Expansion Alibaba to Indonesia to Cause Rising Trade Deficit with China?

Through the acquisition Alibaba is to have a firmer grip on the online retail business in Southeast Asia, including Indonesia, the region’s largest economy where Internet and smartphone penetration have been developing rapidly in recent years (although coming from a low base). The Southeast Asian nations where Lazada has been operating so far have a combined population of 560 million (of which an estimated 35 percent are online and thus potential online shoppers). However, Southeast Asia is also a challenging environment for online retail firms as the area is characterized by tough logistical issues (partly due to the relatively weak state of infrastructure) and there remains a lack of warehousing outside more advanced markets such as Singapor

Through the China-ASEAN Free Trade Agreement (CAFTA), effective per 1 January 2010, about 90 percent of imported goods between Indonesia and China are subject to a zero percent tariff. Due to China’s higher developed manufacturing industry and lower logistics costs the implementation of CAFTA has caused a continuously rising flow of Chinese products into Indonesia. This has caused a rising trade deficit and also curtails development of Indonesia’s manufacturing sector (after all it is cheaper and quicker to import products from China than to invest in costly and long-term import-substitution industrialization).

In 2015 Indonesia imported USD $29.22 billion worth of (non-oil & gas) products from China, while Indonesian exports to China only totaled USD $13.26 billion, implying a trade deficit of nearly USD $16 billion for Indonesia that year. This is in stark contrast to the years before 2008 when Indonesia had the upper hand in trade with China. The table below shows that Indonesia’s trade deficit with China rose significantly after the implementation of CAFTA in early 2010.

Indonesia-China Trade Balance (non-oil & gas):

^{Source: Indonesian Trade Ministry}