Fairness not the meat in Joko Widodo deal

More than anything, President Joko Widodo's brief recent visit to Australia showcased a warm, personal rapport between him and Malcolm Turnbull, and the Prime Minister is to be commended for his efforts to forge the connection, wrote Matthew Busch in the Australian on 3 March.

  • Matthew Busch

More than anything, President Joko Widodo's brief recent visit to Australia showcased a warm, personal rapport between him and Malcolm Turnbull, and the Prime Minister is to be commended for his efforts to forge the connection, wrote Matthew Busch in the Australian on 3 March.

  • Matthew Busch

More than anything, President Joko Widodo's brief recent visit to Australia showcased a warm, personal rapport between him and Malcolm Turnbull, and the Prime Minister is to be commended for his efforts to forge the connection.

Their talks ranged over perennial issues such as security but also focused on trade and investment, including confirming their intention to deliver the Indonesia-Australia Comprehensive Economic Partnership Agreement by the end of the year.

The centrepiece was the uncommon sight of Indonesian and Australian heads of government, side by side, talking trade deliverables, with targeted deals to improve the treatment of Australian exports of sugar and cattle and, in return, imports of Indonesian pesticides.

Despite the theatre, however, these adjustments are unlikely to deliver meaningful change in respect of market access for Australian exports. Examining why reveals some inconvenient truths about the Indonesian economy and underscores the challenge in delivering what Turnbull insists will be a 'high-quality' IA-CEPA.

Under the deal, Indonesia will reduce import tariffs on Australian sugar from 8 per cent to 5 per cent in parity with Indonesia's ASEAN trading partners, mainly Thailand. After Thai import tariffs were cut to 5 per cent in 2015, Australia's raw annual sugar exports to Indonesia fell from one million tonnes to 200,000 tonnes.

Australian sugar went elsewhere, of course, but finding a new home for almost a quarter of its exports cost $US30 million, according to the industry group Canegrowers.

A tariff cut is far from a game changer, even if it puts Australian sugar back on a competitive footing.

Indonesia's sugar industry is heavily state-controlled, with annual import quotas and market segmentation into two categories: a household retail market serviced by domestic plantations; and an industrial food and beverage market serviced by domestic refiners of raw sugar imports.

High-price floors protect the plantation sector and promote self-sufficiency, but in reality they also create windfall profits for insiders that can dump refined sugar, produced from raw sugar imported at competitive prices, into this protected domestic market.

Imports are controlled by the Ministry of Trade and dominated by state-owned companies, which also own the lion's share of the country's physical plant of colonial-era domestic sugarcane mills.

The State Logistics Agency (Bulog) maintains large sugar stockpiles, notionally intended to smooth prices.

Prices nevertheless almost always surge around holiday periods such as the fasting month of Ramadan, meaning large profits for distributors with access to such stocks.

Late last year the Speaker of the upper legislative house was arrested for accepting a bribe from a West Sumatran sugar distributor soliciting the speaker's help to lobby Bulog.

As for cattle, the move from quarterly to annual permits and to slightly relaxed age and weight limits are far from market access breakthroughs.

Previously, these requirements have regularly changed to limit market access, and they will certainly change again. Other policy controls, like the recent mandate that all live imports include a fixed ratio of breeder cattle to meet self-sufficiency goals, are simply the latest tactic for limiting imports without using quotas.

Moreover, as sectoral players know, Indonesia's acceptance of Indian beef imports is an existential threat for Australian beef, which cannot compete on price.

The Indonesian market is simply not developed enough for Australia's reputation for quality and prestige to carry weight with most consumers. And, as shown with the recent arrest of a Constitutional Court judge for accepting a bribe from an importer of Australian beef who sought a decision to keep out Indian imports, Indonesia's beef business is far from clean.

Australia wins when it is on good terms with Indonesia, and for this our leaders should be commended. But, we should be realistic about the depth of the challenge that remains to unlock the Indonesian economy which, as these examples show, is rife with state control and market manipulation.

These deals do not address deep-seated market access issues and illustrate the broad importance of a robust IA-CEPA to get at 'behind the border' issues and create a level playing field for our trade and investment.

Last weekend's theatre fell short of this, instead giving us two businessmen turned politicians co-operating to sell some red meat for their domestic, and at times tetchy, political constituencies.

Thus, it is perhaps not a coincidence for the Prime Minister to deliver for Australian canegrowers amid reports the government's handling of a dispute involving Queensland sugar growers may spill over into his partyroom.

As for the President, it probably does not hurt that his Agriculture Minister, a major financial backer of Joko's 2014 presidential victory, is himself a leading pesticides and sugar businessman.

Ultimately, he can rest easy knowing these concessions do little to alter the market access paradigm facing Australian exports.

The Lowy Institute acknowledges the support of the Victorian Government Department of Premier and Cabinet for Matthew's position.