Turning trade protection into industrial competitiveness

Jakarta (ANTARA) - The failure of G20 trade ministers to reach agreement on tackling global industrial overcapacity at the G20 Trade Ministers' Meeting in Milwaukee, United States, in early October suggests that the pressure from excess goods will remain a challenge for individual countries.

Nearly all G20 members acknowledged the need to address the problem, but existing trade policy tools and responses were considered inadequate.

For Indonesia, trade protection can buy time. What matters is how the government and industry use that time.

When production capacity in major manufacturing countries exceeds domestic demand, surplus goods can flow into other markets and drive down prices in destination countries.

The pressure is most visible in sectors that compete directly with imports, including steel, textiles, ceramics, plastics, and electronics.

The impact extends beyond manufacturers losing market share. When import prices become difficult to match, factory utilization can fall, investment can be delayed, and manufacturers' ability to retain workers can come under pressure.

Responses cannot stop at higher tariffs or import restrictions. Such measures may give domestic producers more room to compete, but their benefits depend on whether that space leads to higher productivity and stronger production capacity.

Protection measures also need regular evaluation to ensure they do not merely hold back import competition without improving competitiveness.

At the same time, domestic manufacturers that rely on imported inputs may face higher costs if local prices diverge too far from international prices.

Minister of Trade Budi Santoso has emphasized that assessments of excess capacity should consider supply and demand dynamics, capacity utilization rates, market behavior, and the underlying factors driving production.

Because each sector has a different production cycle, supply chain structure, market reach, and technology, overcapacity assessments should also be tailored to individual sectors.

Buying time
This principle matters when the government decides which sectors need protection.

Products that can already be manufactured domestically in sufficient quantities and at adequate quality warrant a different approach from raw materials or capital goods that still need to be imported.

The Indonesian Chamber of Commerce and Industry (Kadin) has taken a similar position.

Kadin Deputy Chair for Industry Saleh Husin said protection should be strengthened in a measured, selective, and data-driven manner, particularly for products that domestic industries can supply in sufficient quantities and at adequate quality.

He said policies should also be tailored to the characteristics of individual products.

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The principle matters because protection should build new capabilities. The government needs to establish whether import pressure genuinely threatens domestic production and whether manufacturers have room to expand their capacity.

The effectiveness of protection can then be monitored through capacity utilization, cost efficiency, labor productivity, machinery investment, and improvements in product quality.

If manufacturers are given room to recover, they need to use that opportunity to improve. Without gains in capacity and productivity, protection risks merely containing import pressure without strengthening competitiveness.

What matters is not how long the market remains protected, but whether protection helps strengthen industrial capacity and competitiveness.

These improvements do not depend on companies alone. Energy and logistics costs, regulatory certainty, raw material availability, financing, and market access all affect manufacturers' ability to turn temporary protection into lasting competitiveness.

Market protection should therefore go hand in hand with efforts to remove investment barriers and expand production capacity.

Kadin has also stressed that import restrictions must not obstruct access to raw materials and capital goods that domestic industries cannot yet supply.

This distinction matters because protecting products that compete with domestic output serves a different purpose from restricting imports in ways that disrupt production.

Evaluations must also account for the effects on downstream industries. While protection can give domestic producers greater room in the market, manufacturers that use those products as inputs may face higher production costs.

Protection policies need to weigh both effects to ensure that strengthening one sector does not undermine the competitiveness of another.

Strengthening supply chains
Beyond sectors that need protection, other industries must ensure that global pressures do not restrict access to productive inputs.

Trade Ministry data show that raw materials and intermediate goods accounted for 71.45 percent of Indonesia's imports from January to July 2026, while capital goods accounted for 19.88 percent. Together, the two categories made up 91.33 percent of total imports.

Permata Bank Chief Economist Josua Pardede said rising imports should not automatically be viewed negatively, as some may reflect expanding production capacity and investment.

He said imports of machinery, production equipment, raw materials, and intermediate goods can be beneficial if they subsequently support higher value-added production and exports at home.

The key consideration, therefore, is not simply the volume of imports, but what they help produce. If imported machinery and raw materials only deepen dependence on overseas suppliers, their contribution to industrial development will remain limited.

By contrast, if imports are accompanied by greater use of domestic suppliers, technology transfer, workforce training, and the development of intermediate and finished goods, they can help strengthen national production capacity.

Industrial policy must therefore move beyond managing trade flows to strengthening the links between imports, production, and exports.

An increase in capital goods imports, for example, will be more meaningful if the machinery raises factory productivity, expands the ability to produce higher value-added goods, and opens up new markets.

The government also needs to ensure that companies benefiting from greater access to the domestic market have incentives to invest. Developing local suppliers, upgrading workforce skills, transferring technology, and expanding export networks can deepen the domestic industrial base.

Meanwhile, industries whose production capacity already exceeds domestic demand, such as cement and ceramics, need a different strategy. Alongside maintaining their domestic market share, they must focus on opening up export markets.

This approach matters because overcapacity cannot always be resolved by expanding domestic demand. When production capacity exceeds the size of the domestic market, companies need new markets to make better use of their existing capacity.

The government can help through trade promotion, efforts to resolve market access barriers, trade agreements, and stronger export logistics.

Trade Minister Budi has also called for broader export markets to create investment opportunities and strengthen Indonesia's position as a production base in global supply chains.

Indonesia cannot control global industrial overcapacity on its own. The failure to reach agreement at the G20 meeting shows that international coordination has yet to produce a sufficiently strong response.

However, Indonesia retains room to determine its own approach. Industries facing import pressure need targeted protection that gives them time to improve productivity.

Industries that still rely on imported raw materials and capital goods need continued access to productive imports, alongside stronger domestic suppliers. Industries with excess capacity, meanwhile, need broader export markets.

These three situations cannot be addressed with a single instrument. Protection, productive imports, and market expansion will deliver results only if they encourage investment, raise productivity, deepen supply chains, and open up wider markets.

With this approach, global industrial pressures need not remain a threat to the domestic market. They can instead provide an impetus for Indonesian industry to become more efficient and better equipped to compete.

*Martha Herlinawati Simanjuntak is a journalist at the ANTARA News Agency

Disclaimer: The views and opinions expressed here are those of the author and do not necessarily reflect the official policy or position of the ANTARA News Agency.

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