Trade dispute between Indonesia and Singapore

Trade dispute between Indonesia and Singapore

Sam Choon Yin (2003)

 

The relationship between Indonesia and Singapore turned sour when the former accused the latter for being non-transparent with trade data between the two countries. Singapore expressed shocked with the accusation. Singapore argued that she had been releasing trade figures to Indonesia for the last 29 years. Back in 1974, a decision was made by the government leaders of both countries not to release the data publicly possibly because of the huge differences in the trade figures. Singapore claimed though that it welcomed the decision to release the data if Indonesia was comfortable in doing so.[i]

 

The whole commotion began when Indonesian’s Industry and Trade Minister Rini Soewandi held a press conference to announce that Singapore had not been transparent with the trade data and alleged that the discrepancies might have been attributed to smuggling (see Table 1 for a listing of the events posted in chronological order). The matter was so serious that Indonesia had threatened to move its shipping business to Malaysia, bringing the matter to world governing bodies and possible engaging in trade war with Singapore. In response, Singapore’s Trade and Industry Minister BG Yeo made public the exchanges he had with Minister Rini to set the record straight pointing out that trade data had been given to Indonesia and it was really up to Indonesia whether Indonesia wanted to publicly release the data or otherwise. BG Yeo expressed surprise that such accusations were made from his counterpart in Indonesia.

 

What could have possibly explained why the issue erupted in the first place? In an interesting commentary made in The Straits Times, journalist Derwin Pereira noted that the reason was political in nature. He argued that Miss Rini was using Singapore as a whipping boy to ‘stock nationalist sentiments so that she can score points ahead of next year’s election’. I am not sure how true this is. The part on using Singapore as a whipping boy was perhaps more convincing. I say this because discrepancies in the trade figures did not happen only between Indonesia and Singapore. Indonesia faced the same problem with other countries (see Table 2). In some cases (like those with Germany and China) the discrepancies were even more serious that the one with Singapore. Why did Miss Rini choose to highlight the trade discrepancy with Singapore and not other countries? Was Singapore really being treated as a whipping boy? Perhaps.

 

On the election issue, one should be mindful that the election is still quite far away. Memories to this event may not linger for very long to help her score points with electorates. In fact, she must have recognized that the strategy might backfire if her accusations turned out to be incorrect. What I suspected was that the issue really mattered greatly to her. It was a genuine concern and she wanted to solve the country’s smuggling problem. Smuggling was indeed a serious in Indonesia with severe repercussions if it remains unsolved. After all, smuggling and failure to capture trade data properly reflected badly on the government in general and the Trade Ministry in particular. The problem retards the Ministry’s ability to show improvements in the country’s trade with her trading partners in a convincing manner.

 

It may be useful to note at this juncture that discrepancies in trade figures are supposed to be common. As BG Yeo noted ‘discrepancies in the trade statistics of two countries should not surprise statisticians. It depends on the basis of compilation and other factors. For example, Singapore statistics are based on the General Trade System while Indonesia’s import statistics are based on the Special Trade System. Singapore includes certain breakdowns of trade statistics such as data on re-exports and bunker exports while Indonesia does not. Therefore, Singapore’s export figures will not be equal to Indonesia’s import figures and vice versa’ (The Straits Times, 6 July 2003). Dr Soedarti Surbakti, the head of Indonesia’s Central Board of Statistics, confirmed this when she noted that discrepancies in the trade figures were due to different measuring methods. For instance, Indonesia did not measure goods coming into economic zones such as Batam, but exports from these areas are listed (Streats, 11 August 2003). This point might well be relevant when it comes to trade dispute with Singapore since Batam and Bintan have intense trading activities with Singapore. Recently (since 8 August 2003), its ferry terminal, Batu Ampar, was refurbished and converted to a port serving trading activities between Batam and its trading partners particularly Singapore.

 

There are several other implications of intense smuggling. First, smuggling may imply easier transportation of unwanted goods and services to Indonesia. Recent bombings in Jakarta and Bali signalled Indonesia’s vulnerability to attacks. They are real dangers of arms and weapons being smuggled into Indonesia, and obviously, this is something the Indonesian authority does not want. Tackling the smuggling problem has strong implications in telling the world that Indonesia is serious about eradicating terrorist threats in the country. Second, trafficking of human beings may rise if steps to eradicate smuggling were not forthcoming. It certainly does not reflect very well about the country if, for example, prostitutes can be easily smuggled in. The same applies if other ‘unwanted’ things like drugs were successfully smuggled into the country.

 

Third, smuggling is unhealthy to the country if the smuggled items are taxable in the first place. This would create loss of tariff revenue to the government. It would in turn affect the country’s expenditure programs. Quality and quantity of public service may be affected negatively. Fourth, smuggling increases the magnitude of the country’s underground economy (UGE). The UGE is that part of the economic activities that fail to be recorded when they are supposed to be. The implication of strong UGE is that policies recommended based on the reported gross domestic product would not be effective. The reported GDP did not reflect the economic status of the country’s economy correctly.

 

It may be useful at this point to see why smuggling is a serious problem in Indonesia. First, there are opportunities for smuggling in Indonesia. Long coastline there and the country’s close proximity to main entrepot centers such as Singapore and Hong Kong promote smuggling activities in taking place. Second, the probability of detecting smugglers is relatively low because of the presence of many small ports scattered all over the country. This essentially lowered the expected cost of taking part in smuggling.

 

Third, lax enforcement and corrupt trade officials to check traded goods created additional opportunities for traders to smuggle their goods through the Indonesian custom ports. Fourth, traders were motivated to smuggler their goods because of high tariffs imposed on many imported goods into Indonesia.

 

The above causes essentially tell us the existence of low expected net costs of engaging in smuggling activities. Any rational persons would be tempted to take the risks (perceived to be low) and reap abnormal returns from such activities. Any measures to tackle the problem must alter the net benefit equation of smuggling at least as perceived by existing and potential smugglers. It will be a huge task, but not impossible, to introduce measures to tackle the problem. The Indonesian government might as well begin the initiatives early.

 

Smuggling had been a serious problem in Indonesia even in the past. For example, absence of a strong government in the 1960s, to provide regional governments adequate resources to provide the basic functions, had motivated rubber and copra growers to smuggle their goods to Singapore and Malaysia. This was noted in Mackie (1999).

 

Some empirical works were carried out to measure the size of smuggling activities in Indonesia.[ii]An early attempt was carried out by Simkin (1974). Two approaches were adopted. In the first approach, Simkin (1974) estimated Indonesia’s unrecorded exports (imports) by deducting its recorded exports (imports) from the corresponding imports (exports) of partner countries after correcting for freights, insurance and other transport costs. In the period 1958-62, Simkin found that majority of the unrecorded exports and imports for Indonesia were derived from Singapore (approximately 63 per cent) and Malaysia (18 per cent).[iii] In the second approach, Simkin compared the volume of recorded exports of individual commodities with estimates of ‘normal’ export volume defined as the difference between estimated production and consumption, and then to value the discrepancy at world prices. Among other observations, it was found that more than 100,000 tones of rubber and copra were unrecorded per year in the period 1963-66. It is clear from the study that the magnitude of smuggling in Indonesia had been very extensive, resulting in substantial loss of tax revenue to the government.[iv]

 

In another study, Cooper (1974) analyzed the relationship between the local wholesale price for 70 commodities and estimates of the c.i.f. prices augmented by tariff and other taxes for Indonesia. Cooper (1974) noted that the higher the tariff rates and other applicable taxes, the greater the level of smuggling activities. More interestingly, Cooper (1974) observed that the degree of risk aversion depended on the perceived penalties of being caught and businessman understanding of the law that they need to abide. The results were in support of the supply-side policies in the sense that lower rates of tariffs and taxes were favored over higher rates to maximize tax collection.

 

Looking at the recent trade figures between Indonesia and Singapore reveals that the Indonesian side possibly initiated the problems. In an article published in Asia Times, Bill Guerin noted that trade data for 2002 compiled by Singapore put non-oil exports to Indonesia at USD5.25 billion as compared to the USD2.44 billion as reported by Indonesia’s Central Statistics Agency. According to Singapore, non-oil imports from Indonesia to Singapore were USD7.41 billion in 2002 as compared to USD4.6 billion as mentioned by the Central Statistics Agency (Asia Times, 27 June 2003). This gave the total discrepancies in trade figures between the two countries at USD5.6 billion in 2002. From the figures, one can imagine how much import tariffs Indonesia would loose for failing to account for the imported goods from Singapore.

 

The above figures formed the impression that exports from Singapore to Indonesia were largely recorded by the Singapore side. This was not so from the Indonesian counterpart. The possibility of Indonesians under-recording goods that entered Indonesia from Singapore was high. Likewise, the figures showed that Singapore might have largely recorded those goods that came to Singapore from Indonesia relative to the records made by Indonesians on goods leaving Indonesia for Singapore. The fact that these discrepancies were large despite that imports to Batam from Singapore were not recorded by Indonesians while exports from Batam to Singapore were recorded implied that the discrepancies would have been more serious if such crude attempt of measurement was not made by the Indonesians (besides trading activities, Batam is also a prominent tourist attraction to Singaporeans).

 

I would like to follow up with the point about Miss Rini’s genuine concern about the situation in Indonesia. It is important to understand the position Miss Rini is in. Obviously, as the Trade Minister, the matter reflects badly on her reputation if she is not able to resolve this problem or at least initiate some positive measures to rectify the situation. Growing UGE in the country is unhealthy. Moreover, the government’s revenue collection is at stake here. Despite some areas of vagueness in her arguments (as reported in the Singapore media), I must applaud her enthusiasm in tackling the issue. She took the initiative in suggesting various measures to eradicate smuggling.  Many suggestions for improvements came from her Ministry as revealed during the ‘trade dispute’ episode with Singapore. Among other thing, she suggested for joint border patrolling with Singapore along the coast to catch smugglers, an arrangement which Indonesia was already having with Malaysia. On this, BG Yeo of Singapore rejected the proposition claiming that Singapore was not in a position to do the Customs work of another country. Miss Rini also suggested setting up an electronic data exchange system so that falsified documents can be identified immediately. This was seen as a possible way to combat smuggling (The Straits Times, 10 July 2003).  Singapore again was not keen to assist Indonesia, claiming that Singapore laws did not allow release of trade information without the consent from the affected parties. Singapore asked the Trade Ministry in Indonesia to access any trade data that were available online (meaning publicly available information).

 

Clearly, what Indonesia needs is more detailed or micro data. Broad data at the industry level would not help. Singapore was not helpful in this manner. It may be worth noting that those trade data, which Singapore claimed had been handed over to Indonesia for the last 29 years, were broad data. The list sent over from the Singapore Embassy in Jakarta to Indonesian Ministry of Foreign Affairs listed only the names of general commodities. Miss Rini was quoted in saying that; ‘We (Indonesians) sincerely request that this list be adjustment accordingly, to follow international standard, converting the classification into the HS/SITC system’ (Asia Times, 27 June 2003). These changes were called for so as to assist Indonesians to properly identify those commodities which may have escaped government’s scrutiny. I only hope that Singapore would comply with her requests.

 

References

 

1.               Cooper, R.N. (1974) ‘Tariffs and Smuggling in Indonesia’, in Bhagwati, J. N. (editor), Illegal Transactions in International Trade: Theory and Measurement, North Holland: Amsterdam, pp. 183-192.

2.               Mackie, J. (1999) ‘The Philippines: Still an Exceptional Case?’, in Morley, J.W. (editor) Driven by Growth: Political Change in the Asia-Pacific Region, Institute of Southeast Asian Studies, Singapore.

3.               Peebles, Gavin and Wilson, Peter (1996) The Singapore Economy. Edward Elgar (Cheltenham and Brookfield).

4.               Peebles, Gavin and Wilson, Peter (2002) Economic Growth and Development: Past and Future. Edward Elgar (Cheltenham and Brookfield).

5.               Ritcher, H.V. (1974) ‘Problems of Assessing Unrecorded Trade’, in Bhagwati, J.N., Illegal Transactions in International Trade, North Holland, Amsterdam.

6.               Sam, C.Y. (2001) Size, Causes and Consequences of the Underground Economy in Selected Countries with Particular Reference to Singapore (unpublished).

7.               Simkin, C.G.F. (1974) ‘Indonesia’s Unrecorded Trade’, in Bhagwati, J.N., Illegal Transactions in International Trade, North Holland, Amsterdam.

 

Table 1

Trade data spat: How it all began

 

Date

Events

June 2, 2003

Indonesia’s Industry and Trade Minister Rini Soewandi meets Singapore’s Trade and Industry Minister George Yeo in Thailand and tells him Indonesia wants to publish the trade data that Singapore gives it. BG Yeo welcomes this.

June 10, 2003

Miss Rini informs BG Yeo that she will call him the following day. But her call never comes. Instead, she holds a press conference calling on Singapore to ‘announce transparently’ its trade data and alleging that smuggling is behind the discrepancies in the trade figures. Indonesia’s Foreign Minister Hassan Wirajuda charges that Singapore has ignored its calls for the figures since 1973.

June 11, 2003

Miss Rini warns that Indonesia might move its shipping business to Port Klang in Malaysia and elsewhere if Singapore does not comply with her requests. She threatens to take her complaints to world bodies to pressure Singapore. Miss Rini and Mr Hassan imply that there could be a ‘trade war’ with Singapore over the issue.

June 12, 2003

The Indonesia media runs stories suggesting that the gaps in trade data could be due to smuggling and corruption on the Indonesia side. Singapore Foreign Ministry responds to Indonesia’s Antara news agency to set the record straight that it has given trade data to Indonesian leaders since the 1970s. Singapore has no problem with them publishing the data if they wish.

June 16, 2003

Miss Rini sends BG Yeo letter calling for more detailed trade figures to be published and for joint patrols to fight smuggling. BG Yeo was away in Egypt for a World Trade Organization (WTO) meeting which Miss Rini also attends. He does not receive her letter until June 18. Instead, he hears about it from a minister of an unnamed third country who’s given a copy by Miss Rini.

June 25, 2003

Miss Rini is quoted as saying that she had complained to the WTO about Singapore’s ‘non-transparency’. But no complaint has been lodged.

June 26, 2003

Miss Rini tells the Japanese media, while on a trip to Tokyo, about her unhappiness with Singapore over the trade statistics and adds that she sent a protest note to BG Yeo.

July 4, 2003

BG Yeo writes to express his ‘surprise’ that she has been calling for the trade data to the published when this has been given to Indonesian leaders every year for the last 29 years and they are free to release it if they want.

July 5, 2003

BG Yeo’s letter is made public to set the record straight.

Source: The Straits Times, 6 July 2003

 

Table 2

Indonesia trade data: the gap

 

 

Exports of Indonesia 2002 (in USD million)

 

Country

Indonesian sources

Source from Importing Country

Percentage difference

Absolute difference

Germany

1,269.9

2,118.1

67

848.2

China

2,902.9

4,500.9

55

1,598.0

Singapore

5,349.1

7,839.2

47

2,490.1

US

7,558.6

10,385.4

37

2,826.8

Hong Kong

1,242.3

1,620.3

30

378.0

Malaysia

2,029.9

2,549.5

26

519.6

Taiwan

2,067.5

2,595.0

26

527.5

France (2001 data)

662.7

800.3

21

137.6

Australia

1,924.4

2,322.1

21

397.7

Japan

12,045.1

14,218.8

18

2,173.7

Korea

4,107.2

4,708.0

15

600.8

 

Source: The Straits Times, 6 July 2003 (all trade data were obtained from official government sources)



[i] It seems that Singapore was reluctant to release the trade data with Indonesia. It sticks to the agreement then signed with Indonesia. Interestingly, the Indonesians had been releasing its trade data with Singapore for many years. Gavin Peebles and Peter Wilson, economics professor from the National University of Singapore, used the data from Indonesia sources in the studies (Peebles and Wilson, 1996, 2002). In their more recent book, the authors noted: ‘The reason usually given for the absence of Indonesian data from the Singapore statistics is that the accounting systems used by the two countries are different, but what the problems are and why Indonesia should be singled out for special exclusion are not explained and this is all the more puzzling since Indonesia does publish its own trade data with respect to Singapore. The omission is serious because Indonesia is a key regional trading partner and member of ASEAN. Singapore’s reluctance to publish trade data with Indonesia may also have something to do with political sensitivity over flows of capital from Chinese residents in Indonesia using Singapore as a safe haven from regional uncertainties’ (Peebles and Wilson, 2002, p. 163).

[ii] This part of the discussion draws heavily from Sam (2001). 

[iii] Simkin (1974) however believed that the estimates differed greatly from the actual amount of unrecorded trade.  This could be partly due to statistical errors (e.g. the differences in f.o.b. and c.i.f. values, differences in recording destinations of exports and errors of compilation). More importantly, the assumption that all trading partners fully and correctly recorded their trades with Indonesia might have underestimated the true magnitude of the unrecorded trade figures.

[iv] While Simkin (1974) had provided us with some ideas on the intensity of the unreported trade in Indonesia, one should be cautious about their accuracy. Richter (1974) for instance had questioned the validity of the results in view of the poor quality of official data, especially in relation to dealings with smallholder sector ‘from which the bulk of supplies for smuggling come’ (Richter, 1974, p. 173).