Modern trade is seldom as simple as importing or exporting from A to B.

 

Listener: 31 October, 2013.

 

Keywords: Globalisation & Trade;

 

Your jacket label may say “made in China” but as likely as not the garment is only assembled there. Half the value of a typical Chinese export is imported. The various components of the jacket – the material, buttons, zip – may have been made elsewhere, probably Southeast Asia. It may have been designed in the US or even New Zealand.

 

There is a long history of making products on more than one site, as there is of importing raw materials for local assembly – just think of 19-century English woollen mills. Now it is increasingly common for components to be put together in different countries and transported for final assembly somewhere else.

 

This “value chaining” is transforming the nature of international economic exchange. China accounts for about a sixth of New Zealand’s merchandise imports, which include components that originate in Southeast Asian economies. Separately, those countries supply another sixth of our imports. As economies become increasingly tied together, supply chains are no longer as simple as sending wool to Europe to be processed.

 

Because of New Zealand’s distant location, it tends to be at the beginning or end of the chain, not in the middle. As a consequence, our export to GDP ratio is low by OECD standards. But on another measure – net exports to GDP, worked out by deducting imports that are processed and re-exported – we do much better.

 

It is still possible to be part of Southeast Asia and not be greatly tied into the chaining economy. Indonesia is an example. There may be three main reasons. First, it is not well located. However, falling transport costs and development of a high-speed railway from Kunming in south China to Singapore will bring Indonesia closer.

 

When completed in 2020, the line is expected to cut the 4000km journey to 10 hours rather than the present week or more by rail and truck. Economic integration is no longer merely about “free trade” but is also concerned with lifting institutional and physical barriers, which is one of Apec’s remits.

 

Second, Indonesia specialises in exporting commodities, including oil and gas, cement, wood, rubber and foodstuffs. Success in one export area tends to squeeze out others. However, with the fourth-largest population in the world, Indonesia is unlikely to be able to expand commodity output fast enough to sustain its growing number of people and bring their living standards closer to the levels of neighbours Thailand (twice the per capita income), Malaysia (three times higher) or Singapore (10 times higher).

 

Third, Indonesia is not business-friendly. It is 128th on the World Bank ranking on this measure. Malaysia is 12th and New Zealand third, demonstrating that being business-friendly is not the only thing that matters – location also helps. Cheap Indonesian labour may be able to produce lower-cost buttons than a Malaysian factory, but why would a Chinese jacket-maker tolerate Indonesia’s red tape and uncertainties when Malaysia is just across the way? New Zealand exporters to Indonesia report similar frustrations.

 

With a burgeoning population, unemployment pressures and resource limitations, Indonesia will have to address the restrictions. There will be political turmoil, for there are those who benefit from the barriers. Corruption will have to be reduced and the public service improved.

But what if – or rather when – it succeeds? Indonesia is 40% of Southeast Asia’s population. When it gets into effective value-chaining, the country will be a formidable part of the giant economy of interdependent sovereign nations to our north.

 

This is the last of a series of columns made possible by a study grant from the Asia New Zealand Foundation.