Asia Times, Hong Kong, Mar 22, 2006
How to beat US trade barriers
By Bill Guerin
JAKARTA - The illicit movement of shoes, shrimp and garments that have been repackaged, re-labeled and re-exported after being shipped to Indonesia has established the country as a new regional hub for such activities involving Asian goods - particularly from China - destined for US shores.
Historically Hong Kong’s domain, with the ease that Asian exporters can obtain fake certificates of origin and an apparent official willingness to look the other way, Indonesian laxity has encouraged a massive tide of such illegal transshipments to the US. Those growing illegal trade flows, also known as re-exporting, are undermining the protectionist quotas and levies Washington applies on certain Asian countries’ goods, particularly textiles.
The transshipment issue has cast a shadow over recently warmed US-Indonesian bilateral relations and threaten to damage the Southeast Asian country’s chances of a full free-trade agreement (FTA) with the US. At the same time, Indonesian transshipments underscore and highlight the wide-reaching distortions created by the Multi-Fiber Agreement, which for decades has undermined free trade in textiles, where politically protected US producers are at a clear competitive disadvantage against their lower-cost Asian rivals.
The re-export phenomenon is also testament to Indonesia’s growing pains from recent decentralization measures, which, with limited degrees of success, have devolved more authority for law and order, including governance over commercial affairs, to local-level administrators. The uneven and, in places, chaotic implementation of decentralization policies is starting to complicate commercial relations with some of Indonesia’s most important trading partners, particularly the United States.
Amid the growing transshipment allegations, Marie Elka Pangestu, Indonesia’s minister of trade, is set to fly to Washington this week for talks with her US counterparts on a wide range of bilateral trade and investment issues. "We will discuss the [transshipment] issue, as well as preventive measures, with the US government during my trip," Pangestu said.
According to Indonesian officials, Pangestu plans to suggest that the US help with document verification of textiles and shrimp from Indonesia, some of which allegedly come from China and Thailand. Both Asian countries have recently come under sanction for allegedly dumping shrimp below cost in US markets.
Too big to ignore
The United States is Indonesia’s second-biggest trading partner, last year purchasing goods worth US$9.46 billion, or nearly 15% of Indonesia’s total exports. However, Washington has recently threatened to stem those trade flows, based on accusations that Indonesian exporters are fronting for and distributing fake country-of-origin certificates to third-country companies.
This and several other thorny issues have hampered the bilateral Trade and Investment Facilitation Agreement (TIFA) signed between Indonesia and the US in October 1997. Predicated on recent improvements in bilateral counter-terrorism cooperation, Washington has recently hinted it would be open to forging a free-trade agreement with Jakarta along the lines of the deal it recently brokered with Singapore and is in the process of negotiating with Thailand. Jakarta has expressed keen interest in a bilateral trade deal.
The transshipment issue promises to complicate any future negotiations, however. US Customs - the US government’s second-biggest revenue-generating agency, which works hand-in-hand with various regional countries - has historically taken a hard line on transshipments that aim to circumvent quotas or avoid paying higher duties, most notably against Hong Kong-based textile companies in the 1990s.
Indonesia, which is still trying to regain its economic balance from the 1997-98 Asian financial crisis, obviously wants to avoid a similar fate. "We are serious about the issue and will impose legal sanctions against those who violate the regulation," said Pangestu, though she surprisingly claims to have seen no evidence so far of illegal transshipments.
Pangestu added that the government had already put a number of preventive measures in place, including the imposition last November of tighter central controls on the issuance of certificates of origin. The right to issue certificates of origin is now vested in only 14 local-government trade agencies; previously, all local-government trade agencies were permitted to issue the official documents.
"If the US bans the importation of particular products from these countries, it should set up a verification system to track the countries of origin. We want to know whether the United States will do this or not. I, for one, think they should," Pangestu said.
The buck doesn’t stop there, however. The US is peeved with Indonesia on several trade fronts, and American trade officials have made it clear to their Indonesian counterparts that these issues must be remedied before negotiations toward an FTA can commence.
The complaints range from weak enforcement of intellectual property rights, requirements that product labels must be in Bahasa Indonesia (Indonesian Malay), high import tariffs on several products, and special licensing and Islamic-law-oriented halal certification for the importation of food and alcoholic beverages.
At the same time, Indonesian exporters point out the severe restrictions they face in accessing the US market and have urged the government to negotiate a better deal for their products. In addition, Indonesia’s textile producers contend they are getting a raw deal on raw-material imports from the US. Indonesia, the largest global importer of US cotton, has several times asked for, and failed to receive, special treatment from Washington.
Indonesian textile products have received differential treatment, even though the raw cotton used in production was largely imported from the US. Indonesian manufacturers also question the higher import duties imposed on Indonesian garment products simply because the goods contain synthetic fiber. Pangestu said Indonesia hopes market-opening provisions included in the 1997 TIFA would eventually help to reduce US trade barriers - so far to no avail. And if the transshipment issue escalates, legitimate Indonesian textile producers will definitely see their terms of trade worsen.
Cut of the cloth
The United States consumes about 30% of total global textile exports, making it an essential market for Indonesia’s exporters. The US has severely limited Chinese garment exports since last year, erecting protectionist trade barriers through the so-called "textile-specific safeguard" measures, which are valid through 2008 and aim to protect domestic producers from a surge in low-cost competition. Since then, however, exports of textile products from Indonesia to the US have increased significantly. In the first 11 months of 2005 they rose 17.4% to $2.9 billion, raising US suspicions of transshipment.
"There is an immediate need to curb illegal transshipment and respond to dumping allegations to avoid exports of the commodities from being banned entirely," said Yose Rizal Damuri, an economist with the Jakarta-based Center for Strategic and International Studies. "Chinese manufacturers choose Indonesia because it is easier to obtain an illegal certificate of origin here."
Textiles and garments from China are allegedly often shipped to Indonesia via Singapore or Hong Kong to be re-exported using fictitious certificates or origin. These counterfeit certificates go for about $3,000-$4,000 each, according to industry sources.
Similarly, about 90% of the shrimp on the US market is imported. Despite punitive tariffs, shrimp imports through the first 11 months of 2005 were on pace to exceed 2004’s record total of $1.14 billion, according to trade journals. The US is far and away the biggest market for Indonesian shrimp, of which 70% is exported overseas, earning about $1.2 billion per year.
A shrimp-market report from globefish.org noted that the US government had threatened last year to reject shrimp exports from Indonesia or impose punitive 112% import duties because it suspected that the shrimp really originated from China. An Indonesian delegation to Washington has recently been assured that the reports were false, however.
Nonetheless, Marine Resources and Fisheries Minister Freddy Numberi recently preemptively banned seven Indonesian companies from exporting shrimp to the US on evidence that the product originated from China and Taiwan - two places from which the US has completely banned shrimp imports. "The European Union and the US complained about Indonesia’s shrimp exports to those countries as the shrimp actually originated in China and was re-exported by Indonesia without further processing but only changing the packages," he said.
In 2003, in the run-up to an election year, the US Department of Commerce imposed anti-dumping import duties on farm-raised shrimp from China, Thailand, Vietnam, India, Brazil and Ecuador, the six largest shrimp exporters to the US market. The move was widely seen as politically motivated to protect shrimp farmers on the south coast of the US who still harvest their catch from ocean waters rather than the more efficient land-based farms seen in Asia. The US also in effect raised tariffs on Southeast Asian tuna in 2002, on similarly fishy anti-dumping charges.
In Indonesia, although the domestic stock of shrimp was insufficient to meet US demand, the sanctions against neighboring countries were akin to manna from heaven for opportunistic exporters who, with complete Indonesian export documentation, including certificates of origin and health, bought up piles of shrimp from China, India or Thailand to re-export to the United States.
In 2004, the top recipient country for shrimp exports from China’s Guangdong province was surprisingly Indonesia. US Customs officials soon thereafter sent a team to Indonesia to audit the records of several companies. Up to eight of these were suspected of transshipping Chinese shrimp, and at the end of 2004 Jakarta banned all shrimp imports in a bid to prevent such illicit re-exports.
Johanes Kitono, chairman of the Association of Fishery Companies (Gappindo), had said that the fake certificates of origin had damaged the reputation of the Indonesian shrimp industry. But in reality the ease with which the fake documentation was obtained provided incentive for Asian exporters from other industries to get in on the transshipment action.
Global competitive forces have badly undermined Indonesia’s once thriving, now diminishing, shoe industry. Dozens of local footwear producers had gone bankrupt or closed down under the previous administration after losing out to the competition from China and Vietnam. Many others, it appears, have been offered huge fees to agree to re-label consignments with "made in Indonesia" tags and then re-export the goods to Western markets.
China produces 8 billion pairs of shoes a year, and the southern industrial powerhouse province of Guangdong accounts for about half of that stock. After the recent imposition of quotas by the US and Europe on Chinese-made shoes, producers are looking increasingly to Indonesia as a back-door gateway to lucrative markets.
Although Pangestu has said certificates of origin for footwear products were not required by importers, Edi Wijanarko, head of the East Java branch of the Indonesian Footwear Producers Association (Aprisindo), confirmed that transshipment deals were being made and warned the government to ensure that the provincial offices of the Industry Ministry and Trade Ministry did not issue Indonesian certificates of origin for products made in China.
One Aprisindo member, Welly Karlan, owner of PT Golden Footwear Indonesia, recently told Industry Minister Fahmi Idris that he had been approached with one such deal. He told the minister the Chinese producer was ready to pay him a fee of $500 per container as long as he could obtain certificates of origin from the Indonesian authorities. "If I could obtain the certificates, they were ready to transship 1,000 containers per month, which means that I could pocket $500,000 per month," he said.
Fahmi promised to take whatever action was necessary, including preventing the local offices of the relevant ministries from illegally issuing certificates of origin, saying, "We don’t want to see what’s happening to the textile industry to also happen to the footwear industry." As Washington wakes up to Indonesia’s thriving illicit-transshipment phenomenon, it appears that sentiment might be wishful thinking.
Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000, has been in Indonesia for 20 years, mostly in journalism and editorial positions. He has been published by the BBC on East Timor and specializes in business/economic and political analysis related to Indonesia. He can be reached at firstname.lastname@example.org.