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Summary of "Trading Towards Sustainability: The Role of Trade Policies in Indonesia's Green Transformation"

Core Content

This report, Trading Towards Sustainability: The Role of Trade Policies in Indonesia's Green Transformation, examines how trade policies can support Indonesia's transition to a more environmentally sustainable economy. It focuses on the role of trade in the context of climate change and the importance of environmental goods (EGs) and plastic substitutes in this process. The analysis is structured around the impacts of trade agreements, tariffs, and non-tariff measures (NTMs) on EGs and plastic substitutes, and includes policy recommendations to enhance Indonesia's green competitiveness.

Main Points

• Green Trade and Sustainability: Trade in environmental goods and services is crucial for achieving sustainable development. It can help shift production towards cleaner technologies, access new green technologies, and reduce environmental footprints.

• Indonesia's Green Competitiveness: Indonesia's green competitiveness ranking has declined in recent years, but the country still has untapped potential in exporting EGs and plastic substitutes. The report highlights the importance of the private sector, particularly firms involved in global value chains (GVCs), in driving green trade.

• EGs and Plastic Substitutes: EGs and plastic substitutes are defined and categorized based on their environmental roles. The report includes a list of 19 EG categories and 282 6-digit HS codes for plastic substitutes, as per UNCTAD standards.

• Trade Trends: Indonesia's trade in EGs and plastic substitutes is increasing in absolute terms. However, the share of EGs in exports remains low, while EG imports are more technology-intensive. Indonesia is among the top 20 global traders of plastic substitutes, though its share has been stagnant.

• Tariff Analysis: Indonesia has relatively low average tariffs on EG exports but high MFN (Most Favored Nation) tariffs on EG imports. The report evaluates the potential impact of tariff reforms and multilateral trade actions, suggesting that reducing tariffs could boost EG trade.

• Non-Tariff Measures (NTMs): NTMs significantly affect the trade of EGs and plastic substitutes. They include technical barriers to trade (TBT), sanitary and phytosanitary (SPS) measures, product standards, and local content requirements (LCRs). The report emphasizes the need for harmonization of environmental standards and mutual recognition arrangements to reduce the cost and complexity of NTMs.

• Challenges in Green Trade: Indonesia faces challenges such as outdated technology, lack of funding, and inadequate institutional frameworks. These obstacles hinder the country's ability to fully participate in and benefit from the global green transition.

• Policy Recommendations: The report recommends several actions to support green trade, including promoting international environmental standard harmonization, simplifying administrative processes for green product certification, providing technical assistance, and encouraging cooperation between governments and the private sector to develop green trade guidelines and best practices.

Key Information

Environmental Goods (EGs) and Plastic Substitutes

• Definition: Environmental goods are products that contribute to climate change mitigation and adaptation. Plastic substitutes refer to materials that can replace conventional plastics.
• Importance: EGs and plastic substitutes are essential for sustainable development, helping to reduce emissions, improve environmental quality, and promote cleaner production practices.
• Trade Trends: Indonesia's trade in EGs and plastic substitutes is increasing in absolute terms, but the share of EGs in exports is low. EG imports are more technology-intensive, suggesting a need for investment in technology and innovation.

Trade Policies and Tariffs

• Tariff Reforms: Reducing tariffs on EG imports and exports could enhance Indonesia's competitiveness and facilitate the transition to a green economy.
• Multilateral Actions: Participation in multilateral environmental agreements and trade initiatives could help Indonesia align with global standards and reduce trade barriers.
• MFN Tariffs: Indonesia's MFN tariffs on EG imports are relatively high, potentially limiting market access for green products.

Non-Tariff Measures (NTMs)

• Impact: NTMs affect up to 95% of EG products in each category, with TBT and SPS measures being the most significant.
• Cost of NTMs: The cost of NTMs is high, especially for inputs used in the production of EGs. The report suggests that simplifying these measures is essential for promoting green trade.
• Local Content Requirements: LCRs on solar panels and electric vehicles (EVs) are a concern, as they can increase costs and reduce competitiveness.

Environmental Policy Stringency (EPS)

• Global Trends: EPS has been increasing globally, with Indonesia's EPS index showing a decline in recent years.
• Green Complexity Potential (GCP): Indonesia's GCP, which measures the potential to diversify into green, technologically advanced products, ranks relatively high and has been improving until 2015.

Private Sector Role

• Two-Way Traders: Firms that both import and export have higher survival rates in EG trade and are more likely to engage in higher-technology EGs.
• Firm Size and Ownership: International EG traders are typically large firms, while domestic traders are medium-sized. Nearly 30% of international EG traders are foreign-owned.

Conclusion and Recommendations

• Green Transition: The transition to a green economy is not only necessary for environmental sustainability but also presents economic opportunities.
• Policy Balance: Trade policies must balance the promotion of trade liberalization with the protection of environmental goals.
• Collaboration: Governments, international organizations, and the private sector must collaborate to address NTMs and promote green trade.
• Future Outlook: The report concludes that while trade in EGs and plastic substitutes can have significant positive impacts, it is also important to consider distributional effects and ensure that all stakeholders benefit from the green transition.

Key Figures and Tables

• Figure ES.1: Trends in EPS index values of selected countries between 2003 and 2020, showing a global increase in environmental policy stringency.
• Figure ES.2: Indonesia's share of EGs in exports is low, indicating room for growth.
• Figure ES.3: Indonesia's EG share in imports aligns with the global average, but is more technology-intensive.
• Figure ES.4: Indonesia is among the top 20 global traders of plastic substitutes, though its share has been stagnant.
• Figure ES.5: Two-way traders in EGs have higher survival rates than non-EG traders, highlighting their importance in the green trade sector.

Acknowledgements

The report was prepared by a team of World Bank economists and analysts, with valuable contributions from various stakeholders, including the Indonesian Ministry of Trade and the Directorate General of Customs and Excise. Financial support was provided by the Umbrella Facility for Trade Trust Fund and the Australia-World Bank Indonesia Partnership (ABIP).

References

• The report references studies from the OECD, UNCTAD, and the World Bank, as well as policy documents such as the Country Climate Development Report (CCDR) and the Environmental Goods Agreement (EGA).