Impact of Asean Australia and New Zealand free trade agreement on beef industry in Indonesia

Abstract

Persistent increase in income and population and change in food consumption in Indonesia has led to considerable increase in food demand such as vegetables, fruits, sugar, beef, dairy products, poultry and seafood. As the result, there has been increasing imports of some of these products to meet their domestic demand. In particular, roughly 30 percent of national beef demand is met by imports of beef and beef cattle largely from Australia and New Zealand. For the past years Government of Indonesia has implemented several policies to protect domestic beef farmers so that domestic beef production can increase and reduce dependence on imports. One of such policies is imposition of beef import tariff. Nonetheless, with several free trade agreements that Indonesia has been participating in, such as ASEAN, Australia and New Zealand Free Trade Agreement (AANZFTA), those efforts will cease. Every year more than 90 percent of Indonesian beef imports come from Australia and New Zealand. Involvement of Indonesia in AANZFTA may have negative effects on beef industry when beef import tariffs are phased out in 2020. Hence, the objectives of this study are (1) to evaluate the impact of tariff removal on production, consumption, domestic price and import of beef, (2) to evaluate impact of free trade agreement on beef producer and consumer surpluses and (3) to propose alternative policies that can be implemented to increase domestic beef production. In this study, yearly time series data from 1990 to 2008 was used and analysed with econometric model. The model consists of eight structural equations and four identity equations. Parameters were estimated with Two Stage Least Squares method. Several policy alternatives were simulated which include single policies and their combinations: (1) removal of beef import tariffs for beef imports from Australia and New Zealand, (2) reducing interest rate, (3) increasing number of imported breeding cattle, (4) increase artificial insemination technology, (5) combination of reducing interest rate, increasing imported breeding cattle and increasing artificial insemination technology, (6) increasing import tariffs for beef imports from Australia and New Zealand, (7) combination of reducing interest rate, increasing imported breeding cattle, increasing artificial insemination technology and increasing import tariff, (8) combination of reducing interest rate, increasing imported breeding cattle, increasing artificial insemination technology and removal of beef import tariffs for imports from Australia and New Zealand, (9) reduction of beef imports from Australia, New Zealand, rest of the world and imported feeder cattle by 90 percent each, (10) combination of reduction of beef imports from Australia, New Zealand, rest of the world and imported feeder cattle by 90 percent each, reducing interest rate, increasing number of imported breeding cattle and increasing artificial insemination technology, and (11) combination of interest rate reduction, increasing import beef tariffs for imports from Australia and New Zealand, artificial insemination technology and number of imported breeding cattle. Simulation results revealed that removal of beef import tariff will increase beef import, increase domestic beef supply, leading to reduction in domestic beef price hence, increased beef demand. However, domestic beef production does not decrease drastically. The free trade agreement will increase consumers’ surplus and reduce producers’ surplus. Reduction of beef imports from Australia, New Zealand, rest of the world and imported feeder cattle by 90 percent each will result in highest producers’ surplus, however domestic beef production does not increase significantly. Domestic beef supply is drastically reduced, leading to high domestic beef price hence, reduced beef demand. As the result, producers benefit at the expense of consumers. The study found out that, in case Indonesia can be allowed to increase beef import tariff, combination of interest rate reduction to four percent, increasing imported breeding cattle by 60 percent, artificial insemination technology by 64 percent and beef import tariffs for imports from Australia and New Zealand by 40 percent each, can be the best policy alternative to increase domestic beef production and curb beef imports from Australia and New Zealand by almost 100 percent. This policy combination can be implemented ahead of implementation of AANZFTA in Indonesia as it has been discovered that it gives highest domestic beef production among the proposed policy alternatives. Nonetheless, Indonesia will achieve only 52 percent beef self sufficiency with this policy in 2014. There is a need to improve productivity so that domestic beef production can be increased. To minimize the effects of AANZFTA on Indonesian beef industry, it is recommended that policy combination of interest rate reduction, increasing artificial insemination technology and number of imported breeding cattle be implemented. Copyright© 2011, Bogor Agricultural University All right reserved