In the five years until early 2006, 467 textile and textile product (TPT) industries went out of business. A total of 227 (48.6%) of them are located in West Java. What happened?
Much has been written about the high cost of production as the reason for the decline of the TPT industry, but actually there is a global situation that has greatly affected the progress and decline of the TPT industry, namely the end of the textile quota for Indonesia.
TPT is part of the products regulated in the international trade scheme by the WTO (World Trade Organization) through an agreement called the ATC (Agreement on Textiles and Clothing). As a member of the WTO, like it or not, Indonesia must comply with various points of the agreement.
ATC is a continuation agreement after the MFA (multifibre arrangement) which ended on December 31, 1994. During the validity period of the MFA, Indonesia and several developing textile exporting countries were given quotas so that their TPT products could be exported to developed countries. Free trade requires that all of these quotas be abolished, and the ATC is an agreement in a transitional period that contains the stages and methods of integrating TPT into the international trade scheme before all TPT quotas are abolished for 10 years (1 January 1995 to 31 December 2004).
The process of drafting the ATC met with opposition from many developing countries, including Indonesia, but apparently the WTO was too strong so that Indonesia had to prepare itself for a 10-year transition period to be able to compete in the global market without quotas.
There are two important things regulated in the agreement. First, setting the export quota. During the 10 year transition period, there were four stages of integrating quota products. In early 1995, 16% of the total quota value had to be released for the free market and became a bone of contention for TPT exporting countries. That value increased to 33% in 1998, 51% in early 2002, and finally, January 1, 2005 no more quotas were given and thus meant competition took place between TPT exporting countries.
Second, setting import quotas. When exports are freed, all import barriers must also be removed. This means that WTO member countries must begin to facilitate TPT imports such as lowering import tariffs and facilitating licensing.
When these two important things come together, for Indonesia there is only a choice, to compete to be able to export TPT to developed countries to compete with other countries that export fellow TPT and to be prepared to receive a flood of TPT products from other countries.
China is more competitive
North America (Canada and the US) and the European Union are major TPT importing countries from developing countries. After going without quotas, the North American TPT market is currently controlled by China. China controls 50% of all North American TPT imports, compared to its value which was only 16% in 1997 (when it was still with quotas).
Under China, it is India that controls 15% of TPT imports to North America (increased from only 4% in 1997). With 65% of the market already controlled by China and India, it is not surprising that several other countries that are among the top 10 TPT exporting countries to North America have experienced a decline. Indonesia, the Philippines and Bangladesh experienced a decline in TPT exports from 4% to 2%. Exports of Mexico and other US states also fell sharply between 7-10%.
Meanwhile, new players also started entering the US. Vietnam (which is not yet a member of the WTO and so is not obligated to comply with the ATC), has a trade agreement (December 2001) with the US and is now starting to enter the US market. With its geopolitical history with the US, it is expected that there will be special US tariffs for Vietnam. Apart from Vietnam, Lao PDR and Cambodia also have special agreements with the US.
Elsewhere, the composition of TPT exporting countries to the European Union has not changed much. China, India and Bangladesh continued to experience increases. China with 29% (from 18% in 1997) and India and Bangladesh increased slightly (1-3%). Hong Kong (6%) and Indonesia (3%) remained the same, neither increasing nor decreasing. Other countries such as Turkey, Bangladesh, Morocco, Poland and Eastern Europe actually fell between 1-3%.
Factory closures and worker layoffs continue to be a story that colors the Indonesian textile industry today. Data from the Indonesian Textile Association (API) reveals that 467 textile industries have gone out of business in the last five years. Most of them are the TPT industry in the medium-large industry category with a workforce varying between 3,000-4,000 people.
Still from API, most of the closed industries are located in West Java (227 factories), Jakarta (108), Central Java (34), East Java (17), Bali (16), Medan (4), and a small-scale TPT industry. with a workforce of 1,200 people located in Padang.
The same thing also happened in Kab. Bandung. Even though 53% of economic activity in Kab. Bandung is contributed by the manufacturing sector which is concentrated in the Districts of Majalaya, Padalarang, Margahayu, Dayeuhkolot, Katapang, Soreang and Cileunyi. Currently there are around 699 large and currently employing 177,318 people, with 60% of them working in the TPT industry. The number of workers in this sector decreased by 24% compared to 2003 which reached 234,868 workers.
On the other hand, the opening of import taps (post-ATC) has caused TPT imports from China to Indonesia to increase. API data shows, the total growth of China’s garment imports in the last five years (2004) reached 380%. This figure does not include illegal TPT imports into Indonesia which, according to the API, the value could be greater than what is officially recorded.
The quota abolition agreement (ATC) cannot be fully blamed for causing the textile industry to decline. There are other factors such as the increase in production costs for raw materials (40% of the textile industry’s components are imported) after the increase in fuel prices and levies which have contributed to the decline of the textile industry.
Like it or not, now is the time for the government, both regional and central, to take care of the TPT industry more seriously, before the death knell really resounds. Currently it seems that Indonesia is aggressively inviting investors. But if you observe, there are many regulations that do not support the creation of a good climate for an industry.
Here I just want to write, instead of the government getting tired of inviting investments that are not necessarily good, why not try to strengthen and help develop the existing TPT industry. The TPT industry, even though it still contains 40% imports, can still be expected because of the high production of the industry behind it (upstream) and downstream.
Another important thing to do is the government’s activeness in creating policies to protect Indonesian TPT products from China. Don’t be afraid to do this because the US and the European Union, which are members of the WTO, have implemented a policy of reducing quotas for Chinese products.
In November 2005, the US and the European Union agreed to reduce imports of Chinese products until the end of 2008. At least other countries, such as Indonesia, can breathe a little easier until 2008. But three years is a short time. It is time for the government to issue policies to protect the domestic textile industry from the invasion of imported products from China.
Even so, protection alone is not enough, because it will only make TPT products good at home. Another important effort is to actively enter into intergovernmental or intercompany agreements to facilitate the creation of trade agreements.
Indonesia has indeed proposed that the validity period of the TPT quota be extended for another five years for the US. The results of the negotiations are still awaiting the decision of the US government. It’s a good first step, but preferably not just with the US. It is time for the large budget for Indonesia’s diplomacy to be properly empowered to make special agreements that benefit Indonesia’s trade.