The Heterogeneous Impact of Tariffs and Ntms on Total Factor Productivity for Indonesian Firms

Abstract

The Indonesian government has been working hard to engage with the world market as tariffs continue to decrease. However, the government seems to be following the global trend of relying on non-tariff measures (NTMs) to regulate the Indonesian market and protect the country’s industries. This paper assesses whether these measures hurt firms by limiting their access to better quality and cheaper foreign inputs. It builds on the findings of Amiti and Konings (2007) by assessing the impact of trade policy shocks on firms’ total factor productivity (TFP). It finds that tariffs and NTMs hurt firms’ TFP significantly and reduce employment. The impact is less severe for bigger firms, confirming the heterogeneous effect of trade policy. The results suggest unintended consequences of protectionism in the Indonesian market. Moreover, as the country seeks to boost foreign investment, more protectionism may be used to keep mark-ups in the domestic market high as an incentive.

Keywords:

• total factor productivity
• non-tariff measures
• tariffs
• trade liberalisation

JEL classifications:

• O14
• O53
• F14
• F15

ACKNOWLEDGMENTS

I would like to thank Arianto Patunru, Paul Gretton and Budy Resosudarmo for their discussion and feedback. This paper also benefited from talks with participants of a seminar held at the Crawford School of Public Policy, the Australian National University. I would like to thank Paul Burke and Ryan Edwards in particular for arranging the talks.

Notes

1 While some firms report non-zero amounts of imported inputs in the SI database, they are not recorded in the customs database. Since the SI database does not contain information on the imported goods’ HS codes (unlike in the customs data), their coverage ratios cannot be generated. These firms then are treated as non-importers in this paper.

2 See Petrin, Poi and Levinsohn (2004).

3 Firms that report zero capital and energy consumption have somewhat lower but not statistically different coefficients.

4 The fixed effect of year alone did not change coefficients’ statistical significance.