Canada-Indonesia Comprehensive Economic Partnership Agreement
Initial Economic Impact Assessment

Summary

On June 20, 2021, Canada and Indonesia launched negotiations towards a Canada-Indonesia Comprehensive Economic Partnership Agreement (CEPA). In conjunction with this decision, the Government of Canada has conducted an initial Economic Impact Assessment (EIA) of a possible Canada-Indonesia CEPA to study the associated potential economic benefits.

EIAs are a tool used to assess the potential economic impacts of free trade agreements (FTAs) entered into by Canada and its trading partners. EIAs provide both quantitative and qualitative assessments of measures included in Canada’s FTAs, and are useful in identifying anticipated economic effects –both in terms of bilateral trade flows (exports and imports) and GDP growth for both parties to an agreement. More recently, Canada’s approach has expanded to allow for a more detailed analysis of the impacts of an FTA on labour and gender. The estimates from EIAs also contribute to other assessments that are required by the Government of Canada for any major policy initiatives including environmental assessments and gender-based analyses (GBA+).

A Canada-Indonesia CEPA would contribute to Canada’s objectives to diversify trade, particularly with fast-growing economies in Southeast Asia, and complement Canada-Association of Southeast Asian Nations (ASEAN) FTA negotiations, which were launched on November 16, 2021.

Indonesia is Canada’s largest export market in Southeast Asia. In 2019^{Footnote 1}, Canada exported $2.2 billion^{Footnote 2} in goods and services to Indonesia and imported $2.0 billion in goods and services^{Footnote 3}. Indonesia is also the second-largest destination for Canadian direct investment in Southeast Asia, with a total stock of $3.8 billion in 2019.^{Footnote 4} While these figures are significant, Indonesia’s potential as a market for Canadian exports is under-realized. With a population of 270 million, a growing middle class and average annual economic growth of 7.0% (2009-2019)^{Footnote 5}, there is potential opportunity for Canada to deepen trade relations with Indonesia and benefit over the long-term from Indonesia’s significant economic growth.

The initial EIA estimates that a Canada-Indonesia CEPA could increase Canada’s GDP by $328.0 million and exports to Indonesia by $446.5 million (7.9%) through increased market access for Canadian companies and new market access for Canadian products in a broad range of sectors. Sectors exporting to Indonesia that would benefit from an agreement include business services, machinery and equipment, agri-food, chemical products, computer and electronic products, and transport. Meanwhile, the initial EIA estimates that a Canada-Indonesia CEPA could increase Indonesia’s GDP by $1.4 billion and exports to Canada by $1.1 billion (47.0%), primarily through an increase in Indonesian exports of wearing apparel and leather products. The study found that increased exports of these products to Canada would likely displace exports from other countries rather than directly replacing domestic production in Canada.

Supplementary analysis shows that a Canada-Indonesia CEPA could also provide additional export gains for Canada by eliminating or reducing high tariffs on products that Canada does not currently export to Indonesia. In total, Canada does not export on 7,737 of Indonesia’s 10,813 tariff lines, representing about 72% of Indonesia’s total imported products, which could be areas for new export opportunities under a Canada-Indonesia CEPA. The majority of these lines – 88% – are dutiable, and almost half of the lines have a tariff of 7.5% or higher. Canada exports some of these products in significant quantities to neighboring ASEAN countries , while exporting limited amounts of the same products to Indonesia. Products not currently exported to Indonesia that could benefit from an agreement include clothing and textiles, some types of seafood, motor vehicles and parts, and metal products. These qualified potential opportunities represent additional possible gains for Canadian exporters over and above the quantified economic projections presented in this analysis.

It is important to note that the economic model used for this initial Economic Impact Assessment assumes that under a CEPA, Canada and Indonesia fully liberalize all tariffs on bilateral trade between the two countries. Both countries also are assumed to fully bind their existing regimes for services (all modes of supply). This scenario of full liberalization does not pre-judge the final negotiated outcomes and represents the maximum possible quantifiable benefits of a potential free trade agreement between Canada and Indonesia based on existing trade patterns. For more information on the economic model see Annex I.

In accordance with the transparency requirements set out in the Policy on Tabling of Treaties in Parliament, the Government of Canada will table a final economic impact assessment of a Canada-Indonesia CEPA in the House of Commons when introducing the implementing legislation for a concluded agreement. The final economic impact assessment will take into account the final negotiated outcomes of the agreement, whereas this initial EIA is based on a hypothetical scenario in which Canada and Indonesia are assumed to fully liberalize all tariffs on bilateral merchandise trade as well as fully bind their existing regimes for services.

The initial Economic Impact Assessment provides the following:

• 1. Overview of Canada-Indonesia Economic and Trade Relations
• 2. Current Trade in Goods and Services
  • 2.1. Trade in Goods
  • 2.2. Trade in Services
• 3. Canadian Foreign Direct Investment (FDI) Stocks and Flows
• 4. Potential Economic and Trade Impact of a Canada-Indonesia CEPA
  • 4.1. Impact on GDP
  • 4.2. Impact on Bilateral Trade
  • 4.3. GBA+ and initial Environmental Assessment
  • 4.4. Potential New Exports to Indonesia
• Annex I: Model and Scenario
• Annex II: Estimating Gains from Reducing Barriers to Services Trade

1. Overview of Canada-Indonesia Economic and Trade Relations

In 2019, Canada’s GDP totaled $2.3 trillion or $61,470 on a per capita basis, while Indonesia’s GDP totaled $1.5 trillion^{Footnote 6} or $5,496 per capita. Despite this disparity, Indonesia has the fastest growing economy in Southeast Asia, which suggests potential long-term growth opportunities for Canada under a Canada-Indonesia CEPA. Between 2009 and 2019, total GDP in Indonesia grew by 7.0% and income per capita grew by 5.7%. In contrast, during this period the Canadian economy experienced modest growth, with GDP and income per capita increasing by 3.8% and 2.6% respectively. In 2019, total GDP in Indonesia grew by 5.0% and income per capita grew by 3.9%^{Footnote 7}. In contrast, the Canadian economy experienced modest growth, with GDP and income per capita increasing by 1.9% and 0.4 % respectively. Even with the economic impact of the COVID-19 pandemic, the OECD forecasts Indonesia’s real GDP to grow by 4.7% in 2021 and 5.1% in 2022^{Footnote 8}.

2. Current Trade in Goods and Services

In 2019, Canada’s total exports of goods and services to Indonesia amounted to $2.2 billion, while total imports were valued at $2.0 billion. Exports have increased annually in recent years, with the exception of a decline from 2014 to 2016 and 2018 to 2019 (see Figure 1). On average, merchandise exports account for the majority of Canada’s exports to Indonesia, while services make up 10%. A similar pattern is observed for imports from Indonesia. In 2019, service imports accounted for only 11.2% of all imports from Indonesia. Overall, Canada has maintained a positive trade balance with Indonesia over the past decade, with the exception of a trade deficit in 2010 and 2016.

Figure 1: Exports, imports and trade balance of Canada with Indonesia, CAD Millions, 2009-2019

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Figure 1: Exports, imports and trade balance of Canada with Indonesia, 2009-2019^*

Period	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019
* Values are in CAD millions
Services, exports	143	149	156	191	180	172	189	174	204	186	236
Goods, exports	970.7	1,061.5	1,644.6	1,681.3	1,909.3	2,028.0	1,815.5	1,458.3	1,728.8	2,147.2	1,928.4
Total exports	1,113.7	1,210.5	1,800.6	1,872.3	2,089.3	2,200.0	2,004.5	1,632.3	1,932.8	2,333.2	2,164.4
Services, imports	98	89	109	124	115	155	167	148	164	197	228
Goods, imports	1,009.0	1,249.0	1,429.5	1,313.9	1,374.1	1,519.3	1,671.8	1,620.3	1,730.7	1,760.1	1,815.4
Total imports	1,107.0	1,338.0	1,538.5	1,437.9	1,489.1	1,674.3	1,838.8	1,768.3	1,894.7	1,957.1	2,043.4
Trade balance	6.61	(-127.55)	262.19	434.48	600.14	525.74	165.66	(-135.99)	38.06	376.07	120.95
Total Trade	2,220.7	2,548.5	3,339.1	3,310.2	3,578.4	3,874.3	3,843.3	3,400.5	3,827.5	4,290.3	4,207.8

Data: Statistics Canada
Source: Office of the Chief Economist, Global Affairs Canada

2.1 Trade in Goods

Indonesia is an important trading partner for Canada. In terms of total merchandise trade (exports plus imports), in 2019 Indonesia was Canada’s third largest trading partner in Southeast Asia after Vietnam and Thailand. In 2019, Canada’s total trade with Indonesia amounted to $3.7 billion, which represents 13.8% of Canada’s trade with this region. Canada’s trade with Indonesia increased by 89.1% between 2009 and 2019, with an average annual growth rate of 7.3% over this period.

In 2019, Canada’s exports to Indonesia reached $1.9 billion, which is nearly double its value in 2009, when it totalled $970.7 million. The three most important Canadian products exported to Indonesia in 2019 were cereals, wood pulp and fertilizers. Combined, these products represented 70.8% of Canada’s total exports to Indonesia in 2019, with cereals accounting for more than one-third of all exports that year. While exports for all three products grew between 2009 and 2019, cereals experienced the largest increase, rising by nearly 200% (see Figure 2).

Figure 2: Canada’s top three exports to Indonesia ($M), 2009 and 2019

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Figure 2: Canada’s top three exports to Indonesia, 2009 and 2019 ^*

Exports	2009	2019	Growth 2009-2019 (%)
* Values are in CAD millions
Cereals	246,484,258	730,650,698	196.4
Wood Pulp	142,154,775	328,343,595	131.0
Fertilizers	286,219,062	306,560,350	7.1
Other Products	295,791,933	562,835,281	90.3

Data: Statistics Canada
Source: Office of the Chief Economist, Global Affairs Canada

Barriers to trade in goods

Currently, about 86.0% of Canadian exports to Indonesia enter the country duty-free. Dutiable exports totaled $320.0 million. Eighty percent of products entered Indonesia with duties below 5%. Exports of products with tariffs of more than 20% were very limited with a total value of $7.0 million.

Table 1 shows the 10 highest trade-weighted tariffs^{Footnote 9} applied to Canadian products exported to Indonesia.

Table 1: Top 10 Indonesia Trade-Weighted Tariffs Faced by Canada’s Exporters

Data: Statistics Canada
Source: Office of the Chief Economist, Global Affairs Canada

Canada’s imports from Indonesia amounted to $1.8 billion in 2019, which is nearly 80% larger than its value of $1.0 billion in 2009. The top three categories of imported products from Indonesia are apparel and clothing, rubber, and electrical machinery and equipment. Together, they made up 40.5% of Canada’s total imports from Indonesia in 2019, with apparel and clothing accounting for more than one-fifth of total imports.

Figure 3: Canada’s top three imports from Indonesia ($M), 2009 and 2019

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Figure 3: Canada’s top three imports from Indonesia, 2009 and 2019 ^*

Product	2009	2019	Growth 2009-2019 (%)
* Values are in CAD millions
Apparel And Clothing	182	389	113.5
Rubber And Articles Thereof	154	183	18.8
Electrical Machinery And Equipment	124	164	32.2
Other Products	549	1,080	96.6

Data: Statistics Canada
Source: Office of the Chief Economist, Global Affairs Canada

2.2 Trade in Services

Trade in services between Canada and Indonesia totalled $464 million in 2019. During that year, Canada exported services amounting to $236 million and imported services worth $228 million, resulting in a trade balance surplus of $8 million.^{Footnote 10}

As shown in Table 2, the travel sector accounts for over half of all services imported from Indonesia, and commercial services account for less than 10%. While travel accounts for the largest share of exports, commercial services make up close to one-third and transportation and government services represent one-fifth of Canada’s services exports. Canada has consistent trade surpluses with Indonesia in commercial services, mainly in knowledge-based professional services.

Table 2: Canada’s exports and imports of services with Indonesia by category, 2019

Data: Statistics Canada
Source: Office of the Chief Economist, Global Affairs Canada

Barriers to trade in services and investment

Absent a FTA with comprehensive services and investment obligations, countries are only bound to follow their existing international trade commitments, leaving trade in services and foreign investment more vulnerable to changes in policy. This uncertainty can have a negative impact on bilateral trade in these areas. For this reason, this paper assumes that a country that binds its FTA commitments to its current rules and regulations would provide a level of certainty for cross border services trade and investment flows.

Table 3 demonstrates the estimated percentage cost savings in tariff equivalents due to increased certainty for affected services sectors. For instance, the effect of binding Indonesia’s business services sector to its current regime relative to its General Agreement on Trade in Services (GATS) commitments would have the same effect as reducing tariffs by 7.35% for that sector.

Table 3: Estimated cost savings in tariff equivalent

Data: Statistics Canada
Source: Office of the Chief Economist, Global Affairs Canada

3. Canadian Foreign Direct Investment (FDI) Stocks and Flows

Indonesia is Canada’s second-largest FDI destination in Southeast Asia, with total investment of $3.8 billion in 2019, following only Singapore. Canada’s investment in Indonesia has experienced strong growth in recent years, increasing by 32% from 2017 to 2019. Indonesia’s investment in Canada has also seen a modest but steady increase in recent years. In 2019, Indonesia’s FDI in Canada reached $116 million, which is 38.1% larger than its value of $84 million in 2017.^{Footnote 11}

4. Potential Economic and Trade Impact of the Canada-Indonesia CEPA

4.1 Impact on GDP

A Canada-Indonesia CEPA could increase Canada’s GDP by $328.0 million or 0.012% and Indonesia’s GDP could increase by $1.4 billion or 0.037%.

Table 4: GDP Impact of Canada-Indonesia FTA by 2040 under the assumption of full liberalization

Source: Office of the Chief Economist, Global Affairs Canada

4.2 Impact on Bilateral Trade

Canada is expected to benefit from the elimination of tariffs on goods that Canada currently exports to Indonesia, which are widely spread across product categories but are mostly in the 5% to 10% range of tariffs. For these goods, Canada’s exports to Indonesia could increase by $446.5 million or 7.9%, benefitting goods such as food products, chemical products, metal products, computer and electronic products, machinery and equipment and business services, among others as indicated in Table 5.

Table 5: Detailed changes to Canadian exports to Indonesia by 2040

Source: Office of the Chief Economist, Global Affairs Canada

Canada’s imports from Indonesia could increase by $1.1 billion or 47.0%, primarily driven by imports of wearing apparel and leather products, where Canada’s trade-weighted tariffs with Indonesia are 17.3% and 16.1%, respectively (see Table 6). Full liberalization of these tariffs with Indonesia could increase trade substantially in these sectors.

Table 6: Detailed changes to Canadian imports from Indonesia by 2040

Source: Office of the Chief Economist, Global Affairs Canada

4.3 GBA+ and Initial Environmental Assessment

GBA+

A CEPA’s impact on employment is expected to be modest, amounting to an increase of 1,856 jobs by 2040. Women are expected to benefit slightly more than men, due to exports increasing in a variety of sectors. Women in professional, clerical, administrative and sales jobs are expected to benefit the most. Men are expected to benefit most in manufacturing sectors that require operating machinery, due to gains in processed goods sectors, followed by sales and professional workers. Real wages could also appreciate by 0.015% and would be relatively balanced across all eight occupational groups. The increase in jobs and higher real wages support higher levels of consumption and a broader sharing of the benefits of the proposed agreement across Canadian society. Overall, although it is projected that there could be job losses in some sectors, this would be offset by the creation of new jobs in other areas.

Initial Environmental Assessment

Based on the estimated changes in GDP and production, the Government of Canada projected the preliminary environmental impacts of a possible agreement. It is estimated that a CEPA agreement would have a negligible impact on greenhouse gas emissions and air quality in both Canada and Indonesia. This result is expected as the trade agreement would likely have a modest impact on the economies of Canada and Indonesia.

In Canada, greenhouse gas emissions would be expected to increase by 0.096 Mt CO2e by 2040 due to increased economic activity resulting from an agreement, representing an increase of less than 0.01% from the base level of projected greenhouse gas emissions of 1,092 Mt CO2e in 2040. Roughly two-thirds of the increased emissions are expected to come from CO2 directly.

In Indonesia, greenhouse gas emissions could increase by 0.99 Mt CO2e by 2040, or 0.04%, compared to the projected base emissions of 2,451 Mt CO2e in 2040. Approximately 81% of this increase would be due to direct CO2 emissions, while the majority of the remainder would stem from increased methane emissions.

Complementing the initial EIA, the Government of Canada will publish a Gender-based Analysis + (GBA+) and an initial Environmental Assessment of a Canada-Indonesia CEPA, both of which will inform Canada’s position during negotiations. The Government will also publish a final Environmental Assessment with analysis based on the outcomes of the concluded negotiations.

4.4 Potential New Exports to Indonesia

The above analysis examines the potential growth of exports of products and services that are currently being traded. However, Canada does not export on 7,737 of Indonesia’s 10,813 tariff lines, representing about 72% of products imported into Indonesia. The majority of these lines – 88% – are dutiable, and almost half of the lines have a tariff of 7.5% or higher. Canada exports some of these products in significant quantities to neighboring countries in ASEAN^{Footnote 13} while exporting limited amounts of the same products to Indonesia. This suggests there could be export opportunities for these products in Indonesia if tariffs were eliminated. Table 7 shows a sample of products Canada exports to other Southeast Asian countries, which face significant tariffs in Indonesia.

Table 7: Potential new product exports to Indonesia

Source: Office of the Chief Economist, Global Affairs Canada

Annex I

Model and Scenario

The model employed for this analysis follows the structure of the Global Trade Analysis Project (GTAP) model developed and supported by Purdue University^{Footnote 14}.

The data used for this modelling exercise is based on the GTAP database pre-release version 11, which benchmarks all bilateral trade flows, trade protection and domestic support to 2017^{Footnote 15}. The model has been further updated to update all bilateral trade flows and macroeconomic indicators to 2019. The underlying data are values in U.S. dollars at 2017 prices.

Given the importance of better understanding the impacts of FTAs on domestic markets, this analysis utilizes a labour market module building on the existing dynamic CGE model to assess the labour market effect of trade policy, taking into account gender, age and the distribution of Canadian workers across different occupations.

As a note of caution, the modelling results should be considered in the context of both the advantages and limitations of the CGE model being used. Specifically, the CGE model can reflect only the expansion of trade in products already traded in a bilateral trading relationship (known as the intensive margin of trade); it cannot provide quantitative analysis of the creation of trade in new areas such as the introduction of products that were not traded prior to the agreement (known as the extensive margin of trade). Further, the model only allows for analysis of gains from liberalization in goods and services trade and investment and does not include gains from liberalization and enhanced economic cooperation in other areas. As a result, this assessment could be expected to underestimate the gains from liberalization.

The benefits of a possible trade agreement with Indonesia are quantified using the following approaches:

1. The CGE model
2. An extensive margin analysis

Together, these two components cover both gains identified in the CGE model and a qualitative assessment of products that would not be included in an analysis solely based on CGE modelling.

Scenario

One scenario is analyzed in this report:

1. Canada and Indonesia are assumed to fully liberalize all tariffs on bilateral trade between the two countries. Both countries also are assumed to fully bind their existing regimes for services (all modes of supply).

The scenario of full liberalization is designed to not pre-judge the final negotiation outcomes. This scenario represents the maximum possible quantifiable benefits of a potential free trade agreement between Canada and Indonesia based on existing trade patterns.

Baseline development

Economic modelling of potential trade agreements involves two projections:

1. Baseline projection: how the economies of the world would grow over the time horizon in the absence of any changes, such as a trade agreement.
2. Policy projection: how the economies of the world would grow after considering a change such as the implementation of a free trade agreement.

The difference between the two projections can be attributed to the benefits of a free trade agreement. As such, both projections are incredibly important when considering the potential effect of trade policy changes.

The development of the baseline over the time horizon is very important because it provides a point of reference to the policy projection. The projection of the baseline is based on growth forecasts from outside sources such as the International Monetary Fund. The baseline projection can also indicate potential shifts in the trading trajectory as countries grow over time. Developing countries that are expected to grow rapidly have the potential to become important trading partners for certain groups of products where they enjoy a comparative advantage, such as labour-intensive products.

In the case of the Asia-Pacific region, the latest baseline projections indicate that the strong economic growth of Cambodia, Vietnam, Philippines and India could begin to cut into Indonesia’s market share of labour-intensive exports to Canada, such as textiles, wearing apparel and leather products. While Canada’s imports of these products from Indonesia are not expected to decline, they are expected to remain stable throughout the time horizon without much growth as Canada increases imports of these products from the other countries.

Annex II

Estimating Gains from Reducing Barriers to Services Trade

To account for the possibility of increased certainty in the event of a preferential trading relationship, this analysis follows the “shrinking water” approach to estimate the effect of certainty on trade costs. The Services Trade Restrictiveness Index (STRI) by the OECD is used to measure the level of restrictions based on the current regime, and the same index is used to estimate the level of services commitments under the General Agreement on Trade in Services (GATS). This results in an index referred to as the GATS Trade Restrictiveness Index (GTRI). The limitation to this type of analysis is that changes to mode 3 supply of services (commercial presence or investment) are limited to services sectors only. Changes in binding commitments for investment in goods sectors cannot be measured using this methodology due to a lack of data.

When trade is liberalized, the difference between the previous commitments (represented by the GTRI) and the agreements under the newest agreement (generally binding to the current regime, represented by the STRI) is referred to as “water”. Minimizing the difference between the GTRI and the STRI by agreeing to bind to the current regime is referred to as “squeezing the water” and is assumed to provide more certainty for services exporters and thereby encourages increased trade in services. It is also assumed that the effect of binding commitments is less effective than new market access commitments. As such, estimated changes to trade costs resulting from changes to binding commitments are assumed to be half as effective as new market access commitments.