With the economy slowing and retail sales falling, Indonesia yesterday raised import tariffs on more than a thousand items covering many consumer goods such as clothes, food and cars.
The decision is likely to make some Indonesians shift to having coffee at a local shop over Starbucks and drive some mothers to choose locally made diapers over imported brands.
The populist move is meant to protect local industry that is competing with imported products.
The decision is expected to improve the domestic image of President Joko Widodo, whose administration has suffered mounting criticism for not being able to lift economic growth. He has also been hurt by accusations that he has let the elite in his ruling party interfere with his decision-making, sending a bad signal to foreign investors.
Mr Joko says he is keen to make his country more attractive to foreign investors by streamlining the government, cleaning up law enforcement and pushing through major infrastructure projects.
NEW IMPORT TARIFFS
Duty on imported tea and coffee, raised from 5 per cent.
Tariff on meat, up from 5 per cent.
Tariff on cars, up from 10 per cent to 40 per cent previously.
Duty on imported liquor. It was 125,000 rupiah per litre before.
Which makes the decision on tariffs puzzling to some investors, who say the step is badly timed as South-east Asia's largest economy continues to weaken.
Indonesia's manufacturing sector has been relatively stagnant in the past decade, with the government more focused on promoting the commodity sector as an engine of growth. Palm oil, rubber and coal have been important sources of revenue but weakness in the commodity sector has hit the economy and government revenues hard of late.
"Imposing this is out of alignment with the economic integration agenda and a step backward from the global trend of most economies forging FTAs (free trade agreements) towards lower tariffs, if not zero," said Mr Victor Tay, chief operating officer of the Singapore Business Federation.
"Indonesia has the largest population in Asean and is also a net importer of many products. Erecting such barriers may in the short term protect the local industry, but in the longer term, (might lead to) the inability to strengthen in the face of competition. This will not serve the greater business community well, especially if other countries start erecting their own barriers on a reciprocal basis," he added.
Exacerbating the problem is the weakening rupiah currency, pushing domestic prices higher and hurting consumer buying power. Corporations are expanding at only half the pace they were last year.
Under the new tariffs, the duty on imported tea and coffee was raised to 20 per cent from 5 per cent, and the tariff on meat is now 30 per cent rather than 5 per cent, Reuters reported. Imports of whisky, brandy and other liquors are now subject to a duty of 150 per cent of their market price. Previously, the duty was 125,000 rupiah (S$12.75) per litre.
The tariff on cars was fixed at 50 per cent, from a range of 10 per cent to 40 per cent previously. The duty on imported candy was raised to a range of 15 per cent to 20 per cent, from a flat 10 per cent.
Tariffs were also raised for many other goods, including clothes, condoms, carpets and air-conditioners, Reuters also reported.
Indonesia imports mostly oil, chemicals, vessels, steel pipes and clothes from Singapore. Most of these items were not covered in the revision. For clothes, the new import tariffs were raised mostly to between 15 per cent and 25 per cent, according to the government.
"Domestic industry is being overwhelmed by the flows of imported goods. We need to curb these flows so domestic products would not be outnumbered," Mr Heru Pambudi, the Customs and excise tax director-general, told reporters.
Indonesia's imports last month totalled US$12.96 billion (S$17.7 billion), 17.4 per cent lower than the same month a year ago. Imports in the January-June period fell 17.8 per cent to US$73.94 billion, according to Indonesia's statistics agency.
Mr A. Prasetyantoko, an economist at Atma Jaya University in Jakarta, said: "Higher import taxes would reduce the supply of goods and increase domestic prices, which would in turn further weaken buying power, then economic growth."
- Additional reporting by Marissa Lee