Reasons for the Trade Deficit in Indonesia and Solutions to Solve the Problem

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* What are the reasons causing trade deficit in Indonesia and what can Indonesia do to solve this problem?

In this report I am going use the terminology of “international trade”. What is international trade and why the country needs to do international trade? International trade is a trade which buying and selling of goods and services between countries. The main three reasons why the country needs to do international trade are, firstly, to get good and services that the country doesn’t produce. Secondly, they can produce and sell the products to a larger market and lastly international trade benefits of scale.

One more terminology which I am going to use in my report is “deficit trade”. What is deficit trade? Deficit trade is an economic measure of a negative balance of trade in which a country’s imports exceeds its export, deficit trade is also represents as outflow of domestic currency to foreign market.

I will begin this report by introducing you the background of the Indonesian’s international trade. Indonesia has become increasingly globally integrated over the past half century, with its ratio of trade to GDP rising from 30 percent in 1970 to 60 percent in the 2000s(graph1). There have been substantial shifts in the composition of Indonesia’s export over the past 50 years (graph2) with the oil price surged in the 1970s and early 1980s. The Agriculture has also risen in 1969, but later in 1971 to early 1990s its export has declined. But for the Manufacturing is different as we can see from the graph that its export increased from just 2 percent of the total export in 1980 to 46 percent in 1993. (graph1) (graph2)

A different set of trends have been seen since the early 1990s. The manufacturing share of export and other exports have become decreasing day-by-day and cause “Deficit” for the trade of country and becomes a big problem for the Indonesian people until now-a-days.

In the graph 3, at the beginning of 2011 the export of Indonesia was stable and getting profits, but after it entered to 2012, the export of the Indonesia was fluctuated and become unstable. And at the middle of the year, the export of Indonesia dropped with very fast rate and become deficits for the country.

(graph3: Indonesia balance trade, it shows the deficit of the country from may 2012~)

Accordingly to the article which I have read from the Jakarta postdated, I have learnt that due to the on-going slowdown in world economy, especially the debt crisis in Europe and high debt and surged unemployment rate in the US, causing the Indonesian continued trade deficit. But this is not the only reason that has caused such the Indonesian trade deficit. In this essay, I would like to rise up three main reasons which are causing the slow-down of Indonesia exports. The three reasons are as follows:

Firstly, price fall and shipment fall in natural-resource based commodities which are lion-share of the Indonesian export items such as coal, palm-oil and rubber. From these natural-resource based export commodities, the coal makes Indonesia the world’s top thermal coal exporter and its 5 largest export destinations are China, South Korea, India, Japan and Taiwan. Today, India is the largest export market for Indonesia coal followed by China. But, In June this year, the shipment of coal which is the main natural-resource based export commodity of Indonesia to China has fallen 13 percent with volume of about 26.2 million metric tons from 30.16 million tons in May. Not only coal that is falling in the shipment, nickel exports also dropped 80percent to 572,106 tons from 2.85 million tons in May. Moreover copper exports declined 89 percent to 20,000 tons in the same month from 193,941.34 tons in May. In sum, all main commodities which Indonesia is exporting have been fallen markedly in terms of percentage and the volume of the shipment which is bad for the exports of the country, so, I can say that...
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