Indonesia's textile and clothing industry hopes to be one of the main beneficiaries of an Economic Partnership Agreement currently being negotiated with Japan. As Baari La Inggi reports, market expansion is key if Indonesian companies are to survive the increasingly fierce global competition in the US and EU.

The Economic Partnership Agreement (EPA) currently being negotiated between Indonesia and Japan, and due to be completed later this year, has the potential to bring considerable benefits to Indonesia's textile and clothing industry.

In a statement that followed a recent meeting with its country's textile associations, the Japan External Trade Organisation (JETRO) said Japan is keen to reduce its dependence on China as its main source of textiles and clothing and sees Indonesia as one of its main alternative suppliers.

Currently, about 58% of Japan's textile imports and 81% of its clothing imports come from China compared to Indonesia's share of just 6.0% for textiles and 0.6% for clothing.

Global competition
Before quotas on the textile and apparel trade between WTO members were abolished at the end of 2004, Indonesian exporters primarily sold their products to the US and EU where they were able to fill their quotas by offering lower prices than non-quota countries. Only a small number of Indonesian companies exported to Japan.

Today, however, market expansion is key if Indonesian companies are to survive the increasingly fierce global competition in their traditional main markets of the US and EU.

Exporters admit that the main obstacle to entering the Japanese market is not the import duty, which currently averages around 6.7%, since textiles and clothing have a GSP facility in this market. Instead, it is the quality requirements, the loyalty of Japanese consumers to buying products made on Japanese machinery, price, and the long consultations necessary to win a contract.

For this reason, negotiators are highlighting the need to get the most out of the economic partnership agreement for each country.

Joint initiatives to promote the competitiveness of the Indonesian manufacturing industry include a Manufacturing Industry Development Center, where Japanese investment and technology will be used to help the Indonesian industry meet the requirements of the Japanese market.

Under the EPA both sides will eliminate tariffs, with the resulting free import duty also helping to improve market access for Indonesia's textile and clothing industry.

Growth of the labour intensive textile and clothing industry will help solve Indonesia's unemployment problem, but will also mean people can afford Japanese products like electronics.
To secure Japanese investment in Indonesia, though, there needs to be an improvement in the country's infrastructure, security, government regulations and law enforcement.

Products covered in the EPA
All types of textile and clothing ranging from HS code 50 (fibre) to 63 (clothing and other textile products) are covered in the EPA.

However, for garments the agreed rule of origin is the "fabric forward rule," which means that from the fabric onward all the processing must be carried out in Indonesia to qualify for free import into Japan. If the fabrics are sourced outside Indonesia the resulting product will be subject to a duty.

This is intended to encourage the growth and development of Indonesia's weaving and knitting industry which has been in trouble in recent years due to an influx of imported fabrics both through normal procedures and smuggling.

In addition, such a strategic rule of origin for garments will also be very important for the industry's whole supply chain. It will encourage the growth of the industries below it like fibres and spinning and also the industry above, such as garments and other textile products.

Japanese imports
Statistics from World Trade Organization (WTO) indicate that Japan imported US$5.812bn worth of textiles and US$22.541bn worth of clothing in 2005.

China was the major supplier country for both textiles and clothing, contributing US$3.037bn or (52.3%) and US$18.243bn or (80.9%) of the total respectively.

Other supplier countries for clothing were the EU-25 which shipped clothing with a value of US$1.598bn to Japan giving it a market share of 7.1%, Vietnam US$610m (2.7%), the Republic of Korea US$436m (1.9%), Thailand US$280m (1.2%), Malaysia US$152m (0.7%), India US$141m (0.6), Indonesia US$125m (0.6%) and the Philippines US$98m (0.4%).

Important suppliers for textiles were the EU-25, with a value of US$721m and a market share of 12.4%, Indonesia US$349m (6.0%), the Republic of Korea US$328m (5.6%), China Taipei US$302m (5.2%), United States US$264m (4.5%), Thailand US$178m (3.1%), India US$157m (2.7%), Vietnam US$128m (2.2%), Pakistan US$75m (1.3%), Malaysia US$56m (1.0%) and the Philippines US$30m (0.5%).

EPA opportunities
Because Japan has been always one of the world's largest importing countries for textiles and clothing, the EPA will definitely not threaten Indonesia's local industry.

In the long-term it will even be a great opportunity for market expansion. In 2005, the total combined export of textiles and clothing from Indonesia was worth US$8.56bn, including US$474m to Japan.

Assuming that Japan is serious about seeking alternative suppliers for its textiles and clothing, then the EPA will be good news for the industry in Indonesia.

In fact, a very optimistic outlook is that replacing just 10% of the Chinese-made clothing in the Japanese market would enable Indonesia to increase its market share by 1459.44%, from US$125m to US$1.949bn.

This is really a huge market opportunity which also needs huge investment and employment as well. Industrialists and the government must cooperate closely to make sure this great goal comes true.