Earlier this year, the U.S. and China engaged in an all-out trade war as part of President Trump’s efforts to clamp down on what he called unfair trade practices by Chinese corporations. Since then, import tariffs have skyrocketed to a whopping 145%. International trade between the two countries has plummeted. Only recently have they agreed to ease a few of those tariffs.

While these developments hurt both powers, the impact of this tit-for-tat on developing countries and their ability to rely on stable trade with the U.S. and China is often overlooked. Indonesia offers a clear example of how these trade tensions ripple outward.

Indonesia as a Focal Point

Firstly, Indonesia trades with both nations. “Regarding exports, China and the U.S. are the first and third-largest trading partners for [Indonesia], respectively; regarding imports, China is its largest trading partner,” according to a study conducted by Bogor Agricultural University. Secondly, Indonesia is a prime example of how some countries won’t be able to adapt to the trade war while others will.

While some countries would benefit from the trade war due to production and manufacturing moving both outside the U.S. and China to avoid tariff rates, others, like Indonesia, would struggle to adapt to the tariff wars as they occur. This is largely because of low integration with the global value chain and the current trade structure in Indonesia, which heavily serves the Chinese and U.S. domestic markets. Using the country as a case study can show how this trade war can adversely affect developing nations.

Impact on Trade and Poverty

The tariff war between the U.S. and China has opened the door for several developing countries to fill the manufacturing gaps left behind. Countries like Thailand and Vietnam have boosted their exports due to the tariffs. At the same time, however, the trade war is indirectly dampening exports, as seen in Indonesia.

Due to its strong ties to both the Chinese and U.S. markets, Indonesia has experienced a decline in exports to both countries, with rising tariffs and broader economic fallout driving down demand. As a result, Indonesia has been more negatively affected than many other developing nations.

This decline in trade is also likely to affect Indonesia’s poverty rate. As demand continues to fall, the country may struggle to maintain downward progress on poverty. Reduced trade with developed nations like the U.S. and China could lead to job losses in labor- and export-heavy sectors such as textiles and electronics manufacturing.

Solutions

The Indonesian government is making several moves to reduce the impact of the U.S.-China trade war on the nation. One key effort is the government’s “Making Indonesia 4.0” initiative, which aims to harness advanced technologies to boost productivity and performance in the manufacturing sector.

Another potential solution is for the U.S. to sign a bilateral trade agreement with Indonesia. Indonesia has already taken steps toward this by proposing a limited trade deal with the U.S., which is expected to strengthen trade ties between the two countries. The deal aims to raise two-way goods trade from around $30 billion in 2019 to $60 billion in the next few years.

– Caelan Caukin

Caelan is based in Los Angeles, CA, USA and focuses on Global Health and Politics for The Borgen Project.

Photo: Wikimedia Commons