Negative Effects of Non-Tariff Trade Barriers on the Welfare of Indonesians

Indonesia has made progress in poverty reduction and improvement in health and nutrition indicators. But this progress has been undermined by expensive food prices. Food spending accounts for almost half of Indonesians’ average spending. More than a third of Indonesians cannot afford to eat a nutritious diet and high food prices contribute to poverty. It is estimated that for every 1% increase in price, the national poverty headcount increases by 1%. A major contributor to high food prices is the prevalence of non-tariff measures (NTM) imposed on international trade in food and agriculture. As of 2020, 466 non-tariff measures applied to goods in food and agriculture. These NTMs included quantitative restrictions, sanitary and phytosanitary measures, pre-shipment inspections, and technical barriers to trade. Marks (2017) calculated that NTMs on rice produce an effect equivalent to a nominal rate of protection1 of 67.2%, while NTMs on meat produce an effect equivalent to a rate of 37.4%. Most of the price differential can be attributed to quantitative restrictions or quotas. It is estimated that removing non-tariff measures on rice and meat would lead to an overall reduction of the poverty rate by 2.8 percentage points. The removal of NTMs on rice would have the greatest effect (2.52 percentage points), while removal of NTMs on meat and viscera would have a much smaller effect, reducing poverty by only an estimated 0.21 percentage points. The estimated effect on poverty rates of removing these trade barriers is greater in rural areas and in the poorest provinces, especially in East Nusa Tenggara (-7.28 percentage points), West Papua (-4.87 percentage points), and Maluku (-4.17 percentage points). Removal of quantitative restrictions would lead to the largest estimated reduction in poverty. A quantitative restrictions removal on rice alone would reduce Indonesia’s poverty incidence by 2.31 percentage points, and quantitative restriction reversal for both rice and meat could reduce poverty by 2.6 percentage points. Inequality, measured using the Gini coefficient, is also expected to fall in the event of NTM removal on rice and meat, but the effect is small, only a 1.76% reduction. The reduction is more significant in rural areas (2.5%), compared to urban areas (0.98%). In addition, food consumption, measured by expenditure on rice and meat, would increase. These estimates illustrate why Indonesia must reduce non-tariff measures on food and agricultural goods to support poverty reduction efforts and nutritional improvement. Removing quotas and moving to automatic import licensing are two changes expected to yield the greatest benefit. Liberalizing the food trade must be accompanied by increased competition among importers, improved systems to facilitate import processes, and innovative agriculture policies to increase the competitiveness of domestic producers