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Can Indonesia Disavow its Discriminatory Treatment of the Tech Sector on its Path to the TPP?

Newly elected President of Indonesia, Joko Widodo met with President Obama on Monday in Washington DC. Widodo traveled to the United States for the first time with the primary purpose of promoting Indonesia as a good destination for U.S. investment. Although the haze and forest fire crisis in South East Asia cut President Widodo’s trip short, the two presidents managed to agree on a wide range of policy outcomes in their meeting yesterday, according to their joint statement.

A significant result of this meeting is that Indonesia wants to join the recently completed Trans-Pacific Partnership (TPP) trade agreement. Given the current state of Indonesia’s policy approach to information and communications technology (ICT), President Widodo will have a significant amount of work to do at home to meet the TPP’s high standards in this area.

If you are in Jakarta, Surabaya, or any other major city in Indonesia, it seems that everyone has a mobile phone, and the Indonesian government is working to bring broadband and mobile connectivity to more rural segments of the population. Indonesia is an economy ripe for innovative and inclusive growth that increases standards of living through market-based development and economic integration with its neighbors. However, President Widodo has a steep hill to climb in light of Indonesia’s long-standing policy of import substitution, nationalistic tendencies, and absence of political support for free and open trade and investment policies.

Indonesian trade policy, in particular, has tended to favor local companies and industries at the expense of foreign competitors. The ICT sector is littered with examples of discriminatory forced localization measures, some of which may be violating Indonesia’s World Trade Organization (WTO) commitments.

One prominent example of a measure that Indonesia may have to change to join TPP is Ministry of Communication and Informatics (MICT) Regulation 82/2012, along with an associated draft MICT regulation published this summer. Article 17 of the new regulation would require companies to store personal data concerning Indonesian citizens locally, while Article 8 of the earlier regulation would require software developers to surrender proprietary source code.

The data localization requirement will impose higher costs on local companies, especially on small and medium sized enterprises. It will also raise costs for U.S.-headquartered companies operating in Indonesia, as well as Indonesian businesses and consumers, undermining Indonesia’s global and regional competitiveness.

The source code requirement is not only bad for business, but bad for security. Source code and other IP is business proprietary information essential to companies’ ability to innovate and remain economically competitive. Further, companies maintain the confidentiality of source code and design information to protect the security of proprietary products and services, so handing over such information to government regulators (or anyone else) makes little sense.

Two additional forced localization measures that Indonesia would need to address to join TPP include: the MICT Technical Requirements for Equipment and Facilities for Purpose of Long-Term Evolution Time Division Duplexing (Lte Fdd), and Long-Term Evolution Frequency Division Duplexing (Fte Fdd) Broadband Services, as well as the accompanying draft implementation rules put forward by the Ministry of Industry titled, “Procedure for Calculation of Local Content in Telecommunication Devices.”

The Indonesian government may believe that these measures and others like them give it the necessary leverage to foreign direct investment from ICT companies to Indonesia. In reality, these measures are pushing both current and potential foreign investors away, dampening Indonesia’s potential and promise.

We see an opportunity for President Widodo to use his U.S. visit to bolster his stature as a statesman and build his political capital at home, which would prepare him for the tough negotiations within his own government about taking Indonesia off the protectionist path. His statements this week and those of his new trade minister, Thomas Lembong, seem to indicate that his administration is ready for those battles.

While the U.S.-Indonesia joint statement was bereft of any commitments to roll back harmful forced localization measures, we are hopeful that President Widodo’s trip to Washington sets the stage for future progress. In particular, the joint statement does contain a new commitment “to continue to develop cooperation in many areas of science, technology, and innovation, including the development of the ICT sector in Indonesia in alignment with Indonesia Digital Economy 2020 vision.”

ITI would strongly support including an affirmative statement in Indonesia’s Digital Economy 2020 vision that it will avoid and roll back all forced localization measures, which constrain the development of the ICT sector in Indonesia. Such actions will pave a much easier path for Indonesia to join the TPP, as President Widodo intends.

Going forward, ITI and its members will engage with Indonesian officials to find more trade- and investment-friendly approaches to meeting their objectives – whether economic- or security-related. We hope that Jokowi’s visit sets Indonesia on a long-lasting, innovative, and inclusive economic trajectory free of nationality-based discrimination.

Public Policy Tags: Forced Localization, Trade & Investment