The Impact of Import Tariff and Quota Policies on the Supply and Demand of Wheat and Wheat Flour in Indonesia

Abstract

The development of wheat flour industry in Indonesia faces a dilemma. Wheat flour industry plays an important role in the development of local industry, employment absorption and creates tax revenue the government, but the industry very significantly uses large amount of foreign exchange to import those products. To meet the domestic needs of wheat flour, Indonesia imports not only wheat but also wheat flour. The purpose of this study is to analyze the factors affecting the supply and demand for wheat and wheat flour, and evaluate the impact of tariff and import quota on supply and demand for wheat and wheat flour as well as the welfare of economic agents, and formulate the best policies on tariff and import quota of wheat and wheat flour in term of welfare measures. The supply and demand models of wheat and wheat flour constructed in this study is a system of simultaneous equations comprising 44 equations, consisting of 36 structural and 8 identity equations. Based on the "order condition" criteria, it is concluded that each structural equation that exists in the model is over identified. Furthermore, the model estimation method used is 2SLS. In this study there were 15 simulated policies of import tariffs and quota that were analyzed. The results show that the tariff policy is more effective to be applied than that of quota. This is because the tariff policy would generate the government revenue from import tariffs, thus encouraging increasing the net welfare. Policy simulation of imposing an import tariff of 5 percent could increase the largest of welfare. Although this policy leads to a decrease of surplus from wheat downstream industry, this policy increases the largest of surplus from wheat flour industry and the greatest revenue from import tariffs. Thus it result in the overall largest increase in the welfare. Whereas the simulation of policies that could increase the largest surplus of wheat in downstream industry is the increase of wheat import quota by 10 percent.