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Indonesian Trade With China Rises, Despite Fears of Tough Competition

Hu Jintao, president of China

When Chinese President Hu Jintao visits Indonesia this month (May 17th) the free trade agreement between China and its neighbors in Southeast Asia will be a major topic of discussion. Some labor groups in Indonesia want the government to cancel the agreement. They say the Indonesian manufacturing sector cannot compete with China's vast output. However, exports from Indonesia to China are on the rise and not just raw materials.

At a rally in front of the Indonesian Ministry of Labor, members of the Workers Union voice their opposition to the free trade agreement between China and the Association of Southeast Asian Nations.

Baso Rukmana, the head of the union, says the agreement, which went into effect at the beginning of the year, has already cost many textile workers their jobs.

He says many of textile factories are closing down because their products cannot compete in the local market.

While the minimum wage in Indonesia, approximately $100 a month, is comparable to wages in China, Rukmana says Indonesian workers lack the training, modern equipment and government support needed to compete with China. And he says until workers get the support they need, their industries should be protected.

He says the government is obligated to give protection to its people and that protection should be supported by law.

Before it went into effect some economists predicted the trade agreement would increase sales of Indonesian commodities such as palm oil, copper, and rubber, but would hurt low-end manufacturers.

However, Indonesia's shoe industry contradicts that forecast. Footwear sales rose by about 10 percent in the first quarter of this year, with exports growing in several markets, including China.

Binsar Marpaung, head of the Indonesian Footwear Association, says they are seeing some factories being relocated from China and Vietnam to Indonesia, and increased sales of shoes to China. "The people in China, their income is higher, growing. So they can afford to purchase it, because it can be produced here more efficiently or maybe more I should say more economically," he stated.

Overall, in the first three months of this year, Indonesian exports to China more than doubled, while imports from China rose by about 50 percent. While government figures show that most of the rise in exports was in raw materials, sales of manufactured goods also rose.

Marpaung says China's wages are rising, while Indonesia's are more stable, making its manufacturing sector more attractive. And he says the government is helping local industries purchase modern equipment to make them more competitive. "We can't say subsidies but we call it machinery restructuring, because as you know the machinery for the shoe is already 20 years old. It is not too competitive, it is not too efficient anymore," he explained.

China still benefits, by selling modern equipment to Indonesian manufacturers. Ping Jian Sheng, director of the Chinese-owned Yi Fan Trading Company, says he is helping a number of Indonesian leather manufacturers modernize.

He says there is a good future in selling equipment here because the leather manufacturers are improving.

Marpaung says the government could do more to help Indonesian industries, such as requiring that the military and government agencies purchase from domestic sources. But he says too much government help will hinder productivity. "I should say that is rather contradictory. If you put a lot of subsidy that means the production is not competitive or not cost efficient. You have to be competitive. You must increase your competitiveness by being more efficient, either machinery or worker," he said.

He says only by engaging China can Indonesia's economy make the changes necessary to compete in the global economy.