[ Nippon Keidanren ] [ Policy ]

Recommendation: "Expectations for the Early Conclusion of the
Japan-Indonesia Economic Partnership Agreement (EPA)"

20 June 2006
Nippon Keidanren

Japan and Indonesia held intergovernmental negotiations four times from July 2005 to April 2006 regarding the conclusion of a bilateral economic partnership agreement (EPA). The EPA negotiations timetable for Japan recently released by the Council on Economic and Fiscal Policy states that Japan will aim to reach an agreement with Indonesia in principle on major points of the negotiations by sometime this summer.

To achieve this target, however, it is desirable for Indonesia to enact a new investment law as soon as possible and to improve its labour-related legislation. Moreover, it is important for Japan to make an offer that fully responds to Indonesia's requests in regard to such matters as the movement of natural persons.

In light of this current situation, Nippon Keidanren requests the governments of the two nations to achieve the following in the five priority areas below from the perspective of further strengthening our bilateral economic ties, which are also strategically important in Asia, and concluding as soon as possible an EPA that will truly be mutually beneficial.

(1) Trade in Goods

Liberalisation of trade in goods offers great merits. Not only is it expected to lead to an increase in the export of Indonesian products to Japan, but it would also lower the tariff burden and broaden the choice of sources for raw materials and parts procurement as well as of product sales routes for both local Indonesian companies and Japanese corporations in Indonesia. It would also result in the improvement of the international competitiveness and appeal of Indonesia as a production and export base. For this reason, Keidanren would like to see the abolition of tariffs so as to be in compliance with the WTO (Article 24 of the General Agreement on Tariffs and Trade) and the advancement of the liberalisation of bilateral trade in the area of goods, including steel products, motor vehicles, electronics and electrical machinery, and chemicals.

(2) Trade in Services

Regarding manufacturing-related services, it is indispensable that the stability of Indonesia's current regulations be ensured and that they not be permitted to worsen in the future. This is a crucial condition for new corporations to invest in that nation. Moreover, small-scale retailing, infrastructure, and other sectors have been designated as exceptional sectors of national treatment, and full foreign ownership is not permitted in these areas. Even in fields where full foreign ownership is allowed, there are cases where the companies are required to transfer a portion of their shares to Indonesian individuals or corporations within fifteen years of start-up. Nippon Keidanren expects that Indonesia will rectify this urgent issue by enacting and enforcing a new investment law as soon as possible and by reviewing its investment-related regulations, including the "negative list," in order to relax and abolish these restrictions on forms of foreign investment and foreign capital ratios. At the same time, additional deregulation in financial leasing and convenience store franchising is advisable.

Meanwhile, the Japanese business community is called to actively provide cooperation to promote investment in manufacturing-related services among others and to contribute to the economic development of Indonesia and the upgrading of its industry.

(3) Movement of Natural Persons

In response to the change in Japan's demographics with the decrease in the birth rate, the aging of society, and the retirement of the baby-boomer generation which will start in 2007 (the so-called Year 2007 Problem), Japan is taking measures to actively employ young people, women, senior citizens, and others. There are concerns, however, that despite these measures there will be a shortage of high-quality human resources, including experienced engineers and skilled labourers, in some areas of the manufacturing, service, and other sectors. Thus, Japan faces the urgent issue today of reviewing the range of its acceptance of foreign human resources who possess high-quality skills to include even areas that are not currently regarded as sufficiently specialised or skilled.

In the bilateral EPA negotiations, Indonesia has requested that Japan accept Indonesian human resources in nursing and long-term care work as well as in the travel and hotel industries and hire Indonesians after they complete industrial training and technical internship programmes in Japan for foreigners.

Japan should enhance its system for permitting the employment of both outstanding graduates of industrial training and technical internship programmes and human resources who possess high-quality skills. Japan should also expand the range of professions where non-Japanese can be accepted for industrial training and technical internship programmes and review the current length of such programmes. Japan should actively engage in economic cooperation through the use of ODA in the area of human resources development, including offering Japanese-language education in countries that send human resources to Japan.

(4) Natural Resources and Energy

Indonesia is a key supplier of energy for Japan. However, many contracts for the export of liquefied natural gas (LNG) from Indonesia to Japan will expire in 2010, and the Indonesian government has recently indicated that it plans to place priority on the supply of natural gas to its domestic market. There are concerns that the energy security of Japan, the largest importer of Indonesian LNG, will be affected if the contracts with Japan are not renewed from 2010. Encouraging advance notice of policy changes through a bilateral EPA offers the merit of increasing the transparency of and trust in Indonesia's policies and legal system.

At the same time, it is important for Japan to support the creation of an environment that would promote the efficient use of coal and other energy sources by cooperating in the formulation of a vision for Indonesia's domestic energy use. In this regard, in addition to the increase in energy supply to the domestic market and the effective use of energy in Indonesia, Japan is called to contribute to the sustainable economic development and the amelioration of environmental issues in Indonesia by actively cooperating in the development of alternative energy sources and the conservation of energy and by supporting commercialisation.

(5) Law Enforcement and Administrative Procedures

To make Indonesia more attractive as an investment destination and to further expand investment from Japan, it is important for Indonesia to apply its laws in a fairer, more rigid, and more predictable way and thereby improve its administrative procedures so that foreign investors can feel confident in making investments and engaging in business activities in the nation. In addition, it would be desirable for Indonesia to rationalise and raise the efficiency of administrative procedures, including reducing the amount of time required for import/export procedures. In terms of tax, this would include decreasing the number of tax payments and filings, and in the area of customs clearance, this would include improvement of operations related to cargo handling, banking, and customs and confirmation of relevant legislation.

Regarding these matters, Japan has been providing wide-ranging support through the High Level Government/Private-Sector Joint Forum on Investment which is composed of the public and private sectors of the two countries. In the Japan-Indonesia EPA as well, it is important that a framework be included for improving the business environment while continuing to use this Forum.

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