The effects of Indonesia’s technical barriers to trade on manufacturing exports: an empirical analysis using the pseudo-Poisson maximum likelihood method

• DOI: https://doi.org/10.1108/JITLP-08-2021-0045
• Published date: 11 March 2022
• Date: 11 March 2022
• Pages: 160-181
• Subject Matter: Strategy,International business,International business law,Economics,International economics,International trade
• Author: Christina Ruth Elisabeth,Kiki Verico

The ef‌fects of Indonesia’s

technical barriers to trade on

manufacturing exports: an

empirical analysis using the

pseudo-Poisson maximum

likelihood method

Christina Ruth Elisabeth

Faculty of Economics and Business, University of Indonesia, Depok, Indonesia, and

Kiki Verico

Faculty of Economics and Business, Institute for Economic and

Social Research (LPEM), University of Indonesia, Depok, Indonesia

Abstract

Purpose –The purpose of this study is to investigatethe effects of Indonesia’s technical barriers to trade

(TBT) on manufacturingexports.

Design/methodology/approach –This study uses the UNCTAD database to calculate the coverage

ratio and frequency index of TBTs, which represent the restrictivenessof TBTs on imports. The effects of

TBTs are estimated using the gravitymodel (Tinbergen, 1962) and the pseudo-Poisson maximum likelihood

methodology(Santos Silva and Tenreyro, 2006, 2011).

Findings –An estimation on the manufacturing sector shows that TBT reduces Indonesia’s

manufacturing exports. However, the effect of TBT is different in disaggregated manufacturing sector.

TBT is found to reduce exports of chemicals and transportation but increase exports of metal and

textiles. This f‌inding supports the empirical evidence that TBT can create trade-impeding and demand-

enhancing effects on trade f‌lows. The negative effect of TBT on chemical and transportation exports

implies that the cost of compliance is higher than the increasing demand rate. This f‌inding suggests the

need for policy evaluation and improvements for restrictive TBT. As Indonesia is still highly dependent

on imported inputs, restrictive TBT can potentially reduce the productivity of the Indonesian

manufacturing sector.

Originality/value –This study aims to investigate the effectsof TBT in Indonesia, as a manufacturing-

based economy thatrelies heavily on imported intermediate inputs. Furthermore,this study contributes to the

literature by using country-specif‌ictechniques and aggregated and disaggregated manufacturingsectors as

subjectsfor study. Meanwhile,previous studies use multi-country and multi-productapproaches and focus on

the aggregatesector. This study estimates the effects of TBT on the disaggregated sector, given its high share

of imported inputs and relianceon export-oriented industries. TBT is constructed in a more detailed product

level (HS-4 digitlevel) to provide more accurate results.

Keywords Indonesia, Technical barriers to trade, Manufacturing, Exports, PPML

Paper type Research paper

JEL classif‌ication –F13, F14

JITLP

21,2

160

Received24 August 2021

Revised2 February 2022

4 February2022

Accepted4 February 2022

Journalof International Trade

Lawand Policy

Vol.21 No. 2, 2022

pp. 160-181

© Emerald Publishing Limited

1477-0024

DOI 10.1108/JITLP-08-2021-0045

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1477-0024.htm

1. Introduction

Indonesia’s manufacturing sector plays a crucial role in the country’s economic

development. Beforethe pandemic outbreak in 2019, the manufacturing sector contributes to

20% of gross domestic product (GDP) and employs 22% of the workforce. Since 2010, the

average growth of manufacturing sector stood at 4.5%, while the average contribution of

this sector to merchandise exports was 45%. The contribution of the manufacturing sector

to Indonesia’s GDP is the highest among the Association of Southeast Asian Nations

(ASEAN) member countries, making Indonesia an important production base among the

ASEAN region. However, during the pandemic, Indonesia’s manufacturing sector faces a

sudden negative growth, declining by 2.52% in 2020. Contrarily, the agricultural sector

survived with a positive growth rate of 1.75%. Therefore, the recovery of Indonesia’s

manufacturingsector has become the Indonesian Government’s priority.

Despite the large amount of production, Indonesia’s manufacturing sector is still highly

dependent on imported intermediateinputs. In 2019, intermediate inputs accounted for 75%

of the total imports (Badan Pusat Statistik, BPS, 2018). Based on the global value chain

(GVC) data from the World Integrated Trade Solution (WITS) in 2019, 91% of Indonesian

manufacturing exports used imported inputs (pure backward). Under this condition, trade

policy, both tariff and non-tariff measures (NTMs), could affect access to and price of

imported intermediate inputs, affecting the overall performance of Indonesia’s

manufacturing industry. A studyby Grübler et al. (2016) indicates that the impact of NTMs

differs between f‌inal consumption goods and intermediate inputs. Among the different

types of NTMs, technical barriers to trade (TBT) and sanitary and phytosanitary (SPS) are

most predominant in affecting the import of intermediate manufacturing goods. In the case

of Indonesia, a recent study by Elisabethet al. (2020) shows that the imposition of NTMs on

imported intermediate inputs decreases the productivity and prof‌itability of Indonesian

manufacturingf‌irms.

In the past decades, tariffs on manufacturing products have decreased because of

Indonesia’s active engagement in bilateral and multilateral trade negotiations. In 2017, the

tariff rate for manufacturing products was 5.8, a signif‌icant fall from 24.2% in 1990.

However, as tariffs decrease, NTMs increase signif‌icantly. In 2018, on average, 52% of the

manufacturing import value was affected by NTMs. Moreover, 46.4% of products were

affected by at least one NTM. The imposition of TBT has been widening in Indonesia and

worldwide. In 2018, 14,561 NTMs-related regulations were applied by all countries,

consisting of 50,511 measuresthat were effectively imposed. Of those numbers, 16,645 were

TBT (UNCTAD, 2018).

This study attempts to estimate the effects of TBT on Indonesia’s manufacturing

exports. This study is conducted on Indonesia’smain exporters of manufacturing products

between 2004 and 2018. TBT is the focus of this study, as it is the most imposed NTM on

manufacturing products. Basically, the objective of TBT is to ensure consumer safety and

product quality and to protect the environment. Therefore, TBT could improve market

eff‌iciency by correcting market failurein the case of asymmetric information about product

quality. However, to comply with measures and regulations, f‌irms need to pay additional

costs or the so-called compliancecosts. These costs can be in the form of variable costs, such

as laboratory sourcing costs, and f‌ixed costs, such as costs of upgrading equipment and

production processes (Verhoogen, 2008;Bustos, 2011). TBT may act as a barrier or catalyst

for trade which reduces or increasesdomestic imports (Swinnen, 2017).

Our study contributes to the literature by drawing from existing techniques and

investigating the effects of TBT on trade f‌lows. A recent contribution by Ronen (2017)

presents a survey of empirical literatureon the effect of NTMs on sectors or products. The

Indonesia’s

technical

barriers to

trade

161