Trade imbalances between Emerging Economies, do they matter? The case of China and Indonesia, 2001-2016

The first Free Trade Agreement (FTA) China signed with Emerging Economies was with ASEAN in 2005. All ASEAN countries have since experienced growing trade deficits with China. This paper analyses the case of Indonesia, the largest ASEAN country. It finds that Indonesias trade deficit takes no account of transit trade via Singapore, and that its trade with China was more substantial than Indonesias trade data reveal. Its trade deficit with China has grown since 2008 for two reasons: (a) the decreasing trend in the average price of Indonesias exports following the end of the China-led commodity boom in 2011; (b) the sustained increase of Indonesias imports of mobile phones and other electronics, and of construction-related materials and equipment from China since 2008. The latter is related to the rapid increase of construction projects in Indonesia carried out by contracted Chinese firms and their suppliers. The growing bilateral trade deficit reduced Indonesias trade surplus since 2011. Given a continued deficit in the trade of services, Indonesias current account deficit has grown significantly since 2008. This deficit is covered by increasing FDI inflows by Chinese state-owned and private firms and increasing foreign borrowing, especially from Chinese banks for infrastructure projects. The trade imbalance matters for political reasons. Misunderstanding in Indonesia, due to a lack of research and informed public debate, causes it to be a factor of controversy in political campaigning leading up to the 2019 round of Indonesian parliamentary and presidential elections.