Jakarta's import calls cut both ways

OPINION: When the Abbott government used the May budget to celebrate the role of trade agreements in boosting the economy, Indonesia was a glaring absence from the priorities for the year ahead.

There have been formal talks on a closer economic partnership for three years and many discussions before that. But this week's surprise cattle import quota cut has underlined the challenge of even talking about an obvious hole in Australia's trade framework amid economic nationalism and declining bilateral trust.

At its heart, the quota cut reflects very different perceptions of the idea of food security, and this is certainly not unique to Indonesia given that it was also an issue in the negotiations with Japan. But when Australia is lining up for the so-called dining boom in Asia to replace the mining boom, the quota cut underlines how the country needs to be prepared to deal with how our food exports can be seen on the other side of the transaction.

Ironically, the quota was slashed just as a 10-year, $60 million Australian government-industry program to build Indonesian confidence in a cross-border meat supply chain has been getting under way.

This shows how deeply economic nationalism is now embedded in Indonesia's economic policymaking, despite the country embarking on a fresh bid for foreign investment, even telling its diplomats to find new sources.

There is little doubt that the quota cut reflects a push to domestic self-sufficiency in beef production that has been continuing for several years, rather than a diplomatic snub, and this is not the first time there has been an arbitrary shift like this.

But management of the issue would be much easier if the relationship was not suffering from the downward spiral in trust identified by former foreign minister Marty Natalegawa at the Crawford Australian Leadership Forum last month.

Indonesia's economic nationalism - rooted in its constitution and post-colonial resentment - is an irregular wind that sweeps through different parts of the economy at various times and then seems to recede.

But close observers say the traditional resistance in places like the finance ministry is weaker than usual under a president who shows little interest in detailed economic management and brings more of a small businessman's perspective to economic decision-making.

While President Joko Widodo was less protectionist than his main opponent during the election campaign last year, he has tilted more in that direction this year and now endorses self-sufficiency in beef, soy beans, sugar, corn and rice within five years.

In the case of beef alone, a 2010 study suggested this would cost about $500 million a year in welfare losses if pursued via import bans, or an average of around $1 billion a year in subsidies.

When Indonesia is facing slower growth than it needs to employ its youthful population, it can ill afford scattergun experiments in economic isolation, especially if they are implemented as erratically as the cattle import bans of recent years.

In the mining sector, efforts to ban exports until miners agree to build secondary processing plants have run into the brick wall of the miners being unable to raise revenue for secondary processing plants if they can't export. Some observers say global miners need Indonesia's resource endowment so much that they may be prepared to go along with some well-planned secondary processing.

Indeed, Jakarta resources lawyer Bill Sullivan, a critic of recent mining laws, says: "The past couple of months has seen some tantalising signs of possible change in the government's approach to the mining industry and to foreign investment in the mining industry."

The problem with beef self-sufficiency is that the agriculture ministry advocates seem to be constantly caught out by short-term thinking such as the current idea that there is enough domestic livestock to get through the next three months without many imports.

But if this runs down the breeding stock in the meantime, already high meat prices will rise, presenting the government with no choice but to go back to importing to avoid a food crisis.

Indonesia is a natural market for Australia's northern cattle producers but, unlike the miners, they don't need Indonesia quite so much given the emergence of strong new markets in places like China and Vietnam.

Indonesia will face a real food security issue if it pushes its self-sufficiency ambition too hard, only to discover that the traditional fallback of imported Australian live cattle is committed elsewhere.

Source: Jakarta's import calls cut both ways