Economic diplomacy in time of Covid

Content image - Phnom Penh Post
A joint venture Chinese and Japanese electronics firm in northwest China’s Ningxia Hui Autonomous region. Japan has allocated $2.2 billion in stimulus funds to help its companies relocate their production base from China to Southeast Asia. AFP

It has been eight months since the Covid-19 pandemic hit the world hard. With the high prevalence and mortality rates, the disease has turned into more than a health crisis. The pandemic has even penetrated deep into relations between countries, affecting both political and economic aspects.

To meet domestic needs, many countries have acted selfishly, such as banning exports of medical equipment and supplies. There are concerns this trend will hurt the principles of free trade. Some experts predict that because of the pandemic, the world will be trapped in the backflow of globalisation – the rise of protectionist attitude in international trade. This act of betrayal to free trade has disrupted world trade flows.

The pandemic has triggered an economic downturn in various countries. The repercussions of the economic doldrums moving from one country to another is exacerbated when the production of goods is increasingly connected in one global supply chain. China, the world’s second-largest economy and a major player in global supply chains, is also experiencing slow growth.

But the economic slowdown and disrupted world trade cannot be blamed solely on the pandemic. In fact, the prolonged trade tension between the US and China was the first to send shockwaves to the global economy.

The impact of the US-China trade war, which began 2018, was immediately felt. According to the US Census Bureau, US imports from China were down by 16 per cent in 2019 compared to the previous year. It was the biggest decline in the last 35 years. At the same time, total US imports from around the world fell only by two per cent. There has been a shift in the source of supply to the US.

It is interesting that Vietnam and Taiwan benefited the most from the shift. Their exports to the US jumped by 36 per cent and 19 per cent, respectively, last year. Thailand and India also enjoyed a spike in exports to the US, albeit not significantly, at five per cent and 6.3 per cent each.

How about Indonesia? The country’s exports to the US during the trade war fell by three per cent.

The pandemic has made the US and other countries aware that dependence on intermediate industrial goods from China is very risky for their economic resilience. Peter Navarro, economic adviser to the US president, suggested that the US move its production base linked to global supply chains in order to reduce dependence on other countries (Richard Fontain, Foreign Policy, April 17). It is in this context that the US has relocated its industry from China.

So have Japan and Germany. Japan has allocated $2.2 billion in stimulus funds to help its companies relocate their production base from China to Southeast Asia.

German news channel DW also reported a quarter of German companies in China also planned to relocate the intermediary product industry to other countries.

It is believed that the relocation of the industrial base from China by these three countries will change the structure of the global supply chain, which has been so far dominated by China. The Nomura research institute revealed that before the pandemic, between April 2018 and August 2019, at least 56 foreign companies had relocated their factories from China. Of that number, 26 moved to Vietnam, 11 to Taiwan, eight to Thailand, three to India and two to Indonesia.

Clearly Indonesia, unlike its ASEAN neighbours, has yet to tap the opportunities up for grabs during the trade war pitting the world’s two largest economies and the pandemic. It is at this point that Indonesian economic diplomacy should rise to the challenge.

Indonesian Foreign Minister Retno LP Marsudi has instructed the entire Indonesian mission overeseas to launch blusukan diplomacy, or a direct approach to business players and investors to explore the possibility to relocate their investment to Indonesia. The Indonesian embassy in Berlin, for example, has approached the German Chamber of Commerce and Industry regarding the relocation plans of more than 100 German companies from China to the Southeast Asian region.

In an effort to attract foreign investment, economic diplomacy abroad is one thing, and the investment climate is another. But the two must go hand in hand.

More vigorous economic diplomacy will mean nothing without improvement in the ease of doing business at home. Government policies indeed follow this direction, yet many more have to be done.

The 2020 World Bank data shows that Indonesia ranks sixth among the 10-member ASEAN in terms of ease of doing business. When it comes to the competitiveness index and corruption perception index, Indonesia ranks fourth.

The three indicators will surely impact investor confidence. Learning from Thailand and Vietnam, Indonesia needs to combine efforts to improve investment attractiveness with policies toward trade liberalisation, infrastructure development, agrarian reform, labour law and tax convenience (The Economic Times, October 7, 2019).

Daunting challenges lie ahead for Indonesia to convert the distress resulting from the pandemic into opportunities and the looming recession into a steady recovery.

As the old saying goes, where there is a will there is a way. The resolve should be translated in economic diplomacy overseas that moves in sync with reforms to remove barriers to investment at home.

Darmansjah Djumala is an Indonesian diplomat assigned to Austria and the UN in Vienna and lecturer for the doctoral programme of international relations, School of Social and Political Sciences, Padjadjaran University, Bandung, Indonesia