## sipea2026007

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---

### Overview and Key Findings
- Indonesia pursuing deeper trade integration to support Golden Vision to reach high-income status by 2045.
- Deeper trade integration focused on reducing non-tariff barriers (NTBs), combined with complementary structural reforms (human capital and logistics), can generate significant GDP gains.
- Modeled ambitious reform scenario (deep trade agreements + improvements in human capital and logistics) raises real GDP levels by 4.1 percent in the medium- to long-term relative to baseline.
- World Bank simulations (cited in source) indicate removing four major NTBs (pre-shipment inspections, port of entry restrictions, import approvals, national certification requirements) could raise GDP by 5 percent and boost investment and trade.

### Policies and Structural Factors Affecting Trade
- Tariffs:
  - Average tariffs on manufactured goods have steadily declined across partners (ASEAN, Asia-Pacific, extra-region), with scope for further reductions.
- Non-tariff barriers (NTBs):
  - Use of NTBs in Indonesia is higher than in most regional and extra-regional peers.
- Trade agreement depth:
  - Country-pair level depth scores constructed from coverage of 52 areas (14 WTO-mandated, 38 beyond WTO).
  - Indonesia’s depth scores vary widely across partners and are generally below integration levels in the EU and North America.
  - Empirical estimates (Dhingra and others, 2023) imply ASEAN treaties’ depth reduction in NTBs boosts average bilateral exports by 15.5 percent for goods and 17.3 percent for services.
- Structural reforms:
  - Logistics and human capital improvements reduce trade costs and support exports independent of trade-policy measures.
  - Illustrative estimates:
    - Increasing logistics from the 25th percentile to the 75th percentile for EMs is associated with a 13 percent increase in goods exports.
    - Raising human capital from the 25th percentile to the 75th percentile raises services exports by about 9 percent.

### Quantitative Trade Model and Scenario Design
- Model features and calibration:
  - State-of-the-art multi-country, multi-sector quantitative trade model based on Cuñat and Zymek (2024).
  - Calibrated using 2015-2019 data.
  - Production structure spans 40 sectors (goods and services) and 69 economies.
  - Firms use labor, capital, and intermediate inputs with Cobb-Douglas technology; trade faces country-pair and sector-specific iceberg costs (휅 ≥ 1).
  - Counterfactual analysis compares steady-states using an “exact hat” algebra approach.
- Ambitious reform scenario components:
  - Bilateral deepening of partnerships: mutual reduction of NTBs with ASEAN, the EU, Asia-Pacific advanced economies (Australia, Japan, Korea, New Zealand), the United States, China, and India—conceptualized as increases in bilateral depth scores to the conceptual maximum.
  - Boosting human capital and logistics: raising Indonesia’s human capital and logistics to respective medians for OECD economies (alternative interpretation: increase to the 95th percentile of EMs).
- Mapping reforms to model:
  - Both policy-induced NTB reductions and structural improvements are mapped as reductions in iceberg costs.
  - Reductions in partner NTBs lower sector-specific bilateral iceberg costs faced by exporters to Indonesia.
  - Indonesia’s export-cost reductions capture: (i) partner market access (first term), (ii) human capital improvements (second term, coefficient 훼�푆푆 퐻퐻퐻퐻 × Δ), and (iii) logistics improvements (third term, coefficient 훼�푆푆 퐿퐿퐿퐿 × Δ). These reductions apply vis-à-vis all trading partners.

### Main Results and Mechanisms
- Real GDP:
  - Ambitious trade integration and reform scenario boosts real GDP levels by 4.1 percent in the medium- to long-term relative to baseline.
- Channels generating gains:
  - Lower NTBs allow Indonesian firms to source cheaper intermediate inputs, enhancing productivity and output.
  - Cheaper access to final goods and inputs triggers reallocation toward sectors of comparative advantage.
  - Access to external markets increases demand for Indonesian output and further reallocations.
  - Improvements in human capital and logistics reduce trade costs vis-à-vis all partners, supporting exports.
  - Productivity-enhancing reallocations raise the return to capital and boost investment, increasing the steady-state capital stock.
- Complementarity and amplification:
  - Unilateral reductions in NTBs affecting imports generate gains that are amplified when paired with increased market access via deep trade agreements.
  - Structural reforms both reduce trade costs directly and broaden comparative advantage, complementing trade policy.

### Impact of a Unilateral Reduction in Indonesia’s NTBs (Sectoral Results)
- Scenario scope:
  - Analysis covers percent change in real value added across the 40 sectors aggregated into five sector groups: commodities; highly-traded goods (proxy for more GVC-linked sectors); other goods; modern services; other services.
- Channels determining sectoral impacts:
  - (i) Access to cheaper intermediate inputs for production.
  - (ii) Reallocation of domestic demand towards more easily accessible foreign products.
  - (iii) Spillovers from shifting demand from other sectors.
- Key findings:
  - Many key sectors gain (including commodities, textiles, motor vehicles, food, wood products) due to cheaper intermediate inputs and other channels.
  - All goods sector groups gain in value added.
  - The GVC-linked highly-traded goods sector makes the biggest contribution to the overall increase in exports despite assuming no increase in foreign market access.
  - Various services sectors also benefit, either through a direct rise in exports or by facilitating goods exports and demand spillovers.

### Full Bilateral Reduction and Partner-specific Gains (Growth in Sectoral VA, in percent, relative to baseline sectoral real VA)
- Figure/table header as presented: ASEANA-P AEs ChinaEUIndiaUSA
- Growth in Sectoral VA, by Partner:
  - Commodities: 0.67 0.87 0.66 0.41 0.14 0.04
  - Goods, above-med trade-: -0.30 -0.45 -0.86 0.50 -0.52 1.35
  - Goods, below-med trade: 0.51 0.85 0.87 0.58 0.51 0.54
  - Services, highly-traded: 0.11 0.25 0.10 -0.37 -0.15 -0.81
  - Services, other: 0.25 0.33 0.55 0.20 0.18 0.29
- Interpretation:
  - Large gains from Asia-Pacific partners highlight benefits of regional integration and complementarities through regional GVC networks (e.g., China, ASEAN) acting as suppliers of intermediate inputs.
  - For partners such as US and India, gains are driven more by gaining market access in partner economies.
  - Opening to the US and EU generates gains for all types of goods sector groups; modern services do not gain from opening to these partners in current configuration.
  - Opening to major Asia-Pacific GVC-specialized economies produces stronger gains for Indonesia outside the GVC-linked sector group (e.g., commodities, other goods).

### Complementarities Between Trade Integration and Structural Reforms
- Need for structural reforms:
  - Structural reforms are essential to reach high-income status and the Golden Vision by 2045.
  - Key reform priorities: improvements in logistics, investment and business climate, governance, digitalization, financial sector development, and building human capital.
  - Horizontal reforms would generate gains across many sectors and can broaden/deepen gains from trade liberalization by building new comparative advantages in GVC-linked goods and modern services.
- Illustrative reform scenarios (TFP interactions):
  - Structural reforms are modeled as raising relative sectoral TFP with considered gains varying between 1 and 10 percent.
  - Findings:
    - Blue bars: direct gains to sectoral value-added from TFP-raising reforms.
    - Gray bars: additional gains from trade liberalization amplified by TFP increases.
    - Example: in highly-traded goods, a small gain at baseline TFP rises to about 4 percent when sectoral TFP rises by 10 percent.
    - In modern services, a small negative impact on value added closes when sectoral TFP rises by 10 percent.
  - Mechanism: higher sectoral TFP increases comparative advantage; trade liberalization lets firms exploit this by serving foreign markets.

### Trade-induced Investment, Intermediates Intensification, and Amplification Potential
- FDI and productivity:
  - Model includes endogenous investment but does not distinguish productivity-enhancing properties of FDI.
  - Evidence suggests greenfield FDI generates positive spillovers, particularly upstream and when originating from AEs; vertical FDI can boost recipient-country gains (Osnago and others, 2017; Ahn and others, 2024).
  - Trade reforms could attract GVC-related FDI, amplifying productivity gains, particularly in GVC-linked sectors.
- Intermediates use intensity (IO-multiplier) and amplification:
  - Baseline model holds the share of intermediates used in production fixed at the country-sector level.
  - Higher intermediates use intensity can amplify gains because cheaper intermediates upstream generate spillovers downstream across production stages.
  - Back-of-the-envelope simulations:
    - Conditional correlation estimated between IO-multiplier and GDP gains controlling for economy size.
    - Moving Indonesia’s IO multiplier to different levels based on peer distributions indicates amplification potential.
    - Example estimate: if Indonesia had the median ASEAN-level of intermediate inputs usage (roughly about the level of Thailand), the GDP gains from trade integration would be about 40 percent higher.

### Conclusion and Policy Recommendations
- Main conclusions:
  - Significant potential gains from trade integration for Indonesia, particularly from reducing non-tariff barriers.
  - Largest portion of estimated gains arises from reduction of Indonesia’s own barriers, indicating scope for unilateral action even while pursuing deeper integration with major partners.
  - Trade liberalization helps Indonesia exploit shifting global trade patterns and diversify against trade shocks.
- Policy recommendations and priorities:
  - Pursue unilateral reductions in non-tariff barriers to capture gains from cheaper intermediate inputs and reallocation effects.
  - Pursue ambitious integration with trading partners to further boost GDP through reallocation and export expansion.
  - Implement complementary structural reforms: invest in logistics, human capital, digital infrastructure, financial sector development, and governance improvements to broaden and amplify gains.
  - Facilitate FDI attraction and conditions for GVC-linked greenfield investment to capture productivity-enhancing spillovers.
  - Ensure supportive measures to help workers transition to new opportunities so gains are broadly shared.

*Source: sipea2026007 — IMF chapter on Indonesia.*

### References ____________________________________________________________________________ 17

### sipea2026007 - References

### Overview and Key Findings
- Indonesia is pursuing deeper trade integration with regional and global partners to support its Golden Vision to reach high-income status by 2045.
- Deeper trade integration focused on reducing non-tariff barriers (NTBs), combined with complementary structural reforms (human capital and logistics), can generate significant GDP gains for Indonesia.
- A modeled ambitious reform scenario (deep trade agreements + improvements in human capital and logistics) raises real GDP levels by 4.1 percent in the medium- to long-term relative to baseline.

### Policies and Structural Factors Affecting Trade
- Tariffs:
  - Average tariffs on manufactured goods have steadily declined across partners (ASEAN, Asia-Pacific, extra-region), with scope for further reductions.
- Non-tariff barriers (NTBs):
  - Use of NTBs in Indonesia is higher than in most regional and extra-regional peers.
  - World Bank simulations indicate that removing four major NTBs (pre-shipment inspections, port of entry restrictions, import approvals, national certification requirements) could raise GDP by 5 percent and boost investment and trade.
- Trade agreement depth:
  - Country-pair level depth scores are constructed from coverage of 52 areas (14 WTO-mandated, 38 beyond WTO).
  - Indonesia’s depth scores vary widely across partners and are generally below integration levels in the EU and North America.
  - Empirical estimates (Dhingra and others, 2023) imply that ASEAN treaties’ depth reduction in NTBs boosts average bilateral exports by 15.5 percent for goods and 17.3 percent for services.
- Structural reforms:
  - Logistics and human capital improvements can reduce trade costs and support exports independent of trade-policy measures.
  - Illustrative estimates:
    - Increasing logistics from the 25th percentile to the 75th percentile for EMs is associated with a 13 percent increase in goods exports.
    - Raising human capital from the 25th percentile to the 75th percentile raises services exports by about 9 percent.

### Quantitative Trade Model and Scenario Design
- Model features and calibration:
  - State-of-the-art multi-country, multi-sector quantitative trade model based on Cuñat and Zymek (2024).
  - Calibrated using 2015-2019 data.
  - Production structure spans 40 sectors (goods and services) and 69 economies.
  - Firms use labor, capital, and intermediate inputs with Cobb-Douglas technology; trade faces country-pair and sector-specific iceberg costs (휅 ≥ 1).
  - Counterfactual analysis compares steady-states using an “exact hat” algebra approach.
- Ambitious reform scenario components:
  - Bilateral deepening of partnerships: mutual reduction of NTBs with ASEAN, the EU, Asia-Pacific advanced economies (Australia, Japan, Korea, New Zealand), the United States, China, and India—conceptualized as increases in bilateral depth scores to the conceptual maximum.
  - Boosting human capital and logistics: raising Indonesia’s human capital and logistics to respective medians for OECD economies (alternative interpretation: increase to the 95th percentile of EMs).
- Mapping reforms to model:
  - Both policy-induced NTB reductions and structural improvements are mapped as reductions in iceberg costs.
  - Reductions in partner NTBs lower sector-specific bilateral iceberg costs faced by exporters to Indonesia.
  - Indonesia’s export-cost reductions capture: (i) partner market access (first term), (ii) human capital improvements (second term, coefficient 훼�푆푆 퐻퐻퐻퐻 × Δ), and (iii) logistics improvements (third term, coefficient 훼�푆푆 퐿퐿퐿퐿 × Δ). These reductions apply vis-à-vis all trading partners.

### Main Results and Mechanisms
- Real GDP:
  - Ambitious trade integration and reform scenario boosts real GDP levels by 4.1 percent in the medium- to long-term relative to baseline.
- Channels generating gains:
  - Lower NTBs allow Indonesian firms to source cheaper intermediate inputs, enhancing productivity and output.
  - Cheaper access to final goods and inputs triggers reallocation toward sectors of comparative advantage.
  - Access to external markets increases demand for Indonesian output and further reallocations.
  - Improvements in human capital and logistics reduce trade costs vis-à-vis all partners, supporting exports.
  - Productivity-enhancing reallocations raise the return to capital and boost investment, increasing the steady-state capital stock.
- Complementarity and amplification:
  - Unilateral reductions in NTBs affecting imports generate gains that are amplified when paired with increased market access via deep trade agreements.
  - Structural reforms both reduce trade costs directly and broaden comparative advantage, complementing trade policy.

### Policy Implications and Priorities
- Prioritize reducing elevated NTBs as they may deliver particularly large gains beyond tariff reductions.
- Deepen trade agreements to include comprehensive, legally enforceable WTO+ and WTO-X provisions to lower NTBs and increase market access.
- Pursue structural reforms in human capital and logistics to:
  - Reduce trade costs across all partners.
  - Complement trade liberalization by broadening comparative advantage.
- Recognize potential additional gains from GVC-integration and FDI beyond the model’s estimates if reforms make Indonesia ‘open for business’ in shifting global supply chains.

*Source: sipea2026007 - References*

### 12.      A unilateral reduction in Indonesia’s non-tariff barriers, even if not accompanied by

### sipea2026007 - 12.      A unilateral reduction in Indonesia’s non-tariff barriers, even if not accompanied by 

### Impact of a unilateral reduction in Indonesia’s non-tariff barriers
- Scenario setup and aggregation:
  - Analysis covers percent change in real value added across the 40 sectors.
  - Five sector groups constructed: commodities; highly-traded goods (a proxy for more GVC-linked sectors); other goods; modern services; other services.
- Channels determining sectoral impacts:
  - (i) Access to cheaper intermediate inputs for production.
  - (ii) Reallocation of domestic demand towards more easily accessible foreign products.
  - (iii) Spillovers from shifting demand from other sectors.
- Key findings:
  - Many key sectors gain (including commodities, textiles, motor vehicles, food, wood products) due to cheaper intermediate inputs and the other channels.
  - All goods sector groups gain in value added.
  - The GVC-linked highly-traded goods sector makes the biggest contribution to the overall increase in exports despite assuming no increase in foreign market access, underscoring the importance of access to intermediate inputs.
  - Various services sectors also benefit, either through a direct rise in exports or by facilitating goods exports and demand spillovers.

### Full, bilateral reduction and partner-specific gains
- Additional mechanism with bilateral opening:
  - Gaining foreign market access triggers further reallocation toward sectors with comparative advantage.
  - With a fixed labor pool (assumed in the model), reallocation dampens gains from more GVC-linked sectors.
- Decomposition by trading partner (as reported):
  - Figure/table header (as presented): ASEANA-P AEs ChinaEUIndiaUSA
  - Growth in Sectoral VA, by Partner (In percent, relative to baseline sectoral real VA):
    - Commodities: 0.67 0.87 0.66 0.41 0.14 0.04
    - Goods, above-med trade-: -0.30 -0.45 -0.86 0.50 -0.52 1.35
    - Goods, below-med trade: 0.51 0.85 0.87 0.58 0.51 0.54
    - Services, highly-traded: 0.11 0.25 0.10 -0.37 -0.15 -0.81
    - Services, other: 0.25 0.33 0.55 0.20 0.18 0.29
  - Interpretation:
    - Large gains from Asia-Pacific partners highlight benefits of regional integration and complementarities through regional GVC networks (e.g., China, ASEAN) acting as suppliers of intermediate inputs.
    - For partners such as US and India, gains are driven more by gaining market access in partner economies.
    - Opening to the US and EU generates gains for all types of goods sector groups; modern services do not gain from opening to these partners in current configuration.
    - Opening to major Asia-Pacific GVC-specialized economies produces stronger gains for Indonesia outside the GVC-linked sector group (e.g., commodities, other goods).

### Complementarities between trade integration and structural reforms
- Need for structural reforms:
  - Structural reforms are essential to reach high-income status and the Golden Vision of high-income status by 2045 (as discussed in IMF 2024a).
  - Key reform priorities: improvements in logistics, investment and business climate, governance, digitalization, financial sector development, and building human capital.
  - Horizontal reforms would generate gains across many sectors and can broaden/deepen gains from trade liberalization by building new comparative advantages in GVC-linked goods and modern services.
- Illustrative reform scenarios (TFP interactions):
  - Structural reforms are modeled as raising relative sectoral TFP with considered gains varying between 1 and 10 percent.
  - Findings:
    - Blue bars: direct gains to sectoral value-added from TFP-raising reforms.
    - Gray bars: additional gains from trade liberalization amplified by TFP increases.
    - Example: in highly-traded goods, a small gain at baseline TFP rises to about 4 percent when sectoral TFP rises by 10 percent.
    - In modern services, a small negative impact on value added closes when sectoral TFP rises by 10 percent.
  - Mechanism: higher sectoral TFP increases comparative advantage; trade liberalization lets firms exploit this by serving foreign markets.

### Trade-induced investments, intermediates intensification, and potential amplification
- FDI and productivity:
  - Model includes endogenous investment but does not distinguish productivity-enhancing properties of FDI.
  - Evidence suggests greenfield FDI generates positive spillovers, particularly upstream and when originating from AEs; vertical FDI can boost recipient-country gains (Osnago and others, 2017; Ahn and others, 2024).
  - Trade reforms could attract GVC-related FDI, amplifying productivity gains, particularly in GVC-linked sectors.
- Intermediates use intensity (IO-multiplier) and amplification:
  - The baseline model holds the share of intermediates used in production fixed at the country-sector level.
  - Higher intermediates use intensity can amplify gains because cheaper intermediates upstream generate spillovers downstream across production stages.
  - Back-of-the-envelope simulations:
    - Conditional correlation estimated between IO-multiplier and GDP gains controlling for economy size.
    - Moving Indonesia’s IO multiplier to different levels based on peer distributions indicates amplification potential.
    - Example estimate: if Indonesia had the median ASEAN-level of intermediate inputs usage (roughly about the level of Thailand), the GDP gains from trade integration would be about 40 percent higher.

### Conclusion and policy recommendations
- Main conclusions:
  - Significant potential gains from trade integration for Indonesia, particularly from reducing non-tariff barriers.
  - Largest portion of estimated gains arises from reduction of Indonesia’s own barriers, indicating scope for unilateral action even while pursuing deeper integration with major partners.
  - Trade liberalization helps Indonesia exploit shifting global trade patterns and diversify against trade shocks.
- Policy recommendations and priorities:
  - Pursue unilateral reductions in non-tariff barriers to capture gains from cheaper intermediate inputs and reallocation effects.
  - Pursue ambitious integration with trading partners to further boost GDP through reallocation and export expansion.
  - Implement complementary structural reforms: invest in logistics, human capital, digital infrastructure, financial sector development, and governance improvements to broaden and amplify gains.
  - Facilitate FDI attraction and conditions for GVC-linked greenfield investment to capture productivity-enhancing spillovers.
  - Ensure supportive measures to help workers transition to new opportunities so gains are broadly shared.

*Source: sipea2026007 — IMF chapter on Indonesia.*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2026/english/sipea2026007.pdf_