Indonesia WT/TPR/S/51
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III. TRADE POLICIES AND PRACTICES BY MEASURE
(1) OVERVIEW
1. The past four years have been a period of contrast for Indonesia's trade and structural policies.
During the earlier years of high growth, the pace  of trade and investment reforms slowed somewhat
and liberalization proceeded in a selective manner.  Since the onset of the currency crisis towards the
end of 1997, however, Indonesia has accelerated reforms as a matter of economic urgency.  If suchreforms are fully implemented in accordance with the timetable agreed with the IMF, the period under
review will have been one of great liberalization.
2. One of the most notable achievement during the review period was the reduction of applied
tariffs, from an unweighted average of about 20% to 9.5%.  Further unilateral tariff cuts are scheduled
up to 2003 in the context of a clearly defined programme of tariff reduction.  Prior to the currencycrisis, however, only limited progress had been made to remove the array of non-tariff import barriers
(import monopolies, restrictive licensing) and export controls, which continued to affect up to 10% of
imports, 40% of non-oil exports and 30% of production.
1  In the sectors concerned, NTMs and export
measures were generally combined with other form s of assistance, including restrictions on domestic
trade, price fixing, and subsidies, all of which were aimed at providing explicit or implicit protectionon various grounds.  These included infant industry protection (such as for "strategic industries", a
legacy of the Government's industrialization policy), security of food supply (agriculture), control of
natural resources (forestry, mining, oil) or quite simply favouritism.  As a result, the list of products
and industries benefiting from some form of protection or assistance was still extensive when the
economic and financial crisis broke late in 1997.  The list included, inter alia , rice, sugar, wheat and
wheat flour, soybeans, cloves, garlic, milk and dairy products, wood, plywood, rattan, oil and gas,
fertilizer, cement, iron and steel, paper and paper products, automobiles, motorcycles, other transportequipment such as ships and aircraft and parts, some machinery and electrical products.
3. The removal of trade restrictions is at the heart of Indonesia's current reform process.
Indonesia has committed itself, by the end of the IMF-programme period, to the removal of all
non-tariff import measures and export restrictions not justified by health, safety or environmental
grounds.  Accordingly, a large number of import licensing requirements and restrictions on exportshave been removed since the end of 1997.  More specifically, Indonesia deregulated trade in most
agricultural commodities (except rice, for social reasons), terminated production and trade monopolies
in certain intermediate industries (cement, plywood and rattan industries), and reduced export taxes on
key commodities.  Further deregulation of international trade, particularly additional cuts in tariffs and
export taxes, are scheduled over the next two years.  Once the reform programme is fullyimplemented, Indonesia will have one of the most liberal trade regimes among developing countries.
Current difficulties should not be underestimated, however, particularly the implementation of
long-term reforms at sensitive times, and in the face of what appears to be an unduly large
devaluation.  Notwithstanding these difficulties, Indonesia has resisted protectionist pressures,
including the temptation to raise tariffs using th e leeway allowed by the growing gap between bound
and applied rates.
4. The return to a climate of confidence in Indonesia depends on the establishment of more
rules-based, transparent and competition-based internal policies. In the past, intentionally or
                                                     
1While Indonesia made considerable progress in reducing applied tariffs, nominal tariffs are an
imperfect measure of the level of effective protection pr ovided to the economy, particularly given the scope of
NTM's.  Recent analysis indicates that the rates of effective protection for the import-substituting agriculturaland manufactured products most affected by NTMs (particularly restrictive licensing) vary from 115% to 600%.(A. Nasution, 1998; S. Stephenson, 1995; and Fane and Condon, 1996, pp. 33-54).WT/TPR/S/51 Trade Policy Review
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otherwise, internal policies may have consolidated the position of large public and private
conglomerates, which continued their expansion in the absence of clear competition rules and a
certain tolerance by the Government of restrictive marketing arrangements and cartels.  In addition,
these conglomerates benefited from tax incentives, tax exemptions, subsidized lending, production
licences, procurement awards for production-sharin g arrangements, and other forms of formal and
informal government support.  While the expansion of these conglomerates contributed to thediversification of production in Indonesia and the emergence of a new generation of managers and
entrepreneurs, it also resulted in the concentration of production (the top ten enterprises account for a
third of GDP) and the accumulation of private debt in the hands of a few business groups. During the
period under review, conglomerates continued to dominate key sectors such as agri-food, steel, basic
chemicals, pharmaceuticals, forestry and wood products, paper, and communications. They oftenreceived these internal (as well as external) privileges in return for their implementation of the
Government's industrialization objectives.
5. The Government has acknowledged a number of shortcomings in its competition and
regulatory framework pertaining to business, and in its protection of intellectual property rights.  It
had begun to address some of these shortcomings even before the currency crisis.  For example, in1997, Indonesia upgraded its legislation on customs and intellectual property so as to conform with
WTO Agreements, although enforcement of existing regulations for the protection of software, data
and integrated circuits still seems to be inadequate.  Since the crisis, the Government has terminated
production and distribution monopolies in the cement, pl ywood, paper, and cloves sectors.  It is also
committed to enhanced transparency in the granting of subsidies and loans for government-sponsored
development projects and to the resumption of the privatization of state-owned enterprises.
Moreover, it is in the process of deregulating domestic trade, opening wholesale and retail distributionto foreign investors. Nevertheless, the economy could benefit from further long-term reform,
particularly the introduction of a competition law, more transparent and streamlined government
procurement practices and, in general, better enforcement of these and other laws and regulations
pertaining to business.  In the coming months, the Government will introduce new bankruptcy,
banking and central bank laws as well as a new system of commercial courts.
(2) M
EASURES DIRECTLY AFFECTING IMPORTS
6. Between 1994 and 1998, the Government of Indonesia continued to implement gradual trade
reform through the implementation of periodic packages, which encompassed both border measures
(on the import and export sides) and internal measures.  Border measures generally included tariff,
non-tariff and trade facilitation measures.  Prior to the IMF programme, Indonesia had implementedfive reform packages, in May 1995, December 1995, January 1996, June 1996 and July 1997.  Since
November 1997, these have been complemented by measures agreed under IMF programme.
7. The package approach, which the Government has used successfully during the past decade to
bring about deregulation, reflected the desire to approach economic reform in a pragmatic and gradual
manner, each package being a continuation of earlier steps and a prelude to new steps.  This approachcontained an element of fine-tuning, however, which al lowed the process to be highly selective.  As a
result, some major sectors were left out of the reform process.
8. Reflecting the priorities of the period, i.e. the implementation of tariff commitments under
multilateral and regional agreements, the reform packages focused mainly on tariffs, with
considerable progress being made.  Despite the incorporation of surcharges into the customs tariff,
average tariffs have fallen.  In this respect, the May 1995 package was generally considered the most
meaningful of all reform packages adopted before the crisis, because it provided for significant tariffcuts and introduced a medium-term schedule for further reductions until the year 2003Indonesia WT/TPR/S/51
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(section (ii)(a)).  However, little progress was made in the subsequent packages to remove non-tariff
measures such as import licensing and export restrictions.  The 1997-98 crisis prompted much bolder
measures and a re-acceleration of the reform process.  The measures include significant tariff cuts,
affecting essentially agriculture (in line with a general liberalization of the sector), and the removal by
the end of the IMF programme period of all remaining import restrictions, other than those justified
on health, safety and environmental grounds, as well as non-tariff assistance to domestic production.
(i) Customs procedures
9. During the review period, the Government decided to gradually transfer customs
administration back to the Indonesian Customs Services.  This decision followed 12 years of
successful operation of a preshipment inspection sy stem run by the Swiss inspection firm, Société
Générale de Surveillance (SGS).2  In 1995, SGS handed out the task of preinspection to PT Surveyor
Indonesia for imported goods.3  The contracts with SGS and PT Surveyor Indonesia were terminated
by the Government on 31 March 1997.  All companies involved in the operation of the preshipment
inspection system were praised by analysts and importers for the restoration of a smooth flow of
imports and a high degree of transparency and certainty, which had greatly contributed to the
development of Indonesia's international trade.4
10. The transfer of responsibility is based on a new Customs and Excise Law, adopted in 1995.5
The Law basically transformed the system from pr eshipment to arrival inspection, self-assessment and
post-clearance.  Law 10/1995 authorized customs officers to undertake selective inspection of imports
on arrival, to conduct post-audits on import documents and to assess customs duties.
11. Upon arrival, imported goods are processed by the customs through green or red channels.
The goods entering the green channel (90% of all goods, according to the authorities) are immediately
cleared and in principle undergo no physical examination.  Goods directed to the red channel undergophysical examination and checking of the declared value.  The selection of goods subject to physical
examination is based on two criteria:  intelligence information provided by the customs authorities on
the basis of various sources of intelligence and random inspection by computer.  In the absence of
intelligence reports or random inspection, the consignments do not undergo any physical examination
and are released immediately.  Under the new Law, customs officers are also entitled to conductaudits of imported goods after they are released from the customs area.  Such audits include the
                                                     
2The Government of Indonesia decided in 1985 that imports valued at more than US$5,000 should be
inspected by a surveyor at the port or seaport of loading.  The appointed surveyor (SGS until 1995, then PT
Surveyor Indonesia) issued inspection reports on every importation inspected.  On the arrival of the goods inIndonesia, importers would fill a customs declaration, based on the inspection report, before final clearance.The system is considered to have brought c onsiderable progress in the clearance of imports.
3Since July 1995, goods imported through international airports were subject to an arrival inspection,
while goods imported through the seaports were still subject to preshipment inspection by PT Surveyor
Indonesia, until the termination of its contract with the Government.
4While the work of SGS and its Indonesian partners was praised, the handling of shipments in Tanjung
Priok remained a subject of discussion.  As from 1995, some practices of bribery and extortion by customs andport authorities were reported by the Indonesian Association of Importers (reports referred to "intelligencenotes" suggesting importer's wrongdoing and subsequent physical examination, which "convinced" importers topay bribes to avoid unnecessary delays.  (European Commission, Trade Barriers Database).
5The new law upgrades the old customs regulation, many of which dated from the colonial period; it
aims at meeting international standards.  In this connection, it regulates matters that were not covered byprevious legislation, such as anti-dumping and countervailing measures, the control of imports and exports inrelation to the violation of intellectual property rights, bookkeeping, administrative sanctions and investigations,and appeal procedures.WT/TPR/S/51 Trade Policy Review
Page 48
examination of company bookkeeping, reports, records and other documents concerning any
transactions involving international trade, and of company stocks.
12. Since 1997, customs clearance, the payment of duties, and random verification are facilitated
by the operation of a new computerized system, the Electronic Data Interchange (EDI) system for
customs clearance.  As required by the Law, importers have to fill in import declaration forms through
the system, which is on-line with the customs services and the main banks. The aim is to improve andspeed up the processing of goods and documents at seaports and airports, and, as no physical
interaction between customs officials and clients is normally necessary (since information is
submitted electronically), reduce the scope for collusion and illegal levies.
13. The transition to the new system did not occur without difficulties.  Analysts reported high
yard occupancy ratios in the weeks following the introduction of the new system, reflecting slowclearance of goods at customs and a piling up of imports at the port.
6  Further concern was expressed
in July 1997 at a customs seminar in Jakarta about the potentially detrimental effect on Indonesia's
competitiveness of delays in implementing the new on-arrival inspection system.  Part of the problem
was the linked to the lack of preparation of the various actors concerned, in particular insufficient
funding for the implementation of the EDI system7, and the need to train customs officers.8  Other
problems were related, for example, to the difficulty in implementing post-entry audits, as many firms
did not maintain the necessary bookkeeping or did not used standard documentation such as letters of
credit or sales contracts.
14. Since then, the situation has improved significantly.  While the customs declarations cannot
yet be processed electronically at all offices, the use of EDI has increased.  The customs authorities
have shown readiness to cover part of the EDI costs for individual users, and the IIA has made
computer terminals at its own offices accessible  to importers.  Though EDI use has been growing
among importers, exporters and shipping companies, nearly half of all banks are not yet connected to
the system.  Their participation in the system is essential, since the customs authorities can clear the
goods electronically only when confirmation of paym ent of duty (by the banks) is received through
EDI.  Customs authorities are working closely with the World Bank and the World Customs
Organization (WCO) to improve customs training and administration.  Customs valuation workshops
are also organized in the frameworks of the WCO and the APEC.  Indonesia receives bilateral
technical assistance, particularly from Japan, on the standardization of intelligence notes.  As a result,
customs clearance at the main gateways has improved.  According to a recent survey, commissioned
                                                     
6Feridhanusetyawan (1997).  While the Director General for Customs and Excise blamed importers for
improper completion of customs declarations and claimed that correctly filed declarations could be processed
within two hours under the EDI system, it was reported that such processing was actually taking four days.
7The Indonesian Association for Forwarding and Cargo Expedition (Gafeksi) estimated the total cost of
implementation of the EDI system at Rp 52 billion for its 1,300 members.  While the largest members could
bear the Rp 40 million investment, the increasing number of small and medium-size members could not. InJuly 1997, a few weeks after the entry into force of the new system, only 222 operators out of the 8,000 licensedimporters (i.e. 2.7%) were connected to EDI.
8Concerned about the effectiveness of the new system, the Indonesian Chamber of Commerce
(KADIN) had suggested that longer lead times (three to six months) be allowed before enforcing the new
system.  The Indonesian Importers Association (IIA) had initially proposed the maintenance of the current
preshipment inspection system until the end of the century.  The Chairman of the IIA said that the fate of thenew system would depend on the way in which it would be operated by customs officials and regretted that thenew customs law contained loopholes which could potentially be used by officials to obtain money fromimporters.  "Will the Customs Office Remain Clean", (Image of Indonesia, 4 April 1997).Indonesia WT/TPR/S/51
Page 49
by the Government, the average clearance time for goods entering the green channel is about
20 minutes.9
15. Since the entry into force of the WTO Agreement on Customs Valuation, Indonesia has
invoked the special provisions available for developing countries for delayed application.  The
transitional period provided by the Agreement will end on 1 January 2000.
(ii) Tariffs and other border levies
(a) Process of tariff reduction and tariff structure
16. In the Uruguay Round, Indonesia bound 95% of its tariff lines, a significant increase over the
previous bound level (9%).  Bindings were generally set at 40%, about twice the average of applied
tariffs at the time, except for a few agricultural products.10  All agricultural items were tariffied and
bound.  The 5% of unbound tariff lines concerned "sensitive" manufactured products, whichaccounted for approximately 10% of non-oil imports. These included iron and steel, certain
chemicals, plastics and rubber products, some pharmaceuticals, ships, aircraft and parts, motor
vehicles and parts.  While tariff rates on many of these products were already below the ceiling
bindings of 40%, about 60 tariff items carried very high tariff rates (three-digit in the case of motor
vehicles and parts).  In addition to the increased level of bindings and the tariffication of agriculturalnon-tariff measures, the transparency of Indonesia's tariff was enhanced by the exclusive use of
ad valorem  duties.  Indonesia does not apply mixed or specific import duties.  Finally, Indonesia
agreed to eliminate surcharges (as well as NTMs) on bound items within a period of ten years.
17. Since the Uruguay Round, Indonesia has made further major tariff reductions on a unilateral
basis, going far beyond its WTO commitments.  While certain tariff reduction packages were more
comprehensive than others, the May 1995 package was particularly important from a policy
standpoint.  In addition to a substantial reduction of duties on two-thirds of tariff lines and theelimination of surcharges, the package introduced a medium-term schedule for tariff reductions until
the year 2003.  For the sake of transparency and predictability, the schedule was published.  The
objective was to reduce most tariffs to a maximum of 10% by the end of the phase-in period, thereby
lowering Indonesia's simple average applied tariff to 7%;  tariffs in the 0-20% range would be reduced
to 0-5% by year 2000, while those above 20% would be reduced to that level, or below, in 1998, andto a maximum of 10% in 2003.   However, the package maintained important exceptions, such as
agriculture, automobiles, steel and chemicals, which were subject to separate timetables, and alcoholic
beverages, for which no reduction was planned.
11
18. The subsequent tariff packages contained significant additional liberalization (Table III.1).
The two 1996 packages accelerated the schedule of tariff reduction for certain items and eliminatedimport surcharges.  In the wake of the currency crisis, the 1997 and 1998 packages included even
bolder steps, such as the reduction of tariffs on all food items to a maximum of 5%, and the
integration of chemicals and metals into the medium-term programme of tariff reduction, thereby
leaving automobiles and alcoholic beverages as the only exceptions.
                                                     
9Over 90% of total imports enter the green channel.
10Initial ceiling bindings on rice and suga r products were 180% and 110%, respectively.
11Prior to the May 1995 package, completely build-up cars were subject to tariffs and surcharges
reaching nearly 300%.  After the package, the highest rate was 200%, and was scheduled to be 90% in 2003.WT/TPR/S/51 Trade Policy Review
Page 50
Table III.1
Evolution of Indonesia's applied tariff structure in the period under review, 1994-98
No. of lines per tariff range and percentage of lines
Tariff
reduction
packagesMay 1995 January 1996aJune 1996 July1997 September 1997 January 1998
0-5% 4,070 (43%) 3,369 (46%) 3,465 (48%) 3,688 (51%) 3,765 (52%) 4,265 (59%)
0-10% 4,449 (51%) 4,017 (55%) 4,071 (56%) 4,563 (63%) 4,563 (63%) 5,187 (72%)
0-20% 6,134 (65%) 5,041 (69%) 5,721 (75%) 6,151 (85%) 6,151 (85%) 6,971 (97%)
20-35% 3,144 (34%) 2,155 (30%) 1,475 (20%) 1,032 (14%) 1,032 (14%) 167   (2%)
35% 110   (1%) 96   (1%) 95   (1%) 80   (1%) 80   (1%) 72   (1%)
a The January 1996 package consolidated the tariff code, and reduced the number of tariff lines by 22%.  The comparison between
the May 1995 and January 1996 package should only apply to percentages.
Source: WTO Secretariat, based on Government data.
(b) Average tariffs
19. As a result of the reform packages, Indonesia's simple average applied MFN tariff across all
products was reduced by half in the period under the review, from 20% in 1994 to 9.5% in 1998
(Table III.2);  it had fallen by only by 2 percentage points in the previous period (1990-94).  Thelargest reduction was achieved in the May 1995 package, with a decline from 20% to 15%.  This was
followed by smaller reductions, to 12.2% after the June 1996 package, 11.7% after the July 1997
package and ultimately 9.5% after the January 1998 package.  As of January 1998, 97% of Indonesia's
tariff lines were in the range 0-20%.
Table III.2
Applied and bound tariff indicators, 1998
        All goods   Agriculture Manufacturing
Bound tariff lines (%) 95.5 100.0 94.7
   of which:  partially bound 2.5 0.0 2.9
Duty-free tariff lines (%) 20.2 11.1 21.7
Simple average bound tariff rate (%) 38.4 47.3 36.8
Simple average applied tariff rate (%) 9.5 8.6 9.7
Average applied tariff rate for all lines subject to duty (%) 11.9 9.7 12.4
Domestic applied tariff "spikes" (over 3 times the overall tariff average) 132 28 104
Applied tariff standard deviation (%) 15.7 24.3 15.7
Simple average ASEAN-AFTA preferential tariff 7.7 8.4 7.5
Source: WTO Secretariat calculations.
20. The 1998 simple average applied tariff rate for agricultural products (HS 1-24) was 8.6%
(Table III.2).  If the manufactured component of the standard HS definition is excluded, however, the
average agricultural tariff (including raw agricultural products, livestock and fishing) is only 4.2%
(Table AIII.1).12  The low level of agricultural tariffs is the consequence of a government decision to
                                                     
12Sectoral tariff averages vary with the definition used. The definitions used in this section (HS 1-24 for
agricultural products, 25-97 for industrial products), while conventional, do not correspond precisely to those for"agricultural" and other products negotiated in the Uruguay Round.  The WTO Agreement on Agricultureexcludes fish and fish products (HS chapter 3 and pa rts of chapter 16) and includes items regarded as
"agricultural" from HS chapters 29, 33, 35, 38, 41, 43, 50, 51, 52, and 53 (Annex I of the Agreement). TheIndonesia WT/TPR/S/51
Page 51
reduce tariffs on all food items to within the 0-5% range.  In 1998, the simple average rate for
industrial products (HS 25-97) stood at 9.7%.  As scheduled, the simple average for all HS categories
except motor vehicles was reduced below 20%.
21. The rapid reduction of Indonesia's applied tariffs widened the gap between applied and bound
rates (Table III.2).  Notwithstanding the current cr isis, Indonesia has not used the leeway offered by
such gap to increase tariff protection;  on the contrary, Indonesia accelerated its tariff reductions.Nevertheless, the existence of a large gap – 29% between bound and applied rates in 1998  still leaves
an element of uncertainty for importers and trader s, given that in the past, and in isolated but
significant cases related to individual business deals, tariffs on some items have been subject to
sudden changes (as in the case of certain chemicals).
(c) Tariff dispersion
22. The efficiency losses associated with Indonesia's tariff structure depend not just on the
average level of tariff protection, but also on the dispersion in applied tariff rates across products.  The
higher the dispersion in tariff rates, particularly within groups of similar and, thus, highly substitutable
products, the greater the likelihood that consumers' a nd producers' decisions are distorted by the tariff
structure.
13  The magnitude of the overall standard deviation for all goods (15.7) and the fact that
132 tariffs constitute domestic "peaks" (that is, th ey involve rates exceeding three times the overall
simple average applied MFN rate of 9.5%) suggest the continued existence of potentially high degrees
of distortion in both agriculture and industry owing to the tariff schedule (Table III.2).  Among
agricultural and food commodities, applied tariffs on alcoholic beverages remain extremely high in
comparison with other products (110% on average with some as high as 170% (Table AIII.1)).
Among industrial products, motor vehicles (HS 87) carry by far the highest applied tariffs (over 60%
on average and as much as 200% on certain types of car).  Certain basic chemicals are also subject totariffs of up to 170% (Table AIII.1).  Leather pr oducts, textiles and clothing, and certain consumer
products such as toys and sporting goods are in the 15-30% range.  With tariff peaks within each
product category being eroded by further cuts, however, the dispersion in tariff rates across products
is declining.
(d) Tariff escalation
23. Indonesia's tariff structure displays significant escalation, favouring domestic processors in
areas such as food products, textiles, clothing and leather, wood products, paper, metals and other
manufacturing industries (notably transport equipm ent).  The erosion of tariff peaks and gradual
reduction of all rates will reduce the level of escalation.  However the process is incomplete and, as
shown in Chart III.3, producers of final goods in the manufacturing sectors, in general, and in thetextiles and clothing and wood industries, in particular, continue to benefit from substantial tariff
escalation.
                                                                                                                                                                    
breakdown of tariffs by International Standard Industri al Classification categories, contained in Table AIII.1,
attempts to clarify the distinction between the agricult ure/processed food, beverage and tobacco sectors (ISIC 1
and 31) and other manufactures.   In this case, it is wines and spirits that boost the sector's average.  ISIC figuresshow the food manufacturing average as only 4.6%.
13Strictly speaking, a uniform nominal tariff (or a uniformly restrictive NTM) minimizes the net
welfare cost of such protection only if import demand elasticities are uniform across commodities andcross-price effects are negligible.  Tariff uniformity may also be desirable on the grounds of transparency and
administrative simplicity.  For a discussion of these and related matters, see Panagariya and Rodrik (1993),pp. 685-703.WT/TPR/S/51 Trade Policy Review
Page 54
05101520
T o t a l 3 13 23 33 43 53 63 73 83 9Chart III.3
Tariff escalation, 1998
Per cent
ISIC codeRaw materials
Semi-processed
Fully processed
ISIC Rev.2
31
32
33
3435
36
3738
39Description
Manufacture of food, beverages and tobacco
Textile, wearing apparel and leather
Wood and wood products, including furniture
Paper and paper products, printing and publishingChemicals, petroleum, coal, rubber, plastics
Non-metallic mineral products,except of petroleum & coal
Basic metal industriesFabricated metal products, machinery & equipment
Other manufacturing industries
Source
: WTO Secretariat calculations.
(e) Tariff concessions and exemptions
24. In addition, the effective rate of duties collected  at the border is much lower than implied by
the 9.5% simple unweighted average tariff, because of the scope and variety of exemptions.  Nearly
half of potential tariffs are exempted from payments under concessional arrangements.  The main
exemptions or reductions cover the importation of capital goods and raw material used in the
production processes of projects approved by BKPM.14  There are also two drawback and exemption
                                                     
14The duty exemption, previously granted on raw material and capital goods imports only to Indonesian
and foreign-owned companies licensed by BKPM, was extended in 1997 to FDI ventures administered by otherMinistries, such as the Ministry of Industry and Trade.Indonesia WT/TPR/S/51
Page 55
schemes for exporters, operated by BAPEKSTA.  These schemes provide for the importation of
production inputs free of tariffs and licensing requirements.  Finally, the Ministry Finance may grant
additional tariff exemptions to promote certain industries.  These exemptions, which are generally
granted to specific firms or users, were recently extended to certain cable-makers and producers of
electronic products for imports of polyethylene.15
(f) Surcharges
25. In the past, import surcharges have been a major feature of the Indonesian tariff.  Surcharges
had been imposed on certain items to offset the elimination of NTMs such as restrictive licensing or
import bans and, hence, to facilitate adjustment by domestic producers. In the Uruguay Round,
Indonesia committed itself to eliminate surcharges on all bound items (a total of 172) within ten years.
26. This commitment was met well ahead of schedule.  Surcharges imposed on all imported
goods, whether bound or unbound, were eliminated on 1 January 1996, in accordance with the new
Customs Law.16  In effect, surcharges were either merged with existing tariffs (about 80 items), or
simply eliminated.  The resulting applied tariffs for bound items remained below the bound rates.  On
unbound items that carried high surcharges, such as the 75% surcharge imposed on completely
built-up automobiles and motorcycles, the surcharges were incorporated into the tariff.
(g) Tariff preferences
27. As described in Chapter II(3)(ii), tariff preferences are essentially confined to ASEAN
partners.  The preferences relate to the implementation of the AFTA scheme.  Since ASEAN partners
account for 10-12% of Indonesian imports and 90% of such imports are covered by tariff preferences,
the vast majority of Indonesian imports are subject to MFN rates.  In 1998, the average margin of
preference on ASEAN imports, over MFN imports, wa s 2%.  A comparison of agricultural and
industrial products is provided in Table III.2.
28. Indonesia offered preferential tariffs on only one item (polymer polypropylene) in the first
round of negotiations under the Global System of  Trade Preferences among Developing Countries
(GSTP).  In the second round of negotiations, currently under-way, Indonesia offered preferential
treatment on 35 additional items, (Table AIII.2).
29. Indonesia benefits from GSP treatment from Belarus, Bulgaria, Canada, the Czech Republic,
the European Union, Hungary, Japan, Norway, New Zealand, Poland, the Russian Federation, the
Slovak Republic, Switzerland and the United States.
(h) Information Technology Agreement
30. Indonesia is a party to the Multilateral Declaration on Trade in Information Technology
Products (generally referred to as the Information Technology Agreement), signed in December 1996.Changes for the Indonesian tariff cover six categories of products: computers (including printers,
scanners, monitors, hard-disk drives, etc.); semiconductors; semiconductor manufacturing equipment;
software (e.g. CD-ROMs and diskettes); scientific instruments and telecommunications equipment.
The Agreement provides for the elimination of tariffs by the year 2000 on 216 lines with four equal
rate-reductions of one quarter of the existing rates.  As a significant producer/assembler of
                                                     
15The issue of transparency in the attribution of su ch exemptions has been raised by some trading
partners (EU market access database, Indonesia, 1997).
16132 tariff items were subject to import surcharges before they were eliminated or merged into the
existing tariffs; at that time, more than half did not exceed a rate of 5%, however 19 tariff lines (mostly motorvehicles) exceeded 75%.WT/TPR/S/51 Trade Policy Review
Page 56
micro-electronic and information technology (IT) products, Indonesia is likely to benefit from the
acceleration of intra-firm and intra-industry trade in the various products concerned.
31. While the impact of the Information Technology Agreement (ITA) will be considerable for
telecommunications equipment (such as telephone sets, switching equipment and telephone
exchanges, which are produced locally and are dutiable at rates of 5-20%), it will be relatively limited
for other IT products, most of which are already duty free or subject to tariffs in the 0-5% range.17  At
the same time, the ITA may result in a reduction of tariff duty drawback and exemptions granted by
Indonesia to foreign-owned processing and manufacturing joint ventures. In the past,
micro-electronics have accounted for a high share of the drawbacks and exemptions granted each year
to the industrial sector.
(iii) Non-tariff border measures
(a) Trade prohibitions, quantitative restrictions and trade sanctions
32. Indonesia maintains import bans or prohibitions largely for health, environmental and cultural
reasons.  The number of products affected has been gradually reduced over the years, to about 40
tariff lines at present.  The bulk of the restrictions concerns chemical products, including waste and
pesticides. As a signatory of the Montreal and Vienna Conventions, Indonesia bans trade inchloro-fluoro carbons and conforms with the decisi ons taken by the parties to the Basel Convention
on waste and waste products.  Other restrictions concern the import of printed material (including
books, magazines, newspapers, leaflets) written in Chinese, Indonesian or regional languages or
characters, audio and video cassettes, films and colour photocopy machines.  Since the 1994 Review,
prohibitions on the import of certain second-hand goods have been relaxed:  the importation of used
trawlers, and merchant ships was liberalized in July 1997;  the ban on the importation of used ships
was abolished by Presidential Decision 22/1998 (in accordance with the IMF programme);  and theimportation of used machinery, equipment, and capital goods was further liberalized, particularly for
small and medium-size enterprises.
18  Products subject to import bans or prohibitions are listed in
Table III.3.
33. Indonesia does not maintain any trade sanctions.  As noted in the previous Review, the bans
covering trade with Angola and South Africa were lifted in 1994.  However, according to theauthorities, trade with Israel is still subject to some restrictions.
(b) Licensing requirements
34. During the past decade, Indonesia has reduced the scope of non-automatic import licensing.
Inherently complex and non-transparent, the licensing system has been described as one of Indonesia's
main impediments to trade.
19  Privileges conferred by licences distorted competition between
domestic producers as well as in external trade, contributed to the inefficiency of licence holders, and
raised the prices of the goods concerned in the domestic market.
                                                     
17In an effort to boost component production in Indonesia, the Government had already eliminated all
tariffs and surcharges on inputs used to make electroni c components; and eliminated or reduced to 5% the rate
on most components (capacitors, resistors, integrated  circuit boards) used in the production of consumer
electronics (radios, TV, VCRs and cameras).
18Second-hand goods that remain subject to import bans (covering 18 tariff lines) are specified in
Ministry of Industry and Trade Decree No.98/MPP/Kep/2/98 of 26 February 1998, although  the Ministry mayprovide specific authorizations on an individual basis.
19GATT (1994), pp. 59-62.Indonesia WT/TPR/S/51
Page 57
Table III. 3
Products subject to import bans or prohibitions
Tariff Heading No. Description
2903.14.000 CCL4/CTC (Karbon Tetraklorida)
2903.19.000 CH3CC13/Metil Kloroform/TCA (1,1,1, Trikloroetana)
2903.30.000 CH3Br/Metil Bromida
2903.41.000 CFC-11 (Triklorofluoro Metana)
2903.42.000 CFC-12 (Diklorodifluoro Metana)
2903.43.000 CFC-113 (Trikloro Trifluoro Etana)
2903.44.000 CFC-114 (Dikloro Tetrafluoro Etana)
2903.44.000 CFC-115 (Kloro Pentafluoro Etana)
2903.45.100 CFC-13 (Khloro Trifluoro Metana)
2903.45.200 CFC-112 (Tetrakloro Difluoro Etana)
2903.45.300 CFC-111 (Pentaklorofluoro Etana)
2903.45.910 CFC-217 (Khloro Heptafluoro Propana)
2903.45.920 CFC-216 (Dikhloro Heksafluoro Propana)
2903.45.930 CFC-215 (Trikhloro Pentafluoro Propana)
2903.45.940 CFC-214 (Tetrakhloro Tetrafluoro Propana)
2903.45.950 CFC-213 (Pentakhloro Trifluoro Propana)
2903.45.960 CFC-212 (Heksakhloro Difluoro Propana)
2903.45.970 CFC-211 (Heptakhloro Fluoro Propana)
2903.46.000 Halon-1211 (Bromo Khloro Difluoro Metana)
2903.46.000 Halon-1301 (Bromo Trifluoro Metana)
2903.46.000 Halon-2402 (Dibromo Tetrafluoro Etana)
3824.71.000 -- Containing acyclic hydrocarbons perhalogenated only with fluorine and chlorine
2908.10.000 - Derivatives containing only halogen substituents and their salts
3808.90.900 Ethylene dibromide (EDB) pesticides, including Sumibark
3915.10.000 - Of polymers of ethylene
3915.20.000 - Of polymers of styrene
3915.30.000 - Of polymers of vinyl chloride
3915.90.100 -- Of copolymers of vinyl acetate and vinyl chloride in which the vinyl acetate monomer predodinates
3915.90.900 -- Other
Chapter 49 Products of the printing industry:
(a) Books, magazines and all kinds of other printed matter of paper in Indonesian or Indonesian regional
language.  Excepted from import ban are goods based on normal practice.
(b) Printed matter:  books, magazines, leaflets, brochures and newspapers printed in Chinese characters and
language.  Excepted from import ban are literature as well as other printed matter for students including
goods in Braille.
(c) Offset printed matter of paper for cigarette packing and drug labelling in Indonesia as well as that partly
in foreign languages.  Excepted from import ban are offset printed matter of paper for cigarette packing and
drug labelling.
PP 19/1994
PP 22/1995As referred to in the attachment to Government Regulation (PP) No. 19/1994 except lead waste and scrap
(HS.7802.00.000), and waste and scrap of primary cell, using primary batteries and used electricaccumulators (HS.8548.10.000).
Other Waste Waste, elements and objects containing or comprising or contaminated by polychlorinated biphenyl (PCB)
and/or polychlorinated terpenyl (PCT) and/or polybrominated biphenyl (PBB) including other analogues ofpolybrominate of the compounds, with mg grade/content per kg or more.
Waste containing or comprising or contaminated by:
- properties of polychlorinated dibenzo-dioxin
- properties of polychlorinated dibenzo-furan
- asbestos (dust and fibre)
- ceramic fibre equal to asbestos fibre.
Anti-knock mixed mud containing tin.
Scrap waste of residue of the nature of tar (except cement asphalt from refining, distilling and pyrolitic
processes).
Source: The Indonesian Government.WT/TPR/S/51 Trade Policy Review
Page 58
35. The system classifies licences according to the type of operator: importer-producer (IP
licences), registered importer (IT) and agent or sole importer (AT licences).  In addition, certain
products can be imported only by designated state-owned enterprises, which generally benefit from
import monopolies.  These enterprises are: BULOG, the sole importer of certain food commodities;
(at present this concerns only rice), PT Pertamina, the oil company;  and PT Dahana, the explosives,
weapons and ammunitions company (see section (c) below).  All other products are unrestricted andclassified in the general importer (IU, automatic licensing) category.
36. The number of tariff lines subject to restrictive import licences fell gradually from 1,122 in
1990 to 261 in 1994.  While this represented only 3% of tariff lines, its economic incidence was much
wider.  Import licences covered 13% of total imports, 35% of agricultural production and about 30%
of manufacturing production (Table III.4).   The large share of production protected by such licensing
was explained by the inclusion of major food commodities controlled by BULOG (such as rice, wheat
and wheat flour, sugar, and soybeans) and several key "strategic" industrial products (processed food
and beverages, certain chemicals, iron and steel, cars not assembled in Indonesia).  Licensing
requirements in agriculture and manufacturing reinforce various other trade restrictions, including
distribution and import monopolies (agriculture), and high tariffs (beverages, iron and steel, cars).
Table III. 4
Coverage of non-tariff measures, 1986-95(Per cent)
After trade policy reform packages of:
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
Production coveragea
Gross production 41 38 29 28 25 22 22 .. .. ..
  M a n u f a c t u r i n g 6 85 84 53 83 33 23 13 13 13 0
    F o o d  &  b e v e r a g e s. .. .. . 6 3 6 1 6 0 5 9 . .. .. .
    Paper products .. .. .. 38 38 38 35 .. .. ..
    E n g i n e e r i n g . .. .. . 4 9 3 6 3 4 3 4 . .. .. .
.. ..
A g r i c u l t u r e 5 45 34 14 03 93 03 03 53 53 5
  F o o d  c r o p s . .. .. . 6 5 6 5 5 6 5 6 . .. .. .
  E s t a t e  &  o t h e r  c r o p s . .. .. . 2 6 6 5 5 6 5 6 . .. .. .
Import coverage
I m p o r t  v a l u e 4 32 52 11 71 51 31 3 . . . . . .
.. Not available
a Production coverage estimates for 1986 are based on 1985 production weights.  Estimates for subsequent years are based on
1987 weights.
Source: World Bank (1993), "Indonesia Sustaining Development", Report No. 11737-IND;  World Bank (1995), "Indonesia:  Improving
Efficiency and Equity, Changes in the Public Sector's Role";  and Economic Commission for Latin America and the Caribbean
(1998), "Trade and Industrial Policies in Indonesia since the 1980s".
37. In the period under review, Indonesia continued to reduce the number of products subject to
licensing.  The number of tariff lines covered fell by nearly half, from 261 to 160, as a result of both
the implementation of Indonesia's commitments under the Uruguay Round20 and unilateral reform
                                                     
20As described in the 1994 Review, Indonesia committed itself in the Uruguay Round to remove all
non-tariff barriers on bound items. This concerned 179 tariff items, 98 of which are manufactured products, and81 agricultural products.  This commitment did not apply to the agricultural commodities controlled byBULOG, which was covered by the WTO provisions on State Trading.Indonesia WT/TPR/S/51
Page 59
(Table III.5).  However, from 1994 until the currency crisis, progress was uneven and more selective
than previously.  A total of 73 tariff lines were dropped from the import licensing list, 51 of which
were unbound.  Nevertheless, the most "sensitive" products, which accounted for the bulk of
remaining licences (agricultural commodities, alcoho lic beverages, motor vehicles, certain chemicals,
iron and steel products, and scrap material) remained unreformed.  The economic significance of
licensing thus remained strong.
Table III.5
Products subject to licensing, May 1998
Tariff Heading No. Description Type of  licence
1006.10.000 -  Rice in the husk (paddy or rough) BULOG
1006.20.000 -  Husked (brown) rice BULOG
1006.30.000 -  Semi-milled or wholly milled rice, whether or not polished or glazed BULOG
1006.40.000 -   Broken rice BULOG
2106.90.510 --  In packing of 200 litres net or more IT
2106.90.590 --  Other IT
2203.00.000 Beer made from malt IT
2204.10.000 -  Sparkling wine IT
2204.21.100 --  Wine exceeding 26% proof spirit IT
2204.21.200 --  Wine not exceeding 26% proof spirit IT
2204.21.900 --  Other IT
2204.29.100 --  Wine exceeding 26% proof spirit IT
2204.29.200 --  Wine not exceeding 26% proof spirit IT
2204.29.900 -- Other IT
2204.30.000 -  Other grape must IT
2205.10.000 - In containers holding 2 litres or less IT
2205.90.000 -  Other IT
2206.00.100 - Cider and perry IT
2206.00.200 - Sake (rice wine) IT
2206.00.300 - Mead IT
2206.00.400 - Toddy IT
2206.00.500 - Wines obtained by fermentation of fruit juices and of vegetable juices
(except fresh grapes)IT
2206.00.900 - Other IT
2208.30.000 - Whiskies IT
2208.40.000 - Rum and tafia IT
2208.50.000 - Gin and geneva IT
2208.60.000 - Vodka IT
2208.70.000 - Liqueurs and cordials IT
2208.90.000 - Other IT
2501.00.200 - Salt in bulk, containing NaCL minimum 96% (wet basis) IP
2501.00.900 - Other IP
2528.10.000 - Natural Sodium borates and concentrates thereof (whether or not calcined) IT
2710.00.910 - Lubricating oil, lubricant without additive Pertamina
2710.00.920 - Liquid lubricant preparation Pertamina
2710.00.930 -- Solid or semi-solid lubricant preparation Pertamina
2711.14.210 --- For making polyethylene IP
2711.14.290 --- Other IP
2805.40.000 - Mercury IT
2837.411.000 -- Of sodium IT
2837.19.000 -- Other IT
2837.20.000 - Complex cyanides IT
Table III.5 (cont'd)WT/TPR/S/51 Trade Policy Review
Page 60
Tariff Heading No. Description Type of  licence
2840.11.000 -- Anhydrous IT
2840.19.000 -- Other IT
2840.20.000 - Other borates IT
2840.30.000 - Peroxoborates (perborates) IT
2901.21.100 -- For making polyethylene IP
2901.21.900 --- Other IP
2912.11.000 -- Methanal (formaldehyde) IT
2925.11.000 -- Saccharin and its salts IT
2929.90.110 --- Sodium cyclamate IT
2929.90.190 --- Other IT
3102.30.000 - Ammonium nitrate, whether or not in aqueous solution DAHANA/MNK
3302.10.100 -- Compound alcoholic preparations IT
3601.00.000 Propellant powders DAHANA/MNK
3602.00.100 - Dynamite DAHANA/MNK
3602.00.200 - Explosive gelatin DAHANA/MNK
3902.30.200 -- Granules IP
3902.30.900 -- Other IP
4012.20.000 - Used pneumatic tyres IP
4707.10.100 -- For paper making purposes IP
4707.10.900 -- Other IP
4707.20.100 -- For paper making purposes IP
4707.20.900 -- Other IP
4707.30.100 -- For paper making purposes IP
4707.30.900 -- Other IP
4707.90.100 -- For  paper making purposes IP
4707.90.900 -- Other IP
5003.10.000 - Not carded or combed IU
5003.90.000 - Other IU
5103.10.000 - Noils of wool or of fine animal hair IU
5103.20.000 - Other waste of wool or of fine animal hair IU
5103.30.000 - Waste of coarse animal hair IU
5202.10.000 - Yarn waste (including thread waste) IU
5202.91.000 -- Garnetted stock IU
5202.99.000 -- Other IU
5301.30.000 - Flax waste IU
5302.90.000 - Waste of true hemp (including yarn waste and garnetted stock) IU
5303.90.000 - Waste of jute and other waste textile bast fibres IU
5304.90.000 - Waste of sisal and other waste textile fibres of the genus IU
5305.19.000 -- Waste of coconut (coir), (including yarn waste and garnetted stock) IU
5305.29.000 -- Waste of abaka (including yarn  waste and garnetted stock) IU
5305.99.000 -- Waste ramie and other waste vegetable textile fibres (including yarn waste
and garnetted stock)IU
6310.90.000 Used or new rags IU
7001.00.000 Cullet and other waste and scrap of glass;  glass in the mass IP
7112.10.000 - Of gold, including metal clad with gold but excluding sweepings containing
other precious metalsIU
7112.20.000 - Of platinum, including metal clad with platinum but excluding sweepings
containing other precious metalsIU
7204.10.000 - Waste and scrap of cast iron IP
7204.21.000 - Of stainless steel IP
7204.29.000 -- Other IP
Table III.5 (cond't)Indonesia WT/TPR/S/51
Page 61
Tariff Heading No. Description Type of  licence
7204.30.000 - Waste and scrap of tinned iron or steel IP
7204.41.000 -- Turnings, shavings, chips, milling waste, sawdust, filings, trimmings and
stampings, whether or not in bundlesIP
7204.49.000 -- Other IP
7404.00.000 Copper waste and scrap IP
7503.00.000 Nickel waste and scrap IP
7602.00.000 Aluminium waste and scrap IP
7802.00.000 Lead waste and scrap IP
7902.00.000 Zinc waste and scrap IP
8002.00.000 Tin waste and scrap IP
8101.91.000 -- Waste and scrap IP
8102.91.000 -- Waste and scrap IP
8103.10.000 -- Waste and scrap IP
8104.20.000 -- Waste and scrap IP
8105.10.000 -- Waste and scrap IP
8106.00.000 Bismuth waste and scrap IP
8107.10.000 - Waste and scrap IP
8108.10.000 - Waste and scrap IP
8109.10.000 - Waste and scrap IP
8110.00.000 Antimony waste and scrap IP
8111.00.000 Manganese waste and scrap IP
8112.11.000 -- Waste and scrap IP
8112.20.000 - Chromium waste and scrap IP
8112.40.000 - Vanadium waste and scrap IP
8112.91.000 -- Waste and scrap IP
8113.00.000 Cermets waste and scrap IP
8201.10.000 - Spades and shovels IT
8201.20.000 - Forks IT
8201.30.000 - Mattocks, picks, hoes and rakes IT
8201.40.100 -- Hatchets and adze IT
8201.60.000 - Hedge shears, two-handed pruning shears and similar two-handed shears IT
8201.90.000 - Other hand tools of a kind used in agriculture, horticulture or forestry IT
8548.10.000 - Waste and scrap of primary cells, primary batteries and electric
accumulators;  spent primary cells, spent primary  batteries and spent electricaccumulatorsIP
8702.10.100 - With g.v.w. not exceeding 5 tonnes IU, IT/AT
8702.10.200 - With g.v.w. not exceeding 5 tonnes but not exceeding 24 tonnes IU, IT/AT
8702.10.990 -- Other than in completely knocked down condition IU, IT/AT
8702.90.100 - With g.v.w. not exceeding 5 tonnes IU, IT/AT
8702.90.200 - With g.v.w. exceeding 5 tonnes but not exceeding 24 tonnes IU, IT/AT
8702.90.990 -- Other  than in completely knocked down condition IU, IT/AT
8703.21.100 -- Jeep IU, IT/AT
8703.21.200 -- Minibus IU, IT/AT
8703.21.300 -- Sedan and station wagon IU, IT/AT
8703.21.900 -- Other IU, IT/AT
8703.22.100 -- Jeep IU, IT/AT
8703.22.200 -- Minibus IU, IT/AT
8703.22.300 -- Sedan and station wagon IU, IT/AT
8703.22.900 -- Other IU, IT/AT
8703.23.100 -- Jeep IU, IT/AT
8703.23.200 -- Minibus IU, IT/AT
Table III.5 (cond't)WT/TPR/S/51 Trade Policy Review
Page 62
Tariff Heading No. Description Type of  licence
8703.23.300 -- Sedan and station wagon IU, IT/AT
8703.23.900 -- Other IU, IT/AT
8703.24.100 -- Jeep IU, IT/AT
8703.24.200 -- Minibus IU, IT/AT
8703.24.300 -- Sedan and station wagon IU, IT/AT
8703.24.900 -- Other IU, IT/AT
8703.31.100 -- Jeep IU, IT/AT
8703.31.200 -- Minibus IU, IT/AT
8703.31.300 -- Sedan and station wagon IU, IT/AT
8703.31.900 -- Other IU, IT/AT
8703.32.100 -- Jeep IU, IT/AT
8703.32.200 -- Minibus IU, IT/AT
8703.32.300 -- Sedan and station wagon IU, IT/AT
8703.32.900 -- Other IU, IT/AT
8703.33.100 -- Jeep IU, IT/AT
8703.33.200 -- Minibus IU, IT/AT
8703.33.300 -- Sedan and station wagon IU, IT/AT
8703.33.900 -- Other IU, IT/AT
8703.90.000 - Other IU, IT/AT
8704.10.900 -- Other IU, IT/AT
8704.21.000 g.v.w. not exceeding 5 tonnes IU, IT/AT
8704.22.000 g.v.w. exceeding 5 tonnes but not exceeding 20 tonnes IU, IT/AT
8704.23.900 --- Other IU, IT/AT
8704.31.000 -- g.v.w. not exceeding 5 tonnes IU, IT/AT
8704.32.900 --- Other IU, IT/AT
8704.90.900 --- Other IU, IT/AT
8711.10.000 - With reciprocating internal combustion piston engine of a cylinder capacity
not exceeding 50 c.c.IU, IT/AT
8711.20.000 - With reciprocating internal combustion piston engine of a cylinder capacity
exceeding 50 cc but not exceeding 250 ccIU, IT/AT
8711.20.000 - With reciprocating internal combustion piston engine of a cylinder capacity
exceeding 250 cc but not exceeding 500 ccIU, IT/AT
8711.20.000 - With reciprocating internal combustion piston engine of a cylinder capacity
exceeding 500 cc but not exceeding 800 ccIU, IT/AT
8711.20.000 - With reciprocating internal combustion piston engine of a cylinder capacity
exceeding 800 ccIU, IT/AT
8711.90.000 - Other IU, IT/AT
Source: The Government of Indonesia.
38. Since the currency crisis, Indonesia has undertaken to remove these licences in the context of
the IMF programme, particularly those that were not covered by WTO commitments.  A first step was
taken in late 1997 with the removal of import licensing requirements on commodities controlled by
BULOG (except rice).  This involved 26 tariff lines (7 lines for milk and milk products, 7 lines for
sugar and sugar products, 8 lines for soybeans, 2 lines for cloves, and 2 lines for wheat flour and
meslin). These products can now be imported freely under the general importers' licence (UI).
According to the Government, licensing requirements  for completely built-up cars, covering a total of
43 tariff lines will be removed in the near future, effectively reducing the total number of tariff items
subject to licensing, from 160 to 119.Indonesia WT/TPR/S/51
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39. The combination of existing commitments (both in the WTO, with respect to bound items,
and the IMF, regarding the other items) will ultimately result in the virtual disappearance of
Indonesia's long-standing licensing policy at the turn of the century.21
(c) State-trading agencies and firms
40. Upon the entry into force of the Uruguay Round Agreements, and pursuant to Article XVII of
the GATT 1994, Indonesia had notified two state-trading agencies as defined in the Understanding onthe Interpretation of Article XVII.  These were the National Logistics Agency, abbreviated as
BULOG (Badan Urusan Logistik), and the BPPC  (Badan Penyangga dan Pemasaran Cengkeh).
BULOG was described as the agency responsible for implementing the Government's food policy and
ensuring the adequate supply of essential food products. In doing so, it controlled and stabilized
commodity prices through market intervention (domestic procurement, sales and distribution, importand export, and stock management). In this context, BULOG was granted import and export
monopolies in respect of rice, sugar, wheat and wheat flour, soybean and garlic.
22  Similarly, BPPC
was notified as a non-governmental agency responsible for the marketing and distribution of cloves,
and was also granted a monopoly over the import/ export of that commodity.  The agency could
engage in purchasing, selling, distributing, importing, exporting and managing stocks of cloves.
41. Indonesia's commitments to the IMF under the first and second Letters of Intent have resulted
in major changes in the status and operation of  BULOG and BPPC.  Following the deregulation of
trade in sugar, wheat, soybeans, wheat flour and garlic, BULOG's exclusive rights have been limited
to rice (effective 1 February 1998).  In addition, the Government of Indonesia committed itself to free
domestic and international trade in cloves and to disband BPPC by 30 June 1998.  Despite some
resistance of powerful private in terests, BPPC's monopoly was removed ahead of schedule, in the
spring of 1998.23  Indonesia has yet to notify these changes to the Working Party on State Trading
Enterprises.
42. Regardless of whether they fall under the provisions of Article XVII of the GATT, several
other enterprises, agencies or associations of producers benefit from trade privileges, notably under
the licensing system.  Before it was dismantled in January 1998, APKINDO, the Association of
Wood-Panel Producers, controlled the export and shipment of wood-panel products in Indonesia.Prior to 1998 state-owned companies controlled the import of certain processed foods and beverages
                                                     
21Paragraph 36 of the second Letter of Intent, states that "all (other) quantitative import restrictions,
other than those justified for health, safety, environment and security reasons, and other non-tariff barriers that
protect domestic production, will be completely phased out by the end of the programme period."
22BULOG maintained under the Uruguay Round its sole rights to import soybean.  However,
Indonesia's Schedule XXI provides that BULOG must ensure that domestic prices for soybean do not exceed theworld price by more than 30%.  Within the context of the Uruguay Round, Indonesia made a commitment tophase out related local-content requirements within three years of the implementation of the WTO Agreement.Indonesia implemented that commitment on 1 April 1996, 21 months ahead of schedule.
23Following the termination of BPPC's activities, the press reported that PT KCN, a company held by
former BPPC shareholders, attempted to re-impose informal monopoly trading arrangements to the cigarettecompanies, the main users of cloves. According to th e Chairman of the Association of Indonesian Cigarette
Companies, association members were required to purchase  cloves from PT KCN as a prerequisite of buying the
necessary excise stamps from the Directorate General of Customs and Excise (DGCE), an affirmation denied byDGCE.  Despite the deregulation, it was also reported that many cigarette companies continued to be bound by
one-year or longer purchase contracts with PT KCN, a company which exercises considerable market power by
holding about 170,000 tonnes of cloves inherited from BPPC.  In turn, the Government reiterated that farmersand cooperatives were free to sell cloves directly to end-users, and provided clarifications on the new rules inthis respect (Jakarta Post, 25 April 1998:  "New firm controls clove supply";  and 26 April:  "new clovemonopoly will undermine reforms").WT/TPR/S/51 Trade Policy Review
Page 64
(dairy products, sugar, rice flour, soybean, clove, saccharin, na-cyclamate and alcoholic beverages)
through registered importers' (IT) licences. Since January 1998, that list has been reduced to
saccharin, na-cyclamate and alcoholic beverages, only.  A number of state-owned enterprises have
also been granted import monopolies for goods that they produce.  Imports of petroleum and gas
products are licensed exclusively to Pertamina, while imports of explosives are restricted under
licence to the state-trading entity, PT Perum Dahana.
(d) Trade defence measures
Anti-dumping and countervailing actions
43. Until late 1995, Indonesia had no anti-dumping or countervailing legislation.  The
Government generally used tariffs and surcharges to protect industries against foreign imports when
national or private interests were considered to be affected.  A new anti-dumping and countervailingregulation was introduced as part of the 1995 Customs Law, and complemented by Government
Regulation 34/1996 of 4 June 1996, and Ministerial Decrees 136/Mpp/Kep/6/1996 and
172/MPPKep/7/1996.  The latter regulation established the Indonesian Anti-Dumping Committee, a
decision-making body, chaired by the Minister of I ndustry and Trade, with the Minister of Finance as
Vice-Chairman.
24  The Committee is assisted by the Anti-Dumping Operational Team which conducts
investigations, on anti-dumping cases.  In addition, the Team provides assistance to Indonesian
exporters involved in allegations of dumping by third countries.  The Team consists of a Secretariat, a
Division of Anti-Dumping and a Division of Dumping Prosecuti on. Indonesia's anti-dumping process
is described in Box III.1.
44. Indonesia's  new anti-dumping and countervailing laws and regulations have been notified to
the WTO Committees on Anti-Dumping Practices and Subsidies and Countervailing Measures (WTO
Documents G/ADP/N/1/IDN/2 and G/ SCM/N/1/IDN/2, 23 September 1996) .  They were reviewed by
the Committees in the spring of 1997.  As part of this process, Indonesia responded to questions from
its partners, a few of whom questioned the compatibility of certain aspects of Indonesia's legislation
with the provisions of the WTO Agreements on Anti-Dumping Practices and on Subsidies and
Countervailing Measures.  In particular, Members sought clarification on:
- the exact circumstances in which provisional measures are imposed;
- the consistency of Indonesian procedures concerning the initiation of an investigation
with Articles 5.2 and 12.1.1. of the Anti-Dumping Agreement;
- the consistency of the definition of "domestic industry", "similar goods" (like
products) and other terms with that of the WTO Anti-Dumping Agreement;
the termination of anti-dumping and countervailing investigations with respect to
negligible imports;
- the implementation of the WTO Agreement concerning the consideration of specific
factors when analysing dumped or subsidized imports having caused material injury;
- the application of the lesser duty rule; and
- the nature of the Appeal Body, charged wi th judicial review of anti-dumping and
countervailing determination.
                                                     
24According to the terms of Article 7 of Gove rnment Regulation 34/1996, the Committee is tasked
with: "investigating dumped imports and subsidized goods;  collecting, examining and processing pieces ofevidence and information;  proposing the imposition of anti-dumping and countervailing duties;  carrying outother activities determined by the Minister of Industry and Trade; and preparing reports on the realization of thetasks".Indonesia WT/TPR/S/51
Page 65
Box III.1:  Indonesia's anti-dumping process
Applications  received by the Indonesian Anti-Dumping Commit tee from domestic industry for the initiation of
an investigation are accepted on condition that there is sufficient prime fa cie evidence of dumping, injury and
causality thereof, and that claims m ade are substantiated by relevant evi dence.  The complainants are required
to complete an application providing the information upon which the allegations are made, including evidenceof the alleged dumping and injury, the known exporters, import levels and market penetration, and basic
industry data such as production, capacity utilization, stock and consumption levels, price developments, price
undercutting, etc.  A major requirement is that the comp lainant be representative of the domestic industry;  to
this end, producers of the products concerned are contac ted to evaluate the industry's support for the complaint.
Once the application has been assessed, the Anti-Dum ping Committee decides whether a proceeding should be
opened on the basis of the Operational Team's recommendation.  The applicant is informed accordingly.  There
are no time limits set for the acceptan ce of an application.  The Committee ta kes the "necessary time" to ensure
that applications are well substantiated.
Having decided that there is sufficient evidence to justify the initiation of a proceeding, the exporting authorities
concerned would be pre-notified normally around 15 days before the publication of the initiation   of the
investigation.  All interested parties known to exist, as laid down in the petition, would receive copies of thenon-confidential complaint, a questionnaire and a copy of the notice of initiation.  Th e same copies would also
be sent to the representative of the exporting countries concerned.  The allegation of dumping and injury are
considered simultaneously.  All facts made available by interested parties are to be taken into account and thefindings presented to the Committee on Anti-Dumping with accompanying recommendations for a  preliminary
determination.   If the preliminary determination recommends the imposition of provisional duties, such duties
can be imposed no sooner than 60 days after the initiati on of the proceeding.  However, there are no specific
time limits within which a preliminary determination should be made.
Throughout an investigation all interested parties are given the opportunity to request a hearing  with the other
parties.  The Committee also provides opportunities for hearings following the initiation and the preliminarydetermination provided a request is made within the time limit laid down.  Interested parties may also request ameeting with the Committee on specific issues that may arise during the course of the proceeding.  A written
submission  must be lodged with the Committee by interested parties.  All interested parties have at least
37 days to provide written submissions, complete the questi onnaire, as relevant, etc.  Parties that have notified
their interest within this period and are considered fully cooperating parties may provide additionalsubmissions at any time during the subsequent proceeding.  Parties t hat did not respond within the 37-day
period, or whose response was considered deficient may still submit additional information, but the Committeereserves the right to decide whether this information can be taken into account for the purposes of theinvestigation.
Prior to publication of the final determination, all interested parties are provided with a disclosure of essential
facts  under consideration, which form the basis for the decision whether to apply definitive measures.  While
there is no set time period, this disclosure is given in sufficient time for the exporters to defend their interests.Once the Operational Team has taken account of the evidence, a final determination  is prepared and submitted
to the Anti-Dumping Committee.  The final determination will normally be made within four months of theimposition of provisional anti-dumping duties, unless a request is made by a majority to extend the duration of
provisional measures and prov ided that this extension does not exceed the statutory time limits.  The initiation,
preliminary and final determination are published in the government gazette.  Copies are sent to all knowninterested parties in addition to the authorities of the exporters concerned.  There are no time limits laid downfor these public notices .  However, preliminary determinations involving the imposition of duties cannot be
made within 60 days of the notice of initiation.  Definitive determinations can be made no later than 12 monthsand in exceptional circumstances 18 months af ter the initiation of an investigation.
Source: WTO Secretariat, based on replies by the Indonesian authorities to questions posed in the Committee
on Anti-Dumping Practices (WTO document G/ADP/Q1/IDN/10, 13 October 1997).WT/TPR/S/51 Trade Policy Review
Page 66
45. More generally, Members questioned whether key issues in the WTO Anti-Dumping
Agreement were addressed in the Indonesian legislation or correctly codified, as, for example: the
establishment of normal value; adjustments to export price and normal value; the degree of trade
adjustment; the notion of fair comparison; appropriate exchange rates; the determination of injury; the
threat of material injury; the standing of the complainant; de minimis dumping margins; provision of
full text of the written application to the known exporters, the exporting country and interestedparties; and newcomer review.
46. Indonesia provided answers to all questions.  To the general remark about the absence of
explicit domestic provisions in areas covered by the WTO Agreements, the Indonesian authorities
responded that they intended to fully comply with  all the requirements of the WTO Agreements; for
the time being, this does not require any changes to the Indonesian anti-dumping laws.  In themeantime, the Indonesian authorities assured Members that anti-dumping actions would scrupulously
adhere to all aspects of the WTO Agreement.  In the context of this Review they also confirmed that,
while the WTO Anti-Dumping Agreement was self-e xecuting through Indonesian law, the Agreement
could apply directly and be invoked by the interested parties if certain aspects of the Agreement were
not mentioned in the law.  So far, according to the authorities, no such case has yet arisen.
47. Since the adoption of the new legislation, Indonesia has initiated several anti-dumping
actions, and in two instances has imposed duties (a gainst imports of HRC/Plate products from Russia,
China, India and Ukraine, and against imports of wi re rod from India and Turkey).  Actions against
imports of synthetic fibres from Chinese Taipei and the Republic of Korea have been terminated with
conclusions of no causal link.  In the action relating to imports of carbon black from India and
newsprint white from Canada, France and the United States, the complaints were withdrawn. Full
details of anti-dumping actions by Indonesia are provided in Table III.6 .  According to the
Government, the demands for anti-dumping investigations generally originate from subsidiaries of
foreign-owned firms, which seem to show grea ter knowledge and international practice of such
procedures than Indonesian-based firms.
48. Indonesia's exports are also subject to a number of anti-dumping actions in certain main
markets.  Exports of textiles and consumer electronics are the main products affected.
25  Given the
large devaluation of the rupiah, Indonesia expressed fears in the context of this Review that increased
anti-dumping actions by importing countries against its products would be unfair and jeopardize its
chances of recovery.
49. As mentioned above, the rules on countervailing measures were introduced at the same time
and in the same legislation as  those on anti-dumping.  The legislation has been notified to the WTO(document G/SCM/N/1/IDN2, 23 Se ptember 1996) and reviewed by the Committee on Subsidies and
Countervailing Measures. Countervailing (like an ti-dumping) cases are investigated by the Anti-
Dumping Operational Team,
26 which makes proposals to the decision-making body, the Indonesian
Anti-Dumping Committee. To date, Indonesia has not undertaken any countervailing investigations
(WTO document G/SCM/N/35/add.1/Rev.1).
                                                     
25Indonesia has pointed out in the context of this  Review that the third consecutive opening of an
anti-dumping investigation against its exports of unbl eached cotton to the Europ ean Union was evidence of
"trade harassment" against these exports and that "consideration should be given to protecting exporters from
such practices by adapting the Agreement accordingly".
26Article 2 of Decree 172/MPP/Kep/7/1996 provides that: "the Operational Team of Anti-Dumping
supports the Indonesian Committee on Anti-Dumping in coping with dumped import and subsidized goods aswell as dumping prosecution for the Indonesian exported goods".Indonesia WT/TPR/S/51
Page 67
Table III.6
Anti-dumping  measures,  24 April 1998
Final measures
(Date and dumping
margin)No final measures Country or
customs
territoryProduct InitiationProvisional
measures/
determin-
ationsDefinitive
dutyPrice
undertakingNo
dumpingNo
injuryCase
withdrawn
Australia Tin plate 24.3.98
Canada Newsprint
white31.11.97
China HRC/Plate 19.12.96 17.4.97
30%29.9.97
30%
FernoManganeseand Silicon
Manganese21.4.98
Chinese Taipei Synthetic
fibre30.9.96 25.7.97 25.7.97
Tin plate 24.3.98
France Newsprint
white31.11.97
Japan Tin plate 24.3.98
Carbon
black7.11.9622.7.97
HRC/Plate 19.12.96 17.4.97
26-38%29.9.97
23-38%
Wire rod 24.3.97 18.11.97
30%17.3.98
23%India
Ampicilin/
Amoxicillin
Trihydate16.4.98
..
Synthetic
fibre7.11.96 25.7.97 25.7.97 Korea, Rep. of
Tin plate 24.3.98
Russia HRC/Plate 19.12.96 17.4.97
39%29.9.97
19-39%
Thailand Carbon
black7.11.96 22.7.97
Turkey Wire rod 24.3.96 18.11.97
10-14%17.3.98
9-13%
Ukraine HRC/Plate 19.12.96 17.4.97
22-42%29.9.97
18-42%
United States Newsprint
white31.11.97
.. Not available.
Source: WTO Secretariat on the basis of notifications and information provided by the Government of Indonesia.
Safeguards
50. Indonesia has no legislation or regulation conc erning safeguard measures.  There were no
pre-existing Article XIX measures in force at the entry into force of the WTO Agreement on
Safeguards, nor any grey-area measures to be eliminated.  With regard to questions posed by WTO
Members in 1996 as to when Indonesia intended to enact legislation concerning safeguards, the
Indonesian authorities answered that the Agreement on Safeguards was still being processed by theWT/TPR/S/51 Trade Policy Review
Page 68
appropriate authorities.27   To date, Indonesia has not made use of special safeguards available under
the WTO Agreement on Agriculture.
(e) Local-content and performance requirements
51. For many years, the Indonesian Government has been operating programmes aimed at
encouraging the use of locally produced components in assembly operations, particularly in the
transport equipment and industrial machinery sectors.  In the 1980s, "deletion plans," specifyingproducts that could be imported, together with those to be sourced locally, were combined with
restrictive licensing requirements to achieve the desired level of local content.  However, stringent
local-content requirements (up to 100%) and poor local inputs have resulted in relatively inefficient
production, and demands for protection of the finished products by the producers-assemblers involved
in these programmes (see GATT, 1994).
52. Beginning in 1993, the deletion plans were gradually removed, and in certain cases, replaced
by local-content schemes providing for incentives in the form of duty concessions for imports of
components used to produce the goods concerned.  Such schemes have developed, mainly in the
transport equipment sector (particularly the motor vehicle industry);  however, during the period
under review, they gradually disappeared in the industrial machinery, electronics, and agriculturalsectors.
28
53. Under the 1993 local-content scheme for motor vehicles, import duties on certain parts and
accessories of motor vehicles vary inversely with local content (duties were imposed at rates of 0, 10,
15, 20, 25, 35, 50 and 65% depending on the category of motor vehicle and local content).29  To
benefit from duty-free importation of parts and com ponents, local-content rates are set at a minimum
of 60% for all sedans and station wagons with engi nes of less than 1,600 cc;  40% for jeeps, combi,
minibuses;  30% for trucks and buses weighing between 5 and 24 tonnes.  Local-content rates are
reviewed every year to assess progress in the development of the domestic automotive industry.
Exemption from or reduction of sales tax are also accorded to motor vehicles of less than 1,600 cc,
conditional upon them being manufactured locally and in some cases upon a minimum local-content
requirement of 60% (Decree 645/93, amended by Regulation 36/96).
54. In a further move in support of local content the Government introduced in 1996 a National
Car Programme, aimed at producing a fully locally made automobile in a relatively short period, (a
full description of the Programme is provided in Chapter IV. (4)(iii)(6).  "Pioneer" status was to have
been granted to Indonesian car producers who: produced in facilities  100% owned by national
industrial companies or Indonesian companies; us ed trade marks owned by Indonesian companies or
citizen; and developed the cars with increasin g Indonesian technology, design and engineering.
"Pioneer" companies would thus be entitled to total exemption from import duties on all parts and
components (Presidential Decree 82/96) and exemption from sales tax (Government Regulation
20/96), conditional upon the fulfilment of local-content requirements (20% in the first year of
operation;  40% at the end of the second year; and 60% at the end of the third year).  Presidential
Decree 42/96 and Ministerial Decree 142/96 extended duty and sales tax exemptions to Indonesian
                                                     
27WTO document G/SG/Q1/IDN/1, 24 June 1996.
28Indonesia committed itself in the Uruguay Round to remove local-content requirements on bound
items within ten years.  This commitment concerned two programmes, one applying to soybean meal used for
animal feed and one applying to dairy products.  The first scheme was removed in 1996 and the second in 1998
(see below).  However, the main programmes applied to unbound products such as motor vehicles, which arethe focus of this section.
29Duties on the import of components for assembling purposes were lowered in 1995, without any
changes in the overall policy.Indonesia WT/TPR/S/51
Page 69
manufacturers who produce National Cars in a foreign country, provided that they meet the same
local-content requirement (i.e. the phased 20-40-60% levels).30
55. The granting of duty and sales tax exemptions on imported parts and components conditional
upon local content, in favour of "pioneer companies" or other companies under the 1993 and 1996
schemes, was the subject of a dispute brought to the WTO by the European Union, Japan and the
United States.  Requests for consultations were made in October 1996.  Panels were established at theDSB meetings of June and July 1997 (the three panels were later merged into one).  The Panel Report
was circulated on 2 July 1998 .
56. In the second Letter of Intent, the Government decided to "discontinue immediately any
special tax, customs, or credit privileges granted to the National Car", and to "implement ahead of
schedule the ruling of the WTO Panel".
31  In addition, the Government announced that, "consistent
with its WTO commitments, the local content program for motor vehicles, which gives preferential
tariff rates to manufacturers using a high percentage of local parts, will be phased out by year 2000."
The second Letter of Intent also announced the phasing out of local-content requirements on dairy
products (Presidential Instruction 4/1998), thereby advancing implementation of a commitment taken
in the Uruguay Round (the initial commitment was that the measure would be eliminated within tenyears).  The removal of measures affecting dairy products was effective as of 1 February 1998.
57. The gradual elimination of local-content schemes is an important policy development in a
country that has a long tradition of encouraging industrialization and local production through such
schemes. While it may have contributed to the emergence of assembly operations or parts production
in certain industries, it may also have diverted some of the country's scarce capital resources to
projects that would not have been competitive without such requirements and associated incentives.
Already, the modifications introduced in the 1990s to the local-content programmes to make themmore flexible (for example by allowing the multi-sourcing of parts) reflected the concern of producers
and assemblers about the quality and cost of locally made parts.
58. In this respect, the divergent performance of automobiles and electronics, which have in the
past been the two main sectors targeted by the Government, are instructive.  Since the elimination of
deletion plans and the reduction of tariffs, electronics has developed into Indonesia's third largestexport sector, with annual increases in exports of about 50% (Chapter IV).  By contrast, in the
automotive sector, stringent local-content requirements have contributed to the establishment of an
inward-oriented assembly-based car industry.  The motor vehicles produced are adapted largely to
Indonesian taste, standards and income.  According to  government statistics, not a single locally-made
car has ever been exported.  As a result, the industry has become highly dependent on, and vulnerableto the domestic market.  Since July 1997, domestic sales of cars have dropped by 80%, forcing
Indonesia's largest manufacturer, PT Astra, to reduce its production significantly.
                                                     
30Imported National Cars are deemed to meet the 20% lo cal-content requirement in the first year if the
overseas National Car producer purchases Indonesian-made parts and components accounting for 25% of the
car's import value.
31The commitment to cancel privileges granted to the National Car Programme was implemented
through two Decrees of the Ministry of Industry and Trade (19/MPP/Kep/1/1998 and 20/MPP/Kep/1/1998), anda Decree of the Ministry of Finance, which were part of the first implementation package of the Letter of Intent,dated 21 January 1998.WT/TPR/S/51 Trade Policy Review
Page 70
(f) Rules of origin
59. Indonesia has notified the WTO that it has no judicial decisions or administrative rulings of
general application relating to non-preferential rules of origin.32  It continues to work with other WTO
Members towards international harmonization under the WTO Agreement on Rules of Origin.
60. Specific rules of origin apply to ASEAN members in order for them to benefit from
preferential tariff under the Agreement on the CEPT.  According to ASEAN-CEPT rules, a product isgenerally deemed to be of ASEAN origin if a minimum of 40% of its content originates from any
member countries, the 40% local content applying to both single country content and cumulative
ASEAN content.  For textiles and textiles products, the local-content requirement can either be
expressed as a percentage (the 40% level) or based on the principle of substantial transformation.
(g) Countertrade
61. Between 1994 and 1996, countertrade transactions accounted for about 2% of Indonesian
exports (US$1.3 billion in 1994 and 1995, US$1 billion in 1996) but shrank in 1997 (US$400 million)
due to the economic crisis.
33  Most countertrade activities are generated under two Government
schemes.  The first scheme, <administered by the Ministry of Industry and Trade,> relates to the
countertrade obligations imposed on foreign firms tendering for government procurement contracts,financed by export credit and worth between Rp 500 million and Rp 10 billion.  Such obligations do
not apply to contracts financed by international financial institutions such as the International Bank
for Reconstruction and Development, the Islami c Development Bank or the Asian Development
Bank.  Countertrade obligations are not systematically applied and depend on individual contract
terms (section (4)(iv)).  Under the second scheme, foreign investment companies established under
PMA status and located in bonded areas or export-processing zones, are entitled to use countertrade
arrangements with their parent companies for th e importation of necessary equipment for production
(including raw materials, intermediate capital goods and machinery, factory equipments and
components), provided that the final product is expo rted.  In such cases, imports would be exempted
from any tax, including customs duties and luxury sales tax.
(3) 
 MEASURES DIRECTLY AFFECTING EXPORTS
(i) Export restrictions and controls
(a) Policy trends
62. Until the economic crisis, Indonesia maintained a number of controls, bans, high taxes and
regulations restricting exports of a wide variety of agricultural, forestry, mining and industrial
products.  At the time of the 1994 Trade Policy Review, these restrictions affected up to 2,000 tariff
lines and covered nearly half of the value of Indonesia's non-oil exports.  The items most affectedwere forestry products, with 85% of exports covered, and agricultural products, with two thirds of
exports covered.  Non-oil manufactured products were less affected, with export restrictions covering
only 10% of exports, a share of which can be explained by the externally imposed controls on textiles
and clothing under the WTO Agreement on Textiles and Clothing.
                                                     
32WTO document G/RO/N/16, 5 March 1997.
33In 1996, Indonesia's countertrade operations involved more than 60 trading partners.  While
individually, the United States (US$166 million), Japa n (US$67 million) and Singapore (US$52 million) were
Indonesia's main countertrade destinations, APEC as a group represented the largest share with Indonesia's
countertrade exports valued at US$324 million.Indonesia WT/TPR/S/51
Page 71
63. Apart from textiles quotas with importing nations, the Government generally justified these
export restrictions on the grounds of (i) protection of natural resources and endangered species;
(ii) the promotion of higher-value-added downstr eam industries; (iii) upgrading the quality of
exported products; and (iv) adequate supply of "essential products". However the 1994 Secretariat
Report, as well as subsequent World Bank reports, pointed out some negative side effects of certain of
these export restrictions.  For example, there was growing evidence that export taxes on logs andtimber, by depressing domestic prices for such commodities, encouraged inefficient logging practices,
an unsustainable pace of logging, and ultimately the gradual replacement of an efficient export
industry (logging) by a less efficient downstrea m processing industry (plywood) (GATT 1994 and
Chapter IV(2) of this report).  Other economic side effects of such export restrictions include the
establishment of powerful export cartels (in cement, wood and wood products, and lampit rattan) tocapture the "economic rent" associated with the rest raints;  and discouragement of investment in and
supply of the production inputs when their prices are depressed by controls (rattan).
64. The deregulation packages introduced between 1994 and 1997 focused principally on imports
and therefore did little to remove export controls.  Since then, the anti-export bias of Indonesia's trade
policy has become increasingly difficult to justify as the country faces a serious balance-of-paymentcrisis and needs to increase export receipts.
65. In this connection, the Government committed itself in its second Letter of Intent to "phase
out punitive export taxes" and "remove all other types of export restrictions" within the programme
period, apart from those imposed for health and security reasons as well as temporary measures
introduced in the event of occasional shortages (paragraph 37 and 38 of the Letter of Intent).  In a first
step, it has reduced significantly the level of export taxes, reduced the list of regulated products and
replaced the ban on export of palm oil by a tax.  In addition, the Government decided to remove all
impediments to exports, including quotas and provincial taxes levied on interprovincial and
interdistrict trade (the "retribusi"), which ultimately affected exported goods.
(b) Individual measures
Export bans and prohibitions
66. Export bans and prohibition concern mainly live fishery products, wildlife, hides and skins of
certain animals such as reptiles, some rubber material (notably rubber in block) and a variety of waste
and scrap products (Table III.7).  Their number has been relatively stable over time (60 to 70 tariff
lines). Their aim is to protect endangered species and prevent the exportation of dangerous material.
Export taxes
67. Prior to the currency crisis, export taxes affected about 80 products, covering a wide range of
forest products (notably logs, sawn timber and rattan), agricultural products (crude palm oil and
coconut oil), and mining and metal products (ores and concentrates of copper, lead, tin and platinum,
aluminium waste, etc.).  While most rates were set at 30% ad valorem , specific taxes, with
prohibitively high ad valorem  equivalents, were imposed on log, sawn timber, rattan and other wood
products.  On raw/split rattan, the Government levied taxes of up to US$10 per kg., for internationalprices of less than US$2  a kg. (equivalent to a 500% tax).  Export taxes on logs reached US$4,800
per cubic metre, for a unit price of US$90-120 per cubic metre in the international market (an ad
valorem  equivalent of about 4,000%).  Although export taxes are in principle levied on the declared
f.o.b. price of the products, check prices, set bi-annually by the Ministry of Industry and Trade, were
used, particularly for wood (Table III.8).  Use of ch eck prices, intended to prevent under-invoicing by
exporters, added a discretionary element to the system of export taxes, reducing transparency.
34
                                                     
34GATT (1994), pp. 74-75.WT/TPR/S/51 Trade Policy Review
Page 72
Table III.7
Export bans, April 1998
HS Code Description
Ex. 0301.10.100 Fish fry of Arowana (sclerophanges formosus – Sclerophanges leichardti)
Ex. 0301.10.920 Arowana fish (sclerophanges formosus – Sclerophanges leichardti)
Ex. 0301.10.920 Freshwater ornamental fish in the kind Botia macracanthus, length 15 cm and over
Ex. 0301.92.100 Fish fry of eels (Anguilla spp) less than 5mm
Ex. 0306.29.190 Cray fish, less than 8 cm
Ex. 0306.29.190 Paneidae shrimp
Wild animals and nature floral/plants listed in the CITES Appendix
4001.22.900 Rubber in block (technically specified rubber is not in compliance with the Standard Indonesian Rubber)
Ex. 4001.29.000 Re-milling material and smoking facilities, such as:  slabs, lumps, scraps, tanah rubber, unsmoked sheets,
blanked sheet, smoked lower than quality IV, blanked D. off, cutting C, remilled 4, and flat bark crepe
4103.20.000 Raw hides, pickled, and wet blue of reptiles
7204.10.000 Waste and scrap of cast iron
7204.29.000 Waste and scrap of other alloy steel
7204.30.000 Waste and scrap of tinned iron or steel
7204.41.000 Other waste and scrap of other steel in the form of turning shavings, chips, milling waste, sawdust, filings,
trimmings and stampings, whether or not in bundles
7204.49.000 Waste and scrap of other steel, other than turning shavings, chips, milling waste, sawdust, filings,
trimmings and stampings, whether or not in bundles
Culture-valued archaic or relic articles
Source:  Decree of the Minister of Industry and Trade No. 182/MPP/4/1988, dated 20 April 1998.
68. In its second Letter of Intent, the Government committed itself to phase out "punitive" export
taxes;  as of 1 February 1998, export taxes on leathe r, cork, ores and waste aluminium were abolished.
For natural resources, the Government has decided to convert the specific taxes into ad valorem
duties, in order to reduce gradually their level and replace them by "resource rent taxes" as
appropriate.  The aim is to reduce the anti-export bias of the policy while at the same time preventing
the over-exploitation of the resource and the deterioration of the environment.  In a first step, inApril 1998, the ad valorem  rates of export taxes on logs, sawn timber, rattan and minerals were
reduced to a maximum of 30%, and a resource rent tax was imposed (Table III.9).  Further reduction
of export taxes on these products are scheduled (a reduction to 20% by the end of 1998, to 15% by the
end of 1999 and to 10% by the end of 2000).
35  The temporary export ban on palm oil, imposed in the
context of domestic shortages, was replaced in March 1998 by an ad valorem  export tax of 40%.
Regulated exports (licensing requirements and quotas)
69. Until the crisis, up to 50% of Indonesia's exports of agricultural products, and significant
shares of mining products, petroleum products and certain manufactured products (essentially textiles
and clothing) were regulated by the Government and could be exported only through approved and
registered exporters.36 The system was intended to capture the economic rent associated with
Indonesia's perceived market power in these areas (GATT 1994, p. 76).  In the case of textiles and
clothing products, the arrangement was designed to monitor quota allocation and entitlements underthe MFA regime.
                                                     
35The check prices shown in Table III.8 and used as a basis for levying the export taxes seem somewhat
higher than the world market prices for many of the wood products concerned.  Such check prices are set by the
Ministry of Industry and Trade in cooperation with the Industry Associations. As a result, the effective tax rateis likely to be much higher than the current 30%.
36At the time of the previous Review, the system covered about 1,800 tariff lines, ranging from coffee,
vegetables, spices, manioc, wood, plywood, processed timber, to liquified gas and mining products.Indonesia WT/TPR/S/51
Page 73
Table III.8
Check-prices for levying export taxes
(Valid from 1 April 1998 to 30 June 1998)
HS Code Description Check price (US$/unit)
1211.90.241 Cinchona bark containing 3% or more quinine by weight 6.00kg
1211.90.249 Cinchona bark, other than containing 3% or more quinine by weight 3.50kg
1401.20.100
1401.20.5001401.90.210Natural manau cane untrimmed AB, in all sizes 3.50kg
1401.20.100
1401.20.5001401.90.210Machine polished manau cane AB, in all sizes 3.80kg
1401.20.100
1401.20.5001401.90.210Batang natural W/S in all sizes 1.80kg
1401.20.100
1401.20.5001401.90.210Tohiti natural W/S in all sizes 2.05kg
1401.20.100
1401.20.5001401.90.210Jahab Loonty trimmed AB in all sizes 3.40kg
1401.20.100
1401.20.5001401.90.210Lambang in all sizes 2.00kg
1401.20.100
1401.20.5001401.90.210Kooboo soft untrimmed AB in all sizes 2.00kg
1401.20.100
1401.20.5001401.90.210Red Datu AB 2.05kg
1401.20.100
1401.20.5001401.90.210Red Pulut 4.00kg
1401.20.100
1401.20.5001401.90.210White Pulut 3.00kg
1401.20.100
1401.20.5001401.90.210Other rattans, I 2.00kg
1401.20.100
1401.20.500Batang polished A 1.90kg
1401.90.210 Batang polished B 1.90kg
1401.20.100
1401.20.5001401.90.210Tohiti polished A 1.85kg
1401.20100
1401.20.5001401.90.210Tohiti polished B 1.70kg
Table III. 8 (cont'd)WT/TPR/S/51 Trade Policy Review
Page 74
HS Code Description Check price (US$/unit)
1401.20.100
1401.20.5001401.90.210Umbullu core A, all sizes 2.80kg
1401.20.100
1401.20.5001401.90.210Umbullu core B, all sizes 2.65kg
1401.20.100
1401.20.500
1401.90.210Fitrit/small core A, all sizes 6.50kg
1401.20.100
1401.20.5001401.90.210Fitrit/small core B, all sizes 5.95kg
1401.20.100
1401.20.5001401.90.210FOC A, in all sizes 5.35kg
1401.20.100
1401.20.5001401.90.210FOC B, in all sizes 4.95kg
1401.20.100
1401.20.5001401.90.210Skinned unshaven A in all sizes 6.25kg
1401.20.100
1401.20.5001401.90.210Skinned unshaven B, in all sizes 5.15kg
1401.20.100
1401.20.5001401.90.210Skinned shaven A, all sizes 7.26kg
1401.20.100
1401.20.5001401.90.210Skinned shaven B, all sizes 6.18kg
1401.20.100
1401.20.5001401.90.210Chair cane A/B, all sizes 12.50kg
2505.90.000 Sands (under the sea) 3.00M3
2505.90.000 Sands (on the land) 4.00M3
4403 Other "Kayu Indah" wood species, in logs 571.00M3
4403 Rimba Campuran wood, in logs 90.00M3
4403.10.291 Ebony and cendana wood, in logs 2,471.00M3
4403.10.270 Teak wood, in logs 750.00M3
4403.10.271 Meranti wood species, in logs 125.00M3
4403.10.296 Rubber wood, in logs 70.00M3
4403.20.100 Raw material of chips wood 30.00M3
4403.99.100 and
4404.20.100Chips wood 50.00M2
Table III.8 (cont'd)Indonesia WT/TPR/S/51
Page 75
HS Code Description Check price (US$/unit)
4406, 4407.99100/120,
4407.99.210/290,4407.99.300/310,
4407.99.911/912,
4407.99.991/992, and
4408Ebony and cendana wood, sawn or chipped lengthwise, sliced or peeled,
whether or not planed, sanded, sanded or finger-jointed, of a thickness
exceeding 6mm, including railway or tramway sleepers (crossties), and veneer5,00M3
4406, 4407.29.110,
4407.29.210,
4407.29.310,
4407.29.910 and 4408Teak wood, sawn or chipped lengthwise, sliced or peeled, whether or not
planed, sanded, sanded or finger-jointed, including railway or tramway sleepers
(crossties), and veneer1,200M3
4406, 4407.26.110,
4407.26.210,
4407.26.310,
4407.26.910 and 4408Meranti wood, sawn or chipped lengthwise, sliced or peeled, whether or not
planed, sanded, sanded, sanded or finger-jointed, including railway or tramway
sleepers (crossties), and veneer500.00M3
4406, 4407, 4408 Rimba Campuran wood sawn or chipped lengthwise, sliced or peeled, whether
or not planed, sanded, sanded or finger-jointed, including railway or tramway
sleepers (crossties), and veneer350.00M3
4406, 4407.99.140,
4407.99.230,
4407.99.914 and 4408Rubber wood, sawn or chipped lengthwise, sliced or peeled, whether or not
planed, sanded, sanded or finger-jointed, including railway or tramway sleepers
(crossties), and veneer280.00M3
4405.20.210 Split poles and piles, of ebony and cendana woods 3,000.00M3
4404.20.220 Split poles and piles, of other indah wood species 720.00M3
4404.20.220 Split poles and piles, of teak wood 720.00M3
4404.20.230/240 Split poles and piles, of meranti wood species 300.00M3
4404.20.240 Split poles and piles, of rimba campuran wood 210.00M3
4404.20.230 Split poles and piles, of rubber wood 168.00M3
Source: Government of Indonesia.
70. On several occasions, the export licensing system was questioned for its lack of transparency
and adverse economic effects.37  The relevant commodity trade associations cooperated closely with
the Government to restrict the number of licensees, the list of approved exporters, and the allocation
of export quotas, thereby encouraging the formati on of powerful export cartels, notably in the wood,
plywood and rattan industries.  While, in allocating and administrating export quotas, the Governmentwould generally take into account prior export performance, reliability, and adherence to existing
quotas and licensing arrangements, the process retained a large degree of discretion (export quotas are
not auctioned; the list of quota holders is rarely published).
71. Following the crisis, the Government has undertaken to reform the system.  The list of
regulated exports was significantly reduced in early 1998, with the removal of many agricultural
products (live cattle, wheat and wheat flour, and sugar), mining products (silver, gold and tin), gasproducts (liquified natural gas, butane, and propane), and some chemicals.  At present, the list
contains products such as manioc, coffee, textiles  and textiles products under MFA arrangements, and
plywood products (Table III.10).  Further deregulatory measures are to be implemented during theIMF programme period.
Supervised exports
72. Certain agricultural, mineral and industrial products are classified as "supervised exports",
which must be approved by the Ministry of Industry and Trade.  The rationale for such controls has
been to ensure an adequate domestic supply of these products at any time, and at reasonable prices.
The list which previously contained more than 100 tariff items ranging from live animals to soybeans,salt, copper, crude vegetable oils, newsprints, fertilizers, cement and tyres, has gradually been reduced
to 39 tariff items (Table III.11).
                                                     
37See in particular the GATT (1994), p. 76; and World Bank (1997).WT/TPR/S/51 Trade Policy Review
Page 76
Table III.9
Export taxes (April 1998)
HS Code Description Export tax rate
1401 Natural manau cane untrimmed AB 30%
1401 Machine polished manau cane AB 30%
1401 Batang natural W/S 30%
1401 Tohiti natural W/S 30%
1401 Jahab Loonty trimmed AB 30%
1401 Lambang 30%
1401 Kooboo soft untrimmed AB 30%
1401 Red datu AB, red pulut, white pulut, and other rattans 30%
1401 Battang polished A and polished B 30%
1401 Tohiti polished A 30%
1401 Tohiti polished B 30%
1401 Umbullu Core A 30%
1401 Umbullu Core B 30%
1401 Fitrit/small core A 30%
1401 Fitrit/small core B 30%
1401 FOC A 30%
1401 FOC B 30%
1401 Skinned unshaven A 30%
1401 Skinned unshaven B 30%
1401 Skinned shaven A 30%
1401 Skinned shaven B 30%
1401 Chair cane A/B 30%
1511.10.000 Crude palm oil (CPO) 40%
1511.90.000 Refined bleached deodorized palm oil (RBD PO) 35%
1513.11.000 Crude coconut oil (CCO) 20%
1513.19.000 RBD coconut oil 15%
1513.21.000 Crude palm kernel oil 35%
1513.29.000 RBD palm kernel oil 30%
2505.10.000 Natural sands of all kinds, whether or not coloured, other than metal bearing sands, in the form
of other than silica sands and quartz sands30%
2505.90.000 Natural sands of all kinds, whether or not coloured, other than metal bearing sands, in the form
of other than silica sands and quartz sands30%
3823.11.000 Crude stearin 35%
3823.11.000 RBD stearin 30%
3823.12.000 Crude olein (CRD Olein) 40%
3823.12.000 Refined bleached deodorized olein (RBD Olein) 35%
4403 "Kaya Indah" wood nesoi, in logs 30%
4403 Rimba campuran wood, in logs 30%
4403 Ebony and cendana wood, in logs 30%
4403 Teak wood, in logs 30%
4403 Meranti wood species, in logs 30%
4403 Rubber wood, in logs 30%
4403 Raw material of chip wood 30%
4403 and 4404 Chip wood 30%
4404 Split poles (wood poles) and piles 30%
4406 Railway or tramway sleepers (crossties) 30%
4407 Ebony and cendana woods, in the form of sawn timber 30%
4407 Indah wood species in the form of sawn timber 30%
4407 Teak wood in the form of sawn timber 30%
4407 Meranti wood in the form sawn timber 30%
4407 Rimba campuran wood, in the form of sawn timber 30%
4407 Rubber wood in the form of sawn timber 30%
4408 Veneer 30%
Source: Decree of Minister of Finance No. 241/KMK.01/1998 and 242/KMK.01/1998, of 22  April 1998.Indonesia WT/TPR/S/51
Page 77
Table III.10
Regulated exports, April 1998
HS Code Description
0714.10.100 Dried or sliced manioc
0714.10.200 Manioc in the form of pellets
0714.10.900 Manioc in a form n.e.s.
0901.11 Coffee, not roasted or decaffeinated
0901.12 Coffee, not roasted, decaffeinated
0901.21 Coffee roasted, not decaffeinated
0901.22 Coffee roasted, decaffeinated
2101.11.000 Extracts, essences and concentrates of coffee
2101.12.000 Preparations with a basis of extracts, essences or concentrates or with a basis of coffee
3306.20.000 ex. 4202, 5001 to
6310,ex. 6405, ex. 6406, ex. 6501 to
ex. 6506, ex. 6703, ex. 6704, ex. 6805,
ex. 6812, ex. 7019, ex. 9404, and ex. 9212Textiles and textile products (under MFA categories) only if exported to the
United States, European Union countries, Canada, Norway, and Turkey
4408 Veneer sheets and sheets for plywood (whether or not spliced) and other wood sawn
lengthwise, sliced or peeled, whether or not planed, sanded or finger-jointed, of a
thickness not exceeding 6mm
4412 Plywood, veneered panels and similar laminated wood
Industrial and handicrafts products made of cendana wood
Source:  Decree of Minister of Industry and Trade No. 182/MPP/4/1998, dated 20 April 1998.
(ii) Export and trade finance
73. Since the early 1980s, Bank Indonesia has provided a re-discount post-shipment facility for
exporters.  Since 1993, however, interest rates charged on these facilities have not been concessionary
and are based on the Singapore interbank rate (SIBOR).  Exporters may sell their export proceeds to
Bank of Indonesia through a foreign exchange bank.  Bank of Indonesia then rediscounts the exportbill, irrespective of whether it is denominated in US$ or in other foreign currency.  However, Bank
Indonesia provides a small advantage to companies designated as "special exporters" by
re-discounting their export at SIBOR plus 3%, while general exporters' credits are re-discounted at
SIBOR plus 4%.
38  In the period under review, the Government has gradually increased the scope of
sectors eligible for the special exporter status, from 5 initially to 18 in 1997 and 27 in 1998 (includingtextiles and clothing, leather, electronics, shoes, rattan, rubber, pulp and paper, and crude palm oil).
In addition to the post-shipment facility, Bank Indonesia introduced in 1997 a preshipment
re-discount facility for exporters.
74. Despite such schemes, in recent months Indonesian firms have encountered increasing
difficulties in obtaining trade finance, both for exports and imports.  As a result of lack of confidencein the soundness of Indonesian banks, their letters of credit are no longer accepted in international
markets, thereby seriously disrupting Indonesia's trade flows.  Given the high import content of
exports (over 40%), the growth of exports is also seriously impeded by the difficulty of obtaining
import credits for raw materials and other inputs that are vital for export-oriented industries.
                                                     
38As part of its policy to favour exports, the Government introduced in mid-1996 the "special exporter"
status, allowing for certain firms, selected by the Ministry of Industry and Trade in designated sectors, to benefit
from trade facilitation measures ranging from faster cust oms and other administrative procedures to preferential
post-shipment rediscount rates.  According to the Gove rnment, the criteria for the "special exporter status" do
not discriminate between local and foreign-owned firms.  Instead, the Government takes into account the firms'good record and behaviour in respecting national laws and regulations, in particular tax and customs laws, aswell as in maintaining creditworthiness.WT/TPR/S/51 Trade Policy Review
Page 78
Table III.11
Supervised exports, April 1998
HS Code Description
0102.10.000 Pure-bred breeding cattle
0102.90.110 Cattle, not pure-bred breeding
0102.90.190 Cattle, not pure-bred breeding
Ex. 0102.90.900 Water buffalo/bull
Wild animals and nature floral/plants listed in the CITES Appendix
Ex. 0301.10.100 Fish fry of Wrasse Napoleon (cheilinus undulatus)
Ex. 0301.10.910 Wrasse Napoleon fish (chelinus undulatus)
Ex. 0301.91.100 Fish fry of Bandeng fish (nener)
Ex. 0310.10.920 Fish fry of Arowana (sclerophages jardinii)
1006 Paddy and rice
1101.00.000 Wheat or meslin flour
1102.30.000 Rice flour
1102.90.000 Other flour, other than rice flour, maize flour, rye flour
1201 Soya bean, whether or not broken
1207.10.000 Palm nuts and kernels
1208.10.000 Flour and meal of soya beans
1701 Cane or beet sugar and chemically pure sucrose in solid form
2607.00.000 Lead ores and concentrates
2609.00.000 Tin ores and concentrates
2709 Petroleum oils and oils obtained from bituminous minerals, crude
2710 Petroleum oils and oils obtained from bituminous minerals, other than crude;  preparations not elsewhere
specified or included, containing by weight 70% or more of petroleum oils or of oils obtained frombituminous minerals, these oils being the basic constituents of the preparations
2711 Petroleum gases and other gaseous hydrocarbons
2712 Petroleum jelly, paraffin wax, micro-crystalline petroleum wax, slack wax, ozokerite, light night mite wax,
peat wax, other mineral waxes, and similar products obtained by synthesis or by other processes, whether ornot coloured
2713 Petroleum coke, petroleum bitumen and other residues of petroleum oils or of oils obtained from bituminous
minerals
3102.10.000 Urea fertilizer
7106.10.000 Silver powder
7106.91.000 Unwrought silver
7106.92.000 Semi-manufactured silver
7108.11.000 Gold powder
7108.12.100 Gold, in lumps, ingots, or cast bars
7108.12.900 Other unwrought forms of gold, in the form other that in lumps, ingots, or cast bars
7204.21.000 Waste and scrap of stainless steel
7404.00.000 Waste and scrap of cooper
Ex. 7407.21.000 Waste and scrap brass
8001.20.000 Tin, alloys
8002.00.000 Tin, waste and scrap
8003 Tin bars, rods, profiles and wire
8004 Tin plates, sheets and strips, of a thickness exceeding 0.2mm.
8005.00.000 Tin foil (whether or not printed of backed with paper, paperboards, plastics or similar backing materials), of
a thickness (excluding any backing) not exceeding 0.2mm;  tin powders and flakes
8006.00.000 Tin tubes, pipes and tube or pipe fittings (for example, couplings, elbows, sleeves)
Source:  Decree of Minister of Industry and Trade No. 182 /MPP/4/1998, dated 20 April 1998.Indonesia WT/TPR/S/51
Page 79
75. To alleviate the problem, the Government and Bank Indonesia are working in three
directions: (i) Bank Indonesia recently deposited US$1 billion in ten foreign banks as a guarantee for
the letters of credit issued by Indonesian banks.  Bank Indonesia expects to extend a new similar
scheme in cooperation with Japan's Exim Bank;  (ii) the Government is working with several
countries or institutions to finance/guarantee the importation of certain essential commodities and raw
materials;  (iii) while not involved directly in the negotiations, the Government and Bank Indonesiahave encouraged and sponsored the recent agreement of the Steering Committee of Indonesia's private
lenders and borrowers, particularly with regard to trade finance arrears.
(iii) Export-oriented zones, duty drawbacks and exemptions
76. There have been no major changes in the operation of bonded areas, export-processing zones
or private entrepôts, since the 1994 Trade Policy Review.  Eligible exporters operating in export-
processing zones or export-oriented manufacturing entrepôts are eligible for special concessions,
notably tariff and tax exemptions for all capital equipment, machinery and raw materials needed for
initial investments and production. The scope of such exemptions (the number of tariff lines) was
increased in 1996.  In the same year, the requirement that foreign and domestic investors willing to
establish in industrial estates hold a production licence, approved by BKPM, was removed.
77. Free-trade zones and industrial estates are combined in several bonded areas, the best known
being the island of Batam.  Other locations include the Nusantara Harbour and the Port of Tanjung
Priok in Jakarta.  Production in these areas includes electronics, semi conductors, and as textiles and
garments.  In the past two years, the Government  has gradually increased the share of production that
firms located in bonded zones are able to sell domestically, from 25% at the time of the previous
Review, to 50% in 1997 and 100% in 1998.  Producers operating in bonded and export-processing
zones, which largely specialize in assembly operations, have been severely affected by thedepreciation of the rupiah and subsequent rise in import prices.
78. The operation of the duty exemption and drawback schemes remains unchanged.  As
described in section (2)(ii), tariffs on imported inputs as well as taxes paid on domestically purchased
inputs may be exempted or refunded.  The prior exemption scheme, which is based on self-assessment
of import values and inputs used in products, is subject to post-audit.
39  It is considered by exporters to
be more flexible than the drawback scheme and is therefore more widely used.
(4) INTERNAL MEASURES
(i) Regulation, standards and other technical requirements
79. In 1997, a National Standardization Agency (Badan Standardisasi Nasional) reporting directly
to the President of the Republic was established.  It deals in particular with the development andapproval of national standards; the accreditation of testing/calibration laboratories, certification bodies
and technical inspection bodies; international cooperation in standardization activities;  the
harmonization of international standards with national standards; and standards information services.
80. Apart from standards related to health, safety and consumer protection, almost all of the
4,500 standards adopted so far by the National Standardization Agency are voluntary.
40  Standards are
                                                     
39On 1 December 1997, post-audit responsibility was transferred from BAPEKSTA to the Directorate
General for Customs and Excise.
40Only 56 of the existing 4,500 standards are mandatory.  They are imposed on grounds of protecting
consumer health and safety.  They concern products such as portland cement, mineral water in plastic packing,lamps, vehicle tyres and shrimps.WT/TPR/S/51 Trade Policy Review
Page 80
set on a non-discriminatory basis, and applied to domestic and imported products alike.  They are
generally based on international standards, including those set by the Codex Alimentarius
Commission for food41, those of the International Organization for Standardization (ISO) and those of
the International Electrotechnical Commission for electro-technical specifications.  In 1995, the
National Standardization Council adopted the WTO Code of Good Practice for the preparation,
adoption and application of standards, under the TBT Agreement.
81. On 13 October 1996, Indonesia signed a mutual recognition arrangement with the Philippines
for product certification and approval schemes of vehicle tyres and tyre products, plywood,
accumulators, matches and incandescent lamps.
(ii) Tax measures
(a) Indirect taxes
82. Indonesia applies a 10% VAT on imported and domestically produced goods as well as on
most services.  Many products and services are exempt, however, including crops, livestock, soybean
feed for cattle, sugar, fish, salt, medical equipment,  machinery, hotels and restaurants, electricity for
private companies, taxis, and capital goods imported by foreign investors for production purposes.  In
the second Letter of Intent, the Government decided to remove all exemptions, except that onimported capital goods, on 1 April 1998.  From that date, exemptions will be allowed only on an
exceptional basis and will be reviewed regularly.  The Government also decided to seek assistance
from the IMF to improve VAT collection, by identifying large potential taxpayers.
83. On top of VAT, the Government levies a luxury sales tax of 10% to 35% on manufacturing
products such as motor vehicles, alcoholic beverages, bottled or canned food or drink, and perfume.
As a result of the recent deterioration in public finances, it increased the number of goods subject to
the luxury tax, which now include apartments and flats.  In addition to the VAT and luxury salestaxes, excise taxes are levied at various rates on certain products such as cigarettes, alcoholic
beverages, and sugar.  The Government also announced, in the second Letter of Intent, immediate
heavy excise tax increases on alcohol (80%) and ci garettes (10%), with further increases to follow
mid-year, depending on price and exchange rate developments.
84. Customs duties, the VAT, the luxury tax and the excise tax are cumulative.  Thus, in the case
of alcoholic beverages, for example, the 10% VAT is  levied on the tariff inclusive import price, the
luxury sales tax applies to the VAT inclusive price, and so on.
85. In principle, indirect taxes are levied in a non-discriminatory manner, with the notable
exception of sales taxes levied on cigarettes (whe re a lower rate applies to Indonesian-made "Kretek"
cigarettes), certain non-alcoholic beverages, motorcycles with engine capacity of less than 250 cc andmotor vehicles.  A luxury tax on motor vehicles is normally imposed at rates of 20%, 25% and 35%
depending on the category of the motor vehicle.  However, tax rates depend also on local-content.
Under the 1993 incentive programme, a reduction in sales tax, from 35% to 20%, is granted on
domestically produced jeeps, sedan cars and station wagons of less than 1,600 cc that have 60% local
content.  Motor vehicles of the same category w ith lower local content, including imported assembled
vehicles, are subject to the 35% tax.  The indirect tax incentive for locally produced vehicles was
increased with the introduction of the National Car Programme in 1996.  National Cars were granted
                                                     
41In 1996, the Government announced new maximum pesticide residues for all food commodities,
which are consistent with the international CODEX standards.  In the same year, it introduced a new food law,dealing with such issues as labelling, expiry date and advertising.Indonesia WT/TPR/S/51
Page 81
total exemption from the luxury sales tax, thus providing a 20% price advantage over cars covered by
the 1993 incentive programme and a 35% price difference with imported cars of the same category.
86. The exemption from luxury sales tax provided in favour of the National Car, and, to a lesser
extent, the tax reduction granted under the 1993 incentive programme, are currently at the centre of
the dispute in the WTO with the European Union, the United States and Japan.  The Panel Report is
expected to be circulated in July 1998.
87. In the second Letter of Intent, the Government decided to remove, on a unilateral basis, and
regardless of the outcome of the above-mentioned Panel, all special tax privileges for the National
Car, effective 21 January 1998.
(b) Direct taxes and related incentives
88. Indonesia levies a graduated income tax on enterprises as well as individuals.  Statutory tax
rates are 10% on taxable income less than Rp 25 million, 15% on income between Rp 25 million and
Rp 50 million, and 30% on income exceeding Rp 50 million. Effective tax rates may be considerably
less than these statutory rates, however, as a result of various tax concessions, especially for certain
firms in the industrial sector or for companies located in certain regions.  The outcome is significant
variation in effective tax rates, and thus in the tax incentive to invest, across industries and evenenterprises.
89. The 1984 Income Tax Law  repealed the provisions of the Foreign and Domestic Investment
Laws granting income tax incentives to companies.   These incentives included corporate income tax
holidays, dividend tax holidays, accelerated depreciation allowances and generous loss carry-forward
provisions.  As a consequence, income tax incentives of  limited duration expired from
1 January 1984.  Subsequently, the Income Tax Law 1995 (effective 1 January 1995) introduced the
following incentives:  accelerated depreciation; ten-year carry-forward of losses; and reducedwithholding tax on dividends.
42   While there was no immediate return to full tax holidays, in
July 1996, the Government decided to assume the income tax burden on income received or earned by
corporate taxpayers and on the payment abroad of dividends for a maximum period of ten years.  This
tax holiday under another name is aimed at newly established companies operating in selected
industries;  industries are selected by the President (on the basis of the proposal of a team especiallyset up for this purpose) on the grounds that "they constitute the strategic key to the realization of
industrialization".
43  Empirical evidence casts considerable doubt on the effectiveness of tax (as well
as non -tax) incentives, which have severa l well-known drawbacks (Box III.2).44
                                                     
42Withholding tax on dividends, interest, royalties, technical and management fees varies depending on
residential status;  earnings of residents and non-residents are subject to rates of 15% and 20%, respectively.
43Government Regulation No. 45/1996.
44Controlling the use of investment incentives has been the subject of a number of recent discussions,
including among OECD Members and in the WTO 1996 Annual Report.  In addition, although the APECnon-binding investment principles adopted by Indonesia do not limit the use of foreign investment incentivesper se , they do state that members will not relax health, safety or environmental regulations as an incentive to
encourage foreign investment.WT/TPR/S/51 Trade Policy Review
Page 82
Box III.2:  Effectiveness of investment incentives
Incentives for investment, notably tax holidays, are common not just in Indonesia, but in many other developing
and developed economies. The main aim of  these incentives is to attract foreign direct investment (FDI) and
thereby develop a local industry oriented towards exports.  While it is difficult to judge the extent to which
incentives have actually attracted FDI to Indonesia, there are grounds for doubting their effectiveness, based on
evidence from other economies.  Indeed, in some instances the use of incentives may be counterproductive.
In the first place, access to  incentives is seldom among the main dete rminants of business d ecisions.  This has
been confirmed repeatedly by business surveys.  Proximity to markets, the availability of sufficiently skilled
labour at relatively low cost, adequacy of essential infrastructure and a stable economic and legal environment
are usually much more important.  Other countries' experience with evaluation of tax and non-tax incentives
suggests that the cost of such measures to the Governme nt (in terms of expenditure or tax revenue forgone) may
exceed the investment generated.  Their high cost is relate d to the difficulty in iden tifying incremental investment
(i.e. investment that would not be undertaken without the incentive.
Tax cuts for foreign multinational enterprises (MNEs) that are taxed in their home countries purely on a
residence basis (that is, they receive a full credit for taxes paid abroad) may have little or no effect on the
incentive for those firms to invest in the country offering such relief.  Such cuts would provide an effective
incentive only insofar as MNEs are in an excess foreign credit position, taxes on repatriated income can be
deferred, the MNE's home country exempts foreign-source income from domestic taxes, or "tax sparing" is
allowed by double taxation treaties.  Indonesia has an extensive network of such treaties covering 32 countries
(including Australia, France, Germany, Japan, Malaysia, the Netherlands, Korea, Singapore, Chinese Taipei,
the United Kingdom and the United States).
To the extent that incentives do stimulate particular types of investment, they may result in a less efficient
allocation of national resources than would be the case if the Government remained neutral and refrained from
influencing private decisions.  Any adverse effect of incentives on resource allocation would manifest itself as
lower total factor productivity (TFP).  The belief that  foreign investment should be assisted because it yields
social benefits (externalities) that are not adequately taken into account by private investors would appear to be
overstated.  Most of the benefits from foreign investment accrue privately and hence incentives are not needed.
Moreover, it does not provide a justification for assisting fore ign over domestic investment and, as it is usually extremely
difficult to measure such externalities precisely, there is always the likelihood that incentives will turn out to be
excessive.
In addition to involving potentially large losses in tax revenues, a tax system embodying many special incentives
is much more susceptible to tax av oidance and tax evasion, which further cont ribute to the loss in tax revenues.
Incentives tend to worsen the fiscal balance, therefore, reducing national savings and causing a deterioration in
the current account balance. Investment incentives may also encourage capital intensive forms of production
rather than employment of labour.
Use of investment incentives may also provoke counter measures by trading partners.  Even where they do not
contravene the WTO Agreement on Subsidies and Countervailing Measures, they may be used by other countries
as a justification for countermeasures.  In particular, countries may react by adopting incentives of their own,
thus resulting in a beggar-thy-neighbour situation.  Such an "incentives race" tends to be harmful to all countries
concerned, developing c ountries especially.
As countries often have a mix of policies that simultaneously impede and encourage foreign investment, rather
than offering incentives to attract foreign investment, governments should instead focus on the removal of
existing impediments to investment.
Source:  WTO Secretariat.Indonesia WT/TPR/S/51
Page 83
(iii) Subsidies
Direct and indirect subsidies to the manufacturing sector
90. In addition to the forms of assistance already mentioned (trade measures, marketing quotas,
distribution monopolies, administered ex-factory and retail prices), the Government has traditionally
provided significant financial support to public ente rprises in designated strategic industries such  as
fertilizers, cement, steel, shipbuilding, aircraft, and telecommunications equipment (GATT 1990 and1994). The amounts of such assistance have always been difficult to ascertain as it was largely
channelled through off-budget accounts such as the Investment Fund and Reforestation Fund.
However, the Government of Indonesia made clear in the context of this review that, at present, it
does not provide any direct financial grants to state-owned enterprises.
45
91. Nevertheless, in order to improve fiscal transparency, the Government committed itself in the
second Letter of Intent to accelerate the Non-Tax Revenue Law of May 1997, which provides for the
integration into the State Budget of the Investme nt and the Reforestation Funds by 1 April 1998, and
of all other off-budget accounts by 2003.  It also decided to terminate any budgetary and
extra-budgetary support (as well as credit preferences) to IPTN, the aircraft manufacturer (Presidential
Instruction 3/1998 of 21 January 1998).  US$160 million a year in assistance was apparentlychannelled through the Reforestation Fund.  Once integrated into the Budget, the fund will be used for
its original purpose namely to finance  reforestation programmes.
92. Major industrial users of natural gas, such as fertilizer producers and steel makers, continued
in the period under review to benefit from sizable input subsidies in the form of below-market prices
for gas.  As a legacy of old contracts imposed by the State, PT Pertamina supplies natural gas to PT
Krakatau Steel, the state-owned steel producer,  at US$0.65 per MM BTU (British Thermal Unit) for
process and US$2 per MM BTU for fuel, and to fertilizer companies at US$1.5 per BTU, well belowinternational levels.  As noted in the previous Review, fertilizer manufacturers are the main
beneficiaries of subsidized natural gas, which is a major input in the production of nitrogenous
fertilizers.  While the subsidy was initially design ed to compensate producers for selling fertilizers to
farmers and plantations at below-market prices, at the current exchange rate fertilizer producers are in
a strong position to benefit from increased export opportunities and significant profit marginsassociated with higher export prices, thereby rendering the input subsidy less justifiable from an
economic standpoint.
Direct and indirect subsidies to the farm sector
93. The Government has traditionally combined direct intervention on prices and the provision of
economic incentives to encourage production and achieve self-sufficiency in major staple foods. Theincentive system was therefore aimed directly at farmers.  Apart from intervention on prices, the
policy focused on the subsidization of agricultural inputs, such as seeds, pesticides, fertilizers,
irrigation, and fanning equipment.  Since the termination of the pesticide subsidy in the late 1980s, the
main subsidy scheme has been the fertilizer subsidy.
46  While plantations buy urea fertilizers at the
                                                     
45Aid provided to state-owned enterprises or projects considered as strategic may also take other forms,
such as subsidized credit (IPTN Nusantara), privilege d access to credit from state-owned banks (the National
Car project), or input subsidies (on energy prices; see below).
46As noted in GATT 1994, (p. 89), while the fertilizer subsidy aims primarily at lowering the price of
fertilizers for farmers, other provisions ensure that th e scheme operates to assist the local production of such
fertilizers. While imports of fertilizer s are in principle deregulated, in reality they are tightly controlled by
limiting their distribution through designated coopera tives operated by PT Pusri, a state-owned fertilizer
manufacturer.  Combined with administered ex-factory and retail prices as well as marketing quotas, thisWT/TPR/S/51 Trade Policy Review
Page 84
market price of Rp 1,100-1,250 per kg., small farmers benefit from a ceiling (subsidized) price of
Rp 450 per kg.  Farmers also receive substantial implicit subsidy in the form of free or under-priced
irrigation facilities or water.
94. Since the beginning of the currency crisis, however, the system of support has been converted
from subsidizing production (at the expense of consumers) to subsidizing imports, and thus
consumers.  At the current exchange rate (around Rp 14,000 per US$), agricultural commoditiesproduced in Indonesia are extremely competitive internationally and may generate sufficient incentive
for production.  However, the cost of imports both of staple food for consumers and raw materials for
farmers has become prohibitive.  Since the devalu ation therefore, the Government has introduced a
programme aimed at subsidizing imports of major commodities by providing letters of credit to
importers at a favourable exchange rate (currently at Rp 6,000 per US$, compared to a market rate ofRp 10,000), with the State budget paying the difference.
47  While initially reserved for  commodities
imported by BULOG, the subsidy has been extended to all imports of agricultural commodities,
regardless of the status of the importer.  The need to subsidize imports of basic foodstuff, for social
reasons, puts considerable pressure on the State budget at a time of falling revenues.  Inevitably, this
casts doubt on the rationale for other subsidy programmes.
Consumer subsidies
95. Apart from the subsidy on imports related to the exchange rate, BULOG subsidizes the
domestic price of certain commodities, such as rice, on social grounds.  It also subsidizes some less
privileged consumers in remote areas or in areas heavily affected by floods and drought.  The cost of
bridging the gap between the selling price and the market price is borne by the state budget.
96. Through various mechanisms the Government subsidizes the prices of goods and services
deemed to be essential for the population.  This is the case for pharmaceuticals, petroleum and fuel,electricity and various modes of transportation.  In the second Letter of Intent, the Government
committed itself to gradually eliminate subsidies on fuel and electricity, and to bring domestic prices
into line with international prices.
48  Significant adjustments of fuel and electricity prices were made
in the spring of 1998.49  Figures on the amount of the subsidy for petroleum products are provided in
Table III.12.
                                                                                                                                                                    
ensures that a large share of the subsidy goes to domestic manufacturers (and to PT Pusri in the case of imported
fertilizers), by allowing them to charge prices above international levels.
47In the early days of the devaluation, a subsidy scheme was rapidly put in place by the Government to
assist the poultry sector, which consisted essentially of small-scale producers heavily depended on imported
inputs (animal feed).  Under the scheme, BULOG would provide letters of credit at the request of feed importers(corn millers) at the exchange rate of Rp 5000 per US$.  Subsidy schemes along similar lines were graduallyextended to imports of sugar, wheat and wheat flour.
48Despite efforts in recent years to bring domestic prices on petroleum products back into line with
international levels, in the industrial sector, gas oil has remained heavily subsidized, resulting in obvious
economic distortions.  Since the devaluation, the task of raising prices to international levels has become even
more difficult.
49Electricity prices were increased by 25% in April 1998.  Effective 1 May 1998, the Government also
increased domestic prices on all petroleum products, ranging from 25% on kerosene for household use to 71%on gas oil.  Due to the reaction of the population over the price increases, the Government stepped back partly.Indonesia WT/TPR/S/51
Page 85
Table III.12
Subsidy for petroleum products, 1995-98
(Rp trillion)
Product 1995/96a1996/97 1997/98
Kerosene 1.00 1.40 1.10
Gas oil 0.50 1.20 0.58
Fuel oil not recorded not recorded 0.69
Total 1.50 2.60 2.37
a Fiscal year.
Source: Government of Indonesia, Directorate General of Oil and Gas.
Financial support for research and development
97. The Government provides financial support for research and development activities which
accounts for about 0.3% of GDP, mainly to promote high technology and technologicallysophisticated industries.  While policy-making and coordination rests with the Ministry of Research
and Technology, the programmes are implemented by various government research bodies, such as
the Agency for the Assessment and Application of Technology (BPPT), the National Institute of
Sciences (IPI), the National Atomic Energy (Batan) or the National Institute of Aeronautics and Space
(LAPAN).  The main beneficiaries of such programme s have been in the strategic industries, owing to
their particular role in expanding Indonesia's technological expertise and promoting innovation
(section (vii)).  Research in agriculture, which falls largely under the responsibility of the Ministry of
Agriculture, accounts for a small share of Government spending on research and development (less
than 7%).  Most research and spending is directed towards the cultivation of rice, Indonesia's main
staple food.
(iv) Government procurement
98. There has been no major change since the 1994 Review in the legislative framework
governing Government procurement in Indonesia.  The Regulation introduced by the Government in
1994 (Kapres 16) to regulate public practices and oversee the procurement process is still in place.
50
It is designed to enhance transparency in government procurement procedures, notably by introducingformal bidding procedures on tenders above Rp 15 million. Below this amount, contracts are awarded
through direct designation or procurement.  Above this amount, the number of tenders depends on thevalue of the contract.  Contract worth between Rp 15 and 50 million are subject to limited competition
(three tenders or more, chosen from a list of "capable suppliers").  Above Rp 50 million, tenders must
be publicly advertised and at least five tenders invited.
99. The Regulation also provides for significant decentralization of the procurement system.  All
government agencies and state-owned enterprises are responsible for their own procurement in the
case of contracts not exceeding Rp 10 billion.
51  Above this amount (involving about 250 contracts
per year), contracts are submitted by the Minister/Head of Agency concerned for final approval to the
Central Procurement Team (TEP), an inter-ministerial body chaired by the Coordinating Minister of
Development and State Supervision.  Prices are ultimately controlled by the Finance and
                                                     
50KAPRES 16 was slightly modified a year later by KAPRES 24, but the main features of the
Regulation remained unaffected.
51For contracts up to Rp 2 billion, project manage rs are given responsibility over the selection of
contractors and the execution of contracts.  For contracts between Rp 2 and 5 billion, the responsibility restswith the deputy minister (or equivalent) of the agency concerned; and for contracts between Rp 5 and 10 billion,responsibility lies with the minister.WT/TPR/S/51 Trade Policy Review
Page 86
Development Supervisory Agency (BPKP), an inde pendent public auditor reporting to the House of
Representatives.52  While in principle there is no preferential margin in favour of domestic producers,
in reality public entities are encouraged to purchase goods with the highest possible local content, and
to favour local tenderers using imported inputs. This is not compulsory however in the case of
foreign-funded contracts.  Contracts of less than Rp 100 million are generally reserved for small and
medium size enterprises and a 10% preferential price margin is applied in their favour for contractsbetween Rp 100 and 200 million.  According to the Government, these preferences do not
discriminate between local and foreign suppliers, only between small and large domestic firms.
53
100. Nevertheless, foreign suppliers tendering for government procurement are subject to
countertrade obligations, requiring them to purchase, or export, selected Indonesian goods of an
equivalent value (minus local charges incurred in executing the contract).54  Countertrade obligations
may also be attached to some large government-funded contracts, such as construction projects.
101. Indonesia's procurement regulation contains remedial provisions.  Firms bidding for contracts
are entitled to lodge administrative appeals with respect to award procedures by the competent
administrative authorities (project managers, deputy ministers or ministers). If unsuccessful, appeals
may be ultimately made to a Special Administrative Court, established in 1995.  According to theGovernment, about 10% of administrative decisions ar e overturned by the Court, and may lead to re-
evaluation of the decision by the administrative authority concerned or re-tendering.
102. The above rules apply essentially to government-funded contracts.  However, over half of
government contracts in Indonesia are financed by bilateral or multilateral donors, generally under
concessional terms.
55  In these cases, while donors may accept a local share to the contract or some
local content, they generally fix their own procurement requirements.
103. Apart from internationally funded contracts, the main exemption to government procurement
regulations concern state-owned enterprises that have offered shares to the public through the stock
exchange.  In the absence of a clear legal framework for these enterprises, they apply their own
procurement rules.  According to the Government, there are no sector-specific exemptions from the
Regulation, nor are any sectors closed to foreign tendering.
104. Overall, the 1994 Regulation has somewhat clarified the government procurement framework
and promoted the use of clear, written procedures.  Despite progress, however, much remains to be
done to establish fair, reliable, timely and efficient practices in Indonesia.  Bureaucratic obstacles,
re-tendering, slow handling of tenders, changing technical specifications, high commercial charges
and the imposition of specific Indonesian sub-contractors on main foreign contractors have, in the
past, been acknowledged practices.  While the introduction of remedies available to foreign firms
                                                     
52BPKP is the supreme audit authority.  Before reachin g this stage, contracts are also reviewed by the
Inspectorate General of each ministry and the TEP's own internal auditors.
53For contract above Rp 200 million, the Government merely "encourages" the main contractors to
select small and medium-size en terprises as sub-contractors.
54As described in the GATT 1994, a wide range of pr oducts are eligible for co untertrade.  The list is
reviewed every year by the Ministry of Industry and Trade.
55Indonesia benefits from three main sources of international financing: export credits, soft loans
provided essentially by bilateral partners, and loans from regional or multilateral financial institutions, such asthe World Bank and the Asian Development Bank.Indonesia WT/TPR/S/51
Page 87
constitutes a step in the right direction, the credibility of the Special Administrative Court's
procedures and rulings needs to be strengthened.56
105. Indonesia is not a signatory of the plurilateral Government Procurement Agreement (GPA),
but is carefully considering the possibility of becoming a party to it in the future  It nevertheless
believes that its new procurement system introduced in 1994 is transparent and, being much in-line
with standards set by the GPA, it could even be considered an improvement on the WTO Agreementas it is applied on an MFN basis without exception.  However, Indonesia considers also that
government procurement represents (for a developing country like Indonesia) an important instrument
of national development, and therefore it reserves its rights to maintaining this role.
57
(v) Price and distribution controls
106. Indonesia maintains direct price controls on numerous goods and services, generally on social
grounds.  The number and scope of such controls is declining, however, as a result of recent economic
reforms.  Since the beginning of the crisis in 1997, the prices of several major agricultural products,
such as sugar, wheat and wheat flour, garlic, and cloves, have been deregulated.  The prices of rice
and soybeans remain under the control of BULOG.  The Government also controls the prices of
certain agricultural inputs, such as fertilizers an d irrigation water, and most energy prices, including
those of fuel and electricity. In its second Letter of Intent, it committed itself to gradually eliminate
price regulations on fuel and electricity.  However, the depreciation of the rupiah against the
US dollar and the social impact of the economic crisis makes it difficult, in present circumstances, to
close the gap between domestic and international prices.  While the Government raised energy prices
in April-May 1998, it maintains important price subsidies on diesel fuel and kerosene to protect the
poor.  The Government also controls the prices of drinking water and certain transportation services
(sea transport, buses, railway transport).
107. Until the economic crisis, by organizing, authorizing, or tolerating cartels and distribution
arrangements in many sectors, the Government continued to exercise indirect influence on quantities
and prices of products made available to end-users. As described extensively in GATT 1994 (see
pages 86-89), cement production and marketing was tightly controlled.  If indicator prices were
exceeded, the Government would intervene to regulate domestic supply and reduce prices.  At theinstigation of the Government, cement producers had been regionally cartelized (see below).  The
production, distribution and prices of fertilizers were also subject to controls.  Price fixing by private
producers associations in the pulp and paper, and plywood industries was tolerated by the
Government, even though official price controls on certain of these products had been removed.
These impediments to efficiency and competitiveness, generating high prices and significant rents forthe producers concerned, were addressed by the Government in its Second Letter of Intent.
Deregulation measures adopted as part of the implementation package of 21 January 1998 have
re-established market-based price mechanisms.
58
                                                     
56The World Bank has in the past described the Indonesian courts as "overburdened and understaffed",
highlighted the difficulties to implement rulings and reported some lack of confidence in the fairness of thejudicial process.  World Bank (1995a),
57Statement by H.E. Mr. Tungky Ariwibowo, the then Minister of Industry and Trade of the Republic
of Indonesia at the WTO Ministerial Conference in Singapore (WTO document WT/MIN(96)/ST/22 of
9 December 1996.
58On 21 January 1998, the Ministry of Industry and Trade had been instructed by the Economic and
Financial Resilience Council to "remove any restrictive marketing arrangement for cement, paper and plywoodand prohibit organizations from forced marketing, requiring fees or commissions, setting production volumes,and setting market shares or marketing areas."WT/TPR/S/51 Trade Policy Review
Page 88
(vi) Competition policy, deregulation and privatization
(a) Competition policy
108. While there are some legal provisions dealing with competition scattered in various sector-
specific legislation (such as telecommunications),  Indonesia does not have a unified and consolidated
competition framework.  There is neither a global law covering practices such as cartels, bid-rigging,
abuse of dominant power, price discrimination or other anti-competitive practices, nor any centralizedagency empowered to monitor and penalize these practices.
109. The absence or lack of enforcement of an effective competition policy constitutes implicit
assistance to domestic producers by sheltering them from domestic and foreign competitors.  Despite
extensive deregulation of the Indonesian economy in the past two decades, many markets have
continued to be characterized by an absence of competition (Table III.13).
59 Until the currency crisis,
formal and informal joint marketing arrangements (c artels) influenced the conditions of internal and
external trade in major industries such as cement , plywood and paper, through forced marketing, fees
and commissions on import/export/sales operations, and the setting of production volumes, market
shares or marketing areas.  As recognized in the Second Letter of Intent, in the cement industry, trade
and distribution in the domestic market were restricted by prohibitions on local trade in brands and byexclusive marketing areas, while external trade was subject to the control of the cartel, supported by
government export regulations and licensing (paragraph 40).  In this respect, trade policy, by granting
import or export privileges to specific producers through opaque licensing practices, and the lack of
competition policy by allowing producers to dictate their conditions on the domestic markets,
reinforced each other.
Table III.13
Market structure in selected agriculture and manufacture sectors before the IMF package
Share in manufacturing Industrial organization Market structure:  Government or
industry controls on:
Produc-tionValue
addedExport Mono-
polyCartel SOE
aPrice
fixingRegional
quotaExport Capacity Entry
Wheat flour 0.1 0.1 0.1 yes partial yes
Noodles 0.4 0.4 0.0 yes yes
Sugar 1.9 3.4 0.0 yes dominant yes yes
Spinning 4.6 3.6 2.1 yes yes
Plywood 8.0 7.3 27.7 yes yes yes yes yes
Paper 3.3 4.0 32.0 yes yes yes
Fertilizers 2.6 3.0 2.5 yes dominant yes yes yes yes
Cement 1.5 1.9 0.2 yes strong yes yes yes yes yes
Steel 6.8 5.7 3.2 yes dominant yes yes
Vehicle
assembly4.2 2.5 0.0 yes
Total 33.3 31.9 39.1
a SOE = State-owned enterprises.
Source: A. Nasution (1998), "Trade and Industrial Policies in Indonesia since the 1980s", Economic Commission for Latin America and
the Caribbean.
                                                     
59The economics literature generally regards trade liberalization as insufficient to ensure full
competition in the domestic market, mainly because: a large share of activity among countries relates to
non-tradeable goods and services on which import compe tition has little impact; high transport costs and other
barriers to entry can insulate domestic firms from inte rnational competition; administrative barriers such as
production licences and quotas or preferential procurement practices may further shelter companies from theinfluence of world markets; and as relevant in this section, anti-competitive arrangements by private businessescan dampen the effect of import competition (A. Natusion 1998).Indonesia WT/TPR/S/51
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110. The Government's tolerance, if not encouragem ent, of such anti-competitive practices resulted
in domestic end-users or consumers paying higher than world prices, and enabled the large
conglomerates operating in these sectors to enjoy strong growth.  Conglomerates have in general
accumulated considerable economic power in Indonesia, leading to the concentration of production
and wealth and influencing the country's economic policy and power structure.  The top ten
enterprises account for about a third of GDP.  With  their strong presence in the agri-food, steel and
metals, basic chemicals, pharmaceuticals, forestry, wood, plywood and paper products, cars and other
transport equipment, and communications industries, they have been instrumental in enabling the
Government to fulfill its industrialization objectives.  At the same time, they have benefited from
internal and external protection, as well as preferential access to state concessions, public procurement
and soft bank lending.  As described in section (2)(ii), many of these conglomerates' productsremained unbound in the Uruguay Round.
111. However, the recent economic and financial crisis led the Government to take bold measures
to promote efficiency and establish competitive conditions in the hitherto protected industries.  In the
Second Letter of Intent, it committed itself to ending the main formal and informal marketing
arrangements (as well as restrictions to import/exports) in agriculture (including cloves) andmanufacturing (cement, plywood and paper industries).  This was enforced by Presidential Decision
22/1998 of 21 January 1998, which granted farmers freedom to buy and sell cloves to and from all
agents at a freely determined market price, and dissolved the Clove Support and Marketing Board
(BPPC) on 30 June 1998; a series of Circulars and Decrees removed restrictive marketing
arrangements for cement, plywood and paper, and Presidential Instructions 1 and 2/1998 to Provincial
Governors prohibited intervention or restrictions on inter-provincial trade in cloves, oranges, cashews
and vanilla as well as the removal of provincial taxes on exported goods (retribusi).
112. These measures are likely to contribute to a freer, more competitive marketplace in Indonesia.
However, the deregulation process could be further supported by the introduction of a full-fledged
competition law and the creation of effective enforcement tools and structures, which would foster the
emergence of new competitors in protected industries, reduce prices for consumers and industrial
users, and ensure that the gains from the liberalization of trade be translated into real economic gainsfor Indonesian consumers.  In this respect, the Government has been working on a draft competition
law since 1996, which it intends to propose to the House of Representatives in the autumn of 1998.
(b) Privatization
113. For a wide variety of historical and ideological reasons, the public sector has always played
an important role in Indonesia's development.   Government intervention though state-owned
enterprises is recognized to be legitimate by the 1945 Constitution.
60  State-owned enterprises have
been, and remain to some extent, highly instrume ntal in serving the Government's social, economic
and regional objectives.  Their activities have included the development of infrastructure, the
encouragement of industrialization and the exploitation of natural resources.  The deregulation
process and the emergence of the private sector have reduced the share of state-owned enterprises inGDP (to about 15%), in employment (to 1.5%) and in tax revenues (to about 25% of corporate tax
revenues).  Nevertheless, they continue to be present in virtually all sectors of the economy (industry,
agriculture, financial services, public works and transportation) and are especially dominant in
designated strategic industries (steel, fertilizers, cement, oil, mining).  As a result, they still exert a
                                                     
60While it is still subject to legal interpretation, Article 33 of the Indonesian Constitution stipulates that:
"the economy shall be organized as a cooperative effort, founded on the basis of family spirit; branches ofproduction essential to the state and governing the life and living of the public shall be controlled by the State;land and water and natural riches contained therein shall be controlled by the State and used for the greatestprosperity of the people."WT/TPR/S/51 Trade Policy Review
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strong influence on a wide range of government policies, including fiscal, monetary and trade
policies.
114. The capital shortage resulting from falling oil revenues in the mid-1980s and chronic under-
performance of most state-owned enterprises led the Government to broach the issue of privatization.
In 1989, an evaluation by the Government showed that more than half of the 190 state-owned
enterprises were financially "unsound", and less than a quarter "very sound".  Following thisevaluation, an ambitious restructuring plan was announced, involving in particular the privatization of
52 state-owned firms.
61  Reforms started slowly:  only two enterprises were privatized at the end of
1994 (one of which, PT Indosat being only partially privatized).  The global balance of
privatization/creation of new state-owned enterpri ses was negative over the period 1989-93.  As a
result of the higher political priority attached to  privatization, strong foreign capital inflows and a
favourable economic environment, the programme of privatization accelerated between 1994 and
1996, with the main developments taking place in the telecommunications sector.62
115. The relative success of the partial privatization of PT Indosat and PT Telkom, in the eyes of
the public, seemed to pave the way for further divestiture operations.  The Government contemplated
the partial floating of major state-owned enterprises such as Garuda Indonesia, the national airline, PTKrakatau Steel, the national steel monopoly, PT PLN, the power company, and several state banks
(including BNI), but the programme has been interrupted since mid-1997 because of the collapse of
the Indonesian stock market.
63
116. Consequently, nearly nine years after the launch of the ambitious privatization programme,
there has been relatively little progress by regional and international standards, despite the
encouraging results of the first privatizations.  Thus, the pursuit of privatization was considered in
Indonesia's adjustment programme with the IMF as an essential element of structural reform.  In this
context, the Government of Indonesia set up a new Privatization Board, centralized the responsibility
for the restructuring of state-owned enterprises in the Ministry of Finance, and undertook to clarify
the framework for the privatization of public assets, in particular by establishing criteria for the sale,
restructuring or closure of state-owned enterprises.  It is committed to preparing twelve enterprises for
privatization during the first year of the IMF programme and plans to achieve full, instead of partial,privatization of the companies listed.  It plans further privatization of companies not already listed.
 64
                                                     
61As noted in the GATT 1994, the 1989 plan was aimed at completing the restructuring within two
years.
62Privatization operations, per se, took place essentia lly in the telecommunications sector. In 1994, PT
Indosat, the long-distance telecommunications services operator, sold 25% of government equity on the New
York Stock Exchange and increased its capital by anot her 10% through a public offering in local markets,
raising in total over US $1 billion.  PT Telkom sold 35% of its equity in 1994, 20% in 1995 (thro ugh public
offering on the Jakarta and Surabaya Stock Exchanges) and another 4% in 1996 thro ugh private placement.
Two other state-owned firms, PT Tambang Timah (a tin-mining firm) and Bank Negara Indonesia (a majorbank), were subject to partial privatization.  The Government also favoured private sector participation in the
development and management of public infrastructure by granting concessions to private firms in the power
supply, water supply, port activity and road sectors.  While privatization operations through public offeringshave been conducted according to the rules, the World Bank questioned the transparency of concession award
procedures, notably in the case of toll roads (the pre- selection of well-connected private groups) and power
plants (lack of competitive tenders for the award of the plants). World Bank (1996).
63In recent years, the Government has also deployed efforts to restructure the network of public estate
companies in the plantation sector, in anticipation of future commercialization.  The movement of privatization
in this sector was also interrupted by recent stock market events.
64In April 1998, the Government announced the list of the first seven state-owned companies
designated for early privatization.  These are port management firms PT Pelindo I and PT Pelindo II, palm oilplantation firm PT Perkebunan Nusantara IV, toll-road ope rator PT Jasa Marga, coal mining firm PT TambangIndonesia WT/TPR/S/51
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Remaining state-owned enterprises will be subject to tighter government control, in the form of
publicly announced objectives and annual reports.  A general audit was launched and ailing
enterprises are to be closed.  The individual perf ormance of state-owned enterprises will be reviewed
regularly.
(vii) Strategic industries
117. Until the economic crisis in 1997, Indonesia continued to rely on interventionist industrial
policies to boost the industrialization of the countr y. The Government had identified over the years a
number of "strategic industries", seen as essential to industrial development, promoting technology
transfers, and supporting research and development activities.  They covered a wide range of sectors
such as cement, fertilizers, steel, textiles, pharmaceuticals, shipbuilding, industrial machinery,
electronics, transport equipment (motor vehicles and aircraft), information technology,telecommunications, weapons and explosives.  Th e Government continued to tightly monitor
developments in these industries, either directly (through regulation) or indirectly (through the control
of state-owned enterprises).
118. In 1989, the Government established the BPIS (Badan Pengelola Industri Strategis), an
agency responsible for the supervision of production programmes and the management of governmentassets in many of these industries.  Ten state-owned enterprises were placed under its direct authority,
in an attempt to ensure that they played a leadin g role in the development of the designated sectors.
65
Private firms were "invited" to participate in the support of these strategic industries. The
centralization of competencies in the management of public enterprises was a logical outcome of an
overall industrial policy based on public participation and tight government controls.  There was in
many cases a strong coincidence between state-owned enterprises and the industry itself.  Most are
either monopolies (transport industry, fertilizers,  etc.) or dominant in their market, protected, as
explained in previous sections of this Chapter, by a wide array of tariffs, non-tariff barriers,
restrictions on investment, and price controls.
119. However, the economic environment in which strategic enterprises operate has changed
dramatically as a result of current economic reforms, and the scope for conducting similar
interventionist industrial policies in the future appears to have been reduced as the Government is
removing barriers to trade and other privileges that have protected the development of these
enterprises. Since the beginning of 1998, these initiatives include:  the termination of government
subsidies to PT IPTN;  the elimination of export restrictions affecting PT Dahana;  the reduction of
tariffs on steel products, and machinery affecting PT Krakatau Steel and PT Barata Indonesia,
preparations for the privatization of PT Krakatau Steel, and the removal of the import prohibition onnew and used ships, affecting PT Pal Indonesia.  In addition, the Government decided in January 1998
to transfer the responsibility of state-owned industries from line ministries to the Finance Ministry, to
allow for their restructuring and subsequent privatization.
                                                                                                                                                                    
Batubara Bukit Asam, steel maker PT Krakatau Steel, and airport management firm PT Angkasa Pura II.  The
five listed firms in which the Government will further divest its stake include PT Telkom and PT Indosat(telecommunications services), PT Semen Gresik (cement), PT Aneka Tambang (nickel and gold mining) andPT Tambang Timah (mining).
65The companies concerned are: PT Barata Indonesia (foundry and heavy machinery), PT Boma Bisma
Indra (diesel industry and other industrial equipment), PT Dahana (explosives), PT Inka (rolling stock), PT Inti
(telecommunications equipment), PT IPTN (aeronautics), PT Krakatau Steel (iron and steel), PT Len Industri
(electronics), PT Pal Indonesia (shipbuilding) and PT Pintad (weapons and ammunition).  The oversight of otherdesignated strategic sectors rested with the relevant line Ministries: textiles, cement and fertilizers (Ministry ofIndustry and Trade), pharmaceuticals (Ministry of Health) and printing and publishing (the Ministries ofFinance, Education, and Information).WT/TPR/S/51 Trade Policy Review
Page 92
(viii) Intellectual Property Rights (IPR)
(a) Regulatory framework
120. Conscious that the lack of adequate protection of intellectual property rights may discourage
investors from developing new products and technolog ies in Indonesia, in particular high-technology
activities, the Government has increased efforts to upgrade its legislative framework.  Although taking
advantage of the transition period allowed by the TRIPS Agreement66, Indonesia has brought its
legislation on copyrights, patents and trade marks closer in line with the Agreement and other
international treaty standards.67  Table III.14 provides a summary of the main features of the new
copyright, patent and trade mark laws introduced in 1997.68
Table III.14
Acquisition and enforcement of intellectual property rights, June 1998
Legislation Acquisition Duration Sanctions
Trade-Mark Law
(14/1997)Trade-mark protection is subject to
registration.  The application forregistration of a mark shall be filed to
the Trademark Office, which conducts
a final examination. Opposition can bemade within six months after
announcement.A registered mark receives legal
protection for ten years,  retroactiveto the date of receipt of the
registration.  It can be renewed upon
payment of renewables.Fines from Rp 10 to
100 million andimprisonment from 1
to 7 years.
Unlimited civil
damages.
Patent Law
(13/1997)Protection of inventions is subject to
registration; "the first-to-file" principle
applies.  Application for theregistration of patents shall be filed
with the Patent Office.Patents receive legal protection for
20 years from the filing date of the
patent application. Simple patentsare protected for ten years once the
Certificate of Simple Patent is
issued.Fines from Rp 50 to
100 million and
imprisonment from 5to 7 years.
Unlimited civil
damages.
Copyright Law
(12/1997)Contrary to trade-marks and patents,
whose protection depends on
registration, no registration is required
for the acquisition of copyrights or forrights of performers; copyright
protection exists automatically upon
completion of the work.Copyright protection for computer
programs, cinematographic and
broadcasting works, phonograms
and performances lasts for 50 yearsafter first publication; copyrights for
books, other written works, arts,
songs or music, and architecture lastfor the author's life plus 50 years;
copyright for photography and
typographical arrangements is for 25
years after the first publication.Fines from Rp 15 to
100 million and
imprisonment from 3
to 7 years.Unlimited civil
damages.
Source: WTO Secretariat, on the basis of Laws 12/1997, 13/1997 and 14/1997.
121. The new legislation contains several improvements for rights holders.  In the field of patents,
the duration of protection has been extended from 14 to 20 years, with a possible two-year extension.Registration procedures have been improved, with longer lead times for the publication of patents
(now 18 months after the filing date, as against 6 months before) and new standards for the
                                                     
66At the entry into force of the TRIPS Agreement, Indonesia notified the TRIPS Council that it
intended to avail itself of its rights (under Article 65.2) to delay the application of the Agreement for a period of
four years (WTO document IP/N/1/IDN/1, 8 May 1996).
67Indonesia is a party to most of the multilateral agreements in the field of IPR, including the Paris
Convention for Industrial Property, the Patent Cooperation Treaty, the Trademark Law Treaty, the WorldIntellectual Property Organization (WIPO) Agreement, the Berne Convention for the Protection of Literary andArtistic Work (with certain exceptions), etc.  As notified to the TRIPS Council, Indonesia is also a party to
bilateral agreements with the United States (1989) and the United Kingdom (1994) on copyright protection, with
Australia on copyright protection and enforcement (1993), and with the European Union on sound recordings(1988).
68Laws 12/1997 (Copyright), 13/1997 (Patent), and 14/ 1997 (Trade Mark) repl ace Laws 7/1987, 6/1989
and 19/1992, respectively.Indonesia WT/TPR/S/51
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substantive examination.69  Product patent protection has been extended to food and beverages.  The
cancellation of a patent has been limited to instances where the holder fails to pay the annual fees
within a certain time-frame.  Like the 1989 Law, the new Law contains provisions allowing for the
granting of compulsory licences if the patent has not been used  within 36 months after the issuance of
the Certificate of Patent, or if the patent is used "to the detriment of public order".
122. Under the 1997 Trade Marks Law, intellectual property rights are acquired through
registration rather than by first use.  Opposition to an application for registration of a trade mark can
be made during the announcement period (6 months), and applications undergo strengthened
substantive examination.  While the new legislation aims at a better consideration of well-known trade
marks, the procedure for the cancellation of existing infringing trademarks still relies exclusively on
the judicial system.  The Law does not provide for administrative cancellation of registrations,although the Minister may still, in the first place, decide to refuse registration, or, after expiry (ten
years), refuse to renew the infringing trade mark.
123. The new Copyright Law generally offers longer protection for computer programs (from
25 years to at least 50 years), and recognizes the protection of neighbouring rights in sound
recordings.  Provisions protecting the moral rights of both the author and the performer were alsointroduced (as they were for patents).  Finally, the Law recognizes rental rights in the areas of
computer programs, cinematographic and audiovisual works.
124. In the new patent, trade mark and copyright laws, there are no specific provision governing
parallel imports of goods and services containing intellectual property rights.
125. Other important areas such as integrated circuit layout designs are not yet protected under
Indonesia's IPR laws.  However, in cooperation with the WIPO, the Government is currently
preparing new laws on the protection of trade secrets, industrial designs, integrated circuits and plantvariety, with a view to enacting them before the end of its transitional period under the TRIPS
Agreement.
(b) Administrative structure and enforcement
126. In addition to the modernization of its laws, the Government has been improving the
administrative organization regarding IPR and enforcement, which are closely related.  To date, theformulation of IPR policies, including the development of legislation, rests with the Presidential
Commission on IPR.
70  The Commission, which consists of high-ranking officials from the
government agencies involved in IPR matters (Ministry of Justice, customs, police), also plays a
coordinating role in relation to the acquisition, maintenance and enforcement of IPR.  The
administration of IPR registration is carried out by  the Directorates General for Copyrights, Patents
and Trademarks.  Enforcement is the responsibility of the Attorney General, police, customs and the
courts.  The coordination of activities between these different offices and agencies as well as between
the national and regional levels is a key issue in the degree of enforcement.  In the past, lack of
qualified personnel as well as deficiencies in the transmission of information between central
authorities and the regions may have weakened the effectiveness of Indonesia's regime.  Indonesia iscurrently contemplating a more integrated administrative organization and is putting in place, in
cooperation with the World Bank, an integrated information system on IPR, which would connect the
various actors involved (central and regional offices, Ministry of Justice, police, customs).
                                                     
69The Law widens the definition of a "patent examiner", to allow examiners from foreign Patent offices
to cooperate with Indonesian examiners during the investigation.
70The Presidential Commission on IPR, also known as Commission 34, reports directly to the President
of the Republic.WT/TPR/S/51 Trade Policy Review
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127. The Government has in recent years increased efforts to combat violations of intellectual
property rights.  While some trading partners have noted progress in enforcement of the ban on
pirated video and audio works71, much remains to be done in the areas of software, compact disks
(CDs) and video compact disks (VCDs) piracy, which has grown in recent years.  According to a
1997 study by the Business Software Alliance and the Software Publishers Association, two world-
wide private industry associations, Indonesia remained in the top three countries for software piracy,with a piracy rate of 93%.
72  To address the problem, police forces regularly conduct raids on shops
offering pirated material, resulting in the seizure of large amounts of illegal CDs, CVDs, and
diskettes. In the present context of economic depression, enforcement activities are limited by a
relative lack of resources and a growing underground economy which, even in normal times,
compound the difficulty of controlling a territory composed of 13,500 islands.73
128. The new laws on copyrights, patent and trade marks have increased the criminal penalties on
unauthorized use of IPR (Table III.14).74  Although the Government considers that local courts are
more inclined to open criminal cases against IPR vi olations than in the past, no statistics on court
proceedings and sentences were made available to the Secretariat.75
                                                     
71USTR (1998).
72The study estimates also that, in 1996, 97% of all PC business software installed in Indonesia was
illegally copied. (Asian Wall Street Journal and Agence France Presse of 7 May 1998).  Apart from pirated
goods and services, the problem of counterfeiting in Indonesia, notably the protection of well-known trade
marks, is also regularly raised by the International Anticounterfeiting Coalition.
73Under Indonesian Law, customs services are entitled to seize infringing imports upon request by the
owner of the intellectual property right or ex-officio, wher e, in the course of customs procedures, it is evident
that goods are pirated or counterfeited.
74Maximum imprisonment sentences are high but fines, given the large depreciation of the rupiah, are
at the present exchange rates, relatively "affordable" for internationally organized groups (the maximum fines of
Rp 100 million for copyright, patent and trademark vi olation represents only about US$7,200 at the current
exchange rate of Rp 14,000 per US$).
75The Ministry of Justice does not maintain statistics on IPR infringements and court proceedings.  This
would require systematic reporting of cases and outcomes from local courts, which does not exist at present.