010 despite uncertain

economic gains with few clear economic winners is puzzling particularly considering its

protectionist and nationalist economic policies. Therefore, it is necessary to consider other non-

economic factors that might motivate Indonesia to expand its FTA strategy.

https://aric.adb.org/fta.php?id=175&ssid=3




















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Non-Economic FTA Motivation

In the absence of clear economic motivation, other alternative explanations that have been

put forward to explain proliferation of FTA despite diminishing gains involve the pursuance of

other strategic political interests which may include enforcement of domestic reform through

international commitments, regional dominance competition, and formation of security and

political strategic alliances (Whalley, 1998). As early as 2003, the WTO has noticed that FTAs

are signed between countries not for trade purposes only. They have also served as diplomatic

instruments advancing other non-trade related interests such as security, legal, political and

strategic alliances through economic partnerships (Whalley, 1998; Perroni & Whalley, 2000;

WTO, 2003). None of the alternative explanations applied well for Indonesia’s case.

The Asian currency crisis in 1998 triggered the last democratic reform in Indonesia that

brought the three decades of the New Order authoritarian regime under President Suharto to an

end and ushered in the “Reformasi” era which led to changes in the judiciary, legislature, and

executive office structures of the government (King, 2003). Although far from perfect,

Indonesian reformasi’s unusual course of democratization has provided Indonesia with economic

and political stability which has led to remarkable economic growth (Horowitz, 2013).

In the last decade, Indonesia’s economy has maintained a stable growth at ±5% and a

relatively stable government. There is no evident of need to impose domestic reforms through

international commitments in particular through FTAs that would possibly motivate the

intensification of its FTA initiatives since 2010. Furthermore, such FTA would likely be

concluded with a large and important trading partner with considerable economic and political

clouts to lock-in the domestic reforms such as in the case such as the Mexico’s liberalization of

economy and political system in 1993 using NAFTA (Cameron & Tomlin, 2000).

Indonesia also does not have the need to fight for regional dominance in any parts of the

world. Regionally, Indonesia has assumed the leadership role in ASEAN as one of the founding

nations and it is the de-facto leader in the South East-Region through the sheer size of its

economy, geographical area, and population (Arnter, 2017; Quayle, 2017). Indonesia also

adheres to an “independent and active” foreign policy principle since 1948 following its

independence. Its foreign policies are conducted to maintain a neutral position and avoid

involvement in conflicts of others (KBRI Washington, DC, 2017). The geographical

dissemination of Indonesia FTA initiatives, that are spread across different regions and with

countries and economies of varying degree of development, does not indicate motivation for a

regional dominance competition. Indonesia is currently negotiating with advanced economies

such as the European Union (EU), the European Free Trade Association (EFTA), Australia, and

South Korea as well with other developing economies across the different regions of the world

from Asia, Africa, Latin America, and the Middle-Asia.

The likelihood of Indonesia to pursue non-economic strategic interests such as political and

legal through FTAs is also very unlikely. Diplomatic FTAs, with little or no economic gains,

require the demander to have significant political and economic clouts to provide the economic

incentives and side payments to non-economic terms. These high economic and political capital

requirements have made diplomatic FTAs almost to be exclusively initiated and signed mostly


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by highly developed countries or major-power economies (Quiliconi & Wise, 2009). As a

middle-power economy, Indonesia does not necessarily have the economic or political clouts to

compensate its partners in exchange for non-economic terms in FTAs. Although Indonesia’s

market size could suffice as side payments to some potential partners, the political viability of

passing FTAs with no economic gains and at the cost of domestic producers for Indonesia, who

has strong protectionist policies, is very weak or almost impossible. It will carry high political

costs for the reigning political party in a nation with strong nationalism sentiment and

mercantilist bias to conclude diplomatic FTAs with no economic gains and that are made at the

expense of domestic producers. Furthermore, the fact that the international trade agreement unit

is housed under the Ministry of Trade rather than Indonesia’s Ministry of Foreign Affairs

suggests that the mandate for its trade negotiations are focused on economic and trade gains.

The Puzzle

With no clear economic nor political motivation explaining the expansion of its FTA

initiatives, what has really triggered the sudden shift in its FTA strategy and what could explain

the intense rapid intensification since 2010 despite its protectionist regime remain a puzzle. This

dissertation is motivated to systematically assess both the economic and geopolitical factors

influencing Indonesia FTA decision making-process to understand the expansion of its FTA

initiatives since 2010. It examines this policy shift using the FTA diffusion framework proposed

by Solis and Katada (2004) to analyse the influence of its peers’ FTAs on its FTA strategy.


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III. FTA Proliferation Explained in Literature

To understand what factors and processes that have affected Indonesia’s FTA strategy, this

section briefly reviews the general literature on FTAs in the international economics and

international relations literature to understand the factors, the channels, and the dissemination

mechanism used to explain FTA proliferation. This broad review is then followed by a more

focused examination of the policy diffusion framework to develop the argument for how and

why such a framework may apply conditionally.

The Motivation: Why do Countries Seek FTAs?

One of the most important of feature of an FTA as an international trade instrument is that it

provides an exception to the WTO’s Most-favoured nation (MFN) principle (Solis & Katada,

2009) which is the first principle that underlies the multilateral trading system. The MFN

principle is a non-preferential or non-discriminatory treatment rules whereby a country offering a

preferential treatment such as tariff reduction to a WTO member must extend the same treatment

to all other WTO members (WTO, 2019). Through an FTA, WTO members are allowed to

provide preferential arrangements to its FTA partners that are not made available to other WTO

members regardless of their development status6. This exception makes FTAs a powerful tool to

develop deeper trade linkages with specific partners. The continuous stalling of the WTO

multilateral negotiation since the breakdown of the Doha Round, which began in 2001, has made

FTAs a preferred alternative for international trade policy.

The flexibility of an FTA as a foreign economic policy tool also contributes to its popularity

(Solis & Katada, 2009; Whalley, 1998). As foreign economic policy tools, FTAs now frequently

cover more than just trade and tariff provisions. More and more FTAs are including investment

chapters and provisions such as investors-state dispute settlement (ISDS), effectively replacing

other types of international investment agreements like bilateral investment treaties (BITs) (Lo,

2008; Kong, 2013). Besides trade and investment agreements, FTAs may also include other

regulations in areas such as intellectual property, human rights, labour conditions, and

environmental protection. The WTO only monitors the FTA proliferation and maintains a

database of FTA but it does not set a standard on the format of FTAs, giving FTA partners

considerable latitude in specifying conditions that meet its particular interests.

FTAs have also been widely accepted as non-offensive diplomatic instruments. Major

powers have used FTAs to establish or maintain regional dominance, while smaller economies

such as Singapore and Chile have also used their FTAs to enhance both economic partnerships

and strategic security alliances (Rajan, et al., 2001; Low, 2008; Stallings, 2009; Wehner, 2011).

These two smaller countries are among the early adopters of FTAs and have the greatest number

of FTAs outside the European Union. Deeper economic partnerships with larger and major

global powers not only improve their global positioning and visibility in the global economy but

also serve as a defensive strategy. Both countries have positioned themselves as strategic

6 Currently only Least Developing Countries (LDC) are receiving preferential lower tariff treatment under the WTO’s Generalized System of Preferences (GSP).


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regional hubs that give a greater incentive to their FTA partners to protect their stability (Dent,

2003). Aside from securitization and leadership competition, FTAs have been utilized to lock-in

domestic reform (Moravcsik, 1993), advance the interest of domestic constituents through

protectionist clause (Ravenhill, 2005), and enforce legalization of new trade and investment

rules outside the multilateral forum (Pekkanen, et al., 2007).

Countries may well negotiate FTAs to avoid the WTO’s non-discriminatory rule, because of

their flexibility as a foreign economic policy instrument, and because of its versatility as a

diplomatic instrument. These benefits have existed for many decades, however, these

motivations by themselves do not explain the unprecedented rapid expansion of FTAs since the

1990s, or provide a mechanism by which the expansion has occurred.

The Mechanism: How do FTAs spread?

The conventional explanations of FTA proliferation can be classified into three major

categories: “economic interdependence, domestic lobbying and rent-seeking, and state

autonomy” (Solis and Katada, 2009:3). Both economic interdependence and domestic lobbying

are driven by economic motivation with private sectors as the main actors behind the

proliferation, while state-autonomy argues that states and their political objectives are the main

drivers behind FTA negotiations.

Economic interdependence arguments postulate that the increasing interconnectedness of the

global economy through global value chains of production and international trade is the main

driving factor for proliferation of FTA. It hypothesizes that the increase in international trade

concentration propels the formation of FTAs among trading partners. The demand for FTAs

comes from the private sectors in order to reduce the cost of cross-border transactions (Mattli,

1999). Critiques have pointed out that the economic interdependence hypothesis fails to explain

why the economies with the largest trading volume such as China and the United States have the

fewest number of FTAs. It also falls short in explaining the rising of FTAs beyond Europe and

the negotiation of FTAs between partners with low trade volumes (Solis & Katada, 2009).

The domestic lobbying hypothesis also identifies private sector as the main actors behind

FTA initiatives with the proliferation of FTAs being driven by trade creation and diversion

effects. The trade diversion effects of FTAs set off a ‘domino effect’ of defensive FTAs

(Baldwin, 1997). Industries that are affected by trade diversion are expected to lobby their

government to negotiate an FTA to counter the diversion effects. The political viability of an

FTA is determined by the benefits received by the industries affected by the FTA. The economic

gains received by exporters and importers through trade creation must exceed the loss of import-

competing industries, often leading to carve-outs and exemptions in order to protect sensitive

sectors (Grossman & Helpman, 1995). The domino effects of defensive FTAs provide one of the

most compelling accounts of the mechanism driving FTA proliferation. Yet it does not explain

why countries are signing FTAs with Singapore, for example, which has extremely low (mostly

zero) tariffs, as the most open economy in the world (Solis & Katada, 2009). The domestic

lobbying hypothesis accounts for the proliferation of economically-motivated FTAs but not

diplomatic FTAs with limited gains. Furthermore, both the economic interdependence and


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domestic lobbying hypotheses that stress the importance of private sectors activism in driving

FTA proliferation fail to explain the low utilization rate of FTAs by private sectors.

The state autonomy hypothesis centralizes its arguments around the independence of states in

making foreign policy decision-making. FTAs function as a tools to achieve political objectives,

including overcoming domestic hurdles through international obligations (Moravcsik, 1993) or

forming strategic and security alliances (Gowa, 1994; Whalley, 1998). FTAs have been depicted

as “celebrated bargains” made by political elites and state leaders (Solis and Katada, 2009:5).

Critics pointed out that the narrow description of FTAs as a political instrument ignores the

fundamental function of FTA as foreign economic policy tools. It also fails to explain the

increasing similarities of trade terms among FTAs negotiated in recent years which emphasizes

the importance of FTAs as a trade policy tool rather than a political tool alone (Mattli, 1999:29).

Each of the conventional explanations describes only a subset of FTAs, either economic or

diplomatic. In order to consider all the different interests served by FTAs as a foreign economic

policy tool and diplomatic instrument, Solis and Katada (2009) has developed an FTA policy

diffusion framework that accommodates the interaction of multiple competitive objectives.

FTA Policy Diffusion Framework

Policy diffusion challenges the main notion in political science of explaining similarity in

policy outcomes as independent responses to common external shocks where each government’s

domestic policy-making process is solely determined by domestic factors and preferences

(Garrett, et al., 2008). Diffusion theories emphasize the interdependence of government choices,

with prior policy adoption by one government influencing the policy outcome of the remaining

non-adopters (Strang, 1991; Braun & Gilardi, 2006). The interdependence and the

interconnectedness of the global economy have created the perfect environment for the diffusion

of economic policies.

The policy diffusion framework allows the examination of the mechanism that drive the FTA

proliferation. The spread of FTAs and waves of regionalism have been described as examples of

policy bandwagoning or policy mimicry (Oyane, 2003; World Bank, 2000) which suggests that

there is a diffusion mechanism at work. The waves of bilateral and regional FTAs across the

globe also meets the condition of uncoordinated interdependence of policy diffusion (Solis &

Katada, 2009) or clustered transition as defined by Simmons & Elkins (2004).

Simmons and Elkins (2004) are the first to deliver the policy diffusion framework for foreign

economic policies. They hypothesize that the clustered transitions in foreign economic policies

occur when foreign economic policy choice of a country generates externalities that affect the

payoffs (altered payoffs) associated with the adoption of a particular policy and when it changes

the information sets (altered information sets) on the benefit and cost of that particular policy

adoption (Simmons & Elkins, 2004). Solis and Katada’s FTA diffusion framework also posits

that a government’s FTA decision is not solely determined by domestic factors but it is also

influenced by the FTA strategy of others (2009).


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Solis and Katada’s FTA policy diffusion framework distills the four mechanisms of

diffusion in the literature into two: emulation and competition. They argue that it is hard to

distinguish between soft coercion and emulation as in both case the direction of influence is from

the more powerful or successful economies, who has the means to exert its economic power,

onto the less powerful or successful ones, who are assume to want to emulate or copy the success

of leading economies. It is also difficult to differentiate between rational learning and

competition as countries make rational choices of policies to maintain their competitiveness

(Solis & Katada, 2009). They postulate that FTAs proliferate through both competitive diffusion

and emulative diffusion mechanism. A parallel can be drawn between Simmons and Elkins

(2004) foreign economic policies diffusion framework and Solis and Katada (2009) FTA policy

diffusion framework. Competitive diffusion is induced by altered payoffs whether it is material

or reputational as result of direct economic competition while emulative diffusion is induced by

altered information sets.

Altered payoffs arise when the adoption of a policy generates externalities that directly affect

the costs and benefits of the policy for others. For foreign economic policies, altered material

payoffs are the direct results of economic competition for global capital and trade that have

driven the waves of clustered economic liberalization. Countries are adopting liberal economic

policies to attract foreign investment and shares in the global-value-chain of production

(Simmons & Elkins, 2004). In the competitive global economic environment, one government’s

choice of foreign economic policies will not only affect its own investment and trade but also

those of others, with the probability of diffusion being highest among close competitors (Braun

& Gilardi, 2006; Simmons, et al., 2006). The domino effects of trade and investment diversions

(Baldwin, 1997) that generate defensive FTAs are also driven by the same competitive forces.

Altered reputational payoffs come from the pressures of following the prevailing global

norms or trends (Simmons & Elkins, 2004). Governments adopting policies that are against the

global norm risk reputational ramification. In the global economy, capital and trade react

positively to liberal economic policies and signals of liberalization such as FTAs. Simmons &

Elkins (2004) extending Schelling’s (1978) and Granovetter’s (1978) threshold model of

normative consensus hypothesize that the normative pressure of reputational payoffs to adopt a

policy is higher once the number of governments adopting that policy have reached a certain

threshold of critical mass (Simmons & Elkins, 2004). Following this hypothesis, as more

bilateral and regional FTAs are signed more countries are expected to expand their FTA agenda.

In Solis & Katada’s FTA diffusion framework, the competitive diffusion hypothesis states

that countries will pursue FTAs to mitigate the diversion effects from the FTAs of their

competitors. The competitive distance in Elkins et. al. (2006) measures the economic

competition for market shares and capital between two countries. Simmons & Elkins extend it to

not only represent economic competition but also political competition over status or leadership

contests. The main actors driving the FTA diffusion process are not only business and economic

bureaucrats but also politicians and foreign affairs officials. FTAs induced by competitive

diffusion are characterized as “heterogeneous” and “selective” as each is designed to

counterbalance the diversionary effects of a specific FTA (Solis & Katada, 2009).


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There are three channels through which policy diffusion is induced by altered information

sets which include: learning through the success of others; learning through their communication

networks which consist of the private sectors and the policy epistemic communities; and learning

from cultural reference groups (Simmons & Elkins, 2004). Other economies are more likely to

follow the economic policies of more successful economies, i.e. those which are wealthier, more

developed, or faster growing. These successful countries become the key references for foreign

economic policy-making (Dobbin, et al., 2007). Governments are also more likely to adopt the

foreign economic policies advocated through its epistemic policy communities and

communication networks, which may include professional economists, think-tanks, technocratic

bureaucrats, scholars and private sector lobbyists. Lastly, governments often mirror the policies

of their neighbours, as countries whom are more likely to share the highest affinity in socio-

culture. Cultural reference groups provide a higher relevance regarding the appropriateness of a

particular policy adoption (Simmons & Elkins, 2004).

Solis and Katada’s emulative diffusion hypothesis states that countries are more likely to

imitate the FTAs countries that are considered leaders or those that are considered its

sociocultural peers. The psychological distance between two countries measures similarities in

sociocultural characteristics such as local customs, language and religion. The policy epistemic

communities which may also include cross-country policy networks play an important role in the

emulative diffusion. FTAs propagated through emulative diffusion are “homogenous” and

“omnidirectional”. These FTAs have standard formats and commitments mirroring the FTAs of

the reference country and the strategy is to sign as many as possible (Solis & Katada, 2009).

Simmons and Elkins (2004) performed an empirical quantitative investigation of the

globalization of economic liberalization policies of 182 IMF-member states from 1966 to 1996

to test their policy diffusion hypotheses. Their empirical modelling found strong evidence for

diffusion due to altered payoffs. In their sample, competition for international capital is a strong

determinant for diffusion of liberal economic policy. Their findings also suggest evidence of

diffusion through altered information sets with the policies of leading economies having the most

impact on the economic policy choices of others. However, the evidence for diffusion due to

altered information sets is less robust compared to the evidence of diffusion for altered payoffs.

Similarly, Stallings and Katada (2009) use case-studies of countries in the Pacific Rim from

1990 to 2006 and find evidence of emulative diffusion in the earlier stage of the FTA

proliferation period up to 2002 and stronger evidence of competitive diffusion in the period after.

The FTA diffusion framework informs not only the mechanism of the diffusion but also the

factors and potential actors driving them as well as the expected outcomes of the FTA from each

diffusion mechanism. Economic competition remains the strongest driver of FTA diffusion as

noticed earlier in the literature where the trade diversion effects of FTA generate a domino effect

that spread defensive FTAs. Legal and political competitions push the FTA proliferation further.

Countries also mirror the FTA policy of others particularly leading economies and its

sociocultural peers which leads to emulative diffusion of FTAs. Both competition and emulation

contribute to FTA proliferation. In the foreign economic policy diffusion framework, the policy

epistemic community which comprise of think-tanks, scholars, professional economist, private

sector representatives, cross-country communication networks, and technocratic bureaucrats

have significant roles in the diffusion of a policy.


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IV. Theories & Hypotheses

Indonesia’s FTA intensification that came almost two decades later than when FTAs started

to proliferate in late 1990s despite its long-standing protectionist foreign economic policies

suggests that its FTA expansion is likely to be induced by policy diffusion. Solis and Katada’s

(2009) FTA policy diffusion framework specifies that a country’s FTA strategy particularly

those of later adopters such as Indonesia is influenced by the FTA strategy of its competitors as

well as its peers. Their FTA diffusion framework allows closer examination how the FTAs of

Indonesia’s trade partners and sociocultural peers influence its FTA decision-making process.

The FTA policy diffusion framework posits that the FTA strategy of a country is driven by

either competitive or emulative diffusion forces which depends on the factors triggering the FTA

initiatives and determines the types of FTA generated (Solis & Katada, 2009). Competitive FTA

policy diffusion is triggered by altered material or reputational payoffs that generate defensive

FTAs. While emulative diffusion takes place when the FTA experience of others alters the

information sets on the costs and benefits of FTA that induce formation of homogenous FTAs.

FTA proliferation generates both altered material and reputational payoffs. Trade and

investment diversion from FTAs signed by Indonesia’s trade partners that cause reduction in

exports and foreign direct investments directly alter its material payoffs. These diversionary

effects would trigger Indonesia to form defensive FTAs to remove or minimize them. At the

same time, the prevalence of FTAs on the global trading system have solidified FTAs as the

norm for international trade policies rather than the exception which further increases the

pressure for countries to follow the trend of pursuing FTAs or risk reputational ramification. The

fluidity and volatility of global capital increase sensitivity of investors towards governments

policies. Hence, a reputational deterioration in the global economy as a less-open economy could

lead to material losses as well. Indonesia risks negative reputational consequences in maintaining

its reluctant stance towards FTAs as more of its peers and trade partners are signing more

bilateral and regional FTAs. Its hesitance towards FTA indicates that it is less open to

liberalization compared to its peers and trade partners with more ambitious FTA agenda. Though

exports may not be Indonesia’s main economic growth engine, reputation as a more restricted

economy will inevitably hurt its ability to attract international capital and business.

Solis and Katada’s (2004) FTA policy diffusion framework offers two important concepts to

determine probability of diffusion: competitive distance and psychological distance. Probability

of competitive diffusion is higher the closer the competitive distance is and similarly the

probability of emulative diffusion is higher the closer the psychological distance is.

Competitive distance indicates the extent of competition in economic, legal, as well as

competition for power or leadership. There is no direct measurement of legal and political

leadership competition which must be inferred from other events preceding the actual FTAs.

Economic competitive distance between Indonesia and its peers will be measured as the extent of

similarities in export composition and destinations which indicates competition for export market

share. The higher the economic competition between Indonesia and the peer that first adopt the

FTA, the greater the diversion effects will be and the higher the probability of diffusion.


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Solis and Katada (2004) define psychological distance as similarities in socio-cultural

references with respect to language, religion, and culture. In the context of FTA, psychological

distance should also measure similarities in economic development or income level. The policy

choice of a leading fast-growing economy at similar level of economic development will exert

greater influence than a leading fast-growing economy at a higher level of economic

development. The appropriateness of an economic policy for a developed economy is different

compared to a developing or least developed economies regardless of their cultural background.

The economic gains from trade and investment creation of its peers serve as key references of the

benefits of FTAs and it lends legitimacy to domestic constituent to intensify its FTA strategy.

For Indonesia, its ASEAN peers are both its closest peers and competitors. The ASEAN

members are its closest sociocultural peers by geography, association, and cultural reference.

The 5 largest economies in ASEAN which include Singapore, Malaysia, Philippines, Thailand,

and Vietnam are also its top trade partners after China, the US, India and Japan. These 5 ASEAN

peers are the closest countries in competitive distance whose FTA strategy would exert larger

diversion effects on Indonesia’s trade and investment. Among its ASEAN peers, Indonesia is

closer in psychological distance to other developing member countries which include the

Philippines, Laos, and Vietnam who have GDP per capita less than 4000 USD than to Singapore

who has a GDP per capita over 61000 USD and considered as a developed economy.

The acceleration of Vietnam’s economic liberalization and growth since late 2000s in

particular has put significant pressures for the Indonesian government. Vietnam’s rapid export

growth following its WTO accession in 2007 and rapid FTA expansion reinforces its recognition

as the rising star of ASEAN. It is catching up with the rest of its ASEAN peers rapidly with its

export volume surpassing Indonesia’s in 2015. The success of Vietnam in accelerating its

economic growth the last decade through exports provide a stronger point of reference for

Indonesia’s to follow its success. Indonesian public has started to ask question the government

status quo in the FTA race upon the success of Vietnam in completing FTA negotiations with the

Eurasian Economic Union (EEU) in 2015 that has also completed FTA negotiations with South

Korea, the EU, and as part of the TPP earlier (Anjaiah, 2015).

Figure 3. ASEAN countries Exports Comparison

Source: Calculated based on World Bank data

0

5E+10

1E+11

1.5E+11

2E+11

2.5E+11

3E+11

3.5E+11

Exports (BoP, current US$)

Indonesia Malaysia Thailand Vietnam


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Figure 4. Viet Nam FTA expansion

Source: ADB (Kim, 2013)

With the interconnectedness of the global economy, Indonesia cannot escape from the trade

diversionary effects from the FTAs of its peers and trade partners. Indonesia has witnessed its

exports to Turkey fell by 20% from 1.45 million USD in 2014 to 1.15 million USD in 2015

following the enforcement of Malaysia-Turkey FTA in 2015 (Aria, 2017). Indonesia has started

negotiating with Turkey for a comprehensive economic partnership agreement since 2018 to

regain and increase its market access (Ditjen PPI, 2019). Indonesian textile industry has also

experienced diversionary effects since Vietnam signed FTAs with the EU and the US, two of its

major export destinations for textiles (Sutanto, 2018). Indonesia has been negotiating with the

EU for a free trade agreement since July 2016. The increased pressure from the business

community to accelerate its international trade negotiations to prevent further loss of market

access since 2015 has led President Jokowi to form a new international trade negotiation team

(Ditjen PPI) under the Ministry of Trade in September 2017 (Setkab, 2017).

The emulative and competitive diffusion hypotheses explain the plausible mechanism driving

Indonesia FTA expansion; however, it still fails to explain why Indonesia did not immediately

react to the emulative and competitive forces and only intensified its FTA initiatives starting

2010 and in particular in the later part of the decade starting 2016. Why did the government wait

till late 2017 to finally create a new international trade negotiation team?

Altered payoffs and altered information sets alone cannot explain the intensification that

came almost a decade later than most of its peers. By these hypotheses, the diffusion would have

expected to come earlier in the FTA proliferation rather than later. There are factors that are still

unaccounted for in the FTA diffusion framework that may explain the timing of this shift. The

weakness of diffusion theories in the literature including the FTA diffusion framework is the

implicit assumption that states’ capacities are equal and comparable. Marsha & Sharman (2009)


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argue that this assumption can be traced from the development of the diffusion theories that were

based on the observation of policy diffusion among developed countries, where states’ capacities

to develop and implement policies are comparable. With this assumption, the policy diffusion

process from the more successful economies to the less successful ones, from developed to

developing countries are expected to be seamless. However, the delay in the diffusion of FTA

policies such as in the case of Indonesia that has been observed earlier demonstrates that there

are other factors outside altered payoffs and information set that are critical in determining the

probability of policy diffusion.

I postulate that the altered payoffs and altered information sets are necessary but not

sufficient conditions for policy diffusion. The state’s capacity to develop and implement the

policy is also a critical determinant for policy diffusion. In the case of FTA diffusion, the

adopting state’s financial and technical capacity to actually pursue, negotiate and implement

FTAs determines FTA policy diffusion. FTA negotiation process requires significant investment

in time and resources as it often takes years to complete. A cohesive FTA strategy also requires a

high degree of institutional capacities as it requires coordination of multi-level of governments

and ministries that are affected directly and indirectly by the FTA negotiation. It also requires a

high level of proficiency of technical and negotiation skills in trade negotiations within the WTO

sphere which are conducted mostly in English. These are capacities that require time to develop.

The state’s capacity to develop and implement policy can be borrowed. Developed countries

and economies often offer technical and financial assistance to developing and less developed

countries in capacity building. Similarly, the financial and technical capacities to pursue and

negotiate FTAs can be borrowed. Many developing countries and least developed countries have

utilized the trade capacity building program offered by major economies such as the USAID

trade facilitation program. The richer FTA counterpart or state-sponsored organization such as

USAID do not only help poor countries to finance the process but also to negotiate, draft the text,

and facilitate their WTO and FTA implementation. However, there is evidence of conflicting

interests where the goals of the donor countries to liberalize the economy may not be aligned

with the development goals of the receiving country to protect and develop domestic industries

(Fox, 2004). Borrowing capacity to negotiate an FTA can put the receiving countries at the

mercy of the party handing out the assistance. For Indonesia who has high sensitivity to

perceived threat to its sovereignty, having other countries to negotiate its FTA is not an option.

Safeguarding Indonesia’s sovereignty and national interests in international trade negotiation

process is explicitly stated in the mission statement of Indonesia’s international negotiation

directorate general, the Direktorat Jenderal Perundingan Perdagangan International also known

as Ditjen PPI includes (Ditjen PPI, 2016).

Therefore, I argue that Indonesia’s late entrance reflects the lack in capacity to pursue FTA

negotiation on its own prior to 2010. The delay in joining the FTA race is the time required to

convince its constituents and to build its capacity and experience to negotiate bilateral FTAs.

Indonesia’s financial and technical capacity to pursue bilateral FTAs has only begun to

materialize in 2010. It has intensified its bilateral FTA initiatives further since 2016 as it

continues to learn from its own negotiating experience through ASEAN FTA and its own

bilateral FTA negotiations. The formation of the new international trade negotiation team in late

2017 has allowed Indonesia to further reinforce its FTA initiatives expansion.


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The sensitivity of sectors conditions the effects of altered payoffs due to trade diversions

in driving a policy diffusion. Trade diversions experience by different sectors generate different

level of pressures for the governments depending on the sensitivity of the sectors. Loss due to

trade and investment diversions on different sectors, after taking account of their magnitude, are

perceived differently. Losses experienced by sensitive sectors such as agriculture or by sectors

with strong advocates such as the textile industries have higher political costs and hence a

stronger driver for an FTA initiative.

Lastly, I argue that FTA strategy of a country can receive the influence of both

competitive and emulative forces. Each FTA should be analyzed individually to understand the

factors triggering the initiative to determine whether it has been influenced by competitive or

emulative forces. I also argue that the success of its own previous FTA initiative could serve as a

key reference for the next FTA initiatives hence emulation from its own FTAs is possible. In the

case of Indonesia, it is highly likely the initial triggers were generated by competitive forces

from FTA diversionary effects. These initial FTAs would be heterogenous and selective as they

are designed to counter the diversionary effects of specific FTAs. The latter FTA initiatives since

2015 where it actively sends out FTA proposals to trade partners in different regions with little

export shares are likely to be driven by emulative force. Indonesia’s success to triple its export

volume to Pakistan through a limited goods-only FTA alters its information set on benefits of

FTA adoption that triggers emulative diffusion.

The null hypothesis of a diffusion framework is a non-diffusion. Therefore, the null

hypothesis is that Indonesia’s decision to intensify its FTA strategy is an independent response to

the changing global economy determined by domestic factors and it is not affected by the prior

adoption of FTAs of its peers and trade partners.

H0: Indonesia FTA intensification after 2010 is a response to the changing global

environment that are determined by domestic factors and not affected the FTAs of others.

H1: Indonesia FTA intensification after 2010 is driven by competition. The closer the

competitive distance and the larger the diversion effect are, the higher is the probability

of diffusion.

H1b: The more sensitive the sectors affected by trade and investment diversion as measured by

relative economic and political importance, the higher is the probability of diffusion.

H2: Indonesia FTA intensification after 2010 is driven by emulation. The closer the

psychological distance in cultural references and economic development is, the higher is

the probability of diffusion.

I further extend the FTA policy diffusion framework with the following:

H3: Indonesia FTA intensification after 2010 is initially triggered by competitive forces then

followed by emulative forces propagated by its own FTA success.

H4: The higher the adopting state’s technical and financial capacity to pursue and negotiate

FTAs, the higher is the probability of diffusion.


24 | P a g e

V. Analytical Framework

This research is composed of three distinct phases in which the result of the earlier phase will

be used in the next phase of analysis to test the hypotheses sequentially. Both quantitative and

qualitative research methods are employed to systematically assess the empirical evidence.

This first phase is a quantitative assessment to examine the evidence of the economic impacts

of FTAs on Indonesian economy using statistical analysis and gravity modelling. The gravity

analysis measures the trade creation and diversion effects of FTAs at the aggregate level through

goods exports as the most direct measurable impacts of FTA. The gravity model will also

interact the FTA variable with variables that represent competitive and psychological distance to

find evidence for the hypotheses suggested by Solis and Katada (H2 and H3). A time-trend

statistical analysis on sectoral data and foreign direct investment (FDI) inflows where available

will be added to refine the trade creation and diversion effects of FTAs at sectoral level. The first

phase of the analysis is essential in providing the evidence for the altered material payoffs in

form of trade diversions and the sectoral analysis will aid in identifying sensitive sectors to test

the competitive diffusion hypotheses (H1 and H1a).

The quantitative evidence from the first phase will support the process tracing analysis of

FTA policy diffusion in the second phase that examines the evidence of actual policy diffusion.

The second phase will examine the stakeholders involve in the FTA decision-making process

and how different economic and geopolitical factors influence them. It will investigate selected

FTA initiatives to determine the factors that put the initiative into place. It would check if trade

diversion and creation effects as observed from the first phase had motivated the FTA initiatives.

It would also investigate for geopolitical factors and evidence of altered reputational pressures

that has led into the initiative particularly in the absence of evidence for trade creation and trade

diversion effects. Analysis of secondary sources, government documents, news articles on

Indonesia’s FTA initiatives and negotiations will be part of the process-tracing. Key-informant

interviews will confirm the evidence found in this phase and complete any missing information

on the FTA policy-decision making process. Thus, the second phase will test hypothesis 1 for

evidence of competitive diffusion and hypothesis 2 for evidence of emulative diffusion.

The final phase employs both quantitative and qualitative to test the conditional diffusion

hypotheses (H3 and H4). First, the research will establish Indonesia’s negotiating capacity

through the years by analyzing the structure of the international trade negotiating teams and the

budgets allocated by the government. This research will involve examining various government

documents and reports from the Indonesian government to collect supporting evidence regarding

FTA negotiation capacity. It will be supplemented with information from the key-informant

interviews with government departments and major business stakeholders involved in

international trade negotiations. Second, the conditional diffusion hypotheses will be verified

using a qualitative structured case-study comparison of completed Indonesian FTA initiatives

launched after 2010 with signed FTA text published. The comparison of FTA text agreement

will verify if the format of the FTA signed concur with the type of forces driving their diffusion.

Thus, the third phase will test if the concluded FTA agreement only reflects the influence of

either emulative or competitive force (H3) and if the diffusion of FTAs involving Indonesia is

determined by its financial and institutional capacities to develop and negotiate FTAs (H4).


25 | P a g e

First Phase: Quantitative Evidence using Statistical Analysis & Gravity Modelling

The first phase of this dissertation analyses the quantitative empirical evidence to explain the

economic motivation behind Indonesia’s FTA strategy. The quantitative assessments are focused

on the trade creation and diversion effects of FTAs on exports as the most direct measurable

economic impacts of FTAs. Gravity trade analyses will measure the marginal impacts of FTAs

on exports at the aggregate level. The econometric modelling will be complemented with a

historical time-trend statistical analyses of exports at the sectoral level. The sectoral analysis is

important in measuring the trade creation and diversion effects and in determining the sensitivity

of the sectors. It also enables identification of domestic stakeholders that are most affected by the

FTA proliferation. Though investment diversions often happened together with trade diversions,

this analysis can be done as there is no segregated bilateral FDI data available at sectoral level.

Initial Findings

A gravity modelling on the impact of FTAs proliferation on Indonesian exports with all its

trade partners using panel data from 1995-2014 find strong evidence for trade creation from its

joint FTAs and trade diversion from the FTAs signed by its trading partners with third parties.

In the international trade literature, the gravity model of trade is widely used and recognized

as the work horse of the international trade analysis both in policy papers and academic

literatures (UNCTAD, 2012). The intuitive trade gravity model is derived from Newton’s law

whereby the size of trade is proportionately related to the size of the economies and is inversely

related to the distance between the two countries that represents trade costs (Tinbergen, 1962).

The intuitive trade gravity model describes trade relationship very well with a goodness-of-fit

measures (R-square) above 80%-90% which means almost all the data points in the observation

can be explained by the model. This exceptional empirical performance has drawn criticisms to

trade gravity model from being intuitively rather than theoretically derived.

Source: UNESCAP, ART-NeT-CDRI Capacity Building Workshop

However, many economists have defended the trade gravity model and shown how gravity

equation can be derived and explained using existing classical and modern trade theories from

monopolistic competition to traditional Ricardian model which include the works of Anderson

(1979), Bergstrand (1985; 1989), Deardorff (1998), Eaton and Kortum (2002), Helpman et. al.


26 | P a g e

(2008) and Chaney (2008). One of the strongest propositions of a theoretically derived gravity

model was written by Anderson and van Wincoop (2003) that specifies the multilateral

resistance terms that represent the barriers or costs that each of the country in the pair face in

both domestic and international trading (Yotov, et al., 2016). The theoretically consistent gravity

equation of N countries with variety of goods is specified as follows:

7

This dissertation estimates the trade creation and trade diversion of FTAs using an

augmented trade gravity model that regresses the FTA variables along the trade gravity variables

and structural variables as control variables. It also adds a Linder variable to account for the

Linder hypothesis that states countries of the same income level will trade more with each other.

The model is estimated with a combination of fixed effects estimators on fixed-effects variables

to account for the multilateral resistance terms (Anderson & van Wincoop, 2003; Magee, 2008).

ln 𝑋𝑖𝑗𝑡 =

∝ + 𝛽1 ln 𝐺𝐷𝑃𝑖𝑡 + 𝛽2 ln 𝐺𝐷𝑃𝑗

𝑡 + 𝛽3 ln 𝐷𝑖𝑠𝑡𝑎𝑛𝑐𝑒𝑖𝑗 + 𝛽4 ln 𝑇𝑟𝑎𝑑𝑒𝐶𝑜𝑠𝑡𝑠𝑗𝑡

+ 𝛽5 ln 𝐿𝑖𝑛𝑑𝑒𝑟𝑖𝑗𝑡 + 𝛽6JointFTA𝑖𝑗

𝑡 + 𝛽7PartnerFTA𝑗𝑡

+ 𝛽8𝑁𝑒𝑤JointFTA𝑖𝑗𝑡 + 𝛽9NewPartnerFTA𝑗

𝑡 + 𝜀𝑖𝑗𝑡

Table 5. Variable Definition and Data Source

Variable Description Source

𝑋𝑖𝑗𝑡 Market value of all products from Indonesia (i) to partner

country j in current US$ at year t

World Integrated

Trade Solutions

(WITS) – World

Bank 𝐺𝐷𝑃𝑖

𝑡 Gross Domestics Products of Indonesia at year t

𝐺𝐷𝑃𝑗𝑡 Gross Domestics Products of partner country j at year t

𝐷𝑖𝑠𝑡𝑎𝑛𝑐𝑒𝑖𝑗 Distance between Indonesia and its partner country j CEPII

𝐿𝑖𝑛𝑑𝑒𝑟𝑖𝑗𝑡 Absolute value difference between the GDP per capita of

Indonesia and its partner country j at year t

WITS – World

Bank

𝑇𝑟𝑎𝑑𝑒𝐶𝑜𝑠𝑡𝑠𝑖𝑗𝑡 The comprehensive international trade cost between

Indonesia and its partner country j at year t

UNESCAP

𝐽𝑜𝑖𝑛𝑡𝐹𝑇𝐴𝑖𝑗𝑡 The total number of FTAs jointly held by Indonesia and

its partner country j at year t

WTO Regional

Trade

Agreements

(RTA) &

WTO Preferential

Trading

Arrangement

(PTA) Database

𝑃𝑎𝑟𝑡𝑛𝑒𝑟𝐹𝑇𝐴𝑗𝑡 The total no of FTAs owned by its partner country j at

year t

𝑁𝑒𝑤𝐽𝑜𝑖𝑛𝑡𝐹𝑇𝐴𝑖𝑗𝑡 Dummy variable where 1 indicates a new FTA signed by

Indonesia and partner country j at year t

𝑁𝑒𝑤𝑃𝑎𝑟𝑡𝑛𝑒𝑟𝐹𝑇𝐴𝑗𝑡 Dummy variable where 1 indicates a new FTA signed by

its partner country j at year t excluding joint FTAs

7 Y denotes world GDP, Yi and Yj the GDP of countries i and j respectively, tij (one plus the tariff equivalent of

overall trade costs) is the cost in j of importing a good from i, σ > 1 is the elasticity of substitution and Πi and Pj

represent exporter and importer ease of market access or country i’s outward and country j’s inward multilateral

resistance terms.


27 | P a g e

The gravity model estimates the marginal effects of FTAs at the aggregate level. Ceteris

paribus, the marginal effect of trade creation from an additional FTA signed by Indonesia on its

aggregate export is 2.28% and trade diversion from an additional FTA signed by its trade partner

with third parties is -2.38%. The signing of a new joint FTA with its trade partner is statistically

significant at lagged 1 year and 4 years. A signing of new joint FTA with its trade partner will

increase Indonesian exports by 10.9% in the 1st year and 13.6% in the 4th year.

Quantitative modelling at aggregate level hides the real trade creation and diversion effects

of FTAs that are sector-specifics as the losses of one sector would be balanced by gains from

other sectors, vice-versa. A historical trend analysis of exports at the sectoral level is required to

identify the evidence of trade creation and diversion effects at sectoral level and identify the

overall losers and winners of FTA proliferation in Indonesian economy. Finally, evidence of

trade creation and trade diversion from specific FTA will be examined at country-sectoral level

using both historical trend analysis.

A gravity modelling at sectoral level will be conducted for its top 10 non-energy exports to

provide further evidence in identifying sensitive sectors. The higher the marginal impacts from

FTA on a sector, the higher is the expected sensitivity. The econometrics specification of the

sectoral gravity analysis will follow Urata and Okabe’s theoretically consistent model of trade

creation and diversion (2014) at product level:

where xijk is the import of country i from j for product k that depends on the expenditure Eik of i

on k and production Yjk of k by j, the world production Ywk of k, trade cost Tijk and price indexes

Pij, Pik of country i,j for product k.

Psychological distance and competitive distance variables will be added to the model as

interactive terms for the FTA variables. Psychological distance will be measured using variables

such as common language, common membership in a regional association, common religious

beliefs, partnerships through FTAs, economic development classification and income per capital

level. These data will be extracted from CEPII gravity dataset and World Bank for economic

indicators. The competitive distance variable will follow the specification of Elkins et. al. (2006)

that uses IMF Direction of Trade statistics to produce a correlation matrix that measures

similarities in aggregate export flows. A competitive distance of 1 indicate the country pair has

exactly the same proportion and destination of exports flow and -1 is the complete opposite.

Following are examples of the historical trend analyses for exports. Table 4 shows the

historical trend for Indonesian exports to the world and to different partners from 2001-2017.

There is evidence of trade creation for FTAs signed with China and Pakistan following the

enforcement of the FTAs in 2005 and 2013 respectively. However, its exports to Japan do not

seem to have benefits from the two FTAs, an ASEAN-led FTA and a regional FTA, it has signed

with Japan in 2008. It seems to have suffer greater trade loss than creation from its Japan FTAs.


28 | P a g e

Table 6. Country Aggregate - Export Historical Trend Analysis

Source: with export data from ITC trade map and FTA dates from WTO-RTA & Kemendag RI

A historical trend analysis against imports and overall trade balance against each partner will

provide a better sense whether the benefits from the trade creation exceeds the cost of

liberalizing the markets through its FTAs.

Table 5 presents a snapshot of historical trend analysis of Indonesian exports by product at

HS2 code level. This table provides an example how aggregate export volume at sectoral level

also hides individual FTAs creation and diversion effects. Cocoa, textiles and coffee are few of

the sectors that have experienced trade diversion from the FTAs of others. However, the

aggregate total exports of these products do not show a declining trend. The historical export

patterns of these sectors follow the aggregate pattern of Indonesia’s overall exports which reflect

the global market condition and overall competitiveness of its commodities.

Table 7. Product HS2 Aggregate - Export Historical Trend Analysis

Source: with export data from ITC trade map

Importers FTA Status Trend 2001-2017 Export Rank Export Share

2017

World 100%

China ASEAN FTA enforced 2005 1 14%

United States of America FTA Proposed 1997 - Dormant 2 11%

Japan Bilateral and ASEAN enforced 2008 3 11%

Pakistan

Bilateral PTA enforced 2013; Expansion of

PTA to FTA proposed 2018 15 1%

HS2 Code Product label Trend 2001-2017 Export Share 2017 Export

Rank 2017

'TOTAL All products 100%

'27

Mineral fuels, mineral oils and products of

their distillation; bituminous substances;

mineral ... 19% 1

'15

Animal or vegetable fats and oils and their

cleavage products; prepared edible fats;

animal ... 13% 2

'85

Electrical machinery and equipment and

parts thereof; sound recorders and

reproducers, television ... 6% 3

'40 Rubber and articles thereof 4% 4

'62

Articles of apparel and clothing

accessories, not knitted or crocheted 3% 9


29 | P a g e

A country-level historical trend analysis produces a clearer picture of the winners and losers

of a particular FTA. In table 6, the agriculture and food industry sectors are the winners while

glass and man-made textile materials exports seemed to have suffered significantly following the

Pakistan FTA enforcement in 2013. These examples emphasize the need of detailed analysis at

country and sectoral level to get an accurate picture of the trade creation and diversion effects.

Table 8. Country-Product Export Historical Trend Analysis

Source: with export data from ITC trade map

Second Phase: Qualitative Evidence using Process Tracing Analysis & Interviews

The second phase of the thesis involves tracing the domestic stakeholders and epistemic

policy community networks involved in Indonesia’s FTA policy decision making process, to

examine evidence of FTA diffusion from its ASEAN peers (whether by emulative or competitive

forces) and to analyze the FTA decision-making process. The main methods for the qualitative

analysis process are process-tracing analysis and key-informant interviews. The analysis will be

undertaken using a combination of data sources that include government documents, secondary

data on FTAs collected by different organizations, as well as social media postings of the

Indonesian International Trade Negotiation Directorate General (Ditjen PPI) and the Indonesian

Ministry of Trade to identify and evaluate the domestic stakeholders involved in the FTA

decision-making process. This analysis will be supplemented by key-informant interviews to

identify the policy process from the perspective of key officials, what factors they took into

account in their decision making, and the extent to which they paid attention to different

stakeholders.

Export Trend

2001-2017

'TOTAL All products

'15

Animal or vegetable fats and oils and their cleavage

products; prepared edible fats; animal ...

'08 Edible fruit and nuts; peel of citrus fruit or melons

'27

Mineral fuels, mineral oils and products of their

distillation; bituminous substances; mineral.

'29 Organic chemicals

'23

Residues and waste from the food industries; prepared

animal fodder

'54

Man-made filaments; strip and the like of man-made

textile materials

'70 Glass and glassware

Product

codeProduct label


30 | P a g e

Table 9.Qualitative Variable Definition and Data Source

Data Definition Source

FTA dates Proposal date, negotiation

launch date, signing &

enforcement date

Asian Development Bank (ADB) RTA

Database; WTO RTO Database; Indonesia

Ministry of Trade

FTA text Signed FTA Text Ministry of Trade database of Indonesia and

its partners

Domestic stakeholders &

epistemic community

networks analysis

Social media: Twitter &

Facebook communication

network analysis

Twitter & Facebook analysis using NVivo

Interviews Key-informant interviews

primary sources

Indonesia Ministry of Trade Bilateral Trade

Negotiation Directorate General (PPI)

Indonesia Business Association (KADIN)

The Indonesian International Trade Negotiation Directorate General (Ditjen Perundingan

Perdagangan Internasional (PPI)) under the Ministry of Trade (Kementerian Perdagangan

(Kemendag)) takes a central leadership role in the management of all Indonesia trade negotiation

at the WTO, bilateral, and multilateral level. It is also responsible for Investor State Dispute

Settlement (ISDS) negotiation and proceedings (Ditjen PPI, 2019). An informal interview with

the Indonesian Trade Attaché posted in the Indonesian Embassy in Ottawa informed that the PPI

leads the FTA initiatives and formulates the strategic direction of the overall international

negotiation with the President’s approval. PPI holds consultations with various ministries that are

responsible for the different sectors through out the negotiation process.

This phase of the analysis also identifies the domestic stakeholders involved in the FTA

policy decision making process through their social media interaction of PPI with others. The

NVivo social network analysis tool mapped the social media communication between social

media users and its intensity. Official press releases and media coverage of the negotiation

process will also be used to collect and triangulate the information on the epistemic policy

community networks that influence Indonesia’s FTA decision-making process. A sociogram of

Indonesian Bilateral Negotiation (PPI-bilateral) Twitter is included in Appendix A that maps the

various departments and organizations that the PPI has communicated with. This analysis will

provide further evidence to identify the forces that drive Indonesia’s FTA expansion (H1 & H2)

and the relative sensitivity of the sectors involved (H1a).

To determine the relative sensitivity of sectors and their influence on the FTA policy

decision-making process, joint studies, press releases and news media coverage of the FTA

initiatives negotiations will also be analyzed together with the findings of the trade diversion

quantitative evidence calculated in the first phase.

Key informant interviews will verify the findings from the quantitative and qualitative

analyses and complete the gaps found in the process tracing analysis. Key informant interviews

are planned to be conducted with Indonesian Ministries of Trade – FTA Bilateral Trade Division,

and officers from other ministries identified in the network analysis which may include other

divisions in the ministry of trade (Kemendag), industry (Kemenperin), investment (BKPM), and

also the national business associations (KADIN) to understand their roles and influence.


31 | P a g e

In the FTA diffusion process tracing analysis, each of Indonesia’s in-force non-ASEAN FTA

and FTA initiative is a unique observation. Currently, there are 22 enforced and active bilateral

FTA initiatives. The different dates in the FTA process such as proposal date, negotiation launch

date, and signing dates are tracked and compared with those of its ASEAN partners to establish

possible pattern of diffusion from its ASEAN peers as the closest sociocultural peers. However, a

detailed analysis of the various stakeholders involved will only be examined for the completed

FTA initiatives with FTA texts published that will also be used for the case-study in phase 3.

Third Phase: Conditional Diffusion Hypothesis Testing with Case Studies The third and final phase will first investigate Indonesia’s institutional structure and

capabilities in negotiating international trade agreements with particular attention not only to the

structure but also financial allocation by the government. Government documents such as annual

financial reporting and structural change announcements will form the main source of analysis

and it will be completed with key informant interviews with the Ministry of Trade officials.

Understanding how the Indonesian International Trade Negotiation Directorate General (Ditjen

PPI) grew over the years through the size of the negotiation division and the funding it has

received historically inform how Indonesia’s technical and financial capacity develop over time.

This analysis will provide the evidence to test the conditional diffusion hypothesis on state’s

institutional and financial capacity to pursue and negotiate FTAs (H5).

Ideally, a quantitative modelling of FTA determinants such as Baier and Bergstrand (2004)

economic determinants of free trade agreement model will estimate the strength of each variable

and their interactions in determining the probability of FTA diffusion. However, a quantitative

analysis is not possible at that point since this research is only based on a single country analysis

with less than 30 observation points.

Instead, this dissertation will use structured focus case-study comparison to analyse bilateral

FTA initiatives that have been completed and signed with published texts after 2010 in order to

test the correlation found in the quantitative modelling and to confirm the causal relationship in

the hypotheses. Solis and Katada (2004) examine the FTA policy diffusion framework

hypotheses and conclude that if Indonesia’s FTA expansion is driven by emulative diffusion, the

FTAs will have a standard format that mimic the format of its reference countries or peers. A

competitive diffusion will create heterogenous FTAs that act as countermeasure to eliminate

trade diversion effects and the selection of partners is based on the diversionary pressure.

Therefore, a content analysis of the signed published FTA texts is required to determine whether

the initiative is driven by emulative or a competitive diffusion force.

Currently, there are 3 published texts of bilateral FTAs that have been signed since 2010

which include the Indonesia-Pakistan Preferential Trade Agreement (IP-PTA) enforced as of

September 2013, the Indonesia-EFTA Comprehensive Economic Partnership Agreement (IE-

CEPA) signed in December 2018, and the Indonesia-Australia Comprehensive Economic

Partnership Agreement (IA-CEPA) signed recently on 4th March 2019 in Jakarta. The Indonesia-

Chile FTA negotiation was signed in December 2017 but the text has not been made available. If

there is no new FTA text made available in the next 8 months, the bilateral FTA text with Japan

signed in 2008 will be added as the 4th case.


32 | P a g e

VI. Research Plan

I will be completing the analytical work of these dissertation in the next 10 months before

proceeding with the interviews. Transcribing and incorporating the interview findings to

complete the dissertation are expected to be completed in the following 8 months. The result

from the first two phase will be disseminated and presented through conferences which include

graduate conferences and Canadian Economics Association conference. The preliminary testing

of the conditional diffusion hypotheses will also be completed prior to the field work and will be

verified and improved with new data from the key-information interviews.

The combination of my economic skills, policy-research experience, network with

Indonesian trade policy community and native proficiency in Bahasa Indonesia will contribute to

my success in completing the dissertation.

i

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i

Appendices

Appendix A. NVivo Sociogram

Sociogram of Indonesia Bilateral Trade Negotiation Division under the International Trade Negotiation

Directorate General, Ministry of Trade

Source: captured from NVivo Social Network Analysis

ii

Appendix B. Indonesian Trade & Tariff 1990-2015

Source: Calculated based on data from World Bank-WITS & WTO-RTA Database

Source: Author’s calculation based on data from World Bank-WITS & WTO-RTA Databases

iii

Appendix C. Indonesia Top 41 Export Destination

Importers FTA StatusExport Trend 2001-

2017 Export Rank

Export Share

2017

World 100%

China ASEAN FTA enforced 2005 1 14%

United States of America FTA Proposed 1997 - Dormant 2 11%

Japan Bilateral and ASEAN enforced 2008 3 11%

India ASEAN FTA enforced 2010 4 8%

Singapore ASEAN Free Trade Area enforced 1993 5 8%

Malaysia ASEAN Free Trade Area enforced 1993 6 5%

Korea, Republic of ASEAN FTA enforced 2010 7 5%

Philippines ASEAN Free Trade Area enforced 1993 8 4%

Thailand ASEAN Free Trade Area enforced 1993 9 4%

Taipei, Chinese On going ECA feasibility study 2011-2017 10 2%

Netherlands ASEAN - EU FTA proposed 2015 11 2%

Viet Nam ASEAN FTA - Accession 1995 12 2%

Germany ASEAN - EU FTA proposed 2015 13 2%

Australia

ASEAN FTA enforced 2010; Bilateral CEPA

signed Mar 2019 14 1%

Pakistan

Bilateral PTA enforced 2013; Expansion of

PTA to FTA proposed 2018 15 1%

Hong Kong, China

ASEAN FTA signed 2017, expected

enforcement 2019 16 1%

Spain ASEAN - EU FTA proposed 2015 17 1%

Italy ASEAN - EU FTA proposed 2015 18 1%

United Arab Emirates

regional FTA with Gulf Cooperation Council

proposed 2018 19 1%

Bangladesh bilateral PTA negotiation starts 2019 20 1%

iv

Importers FTA StatusExport Trend 2001-

2017 Export Rank

Export Share

2017

United Kingdom 21 1%

Saudi Arabia

regional FTA with Gulf Cooperation Council

proposed 2018 22 1%

Egypt bilateral FTA proposed 2019 23 1%

Switzerland Indonesia - EFTA CEPA signed 2018 24 1%

Belgium ASEAN - EU FTA proposed 2015 25 1%

Brazil 26 1%

Russian Federation 27 1%

Turkey bilateral FTA negotiation started 2018 28 1%

France ASEAN - EU FTA proposed 2015 29 1%

Mexico 30 1%

Myanmar ASEAN accession 1997 31 0%

Canada ASEAN FTA proposed 2018 32 0%

South Africa PTA proposed 2018 33 0%

Cambodia ASEAN accession 1999 34 0%

New Zealand ASEAN FTA enforced 2010 35 0%

Poland ASEAN - EU FTA proposed 2015 36 0%

Nigeria bilateral PTA proposed 2017 37 0%

Iran, Islamic Republic of bilateral PTA negotiation started 2010 38 0%

Ukraine bilateral FTA proposed 2016 39 0%

Sri Lanka bilateral FTA feasibility study 2018 40 0%

Kenya bilateral PTA proposed 2017 41 0%

v

Appendix D. Preliminary Econometrics Results

Gravity Trade Base Model with Different Estimation Methods (1) (2) (3) (4) (5) (6) (7)

VARIABLES OLS OLS Time FE OLS Country

FE OLS with FE Panel with FE Hoecle with

FE

Panel Corrected SE

with FE

LnGDPi 0.488*** 0.654*** 0.284*** 0.710*** 0.710*** 0.730*** 0.424***

(0.0477) (0.104) (0.0434) (0.0892) (0.157) (0.0392) (0.0341)

LnGDPj 0.767*** 0.762*** 0.768*** 0.539*** 0.539** 0.539*** 0.539***

(0.0282) (0.0277) (0.0800) (0.0875) (0.212) (0.0528) (0.0516)

LnDistij -0.614*** -0.587*** -0.644*** -0.275** -1.171*** -1.171***

(0.0587) (0.0574) (0.108) (0.136) (0.112) (0.0683)

lnLinder -0.101*** -0.102*** 0.0190 0.0165 0.0165 0.0165 0.0165

(0.0166) (0.0171) (0.0221) (0.0252) (0.0293) (0.0340) (0.0194)

lnCostij -2.115*** -2.144*** -0.896*** -0.796*** -0.796** -0.796*** -0.796***

(0.160) (0.158) (0.212) (0.188) (0.354) (0.267) (0.156)

PartnerFTAs -0.0305*** -0.0354*** -0.00510 -0.0236*** -0.0236** -0.0236*** -0.0236***

(0.00520) (0.00536) (0.00401) (0.00393) (0.00929) (0.00301) (0.00285)

JointFTAs -0.00449 -0.0146 0.0454*** 0.0226 0.0226 0.0226* 0.0226***

(0.0199) (0.0198) (0.0173) (0.0172) (0.0395) (0.0118) (0.00729)

Constant 4.065*** -0.536 2.679 -5.816** -9.081** 0 8.492***

(1.557) (3.005) (1.689) (2.539) (3.412) (0) (0.788)

Observations 642 642 642 642 642 642 642

R-squared 0.871 0.877 0.978 0.981 0.835 0.981 0.981

Time FE YES YES YES YES YES

Country FE YES YES YES YES YES

Number of CtyCode 37 37

Number of groups 37

Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

vi

Estimation Results with Time Lag and Interactive Terms (1) (2) (3) (4) (5) (6)

VARIABLES

Panel Corrected

SE

Signing Joint FTA

1yr lag

Signing Joint FTA

4yr lag

Signing FTA Joint FTA 1yr & 4yr

lag

Weighted Signing

Joint FTA 1yr lag

Weighted Signing

Joint FTA 4yr lag

LnGDPi 0.424*** 0.426*** 0.544*** 0.545*** 4.746** 0.778

(0.0341) (0.0321) (0.0430) (0.0405) (1.954) (1.996)

LnGDPj 0.539*** 0.521*** 0.414*** 0.415*** 0.512*** 0.405***

(0.0516) (0.0536) (0.0633) (0.0628) (0.0548) (0.0630)

LnDistij -1.171*** -1.225*** -0.228*** -0.225** -0.133 0.0114

(0.0683) (0.0581) (0.0873) (0.0889) (0.155) (0.162)

lnLinder 0.0165 0.0272 0.113*** 0.114*** 0.0252 0.116***

(0.0194) (0.0182) (0.0314) (0.0316) (0.0193) (0.0314)

lnCostij -0.796*** -0.662*** -0.465*** -0.462*** -0.683*** -0.461***

(0.156) (0.137) (0.121) (0.120) (0.145) (0.122)

PartnerFTAs -0.0236*** -0.0246*** -0.0218*** -0.0216*** -0.183*** -0.0832**

(0.00285) (0.00242) (0.00328) (0.00325) (0.0392) (0.0370)

JointFTAs 0.0226*** 0.0148** 0.0178** 0.0148* -0.204 -0.0814

(0.00729) (0.00669) (0.00841) (0.00783) (0.138) (0.0947)

PSNFTA 0.0991*** 0.0979*** 0.0981*** 0.266 0.470

(0.0251) (0.0251) (0.0249) (0.345) (0.301)

lagNJFTAS 0.109*** 0.0916*** 0.960**

(0.0287) (0.0331) (0.454) c.PartnerFTAs#c.LnGDPj 0.00565*** 0.00221*

(0.00138) (0.00131)

c.JointFTAs#c.LnGDPj 0.00883 0.00394

(0.00548) (0.00373)

1.PSNFTA#c.LnGDPj -0.00598 -0.0136

(0.0126) (0.0109)

1.lagNJFTAS#c.LnGDPj -0.0335*

(0.0183) lag4NJFTAS 0.136*** 0.0979** 1.664***

(0.0441) (0.0393) (0.308)

1.lag4NJFTAS#c.LnGDPj -0.0599***

(0.0125)

Constant 8.492*** 8.611*** -3.373*** -3.467*** -118.2** -9.111

(0.788) (0.795) (0.748) (0.733) (53.48) (54.87)

Observations 642 612 513 513 612 513

R-squaredt 0.981 0.982 0.985 0.985 0.983 0.985

Number of CtyCode 37 37 37 37 37 37

Country FE YES YES YES YES YES YES

Time FE YES YES YES YES YES YES

Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

i

Appendix E. Indonesia Active Trade Negotiations (Ministry of Trade)

Source: Kementerian Perdagangan Republik Indonesia (Ministry of Trade, Republic of Indonesia)

conditional policy diffusion: understanding the expansion ... · 2010. empirical evidence shows...

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