The Panda and the (Komodo) Dragon: Sino – Indonesian Relations

Indonesia_Export_Treemap

In March 2012 Indonesian President Susilo Bambang Yudhoyono made a state visit to China with the aim of improving bi-lateral ties and earlier this year President Xi became the first foriegn leader to address the Indonesian parliament. These visits underline the growing importance of the Chinese economy for Indonesia. The archipelagic nation has quietly recovered from the Asian financial crisis of the late 1990s to become one of the regions’ top economic performers with a steady 5% growth over the last few years. At the same time the country has cemented its democratic credentials with peaceful changes of government, but also holding the country together in the face of separatist movements, no easy task in a place of multiple cultures, languages and 2000 islands.

Indonesia’s relations with China have warmed considerably from the anti-communist days of Suharto and since “normalisation” in 1990; the two have danced closer, China proposing a “special partnership”, which took firmer diplomatic shape as a “strategic partnership” in 2005. Relations between the two have expanded across a wide spectrum, and bilateral trade has swelled to over $50 billion in 2012. Indonesia is playing a role familiar to many other developing nations, supplying raw materials to China, coal, palm oil, rubber and crude being the principal items of demand.

Fears were raised in Indonesia when Chinese manufacturers made the all familiar push into the country. The ASEAN – China free trade agreement was a shock for Indonesian businesses, cheap textiles suddenly made home-grown garments seem overpriced and uncompetitive, even though Indonesia is no slouch when it comes to producing low cost textiles. Tensions with other South East Asian nations and China remain high; Vietnam and China have overlapping claims over islands in the South China Sea. Vietnam could be increasingly pulled towards its old enemy the USA for security. In fact China and Vietnam were at war more recently, having a short, but costly border war in 1979. The Philippines also has claims in the Sea, which raises tensions in the region, along the general suspicion that despite its soothing, peaceful words, China wants to be regional hegemon.

Indonesia remains largely outside these disputes and so can easily remain on good terms with China, while also maintaining strong relations with its neighbours and the USA. Indonesia has a per capita income of around $2000 and a total economy approaching the 1 trillion dollar mark, at this level of per capita income, a country’s businesses will start to look abroad to make investments, expand operations and seek natural resources and supplies. This level of income seems to be an important point in a countries development and Indonesia will be no different in that regard. Although a marginal player at the moment, the country has that much vaunted phrase – great potential. The large population of the country give its companies scale and the ability to expand abroad.  I expect to see Indonesian companies more and more in neighbouring South-East Asia, as well as Africa and even Latin America.



Categories: Frontier Markets, Kula Ring Trade Blog

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