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Indonesia Demands Korean Gov’t Vouch for Automobile Plant Construction Prior to Conclusion of CEPA
Korea-Indonesia CEPA in Trouble
Indonesia Demands Korean Gov’t Vouch for Automobile Plant Construction Prior to Conclusion of CEPA
  • By matthew
  • December 20, 2013, 07:59
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Korean President Park Geun-hye and Indonesian President Susilo Bambang Yudhoyono at the Merdeka Palace in Jakarta on October 12 agree to finalize negotiations about the Comprehensive Economic Partnership Agreement (CEPA) this year.
Korean President Park Geun-hye and Indonesian President Susilo Bambang Yudhoyono at the Merdeka Palace in Jakarta on October 12 agree to finalize negotiations about the Comprehensive Economic Partnership Agreement (CEPA) this year.

 

The Indonesian government asked the Korean government to officially guarantee the construction of a Hyundai Motor Company plant in Indonesia as one of the conditions for the final conclusion of the mutual Comprehensive Economic Partnership Agreement (CEPA). It is expected to result in quite a stir in that no such request has been made in the history of Korean trade agreements until now. 

In fact, there have been some predictions that the construction of car manufacturing facilities in Indonesia will be a final variable in the CEPA negotiations relating to corporate investment. However, this is the first time that the Korean government confirmed its Indonesian counterpart’s official stance. 

It is said that the Hyundai Motor Group is mulling over setting up some plants in the Southeast Asian region, where its business has been slow for a while. Indonesia is the largest market in the region with a population of approximately 250 million, but Japanese automakers currently take up 95% of the market, which means that Hyundai has at least some necessity to make a breakthrough there. It seems that the Indonesian government, well aware of this situation, is intending to use the plant construction as its bargaining chip for employment expansion. “This issue is not strictly limited to Hyundai, but some private investment matters have to do with it as well,” said a high-ranking official in the Korean government. 

Experts are explaining that Indonesia is making such demands because the positive effects of the CEPA are less than expected for Indonesia. Mineral resources account for most of the exports from Indonesia to Korea, and thus the Indonesian government has been more interested in Korean corporate investment and mutual economic cooperation in the form of power plant construction, technology transfer, and the like from the beginning, rather than in expansion of exports to Korea. As of last year, Korea’s total imports from Indonesia were US$15.7 billion, 74% of which were mineral resources such as natural gas, crude oil, and bituminous coal. 

In the meantime, the possibility of a Hyundai Motor plant in Southeast Asia is decreasing these days. According to industry insiders, the current situations in the global auto market are deterring Hyundai from building new plants, at least for some time. 

“The government may clarify its stance for the encouragement of private investment, but cannot stipulate it in the terms of the agreement,” the official continued, adding, “We are doing what we can do to persuade the other party about this point.”

Korea’s major export items to Indonesia include automobiles (20% tariff), auto parts (10% to 15%), petrochemical products (5% to 20%), steel (5% to 12.5%), and consumer electronics (10%), and the exports are expected to increase a lot once the agreement becomes effective. However, this might be a bad precedent for its FTA talks with developing countries if the signing is made on the condition that the government vouches for private corporate investment.