Banning Exports of Raw Materials in Indonesia

There are many aspects to trade.  Matthew Boyce analyzes the trend of keeping raw materials in a country focusing on Indonesia and rattan. 

In the past year, Indonesia has moved to ban the export of a number of the country’s raw materials. Notably, Indonesia’s trade minister issued a moratorium on raw-rattan exports. Rattan, a bamboo-like plant is a popular material in furniture products and comprises a large portion of Indonesia’s massive furniture industry. The new rattan regulation and the surrounding issues involving enforcement and infrastructural investment are representative of a larger trend in Indonesia to keep raw materials in the country.

Recently, wood-producers in Indonesia have been exporting one-third of their raw-rattan, leaving a shortage for local rattan furniture manufacturers. New regulation will attempt to change Indonesia from a raw exporter to a finished-product exporter. There is a slight risk of a decline in business as wood-producers are forced to shift their normal practices, but the moratorium on raw exports will likely help the domestic economy in the long-term.

Although exports in Indonesia have been growing steadily over time, the global financial crisis has greatly diminished the demand for furniture and therefore impacted the demand for rattan and rattan products. A smaller demand for furnishings in the US and EU means leaner business for suppliers.

Exports of rattan furniture have slowed since 2008 and exporting raw materials is not helping the domestic rattan industry. Instead of selling raw rattan to Indonesian furniture manufacturers, much of Indonesia’s rattan is sent to furnishing suppliers in other countries like China. Regulation keeping raw materials in the country will inevitably help strengthen the industry as a whole.

Indonesia’s trade ministry is committed to growing Indonesia into the world’s premiere rattan-product exporter. Beyond new trade regulations, there are other aspects of the rattan industry that will also need to grow. A combination of export regulations, domestic cooperation, government support and design innovation will be needed to create a stronger environment for rattan suppliers.

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Bans on raw exports can be difficult to fully enforce. Smuggling is likely to become more common especially in an archipelago where products are shipped from island to island, leaving many opportunities for materials to change course at sea. Indonesia will have to supplement these export bans with much stronger customs enforcement.

Policies are in the works to stop the export of raw mining commodities as well as crude palm oil. These new regulations will need to be supported by more infrastructural development in the country. Indonesia has given these policies until 2015 to go into full effect. In the preceding years there will likely be a large-scale effort to build out each industry so that the entire process from raw material to finished product can be managed domestically.

Indonesia’s handling of its rattan industry is a micro example of a macro trend. Indonesia and similar emerging economies are trying to keep their natural resources within their borders. Larger economies with more developed industries are importing raw materials from less developed countries and manufacturing finished products. In an effort to grow more comprehensive industries, emerging economies need to invest in creating complete, domestic supply chains.

As emerging economies reduce their raw exports and increase their domestic production capabilities, investment is key. Attracting interest from foreign businesses is necessary to gain capital to build more robust industries. Large-scale growth takes time but reducing and even eliminating exports of raw materials is a step in development taken by many of today’s leading economies.

Matthew Boyce is an Associate at TigerTrade. TigerTrade is an online trusted partner network for global trade, helping sourcing professionals connects to qualified manufacturers in Southeast Asia. TigerTrade works in the apparel, textiles, footwear, furniture, and home decor industries and is headquartered in New York City with regional offices in Vietnam, Thailand and Indonesia.  His email contact is mboyce@tigertrade.com.