Indonesia WT/TPR/S/51
Page 27
II. INSTITUTIONAL ASPECTS OF INDONESIA'S TRADE POLICIES
(1) OVERVIEW
1. Whereas in the last three decades, including most of the period under review, the institutional
and political structures surrounding economic policy have been characterized by a high degree of
stability, the economic crisis that arose in the second half of 1997 has sown the seeds for a major
transition in the political system. Until the crisis, policy-making remained highly centralized andsomewhat informal.  Economic policy objectives were defined in a long-term perspective
(REPELITA plans) and the process of reform wa s pursued in a gradual manner, mainly through
periodic deregulatory packages.  By contrast, both the economy and society experienced fast and
fundamental change as a consequence of modernizati on, high growth and rising living standards.  The
recent crisis has led to a deep recession, however, resulting in a sharp drop in real incomes and a largeincrease in unemployment, all of which have undermined short-term economic prospects.
2. At present, the country is undoubtedly facing its biggest economic and social challenge in
decades.  Nevertheless, it has resisted potential protectionist pressures and accepted the need for
structural reform.  At the instigation of multilateral financial institutions, it undertook to remove most
impediments to domestic and international trade within three years (Chapters I and III).  Whileimportant deregulatory steps have already been taken since the beginning of 1998 (Chapter III), more
reform is yet to come.  All IMF-sponsored reforms in the field of trade are to be implemented on an
MFN basis.  In the WTO, Indonesia reiterated its commitment to multilateralism.  This was
confirmed, in particular, by timely (in some cases, advanced) implementation of its Uruguay Round
obligations, and additional commitments in r ecent WTO negotiations (covering information
technology, telecommunications and financial servic es).  In its relations with ASEAN partners,
Indonesia applies the principle of open regionalism, an  idea that it also promotes in the APEC forum.
Tariff reductions under the AFTA-CEPT scheme of ASEAN have been kept largely in line with
unilateral MFN tariff cuts, so that the margin of preference has remained small (around 2% overall).
3. Following significant liberalization in the period 1993-95, and again in July 1998 including
adjustments to the list of sectors closed to FDI, Indonesia's investment regime is now relatively open.
Partly as a result, Indonesia has attracted unprecedented amounts of FDI since the 1994 Trade PolicyReview (close to US$130 billion).  While reflecting a legitimate desire to maintain its locational
advantage, the proliferation of tax incentives for investment may be worrisome as it tends to
encourage over-investment in non-competitive sectors, reduce tax revenues at difficult times for the
budget, and contribute to regional tax competition (Indonesia is not the only country in the region that
offers incentives for investment).  Instead, policies aimed at achieving a more stable and transparentbusiness environment, including the modernization and better enforcement of laws and regulations,
would arguably constitute a much more effective incentive to foreign investors.
(2) T
HE INSTITUTIONAL FRAMEWORK
(i) Changes in the general institutional framework
4. The main characteristics of Indonesia's institutions, as described in the 1994 Trade Policy
Review remain unchanged, for the time being.1  The 1,000-member People's Consultative Assembly
is constitutionally the supreme organ of State power.  It consists of the 500 members of the House of
Representatives and 500 members originating from the regions, the armed forces, and other social and
                                                     
1The new President of the Republic of Indonesia, supported by numerous political and social groups in
Indonesia, has announced major political reforms in the coming months, including free democratic elections andthe elaboration of new constitutional rules.WT/TPR/S/51 Trade Policy Review
Page 28
political groups.  It determines the country's broad policy guidelines at least every five years and deals
with constitutional matters.  Legislative authority is shared between the House of Representatives and
the President of the Republic.2 The President, who is elected by the People's Consultative Assembly
for (renewable) five-year terms, heads the State and concludes the main international treaties on its
behalf. While he is responsible for the implementation of the Assembly's broad policy guidelines, he
and his ministers retain considerable discretionary authority in daily decisions over general policyissues, through a system of laws, decrees, regulations and presidential instructions and decisions.  The
last presidential election was held in March 1998, but the elected President resigned in May 1998,
leaving the office to the Vice-President, in accordance with the constitution.
(ii) Economic and trade policy formulation
5. Final responsibility for the formulation and implementation of trade and other economic
policies rests largely with the President of the Republic.  He chairs the Economic Stabilization
Council, the highest decision-making body on economic affairs, which comprises all Coordinating
Ministers and Ministers for economic, finance, development, industry and trade matters as well as the
Governor of the Central Bank (Bank Indonesia).  Before being considered by the Economic
Stabilization Council, bills, decrees and other administrative decisions are first presented at themonthly meetings of the Cabinet on Economic Affairs, which consist of several key ministers
responsible for a broad range of issues.
3 In general, however, and before entering into the formal
decision-making framework, all strategic decisions and policy proposals requiring presidential
approval are discussed and considered informally by the ministers concerned. The President, who
directs government action, has authority over the ad ministration and approves legislation.  Ministers
are directly appointed by the President of the Republic.  They are not responsible politically to the
House of Representative; nor do they need to be elected to the House.
6. In accordance with Indonesia's commitments under the second Letter of Intent, the President
established the National Economic and Financial Resilience Council, a body chaired by him and
responsible for the supervision of the IMF programme's implementation.  At its meeting on
21 January 1998, the President appointed its members and formed a team of experts to assist it
(Presidential Decisions 17/1998 and 18/1998).4  He also appointed a Secretary General whose
responsibility is to ensure timely implementation of the reforms agreed with the IMF and coordinate
the activities of the Government agencies and representatives of the private sector concerned.  He
reports directly to the President.
7. To improve coordination of policies and their implementation, in December 1995 the
Government merged the Ministry of Industry and the Ministry of Trade.  The new entity, the Ministry
of Industry and Trade (MIT) has wide responsibilities for domestic and international trade as well as
industrial policies.  MIT's main responsibilities in respect of foreign trade cover the determination of
customs tariffs, non-tariff measures (notably licensing), export controls and promotion activities.  In
areas such as tariffs and export finance, MIT cooperates with the Ministry of Finance.  Following the
introduction of a new anti-dumping and countervailing law in 1996, a Committee on Anti-Dumping
                                                     
2Until 1997, the House of Representatives was composed of 400 elected Members, and 100 Members
directly appointed by the President of the Republic from representatives of the armed forces.  The number ofappointed Members was reduced in 1997 to 75.
3In addition to those Ministers who are Members of the Economic Stabilization Council, the Cabinet on
Economic Affairs groups the Co-ordinating Ministers for Politics and Defence, and Social Welfare.
4President Decree 47/1998 slightly modified the composition of the Council after the nomination of a
new Government in March 1998. It is still chaired by the President and consists of the Coordinating Minister forEconomics, Finance and Industry, the Minister of Finance, the Minister of Industry and Trade, the Minister ofForeign Affairs, the Minister of Privatization, the Governor of the Central Bank as well as high level experts.Indonesia WT/TPR/S/51
Page 29
has been established under the chairmanship of the Minister of Industry and Trade, and with the
participation of the Minister of Finance and high officials from the MIT, the Ministry of Agriculture
and the Directorate General of Customs and Excise.
8. Other important trade-related activities, such as standardization and consumer protection are
performed, under final authority of MIT, by the Centre for Standardization and the Centre for Testing
and Quality Control, and Consumer Services, respec tively.  Responsibility for investment falls under
the Investment Co-ordinating Board (BKPM), a non-departmental agency under direct authority of the
President of the Republic (section (4)(i)(a)).  While the government procurement system is somewhat
decentralized, with smaller contracts being under the supervision of project managers and medium-
size contracts under the responsibility of individu al ministries, larger contracts are handled by an
inter-ministerial body (TEP) headed by the Coordinating Minister of Development, Supervision andAdministration.  Rule-making in the area of intellectual property rests with the Ministry of Justice but
inter-ministerial coordination is the responsibility of the Cabinet Secretariat.  Police and customs
authorities are responsible for enforcement.
9. The recent financial crisis resulted in changes to the competencies of the Ministry of Finance
and the Central Bank.  The Government agreed in its second Letter of Intent to grant Bank Indonesiaautonomy over the formulation and implementation of monetary policy, a commitment implemented
by Presidential Instruction 23/1998 of 21 January 1998.
5  Following the appointment of a new Cabinet
in May 1998, the autonomy of the Central Bank was further strengthened as the Governor was no
longer considered to be a member of the Cabinet.  At the end of the current review of the Central
Bank's status and activities, a new Central Bank draft law will be submitted to Parliament (by the end
of September 1998).  The draft law is expected to further clarify the concept of autonomy and
introduce changes in the composition and mandate of the Monetary Board, the body currently settingthe strategic orientations on monetary and financial policies.
6
10. A new Ministry in charge of State-owned enterprises was set up in early 1998.  As a result,
the supervision of state-owned enterprises was tran sferred from line Ministries to the State Minister
for State-Owned Enterprises, by Government Regulation 50/1998 and Presidential Instruction
15/1998.  This move is seen by the Government as the first step in rationalizing the management ofstate-owned enterprises, leading to their eventual privatization.
7  A Privatization Board, responsible
for the management and privatization of state-owned assets, was established after the first Letter of
Intent.
11. In January 1998, the Government created the Indonesian Bank Restructuring Agency (IBRA),
a financial institution responsible for the restructuring of Indonesia's ailing banks.  Any bankcategorized as insolvent is placed under the authority of the IBRA.  To date, the Agency has
suspended seven Indonesian banks, placed seven banks under its direct management, and put another
41 (out of the country's 240 banks) under close supervision (Chapter IV(4)).  The Agency also
exercises a preventive role in detecting possible bank failures.  In this context, the Agency has
established a system of bank surveillance and ratings in line with international standards.
                                                     
5According to the second Letter of Intent, "the inflation objective will continue to be decided by the
Government as a whole to ensure that the Central Ba nk remains accountable".  However, "the policies for
achieving this objective, such as changes in official in terest rates, will be determined solely by the Central
Bank".
6The Monetary Board is chaired by the Ministry of Finance and comprises the Governor of Bank
Indonesia as well as Government advisors.
7Press Release of 21 January 1998 announcing the first stage of implementation of the Program of
Economic and Financial Reform and Restructuring.WT/TPR/S/51 Trade Policy Review
Page 30
12. While there is no official body or mechanism aimed at regularly reviewing trade policies, the
Government of Indonesia receives advice from external institutions such as the Harvard Institute for
International Development (HIID), the University of Indonesia, and related research institutes.  In
addition, it has traditionally liaised on policies, even before the crisis, with the International Monetary
Fund and the World Bank, which have had permanent representations in Jakarta for a long time.  The
involvement of multilateral financial institutions ha s markedly increased since the beginning of the
crisis.  They provide, in particular, advice, funding, and technical assistance to support the
implementation of the programme of reforms agreed with Indonesia.
13. Private interests are consulted regularly, formally or informally, on issues of their concern.
Official consultations are channelled through KADIN, the Chamber of Commerce and Industry, but
numerous industry associations have managed to exert pressure on the decision-making processthrough successful lobbying.  In the past, some of these associations have been particularly active.
They include the Association of Plywood and Wood Manufacturers, which, as described in 1994
Review, lobbied in favour of the maintenance of export restrictions.  However, this and other
producers' associations, which had previously establ ished informal or formal cartels in the plywood,
wood, rattan, cement, paper, and other industries, ar e now being directly affected by the dismantling
of trade privileges decided by the Government in the context of the IMF programme. In general, the
urgent need to reform the economy and promote efficiency in response to the current crisis may lessen
the ability of vested interests to unduly influence government decisions.
(iii) Legal framework
14. The existence of a modern, reliable and enforceable legal system is an indispensable
condition for economic development.  Other Trade Policy Reviews indicate that domestic and foreign
investors attach a great deal of importance to a business and legal environment that ensures thestability and security of commercial transactions.  This includes, notably, conditions aimed at the
proper execution of commercial contracts;  the adequacy and impartiality of a court system for
commercial law and the availability of compensa tion;  the enforcement of court rulings;  the
recognition of international arbitration;  the existence and effectiveness of remedial provisions against
administrative decisions;  the protection of the interests of creditors in bankruptcy cases;  theprotection of shareholders' rights;  fairness in the application of procurement procedures;  and many
other forms of legal protection and guarantees essential to business relations.
15. The Government of Indonesia acknowledges the need to modernize its laws and regulations,
many of which still date from the colonial period.  Legal reform was made a priority in
REPELITA VI, with the general aim of reducing the costs of doing business in Indonesia.  The task is
immense, however, as a major portion of the civil, penal and commercial codes need to be
modernized and upgraded.
8   Nevertheless, since the 1994 Review, Indonesia has made considerable
progress in this direction.  The Government introduced a new Company Law in March 1996
(Law 1/1995), which shortens time-limits for co mpany approval (60 days maximum), strengthens
shareholders' rights (particularly minority shareholders) and obligations, clarifies conditions forchanges in ownership and board structure, and provides rules for liquidation.  Indonesia also
introduced, in 1997, new patent, trade mark and copyright laws, in an effort to strengthen its legal
framework in this area and comply with the TRIPS Agreement.  It is also preparing legislation on
trade secrets, industrial designs and integrated circuits.  Furthermore, technical work for the
elaboration of a draft competition law has been undertaken.  In undertaking this task, Indonesia
receive technical assistance on a bilateral basis (USAID and the EU for the company law) and from
                                                     
8The rules on bankruptcy, for example, which dated from 1905, have proved ineffective in the context
of the financial crisis.  These were revised a few weeks ago with the assistance of the IMF and the World Bank.Indonesia WT/TPR/S/51
Page 31
multilateral organizations (such as the World Bank in the case of  intellectual property).  Finally, on
7 May 1996, the Government of Indonesia ratified five international conventions on IPR.9
16. Nevertheless, the recent financial crisis revealed major weaknesses in the monitoring of
certain business operations, notably banking. As a result, Indonesia committed itself in the second
Letter of Intent to revise its entire legal framework for banking operations, after a review of the
Central Bank Law, the Company Law and liquidations regulations.10  Concrete action is to be taken by
the end of 1998, with the help of the IMF and the World Bank.
17. While Indonesia has devoted significant efforts to bringing legislation more closely into line
with international standards, enforcement of laws, particularly concerning new transparency
requirements, court rulings and international arbitration remains a problem.  For example, while the
Government has in recent years undertaken to increase transparency in business relations byintroducing relevant provisions in new legislation (Law 16/1994 on Government Procurement; 1995
Company Law; 1995 Customs Law), the application of such provisions remains uneven.
11  By the end
of 1997, the Government had committed itself to introduce an improved system of commercial courts.
With regard to international arbitration, until 1990 Indonesian courts refused to recognize foreign
arbitral awards despite Indonesia's adherence to  the 1958 International Convention on Recognition
and Enforcement of Foreign Arbitral Awards.  To date, no foreign arbitral awards have ever been
applied in Indonesia.
(3) EXTERNAL POLICY MAKING
(i) Multilateral agreements and arrangements
18. Indonesia ratified the Marrakesh Agreement on 2 December 1994 and became a founding
Member of the WTO on 1 January 1995.  Implementation is undertaken on a case-by-case basis,
through individual and sector-specific regulations, rath er than with a single implementing Act.  In the
context of this Review, Indonesia reiterated its commitm ent to ensure full conformity of its legislation
with WTO Agreements.  Accordingly, it has already amended legislation in the areas of intellectual
property (copyright, trade marks, and patents) in order to comply with the TRIPS Agreement, and
introduced a new Customs Law in conformity with the WTO Customs Valuation Agreement.
                                                     
9These conventions are:  the Paris Convention for the Protection of Industrial Property, and the
Convention Establishing the World Intellectual Property Organization (WIPO) (Presidential Decree 15/1997);
the Patent Cooperation Treaty (PCT) and regulations under the PCT (Presidential Decree 16/1997);  the Trade
Marks Law Treaty (Presidential Decree 17/1997);  the Berne Convention for the Protection of Literary andArtistic Works (Presidential Decree 18/1997); and the WIPO Copyright Treaty (Presidential Decree 19/1997).
10Commenting on the 1995 Company Law, the World Bank doubted whether new liquidation
requirements, such as the automatic dissolution of a co mpany when the losses exceeded a certain percentage of
the capital, would be enforced, believing that it be widely circumvented.  This prognosis was partly confirmed
during the recent financial crisis. World Bank (1995a).
11The World Bank reported on the resistance of the business community to provide details of salaries
and benefits of company board members in yearly financial statements. (World Bank, 1995a).  This wassymptomatic of a certain reluctance by companies to publish detailed, and possibly sensitive information, asrequired by the Company Law.  Eventually, the relative lack of transparency in large industrial groups andbanks accounts contributed to uncertainty, which in turn  fuelled speculation during the financial crisis, and
undoubtedly impeded timely intervention by the authorities.  The second Letter of Intent calls for improved
transparency and disclosure in the area of banking, including the publication of more detailed data on theiroperations.  In government procurement, there is also much evidence that transparency procedures of the 1994Law are being circumvented.  Further efforts by the Government, prompted by the new OECD understanding ontransparency, might help improve the situation in these areas.WT/TPR/S/51 Trade Policy Review
Page 32
19. Indonesia's main commitments under the Uruguay Round were described in detail in the 1994
TPR.12 In the area of trade in goods, they can be summarized as follows:
- the binding of 95% of all tariff lines (accounting for about 90% of imports), mostly at
ceiling rates of 40%; at the time of the Agreement, Indonesia's unweighted average
tariff was 20% and nearly two thirds of all tariff lines were subject to duties of 20%
or less;13 unbound items cover essentially products from the designated "strategic
industries" (steel, motor vehicles and parts, aircraft and parts, certain ships, certain
pharmaceuticals, inorganic chemicals, plastics, explosives and ammunitions, etc.);
- the removal within ten years of all import surcharges and non-tariff barriers
(including restrictive licensing) on bound manufacturing products, covering
98 manufacturing items;
- the binding and tariffication of 100% of tariff lines in the agricultural sector, and the
reduction by 33% of average bound tariffs by 2005, with a minimum of 10% per
tariff line;  ceiling bindings of 180% and 110% for rice and sugar, respectively, will
undergo minimum reductions to 160% and 95%;
- the removal of non-tariff barriers on agricultural products (essentially the removal of
local-content requirements on dairy products and on soybean cakes used in animal
feed over 10 and 3 years, respectively);   however, the operations of  BULOG (the
state-trading agency responsible for agricultural products) have been little affected by
the Agreement.
- the minimum and guaranteed access of  70,000 tonnes of rice and 415,000 tonnes of
fresh milk equivalent, annually, at in-quotas duty rates of 90% and 40%, respectively
(out-of-quota rates reaching in this case 180% and 238%, respectively);
- the removal of all export subsidies for agriculture, except for rice.  Export subsidies
for rice were bound at a ceiling amount of US$28.3 billion for 299,750 tonnes in the
first year, and should be reduced to US$21.5 billion by year 2004 for a quantity of
subsidized exports amounting to 257,785 tonnes.
20. In addition, Indonesia made a number of specific commitments under the General Agreement
on Trade in Services (GATS).14   It essentially bound its existing conditions for market access in the
fields of tourism, financial services, telecommunicat ions services and industrial services.  Horizontal
commitments applying across all sectors were also made.  Indonesia's initial GATS schedule was later
amended and significantly improved as a result of its participation in the second and fourth GATS
Protocol on Financial Services and the Agreement on Telecommunications Services, to which it is asignatory (Chapter IV(4)).
15
21. Indonesia has generally fulfilled its WTO notification obligations (Table II.1).  It is currently
involved in one dispute settlement case, regarding certain measures (in particular the 1993 automobile
scheme and the 1996 National Car Programme) maintained by the Government of Indonesia to
                                                     
12GATT (1994), pp.23-27.
13As described in Chapter III(2), Indonesia's unweighted average MFN tariff was significantly reduced.
14 Document GATS/SC/43 of 15 April 1994.
15Additional commitments are contained in WTO documents GATS/SC/43/Suppl.1 of 28 July 1995
S/FIN/W/12/Add.49 of 11 D ecember 1997 (financial services), an d GATS/SC/43/Suppl.2 of 11 April 1997
(telecommunications services).Indonesia WT/TPR/S/51
Page 33
develop the automobile industry, and their consistency with WTO rules.  Requests for consultations
were made separately by Japan, the European Union and the United States in October 1996.  While
different panels had initially been established in June and July 1997, the Dispute Settlement Body
decided that the dispute would be examined by the same panel.  The Panel Report was circulated to
WTO Members in July 1998 (Table II.2).
Table II.1
Principal notifications made in the context of implementing WTO Agreements, November 1997
WTO Agreement Document Main content
General Agreement on Tariffs and
Trade (GATT) 1994(Article XXVIII:5)Schedule XXI – Indonesia
WTO. doc G/MA/46 of 15 January 1997Schedule of tariff concession
Reservation of right to modify schedule
General Agreement on Trade in
ServicesGATT doc. GATS/EL/43, and GATS/SC/43
of 15 April 1994 (+ suppl)List of Article II (MFN) exemptions;
Schedule of specific commitments inservices
Quantitative Restrictions (Decision onNotification Procedures forQuantitative Restrictions)
WTO doc. G/L/59No notification received Initial and biennial reports
Agreement on Agriculture
(Article 18.2)WTO doc.G/AG/N/IDN/1 of 30 January 
1996, and G/AG/N/IDN/3 of 18 March
1996Table MA: 1- administration of tariff
quotas
(Article 10 & 18.2) WTO doc. G/AG/N/IDN/2 of
30 January 1996Table ES:1 to ES:3 - Export subsidies
(Article 5.7 & 18.2) WTO doc. G/AG/N/IDN/4  of  5 November
1997Table MA:5 - Special safeguard
Agreement  on Textiles and Clothing
(Article 6.1)WTO doc G/TMB/N/104 of 4 July 1995 Right to use safeguard mechanism
 (Article 2.6; 2.11) WTO doc. G/TMB/N/113 of
11 August 1995 and  G/TMB/N/234 of
6 March 1997List of products to be included in the first
and second stages of integration
(Article 3.1) WTO doc. G/TMB/N/79 of  28 April 1995 Quantitative restrictions maintained on
31 December 1994. Notification of no
restriction by Indonesia
Agreement on Technical Barriers to
Trade(Article 15.2)No notification received Implementation and administration of the
Agreement
Agreement on Anti-Dumping Practices
(Article 18.5)WTO doc.G/ADP/N/1/IDN/2 of
23 September 1996Law relevant to the Agreement
 (Article 16.4) WTO doc. G/ADP/N/22/IDN  of
9 June 1997, G/ADP/N/29/IDN of
24 September 1997, and G/ADP/N/33 of 14October 1997Semi-annual report on anti-dumping
actions
(Article 16.5) WTO doc.  G/ADP/N/14/ADD.4 of 25 April
1997Competent authorities
Agreement on Safeguards Measures
(Article 12.6)WTO doc. G/SG/N/1/IDN/1 of
11 April 1995No legislation or regulation on safeguards
measures
(Article 12.7) WTO doc. G/SG/N/2/IDN of 21 April 1995 No specific safeguard measures imposed
by Indonesia
Agreement on Rules of Origin
(Article 5.1)WTO doc. G/RO/N/16 of 5 March 1997 No judicial decisions or administrative
rulings of general application relating tonon-preferential rules of origin.
WTO doc. G/RO/N/4  of 7 August 1995 Preferential Rules of Origin
Agreement on Subsidies and
Countervailing Measures(Article 32.6)WTO doc. G/SCM/N/1/IDN/2 of
23 September 1996Law relevant to the Agreement
 (Article 25.11) No notification because no outstanding
countervailing measuresSemi-annual report on countervailing
actions
(Article  25.1) WTO doc. G/SCM/N/16/IDN of 13 January
1997, and G/SCM/N/3/IDN of 19 July 1995 Notification of subsidies
Agreement on Import Licensing
(Articles 1.4 (a) and 8.2 (b))No notification of law received Law and regulation concerning import
licensing procedures
Table II.1 (cont'd)WT/TPR/S/51 Trade Policy Review
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WTO Agreement Document Main content
Agreement on Preshipment Inspection
(Article 5)WTO doc. G/PSI/N/1/Add.1 of 8 June 1995;
modified by Add.6 of 6 June 1997Indonesia notified that, since 1 April 1997,
it does not apply preshipment inspection toits imports
Sanitary and Phytosanitary Measures(Agreement on the Application of)
(Article 7, Annex B)WTO doc. G/SPS/N/IDN/1 of 28 August
1996, G/SPS/N/IDN/2 of 2 December 1996Transparency regulations
State Trading (Understanding on the
Interpretation of Article XVII of the
GATT 1994)(Article XVII:4 (a))WTO doc. G/STR/N/1/IDN of 7 July 1995,
G/STR/N/2/IDN of 23 September 1996State-trading activities
Agreement on Trade-Related
Investment Measures
(Article 5.1)WTO doc. G/TRIMS/N/1/IDN/1 of 1 June
1995Notification of a TRIM inconsistent with
the Agreement
Agreement on Trade-Related Aspects ofIntellectual Property
(Article 63.2)WTO doc. IP/N/1/IDN/1 of 8 May 1996 Notification of 4-year delay for application
of TRIPS Agreement, starting
1 January 1996
(Article 69) WTO doc. IP/N/3/IDN/1 of 3 August 1995 Notification of contact point
(Article 4 (d)) WTO doc. IP/N/4/IDN/1 of 28 March 1996 Notification of international agreements on
IPR to which Indonesia is a party
Plurilateral Agreement Indonesia is not a Party to the Agreements
on Civil Aircraft, on Government
Procurement, on Bovine Meat and on Dairy
Source:  WTO Secretariat.
Table II.2
Case involving Indonesia under WTO dispute settlement provisions, November 1997
Dispute Complainant Request for consultation First established panel Documentation
Indonesia – certain measures
affecting the automobileindustryEuropean
Communities3 October 1996 12 June 1997
aWT/DS/54
Indonesia – certain measures
affecting the automobile
industryJapan 4 October 1996
29 November 199612 June 1997aWT/DS/55 and
WT/DS/64
Indonesia – certain measures
affecting the automobile
industryUnited States 8 October 1996 12 June 1997aWT/DS/59
a The DSB decided that a single panel would examine the three disputes together.
Source: WTO Secretariat.
22. During the WTO Ministerial Conference in Singapore, in December 1996, Indonesia stressed
that the growing exposure of developing countries to global markets posed new economic and
political challenges to them.16  It welcomed the progress in implementing WTO Agreements but
emphasized the continued difficulties faced by developing countries as regards market access,particularly in respect of the use of anti-dumping actions and safeguard measures in the area of
textiles and clothing.  Nevertheless, Indonesia supported further trade liberalization in the multilateral
framework through the completion of the Uruguay Round's unfinished business and the conclusion of
the Declaration on Trade in Information Technology Products ("the Information Technology
Agreement"), which it signed.  It expressed interest in further discussions on the relationship betweentrade and the environment, as well as on the relationship between the multilateral trading system and
regional trade agreements and on the issue of trade facilitation.  However, it sent a message of caution
                                                     
16The positions contained in this paragraph are directly drawn from the Statement by
H.E. Mr. Tungky Ariwibowo, Ministry of Industry and Trade of the Republic of Indonesia at the WTOMinisterial Conference in Singapore (WTO document WT/MIN(96)/ST/22 of 9 December 1996).Indonesia WT/TPR/S/51
Page 35
on the issue of the relationship between trade and competition, considering that the discussion should
focus only on the international aspects of competition, not on policies applied at the national level.  It
reiterated its commitment to adherence to core labour  standards, but considered that the International
Labour Organization, not the WTO, was the appropriate forum to discuss this issue.
23. Many of these policy priorities were confirmed in Indonesia's address to the second
Ministerial Conference of the WTO in May 1998.  The Government of Indonesia expressed itsdisappointment about some aspects of the implementation of the Uruguay Round Agreements
including in the backloading of the provisions re garding special and differential treatment for the
developing countries and the implementation of th e Agreement on Textiles and Clothing.  Indonesia
sees the existence of transitional safeguard measures and unilateral rules of origin, as well as the
abuse of anti-dumping provisions as elements preventing exporters from benefiting from theAgreements.  As for the future, Indonesia indicated that the WTO should concentrate its efforts on the
completion of activities mandated in the build-in agenda and cautioned the opening of comprehensive
negotiations on new areas.  It supported the accession of applicant countries.  Finally, Indonesia urged
other WTO Members, in particular the developed countries, to allow greater market access for
products of export interest to all countries affected by the Asian crisis.  Exports are seen by Indonesiaas a crucial element in the resolution of such a crisis.
17
24. Overall, since the entry into force of the WTO, Indonesia has taken seriously the need for
timely implementation of its obligations.  In many areas, Indonesia anticipated the implementation of
its commitments, with various steps, for example the rapid elimination of all (172) surcharges in
1995, the removal of most non-tariff measures between 1995 and 1998 (to date, 86 NTMs out of a
total of 98 to be removed by 2004), and the elimination of local-content requirements on soybean
cakes (1996) and dairy products (1998).18  By improving its GATS commitments, Indonesia also
contributed to the completion of the Uruguay Round's unfinished business, particularly in financial
services, despite difficult financial market conditions.  It has shown great interest in the conclusion of
the ITA, in which it was an important participant.  For the sake of transparency, Indonesia decided to
make public its ITA schedule.
25. Furthermore, in the context of the current economic crisis, Indonesia resisted the temptation
to use the flexibility allowed by the gap between bound and applied tariffs, to raise trade barriers.
Instead, in agreement with the IMF, Indonesia took this opportunity to further liberalize trade, either
unilaterally, or through faster implementation of existing WTO commitments, or improvements in
these commitments.
(ii) Regional agreements or arrangements
26. Like many WTO Members, Indonesia complements trade policies at the multilateral level by
a network of bilateral and regional relationships.  While Indonesia has proved to be very active since
the creation of the WTO and undertaken substantial unilateral trade liberalization on an MFN basis, it
is also working towards the creation of a free-trade agreement among ASEAN members and
participates actively in the APEC forum.  At the same time, Indonesia's policy is to ensure that its
adherence to the ASEAN Free-Trade Area (AFTA) is consistent with the principles of the WTO.  The
reduction both of MFN rates (on a unilateral basis) and of AFTA-CEPT rates have proceeded in
                                                     
17This paragraph is drawn directly from the statement circulated by H.E. Mr. Mohammad Hasan, the
then Minister for Industry and Trade, at the WTO Ministerial Conference Geneva (WTO document
WT/MIN(98)/5/50 of 18 May 1998).
18Restrictive licensing has been removed, for example, on certain iron and steel products (such as steel
tubes and pipes), certain engine and engine parts, sugar substitutes, certain handtools, and locomotive engines,among other products.WT/TPR/S/51 Trade Policy Review
Page 36
parallel, a process facilitated by the closeness of implementation dates (2003 for the ASEAN-AFTA
scheme and 2004 for the Uruguay Round). As a result, the margin of regional preference remained
relatively small (Chapter III (2)(ii)).
(a) Developments in ASEAN
27. Indonesia is a one of the six founding member s of the Association of South-East Asian
Nations (ASEAN) formed in 1967.  Since the 1994 Trade Policy Review, Viet Nam, Myanmar andLaos have become members of ASEAN.  Within  ASEAN, Indonesia participates in cross-border
initiatives with selected trading partners or groups of trading partners, and in dialogue between
ASEAN and non-ASEAN countries.
19
Cooperation in the field of trade policy
28. Indonesia supported the creation of a Free-Tr ade Area among ASEAN countries (AFTA).  On
1 January 1993, ASEAN members started to implement tariff reductions agreed under the Common
Effective Preferential Tariff (CEPT), the backbone of AFTA, with a view to reducing all tariffs on
ASEAN trade to between 0 and 5% over a maximum of 15 years and to eliminating non-tariff
barriers.20  The 1995 ASEAN Summit formalized a proposal to advance the completion of AFTA by
five years, from 2008 to 2003, and to expand the coverage of the scheme to unprocessed agriculturalproducts.  In addition, ASEAN members decided to incorporate in the CEPT scheme most tariff lines
that where initially left out of tariff schedules under Temporary Exclusion Lists.
21  This incorporation
is taking place in five equal instalments of 20%, with the first instalment in January 1996 and the last
in 2000.  In December 1998, the Heads of State or Government of ASEAN agreed on the principle of
again bringing forward the completion of the free-trade area (possibly by year 2000 instead of 2003),
but details are yet to be decided.  Preliminary discussions seem to indicate that progress in this area
will not be mandatory but be left on a "best efforts basis".22
                                                     
19The ASEAN maintains regular dialogue with Australia, Canada, the European Union, India, Japan,
the Republic of Korea, New Zealand and the United States.  In addition, the Trade Ministers from ASEAN and
the Closer Economic Relations (CER) Agreement with Australia and New Zealand, agreed to meet annually
after their first joint meeting in September 1995.
20As described in the 1994 Trade Policy Review, the CEPT tariff reduction programme consists of a
Normal Track and a Fast Track.  In the initial plan, tariffs on all products in the Normal Track were to belowered to a maximum of 20% by 2001, and to the 0-5% range by 2008.  Tariffs under the Fast Track
(concerning fifteen product groups accounting for about half  of total intra-ASEAN trade)  had to be reduced to a
maximum of 20% by 1998 and to the 0-5% range in 2003.  Members each submitted a list of productstemporarily excluded from the application of the CE PT ("Temporary Exclusion List").  The lists, which
contained mostly chemical, plastic and motor vehicle produ cts, had to be reviewed after eight years. Products
that would definitely not be part of the CEPT scheme were integrated in a "General Exclusion List".   Inaddition, a Sensitive Product List was created for a few items that were to be considered for tariff reduction only
after 2003.
21About 20% of Indonesia's tariff lines had initially been excluded from the CEPT scheme, and placed
on the Temporary Exclusion List (for the most part) or on the General Exclusion List (a few lines).  TheTemporary Exclusion List initially concerned sensitive products such as paper and paper products, transportequipment (including motor vehicles), iron and steel, cer tain electrical products and petroleum products, which
were finally incorporated in Indonesia's CEPT schedule in 1996.  In 1997, items covered by tariff reduction
accounted for four fifths of intra-ASEAN trade.
22ASEAN leaders agreed that "the implementation of the ASEAN Free-Trade Area and the ASEAN
Investment Area be accelerated to increase Intra-ASEAN tr ade and to benefit from the competitiveness of the
region's economies resulting from simultaneous currency depreciation" (Press Release of the Second InformalMeeting of the ASEAN Heads of State or Government, 15 December 1998).Indonesia WT/TPR/S/51
Page 37
29. As a result both of the expansion of the product coverage of the CEPT scheme and the
acceleration of the schedule of tariff cuts in the period under review, about 90% of Indonesia's tariff
lines are currently subject to a reduced rate, a share slightly above the ASEAN average (Table AII.1).
Indonesia's simple average CEPT tariff is currently about 7% (against 9.5%  for applied MFN tariffs),
and is scheduled to fall to 3.7% by 2003.  As noted in Chapter III(2), Indonesia has proceeded to
reduce CEPT and MFN rates concurrently, so that the margin of preference for regional supplies hasremained relatively modest.
23  Pressure to rationalize tariff structures and liberalize trade on a
multilateral basis may even further reduce the difference between the regional and MFN tariff in the
future.
30. The ASEAN also decided to expand the scope of regional cooperation beyond the field of
goods, to services and intellectual property. The Framework Agreement on Services has defined sevenpriority areas, telecommunications, tourism, financial services, construction services, business
services and maritime and air transport services.  Indonesia made its first commitments regarding
tourism, and maritime transport services at the ASEAN Economic Ministers Meeting in October
1997, for implementation in 1998.
24 Indonesia is considering making new commitments in an
additional package to be negotiated by December 1998. The Framework Agreement on IntellectualProperty aims at improving the legislation and enforcement of intellectual property rights in the
ASEAN region and envisages the possibility of integrating patent and trade mark protection into a
single ASEAN legal framework.
31. ASEAN members also seek to develop joint industrial projects between private companies
from different ASEAN countries, by granting , under the new "ASEAN Industrial Cooperation
Scheme", a preferential tariff of 0-5% on the output of participating companies. To date, only two
such cooperation projects have benefited from these preferential tariff reductions.
32. Within ASEAN, triangular cooperative arrangements have been put in place with the aim of
facilitating trade and investment between neighbouring members by taking advantage of geographical
proximity.  Indonesia participates in three of these initiatives, the Indonesia-Malaysia-Thailand
Growth Triangle, the Indonesia-Malaysia-Singapor e Growth Triangle, and the Brunei-Indonesia-
Malaysia-Philippines-East ASEAN Growth Area.  In this connection, a number of projects havealready been undertaken with the cooperation of the Asian Development Bank.
New areas for cooperation
33. In the wake of the currency crisis, ASEAN members have agreed on the principle of reducing
their dependence on the U.S. dollar as a currency of payment and hence of promoting the use of
regional currencies in intra-ASEAN trade. Concrete proposals are scheduled to be made to economicsMinisters in 1998.  One important issue for discussion is the problem of acceptability of certain
currencies affected by very large devaluations.  Ministers are also studying the means of strengthening
their surveillance of economic and financial developments in the region, with a view to better
anticipating cyclical downturns.  Proposals on a strengthened surveillance mechanism are also to be
tabled in the course of 1998.
                                                     
23At present, about 40% of Indonesia's CEPT and MFN tariff lines (accounting also for 40% of import
values) carry similar rates.
24Indonesia's commitments, like most ASEAN coun tries' commitments, largely represent existing
GATS bindings (the maritime transport offer goes slightly beyond the relevant GATS commitments).  While theASEAN seeks to promote the idea of "GATS-plus" commitments, this concept remains under discussionbetween members and is not yet fully reflected in existing offers. Work on improved offers continues in theASEAN coordinating committee on services.WT/TPR/S/51 Trade Policy Review
Page 38
(b) The Forum for Asia-Pacific Cooperation (APEC)
34. Indonesia considers APEC as an important foru m for promoting consultation, cooperation and
trade within the region but has always emphasized that any such initiatives, particularly trade
liberalization initiatives, should be implemented on an MFN rather than on a preferential basis.  That
position is reflected in the terms of the Bogor and Osaka declarations.25  Indonesia is active in all
APEC's fora and working groups.
35. Indonesia hosted the second meeting of APEC leaders in Bogor in November 1994, where
members committed themselves to free and open trade and investment in the Asia-Pacific region, by
2010 for industrialized economies and no later than 2020 for developing economies.  The Bogor
Declaration outlined three broad directions in which APEC would work to achieve this goal, i.e. trade
liberalization, trade facilitation and economic and technical cooperation.  At the APEC Summitmeeting in Osaka (November 1995), members furt her specified APEC's work programme, by
identifying 15 priority areas for future work (tariffs, non-tariff measures, services, investment,
customs procedures, standards, IPR, government procurement, competition policy, deregulation, rules
of origin, dispute settlement, mobility of businessmen, implementation of Uruguay Round
Agreements, and gathering and analysis of data).  Members were required to present IndividualAction Plans, outlining individual liberalization initiatives in these areas.  Indonesia's Plan focused on
its continued process of unilateral trade liberalization and the implementation of its WTO
commitments.  The Public Declaration (Novem ber 1996) called for further improvements in
Individual Action Plans.  Members were also invited to identify 15 priority sectors for early and
voluntary liberalization.  These were defined at the APEC meeting in Vancouver (November 1997),
and included fish and fish products, forestry products, energy, chemicals, medical equipment and
instruments, gems and jewellery, toys, telecommunications, oils seeds and oil-seed products, naturaland synthetic rubber, fertilizers, automotive, civil aircraft, and environmental goods and services.
Proposals for 9 of these 15 sectors are to be finalized in 1998.
(iii) Participation in other fora
36. Indonesia is a member of the Cairns Group of producers and exporters of agricultural
products, along with Argentina, Australia, Brazil, Canada, Chile, Colombia, Fiji, Malaysia, NewZealand, the Philippines, Thailand and Uruguay.  The Group is currently working towards the next
multilateral negotiations on agriculture, with a particular focus on export subsidies, domestic support
and market access.  Indonesia also participates in several international commodities organizations
such as the International Tropical Timber Organization, the International Natural Rubber
Organization and the International Coffee Organization.  In addition, Indonesia remains committed toUNCTAD's Integrated Programme for Commodities and the Common Fund.
37. Indonesian government officials, representatives of business, and academics are actively
participating in the Pacific Economic Cooperatio n Conference (PECC), a forum of exchange and
consultation encompassing individuals from various Pacific countries to promote regional trade and
economic policy cooperation. Recent PECC seminars and studies focused on issues such ascompetition policy and the impact of trade liberalization.
                                                     
25The 1995 Osaka Declaration identified ten prin ciples on which APEC's work towards trade
liberalization and facilitation should be based, among which WTO-consistency, non-discrimination, andtransparency are essential.Indonesia WT/TPR/S/51
Page 39
(4) INVESTMENT REGIME
(i) Recent performance and developments
38. Indonesia has attracted more foreign direct investment (FDI) in the period under review than
ever before.  Between 1994 and the first quarter of 1998 foreign investment approvals amounted
US$131 billion compared to a total of US$209 billion since 1967 (FDI data is only available in the
basis of approvals, not on the basis of FDI actua lly undertaken).  Investment approvals peaked in
1995 at a record high of US$40 billion, and remained  at high levels in 1996 (US$30 billion) and 1997
(US$34 billion) (Chapter I(3)).  About 75% of all investment approved between 1994 and 1997 went
to the manufacturing sector.  The preferred industries were chemicals, paper and paper products, and
basic metal and metal products.  In connection with the opening of several previously restricted
services sectors to FDI (see below), foreign presence in services has also extended beyond itstraditional destination (tourism) and has become significant in banking, finance, real estate, electricity
and telecommunications. The geographical origin of FDI has also changed. Overall, Japan remains the
largest investor with a stock of US$42 billion accumulated in the last 30 years, with the European
Union lying second.  However, newly industrialized neighbours such as Hong Kong, China;  Chinese
Taipei;  and Singapore have recently emerged as top investors since the 1994 Trade Policy Review.
26
39. Indonesia has pursued a long-term policy aimed at  attracting foreign direct investment.  As
described below, the scope of restrictions and limitations was significantly reduced and a large
majority of economic sectors has now been opened to limited, if not full, foreign participation.
Indonesia has sought to maintain its locational advantage in the face of stiffer competition from new
low-cost investment-seeking countries in the region (China and Viet Nam).  In this respect, the rapid
increase in the real minimum wage, by 30% in 1995/96, after a doubling between 1989 and 1994, was
the subject of (possibly exaggerated) concerns in Indonesia.  This, among other factors, may haveencouraged the adoption of tax incentives in 1996.
40. Indonesia's attractiveness to foreign investors depends much more, however, on longer term
factors such as its large potential consumer market, adequacy of its infrastructure, natural resources
(minerals, oil and gas), and the availability of adequately skilled labour at low cost. These factors may
largely explain why, despite the current economic cris is, inward FDI flows have not, so far, suffered a
major decline (approval trends for 1997 and the first quarter of 1998 are in line with past trends).  As
shown by this and in previous Reviews, empi rical evidence casts considerable doubt on the
effectiveness of tax and non-tax incentives in stimulating investment.  On the contrary, incentives
have several well-known drawbacks: they can lead to over-investment in inefficient industries;  they
contribute to regional bidding contests;  usually prove costly for public finances;  generate taxincreases, which are borne by other activities, including non-eligible investments (easy targets);  and
encourage rent-seeking by internationally efficient producers.
41. Establishment of a stable macroeconomic and business environment in Indonesia is far more
important than the provision of financial incentives  to investors. This im plies the maintenance of
steady investment conditions throughout the entire production cycle, and eschewing such measure as:differentiated treatment of certain categories of investors in order to promote industrialization
programmes (car industry);  and temporary closur es and re-opening of certain sectors to foreign
investment (palm oil), which are likely to deteriorate the investment climate.  The establishment of
stable business conditions also involves reducing the cost of doing business through effective customs
procedures, cutting red tape and excessive bureaucracy, eliminating discretionary fees and
commissions, and removing unnecessary obstacles to the hiring of expatriate staff. According to the
                                                     
26As a result of large flows of investment since the 1994 TPR, Singapore has become overall the third
largest investor in Indonesia, Hong Kong the fourth and Chinese Taipei the sixth.WT/TPR/S/51 Trade Policy Review
Page 40
Government, establishment of a stable business environment has been, and continues to be, one of its
highest priorities.
(a) Basic framework
42. The main rules and principles regulating the establishment, operation, rights and benefits of
companies with foreign participation are containe d in the Foreign Capital Investment Law of 1967
(Law 1/1967), whose main aspects have been desc ribed in the 1990 and 1994 Reviews.  Under the
Law, the repatriation of capital and benefits is free and unrestricted, and can be undertaken in the
original currency, at the prevailing exchange rate (there are no exchange controls in Indonesia and all
types of foreign exchange operations are permitted).  Protection against expropriation is provided by
Article 21 of the Law, which stipulates that the Government shall not initiate nationalization of
foreign assets except in the manner required and regulated by the Law and when it is in the interest ofthe State. The principles of international law on compensation are respected.  No such case has
occurred since the inception of the 1967 Law.
Investment regulated by BKPM
43. Foreign investment projects (except in the oil, mining and forestry sectors and financial
services), as well as domestic projects involving a pplications for incentives, are subject to the prior
approval of the Coordinating Investment Board (BKPM) .  The sectors that remain closed or restricted
to foreign investment are included in a Negative Investment List, which, in principle, is established
for three years, but, in practice, is regularly updated.
44. Since the early 1990s, Indonesia has continued to liberalize its FDI regime.  As described in
the 1994 Review, the May 1994 package had already introduced decisive changes by relaxing
ownership/divestiture rules and extending the scope of  activities open to FDI.  As regards ownership
rules, the previous obligation to establish joint ventures with Indonesian partners and to divest themajority of capital (at least 51%) over a certain period of time was removed.  Instead, foreign
investors were given freedom to establish either joint ventures, with Indonesian equity requirement
limited to 5%, or wholly owned firm s (with 100% foreign ownership).
27  Divestiture requirements
were reduced, with a simple requirement that wholly owned firms divest a symbolic share of their
capital after 15 years of commercial operation.  While this share depends on the parties concerned, itcould be as little as 1%.  Minimum capital require ments for investment in a foreign-owned company
were removed.  Foreign investors were no longer "encouraged" to invest in remote areas, and could
choose their location freely.
28  Also, the package provided for the possible extension of operating
licences for foreign firms from an initial 30 years to 60 years.  Finally, the 1994 package opened FDI
to key infrastructural services sectors, such as  telecommunications, power generation, drinking water,
sea port facilities, air, maritime and railway transport, and mass media.  In these sectors, foreign
investors could own up to 95% of a company's shares.
45. As reflected in FDI statistics (based on appr ovals), the 1994 package certainly contributed to
the investment boom in Indonesia.  The Negative List of Investment was further revised in May 1995,
                                                     
27The use of a joint venture was only required in eight sectors: the operation of harbour,
telecommunications, power generation, shipping lines, airlines, potable water, public railways, and nuclear
power generation.
28The Government encourages investors (with duty  and tax-free treatment as well as trade facilitation
measures) to establish in particular industrial estates such as the special export-processing zones and the island
of Batam (Chapter III).Indonesia WT/TPR/S/51
Page 41
with the liberalization of another ten sectors,29 and the confirmation of the opening of infrastructural
services.  In turn, five sectors were closed on environmental grounds.30   The 1995 List enumerates the
11 sectors "absolutely closed" to any investment, both domestic and private (generally on
environmental grounds, although this is questionable for activities such as logging);  the six sectors
"closed to foreign investment" (retail trade, domestic trade support services, broadcasting, movies,
domestic shipping, and taxi and bus transportation); the nine sectors for which access is subject tospecific requirements (such as technology transfer requirements or co-production agreements with  a
state-owned enterprise ) and the eight services sectors opened to FDI in 1994, but considered, in the
Negative List concept, as "closed to 100% ow nership" (while actually opened up to 95%
ownership).
31
46. The List actually remained unchanged until mid-1998, reflecting both the extent of previous
liberalization and the absence of any compelling re ason to deepen reform as FDI was already pouring
into the country.  In 1996, the introduction of the National Car Programme, which affected investment
conditions in the car industry, and the temporary closure of the oil palm plantation sector to FDI,
raised some fears of a reversal of Indonesia's open investment policy.  The general restriction on FDI
in retail and domestic distribution was also felt to  be an impediment to competition, since it secured
the position of domestic producers already benefiting from the assistance provided by import
monopolies, exclusive distribution arrangement, market sharing, etc.
47. The liberalization of FDI resumed in the wake of the economic and financial crisis.  In
September 1997, the Government removed one of the last major foreign ownership restrictions, the
49% limit on foreign holdings of listed shares (except for banks).  In the first quarter of 1998, it also
lifted restrictions on wholesale and retail trade and opened palm-oil plantations to FDI.  Moreover, it
removed the special tax and customs privileges accorded to the "national car", which adverselyaffected other car manufacturers.  In addition, foreign manufacturing companies investing in
Indonesia were allowed to sell their products freely on the domestic market, to retailers or directly to
the consumers by establishing a company specialized in retail (thereby removing earlier restrictions).
Finally, in July 1998, the Government issued a revi sed and shortened (Negative) List of activities
closed to foreign investors.  While the previews List (1995) covered 34 sectors, the new List reducesthe number of sectors restricted to FDI to 25, consisting of 16 sectors "absolutely closed" to
investment, and nine sectors partly closed to inve stment in which foreign investors may nevertheless
have minority equity participation.  The 1998 List is presented in Table II.3.
48. As part of Indonesia's policy to develop national skills and technology, foreign investors are
obliged to contribute to the training and promotion of Indonesian staff.  Foreign-owned firms areencouraged to set up training programmes and the number of, and positions opened to, expatriate staff
is limited by the law.  In this connection, Indonesia has scheduled a GATS horizontal limitation with
                                                     
29The ten sectors include: finished and semi-finished rattan; motor vehicles; utility boilers; aircraft
repair; advertising; machines for producing white cigarette s; disposable gas lighters; block boards; cooking oil;
and prescription medicines.
30The five sectors are: cyclamate and saccharine; sulphite-based pulp production; chloro-fluorocarbon
industries; manufacture of finished and semi-finished mangrove wood; and chloro-alkali industries usingmercury processes.
31This new category was created as a confirmation of the May 1994 package, which opened basic
infrastructure to foreign investment provided that a minimum Indonesian equity of 5% be kept.  In doing so, theGovernment sought to upgrade the country's lagging infrastructure, in the context of rapid economic and socialchange. The 1995 package further opened these sectors by relaxing the 5% local ownership rule and substitutinga softer requirement that foreigners do not own 100% of the capital (this may be 99%).WT/TPR/S/51 Trade Policy Review
Page 42
respect to market access for the movement of natural persons.32  This obligation is known, however,
to be somewhat circumvented by the appointment of various categories of "consultants" and
"experts".
Table II.3
Negative Investment List, July 1998
No. Sector
I. SECTORS ABSOLUTELY CLOSED FOR INVESTMENT
1. Cultivation and processing of marijuana and the like
2. Exploitation of sponges
3. Contractors of forest logging
4. Uranium mining
5. Manufacture of penta chlorophenol, dichloro diphenyl trichloro ethane (DDT), dieldrin, chlordane
6. Production of pulp using sulphite processing and production of pulp with whitening chlor
7. Manufacture of alkaline chloride using mercury process
8. Manufacture of chloro fluoro carbon (CFC/Freon)
9. Manufacture of cyclamate and saccharine
10. Processing of mangrove wood to produce finished/semi-finished goods
11. Liquor and alcoholic beverages
12. Firecrackers and fireworks
13. Explosive materials and the like
14. Manufacture of weapons and related components
15. Printing of valuable paper:
(a) Postage stamps
(b) Duty stamps
(c) Commercial paper of Bank Indonesia(d) Passports
(e) Stamped postages
16. Casino/gambling
II. SECTORS CLOSED FOR INVESTMENT, IN WHICH A PART OF SHARE OWNERSHIP IS OWNED BY 
FOREIGN CITIZENS OR ENTITIES
17. Taxi/bus transportation
18. Local shipping
19. Private television broadcasting, radio broadcasting services, newspaper and magazine
20. Operation of cinema
21 Spectrum management of radio frequency and satellite orbit
22. Trade services and their support services, except:  retailer (mall, supermarket, department store, shopping centre),
distributor/wholesaler, restaurant, quality certification services, market research services, and after sales services.
23. Medical services:  general clinics, delivery clinics, specialist clinics and dental clinics
24. Freshwater fish and feshwater fish cultures
25. Forest utilization right
Source: BKPM (Investment Coordinating Board).
                                                     
32Indonesia's schedule in the GATS provides that "subject to Indonesian Labour and Immigration Laws
and Regulations, only directors, managers and technical experts/advisors, unless mentioned otherwise (corporatetransfer) are allowed based on an economic needs test."Indonesia WT/TPR/S/51
Page 43
Investment regulated by other Government bodies
49. Investment in the oil and gas, mining (minerals), and financial sectors do not fall under
BKPM's authority and are regulated separately by the Ministry of Mines and Energy, the Ministry of
Finance and the Central Bank, respectively.  The oil sector is tightly controlled by the State, which
owns Pertamina, the national oil company, and all oil and mineral rights.  Foreign companies are
allowed to participate in oil exploration and extraction under production-sharing arrangements withPertamina.  In their contract areas, foreign investors finance development, exploration and production
costs, obtaining in return a varying share of after- tax profits.  Following a period of under-investment,
which threatened Indonesia's production capacity, foreign investors' shares of profits have been
increased in recent years to take better account of costs and risks (currently, Pertamina/contractors net
shares of profits vary between 65/35% and 88/12%  for oil contracts and 60/40% to 70/30% for gas
contracts, depending on the conditions in the contract area.).  A major impediment to foreign
investment and modernization in the sector is Pertamina's monopoly over the pricing, distribution and
marketing of oil products and refinery activities, which has discouraged investors from engaging in
downstream activities. While, in 1997, a Presidenti al Instruction (KEPRES 31/1997) allowed private
contractors to import crude oil for private refine ries (following a 1989 regulation allowing private
firms to build and operate refineries), foreign firms are still prevented from directly marketing
downstream oil products in the domestic market.
50. The financial sector was opened up to foreign investment by the 1988 deregulatory package
(Chapter IV(4)).  Foreign presence in the sector is regulated by sector-specific laws, notably the
Banking Law, the Insurance Law, the Pension Law and the Capital Market Law.  Both the Ministry of
Finance and the Central Bank are involved in the licensing of financial institutions, including foreign
firms.  In banking, for example, the Ministry of Finance has prime responsibility for the licensing ofall banks foreign-exchange and non-foreign exchange banks), but decisions are taken upon the
recommendation of Bank Indonesia.  In recent months, Indonesia has considerably improved market
access conditions for foreign financial institutions.  While, initially, foreign participation in local
insurance companies and a non-bank institutions (stockbrokers, securities dealers) could not exceed
40% of the capital, this share was raised to 100% under the Fourth Protocol to the GATS(December 1997).  In banking, Indonesia bound the existing 85% foreign ownership limit in unlisted
joint ventures and a 49% limit in listed institutions.  However, in accordance with the second Letter of
Intent, however, it is committed to the removal of the restrictions on listed banks.  In addition, under
the GATS Fourth Protocol, Indonesia eliminated the discriminatory (higher) capital requirements
imposed on foreign-owned firms in the insurance, re-insurance, and capital markets subsectors.
(b) Incentives
51. Indonesia offers certain tax and non-tax incentives to foreign investors.   There are two main
schemes.  Under the first scheme, foreign investor s are currently able to obtain a full exemption from
tariffs (and VAT) on imported goods and raw materials used for commercial production during the
first two years (depending on the type of goods).  BKPM and PT Sucofindo determine the list ofimported capital goods and raw materials eligible for tariffs and tax exemptions.
52. Since 1996, Indonesia has also operated a scheme involving income tax holidays for newly
established foreign investment companies participating in specific, generally export-oriented,
industries (textiles, leather, electronics, etc).
33  Under the Regulation, income tax is to be borne by the
Government, for a maximum of ten years.  For certain industries located outside the islands of Java
and Bali, the exemption can be extended for a further two years.  Approvals are issued by the
                                                     
33Government Regulation 45/1996.WT/TPR/S/51 Trade Policy Review
Page 44
President of the Republic, on the recommendation of the "Evaluation Team on Tax Facilities for the
Specific Industries", an inter-Governmental body comprising experts from the BKPM and the
Ministry of Finance, which operates under the responsibility of the Coordinating Minister of
Economics, Finance and Industry.
53. Indonesia offers permanent export-related duty exemption and drawback schemes;  there have
been no major changes in these schemes since th e 1994 Trade Policy Review.  Under the "prior
exemption scheme", producers exporting a 65% share of their production are eligible for exemption of
duties and taxes on imported inputs, contingent upon ap proval of production/export plans.  At the end
of the year, retroactive adjustments are made.  An alternative drawback scheme similarly refunds
duties paid on imported inputs that are re-exported in finished form.   Companies can apply to the
customs authorities to have its warehouse qualified as a private bonded zone.  The duty regime forcompanies producing for export would depend on location.  If inside a bonded zone, then the duty is
not paid;  if outside a bonded zone, application may be made for restitution of duties paid.
(ii) International initiatives and agreements
54. To date, Indonesia has signed bilateral investment guarantee and protection agreements with
44 countries, including all its main trading partners, i.e. Australia, the People's Republic of China, theRepublic of Korea, Japan, most EU Member Stat es (Belgium, Denmark, France, Germany, the
Netherlands, the United Kingdom), Norway, Singapore, Switzerland and New Zealand.  It has also
signed bilateral agreements on the avoidance of double taxation with 47 countries (including
Australia, Canada, Japan, Malaysia, New Zealand, the Philippines, Singapore, the Republic of Korea,
Chinese Taipei, Thailand, the United States and most EU Member States), and is currently negotiating
additional agreements with, inter alia , the People's Republic of China and Brunei Darussalam.
55. As one of the main recipients of foreign direct  investment in South-East Asia (Chapter I(3)),
Indonesia supported the creation of the WTO Agr eement on Trade-Related Investment Measures
(TRIMs).  In the context of the preparation of the WTO Ministerial Conference in Singapore, while
not opposing the adoption of a work programme on investment in the WTO, Indonesia nevertheless
considered that the issue of a multilateral framework for investment was essentially outside the scope
and competence of the WTO and that UNCTAD should continue studying the issue.
34
                                                     
34Statement 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/22,9 December 1996).