Category Archives: Indonesia

Up In Smoke

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Indonesians call them kretek.

Ubiquitous in South East Asia, clove cigarettes sparked a conflagration between Indonesia and the United States in 2009. The U.S. Congress passed the Family Smoking Prevention Tobacco Control Act of 2009 which, I admit, escaped my attention at the time. As often happens, it seems well-intentioned legislation. The Act prohibits production or sale in the United States of cigarettes that contain additives such as cloves, cinnamon or fruit flavorings that might attract children and adolescents to try smoking. Menthol-flavored brands, however, are a big money-maker for tobacco companies and highly popular with American adults. A special dispensation was put into the act to grandfather menthol cigarettes, prompting some wags to call it the Marlboro Monopoly Act of 2009. That would come back to haunt us.

Indonesia, the world’s largest producer of clove cigarettes, quickly raised the issue with the kindly trade policy folks in Washington – who told the Indonesians they couldn’t turn this one around. Jakarta took its complaint to the World Trade Organization in April 2010, while continuing to talk to Washington. It was clear that consultations between the two capitols wasn’t going to clear the air (or restore Indonesia’s $15 million in annual sales in the United States), so the WTO’s Dispute Settlement Body established a panel of experts to look at the case in July 2010. At that point, Brazil, the European Union, Guatemala, Norway, Turkey and later Colombia, the Dominican Republic and Mexico reserved their third-party rights. That’s WTO legalese for reserving their right to retaliate against the United States should things get that far. All these countries produce and sell flavored cigarettes. But this was still early days.

It took until September 2010 for everybody to agree on who the experts would be who made up the panel of experts. The panel got down to work and spent a full year talking to all sides and getting all the legal arguments out in the open. The panel issued its findings in September 2011. To oversimplify, Indonesia argued that – as the major supplier of clove-flavored cigarettes to the United States – the U.S. act discriminated against Indonesia by banning clove cigarettes while expressly permitting a “like product” that is produced by U.S. companies, menthol-flavored cigarettes. There was a lot more to it than that, but Jakarta argued that both menthol and clove flavorings appeal to young people, so either both should be banned or neither should be banned. Indonesia also argued that banning flavored cigarettes is not likely to stop young people from trying cigarettes anyway. The panel of experts rejected this argument, but accepted that the United States is inappropriately discriminating between menthol and other flavors.

The United States and Indonesia agreed that the panel’s report should not be formally adopted until January 2012, giving them extra time to try to work things out without a trade war. When January rolled around, however, things were no closer to solution and the United States asked the WTO’s Appellate Body to overturn the panel findings. The Appellate Body ruled April 4 that the panel’s basic finding that the United States is discriminating against Indonesian products should stand. The Appellate Body gave Washington some legal victories, but the fact of discrimination remains. Now Washington needs to do something about it or Indonesia and the others will eventually be authorized to retaliate in some way, probably by banning an equal value of U.S. exports. But we are not there yet.

For now, the Obama Administration is continuing to say that the ban on non-menthol flavored cigarettes is a public safety measure, pure and simple. But they have to say that, don’t they? U.S. consumer watchdog groups are beginning to rally to the cause, though it is hard to see how they can argue that the act is necessary to public health while also defending Philip Morris’ production and sale of menthol cigarettes. Something called the Citizens’ Commission to Protect the Truth (where do they come up with these names?) has noticed this inconsistency and argues that the United States should resolve the issue by banning all flavored cigarettes. That should take care of it. Light ‘em while you still can.

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In an unrelated WTO case, Honduras has filed a dispute against Australia on tobacco products. Still at the consultations stage, the case concerns Australia’s requirements for plain packaging and restrictions on trademarks.

Weird Science

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It’s our reaction to science that is weird. Modern societies seem to distrust science and prefer to rely on gut feelings, especially if the science disagrees with pre-conceived notions. And especially if the science conflicts with the trade protection that governments wish to provide favored industries.

Typical WTO meeting

The WTO’s Committee on Sanitary & Phytosanitary Measures (SPS) met last week in Geneva – with some disturbing results. The WTO press release I have linked to has to be non-prejudicial, but it is clear that there are a lot of countries that are putting on trade restrictions, using the excuse they are necessary for health and safety, but which have little or no scientific justification. An unusual joint complaint about non-science-based trade barriers came from Argentina, Australia, Brazil, Canada, Chile, Colombia, Costa Rica, New Zealand, Paraguay, Philippines and the United States – and it picked up additional support from Mexico, South Africa and the European Union.

“The increase in the number of SPS measures that are not based on international standards, guidelines and recommendations or that have inadequate scientific justification is a point of concern readily raised … These measures often unduly restrict trade and appear to be associated with objectives that are not deemed as legitimate under international trade rules.”

- joint paper submitted by Argentina, Australia, Brazil, Canada, Chile, Colombia, Costa Rica, New Zealand, Paraguay, Philippines and the United States

Let’s get into some of the specific complaints:

Indonesian port closures. The United States, backed by the EU, Australia, Chile, Canada, New Zealand and South Africa, questioned Jakarta’s plan to close four major ports to imported shipments of fruit and vegetables. The United States and New Zealand say this will close off 90% of Indonesia’s fruit and vegetable imports. Jakarta says it has to close the four main ports because it has insufficient laboratory facilities at those ports to look for “threats found in imported products”. The threats are not specified, no increase in health problems has been noted, nor has construction of new lab facilities been announced.

China’s food additive tests. India asked questions about China’s new testing methods to discover the ingredients of food additives. India says the new tests do not conform to any known international standard. The Chinese delegation said they’ll get back to us.

EU standards for aluminum in pasta. I knew that spaghetti wasn’t al dente. China complained that the European Union has set its standards too high for aluminum content in flour products, including noodles. Aluminum can apparently be naturally present in flour, so Brussels has set a content limit of 10mg/kg. Chinese noodles apparently have 50mg/kg, so Beijing says that the EU is discriminating against China. If your penne tastes metallic …

Taiwan’s ban on ractopamine. The United States, Canada and Brazil say that Taipei’s embargo on pork and beef containing ractopamine ignores findings by the Food & Agriculture Organization and the World Health Organization that the growth agent is safe for humans. That said, a proposed international standard for ractopamine content is still being debated in the FAO and the WHO.

EU regulation on novel foods. Brussels has for years had restrictions on importing so-called “novel foods”. These are foods that may have been consumed elsewhere for centuries, but that are new to Europe. Peru, backed by Cuba, Colombia, Brazil, Chile, Argentina and Paraguay, is leading the charge to loosen European limits on their food exports.

Chinese standard for methanol in alcoholic beverages. Beijing is considering a new maximum limit on methanol alcohol in distilled spirits not made from grain. Mexico, worried that the limit may be used to embargo Chinese imports of tequila, is raising questions about the scientific basis of the Chinese proposal.

U.S. and EU standards on pesticide in rice. India raised issues with numerous European limits on pesticide residues and with a specific U.S. limit on the amount of the pesticide tricyclazole that can remain in Basmati rice. The Indians argued that the residues in both big markets are not based on scientific findings.

Argentina’s restriction on book imports. Argentina, seemingly insanely, is stopping imports of books if they haven’t been tested for the lead content of their ink. Seems they are worried about people who lick their fingers while reading. This isn’t a formal WTO case yet, but a new restriction spotted by one of our readers, a fellow trade blogger. Check out Tread The Middle Path.

These are just the latest cases. The WTO says that 331 complaints have been brought to the SPS Committee since it was founded in 1995. The peak was in 2002 when there were 43 cases, so we are some better off today. There were only 16 new cases in 2011. Many of the 331 complaints have been resolved and most never hit the headlines, but – just from the newer complaints above – you can see that these can be contentious.

The language of the WTO, the GATT before it, and the WTO’s SPS Agreement all say that members have the right to protect the health and safety of their citizens. But they also say that this is not an excuse to install trade barriers without scientific basis. A fine line to walk.

Doing Business In Indonesia

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Indonesia: It's not all like this anymore.

Did you realize that the Jakarta metropolitan area is the world’s 4th largest, sporting more than 22 million people? Or that Indonesia is the world’s 18th largest economy? Indonesia’s economy has also stayed rather robust during the last few years of economic weakness, and some 60 million people are positioned to enter the ranks of the middle class in the next decade. Yet the country is only the #32 destination for U.S. exports, signaling that there may be room for improvement.

These were some of the points made at a Honolulu workshop last week, part of a series about doing business with the APEC economies staged by the Hawaii Pacific Export Council, the U.S. Commercial Service and a host of local and state agencies. A special sponsor was the newly formed Hawaii Indonesia Chamber of Commerce (HICHAM). The primary speaker was Michael Hogge, the U.S. Department of Commerce’s desk officer for Indonesia, Singapore and Brunei. Michael is temporarily in Honolulu to help get ready for next month’s APEC summit. Amin Leiman, president of HICHAM, and David Day, HICHAM’s chairman, also chimed in.

There is plenty of opportunity for U.S. sales in Indonesia. American educational services are seen as the top priority by the American Embassy in Jakarta, whether for providing training in Indonesia or attracting Indonesian students to U.S. schools and colleges. Indonesians seem especially interested in U.S. MBA programs, finance, engineering and hard sciences. (The University of Hawaii at Manoa – and dozens more – participated in a Dept. of Commerce education mission to Indonesia earlier this year.)

Indonesia already hosts about 160 U.S. franchises and seems hungry for more. There is a swiftly developing retail sector in which foreign retailers have only 8% of the outlets, but earn 40% of the retail sales. Non-Indonesian retailers can be found as huge hypermarkets, mini markets or even specialty stores.

Indonesia boasts 40% of the world’s geothermal resources (not too surprising considering the vast number of volcanos), but very little of it has been exploited. The renewable energy market as a whole is growing 22% annually and U.S. suppliers have only 3% of the market.

American cosmetics are selling well. The prime items here are skin care products, hair care and spa or massage products. Both Hogge and Leiman cautioned, though, that the cosmetics market is very, very brand conscious. If you don’t have a brand in America, you don’t have one in Indonesia.

Like everywhere else, virtually anything having to do with information technology sells well in Indonesia. Hogge, however, mentioned a burgeoning official interest in fostering telemedicine software to better supply medical advice and diagnostics on Indonesia’s many thousands of remote islands.

OK, that’s the hype. What’s the downside? Hogge cautioned against signing up a rep in Indonesia too quickly. Make sure and do your due diligence carefully, because Indonesia is one of those markets where it can be a long, tough, painful slog to end a business relationship.

And then there is corruption. Politicians in Jakarta talk a good game about fighting corruption, but a presumption of honesty is slow in coming. Indonesia stood an embarrassing #110 on Transparency International’s 2010 Corruption Perceptions Index. Be careful out there and use the Foreign Corrupt Practices Act as a shield. Compounding the corruption problem is a generally ineffective legal system, weak enforcement of intellectual property rights, and an often complex regulatory environment that breeds the conditions that invite corrupt practices. In fact, Indonesia ranks only #121 on the the 2011 World Bank’s Ease of Doing Business Index. Small wonders payments get made under the table.

In sum, not an easy place to do business, but a great market if you develop it carefully. And many of the corruption problems disappear if you simply sell to an Indonesian importer and let them cope with the internal market.

When I asked what Indonesians think of Hawaii, Leiman responded that they love Hawaiian music, especially the ukelele and that Hawaii 5-o is a fantastic brand in Indonesia. He did say, however, that most Indonesians aren’t quite sure that Hawaii is part of the United States.