Indonesia to Apply 200% Tariffs on Imported Chinese Textiles as Domestic Business Crashes
Lead StoryBusiness
Indonesia’s economy is justifiably regarded as one of the true economic miracles, not just in Southeast Asia where its projected $1.48 trillion annual GDP for 2024 towers over all other countries. It is also the 16th largest economy in the world.
Its annual revenues are almost triple that of Thailand, the second largest business power in Southeast Asia, which pulls in $548.9 billion. Singapore’s GDP, while a strong success on a per capita basis, is smaller still, with a GDP of $525.2 billion. Coming in fourth and fifth place in the region are the Philippines, at $471.5 billion, and Vietnam, at $465.8 billion.
Indonesia achieved this success through a radical reinvention of its business which began over thirty years ago. In the 1990s, while an economic crash which spread throughout Asia and was particularly hard on Southeast Asia, Indonesia’s government restructured its industrial focus, modernized its manufacturing, and streamlined international business opportunities and exports. It did so via the ASEAN alliance and linkages to multiple multilateral banks around the world to provide capital for expansion loans, which it has paid back diligently.
It also continues to stimulate its economy from the central government with increasing lending of its own. In 2020 it pumped a staggering U.S. $1.66 billion into continuing business expansion, a figure which doubled three years later to $3.25 billion.
Through all these measures, the Indonesian economy continues to surge. Its unemployment rate also dropped by more than a factor of four from what it had been in the 1990s to its present value of just 4.82% for the first fiscal quarter of 2024.
Flipping the numbers around, that strong employment rate, combined with the nation having the fourth largest population in the world – at 279.8 million – puts a sizable amount of discretionary income in its citizens’ pockets. According to the World Bank, Indonesia currently ranks as the 10th most powerful country in terms of purchasing power.
It is that economic strength and ability to buy is part of what has caused China, Indonesia’s biggest business competitor, to target it as a place to sell a wide range of products. With Beijing also under pressure from Washington, where the United States applied Section 301 tariffs of 25% and upwards on $250 billion annually of Chinese textile and footwear, and the European Union following suit with its own restricted tariffs, the largest manufacturer in Asia found itself stuck with an excess of goods of these kinds that it began dumping in other nearby countries.
It is a pattern which the National University of Singapore’s East Asia Institute said is changing fundamentally the way China is picking its international business expansion locations. Bert Hoffman, a professor there, cited internal reports they have which show China now exports less than 40% of its goods to the G7 group of nations and the European Union. In contrast, countries such as Indonesia which are part of China’s Belt and Road Initiative have risen to constitute more than 50% of those Chinese exports.
That dumping which arrived with that 50% export market penetration has hit hard on Indonesia’s own previously thriving textile industry, which employs 3.9 million workers domestically. Those 3.9 million people account for 20% of the country’s entire manufacturing workforce.
Since 2018, the year the U.S. applied its first punitive tariffs on imported textiles, China sought to redirect those types of products to other countries. After landing on Indonesia as a potential alternate market, and with China’s central government willing to bankroll its textile and clothing producers to sell products at below effective total costs, the impact has been serious on what Indonesia considers a critical source of global revenues and employment for its people.
According to data provided by the Nusantara Trade Union Confederation, known domestically as Kawasan Strategis Pariwisata Nasional (National Strategic Tourism Areas) or KSPN for short, since China began its textile dumping in 2019 some 36 Indonesian textile factories have been forced to close because they could not produce products at low enough costs to compete. Another 31 other textile companies were forced to lay off large numbers of workers, including 50,000 just since the start of 2024.
One of the hardest hit of those companies was PT Sri Rejeki Isman Tbk, known more commonly by Sritex, its international brand name. It is the third biggest textile company in Indonesia, with a market cap of US $194 million as of January 1, 2024. Headquartered in Central Java, it employs 16,000 people total internationally – most of which are in Indonesia itself -- throughout its wide range of textile services, which include spinning, weaving, production of unfinished fabric, and full garment manufacture. After China began extensive imports of cheap clothing and raw fabrics to Indonesia five years ago, Scitex’s revenues have slumped badly. They dropped from $524.6 million in 2022 to $325 million in 2023. That works out to a 38% loss in sales in just one year.
The company has done its best to cut manufacturing costs through efficiency improvements, and to raise margins by identifying more customers for its finished textile products such as clothing, but that has not proved enough of a change to keep it going. It began laying off people once the trend of Chinese competition became clear and the possibility that it too might be forced to shutter its doors became apparent. Those numbers are climbing fast, with Sritex having let go of 3,000 workers between January and May of this year. That amounts to 23% of its domestic workforce.
Sritex’s Financial Director, Wendy Salaam, summarized the situation her company is facing in a formal statement filed with the Indonesian bourse in late June.
“There is an oversupply of textiles in China, which causes price dumping, where these products are targeted mainly to countries outside Europe and China that have loose import regulations, such as no anti-dumping import duties, no barrier tariffs or non-barrier tariffs, and one of them is Indonesia,” she wrote.
As for how badly Sritex has been hurt by China’s dumping of goods in Indonesia, Salaam said in her financial statement that the company was not bankrupt, despite multiple public reports suggesting that. But she did acknowledge that the only way it was able to operate the way it is now was thanks to “internal cash and sponsor support”.
It is because of the growing economic damage that President Joko Widodo is about to unleash some of the harshest punitive tariffs placed yet from any country on Chinese goods that country is dumping on others at subsidized lower costs.
It will be levied at 200%. The number was also selected not based on any detailed financial analysis of what Chinese textile makers’ real costs are and comparing the resultant end export prices to what they might be without subsidies, unlike the approach the European Commission used when it decided to add import duties of up to 38.1% on imports of Chinese-made electric vehicles just a few weeks ago. The proposed Indonesian surcharge is intended to be punitive. It is also large enough to cover whatever subsidized discount China is already applying on textile exports headed to Indonesia.
The announcement that Widodo was considering the tariffs came in a press briefing held by Trade Minister Zulkifli Hasan on June 28. The topic then was not just China’s dumping of textile products in Indonesia at below cost. It also covered China’s equivalent treatment of other important product categories in the Southeast Asian nation, such as ceramic, electronics, and footwear.
“The United States can impose a 200 per cent tariff on imported ceramics or clothes,” the trade minister said. “We can do it as well to ensure our [Micro, small and medium businesses, also known as MSMEs] and industries will survive and thrive.”
President Widodo is holding emergency meetings this with his economic ministers and advisors to determine what tariffs to apply to which specific goods imported from China, so they may be imposed as quickly as possible to protect the country’s core manufacturing businesses. In attendance besides Trade Minister Zukifli areMinister of Finance Sri Mulyani Indrawati, Industry Minister Agus Gumiwang Kartasasmita, and Budi Santoso, the Director-General of Foreign Trade within the trade ministry.
The meetings are being held under the auspices of the country’s Trade Safeguards Committee.
While the trade assault China is waging on Indonesia using subsidies is a problem which punitive tariffs could ease, Widodo also needs to tread somewhat lightly in how broadly they are applied. That is because Indonesia is a rarity among countries which do business with the People’s Republic of China, and which also has a substantial trade surplus with the PRC.
It is one of 53 countries out of the 224 nations Beijing does business with which has this distinction. It also achieved that result, with a $2.057 billion net surplus in 2023, after having suffered massive trade deficits with China of $2.4 billion in 2021 and $1.8 billion in 2022. If the tariffs Indonesia will soon impose on imported Chinese goods are either too big or cover too many products, they could backfire by China pulling back on purchases of what are important but largely commodity goods it buys from Indonesia.
A decision about the tariffs is expected to be announced this week, after the ministerial meetings are concluded.