The economic rationale of Indonesia’s export bans

NO TRADE partner should have been surprised by Indonesia’s decision to ban the export of bauxite, the main ore from which aluminium is processed, from June. The move is in line with Jakarta’s policy of adding value to its raw commodity exports; it wants the processing of ores done within the country. This policy has been in place since 2009 when Law 4/2009 on Mineral and Coal Mining was passed. The law regulates mining licences, mandates foreign shareholder divestment as well as sets parameters for government and community inputs in the mining industry.

Simply put, the country has abjured the doctrine of comparative advantage and decided instead to go for widening its industrial base and thus enhancing its economy rather than just being a raw commodity exporter.

Yet the decision has again raised hackles in the European Union, among other importers, with the claim that such a ban would damage their own industries and would violate World Trade Organization (WTO) rules. This is a familiar cry; President Joko Widodo’s previous ban on nickel ore exports in January 2020 was challenged in the WTO by the EU, which claimed that it impaired Europe’s steel industries. Late last year, the WTO ruled in the EU’s favour. Jakarta is appealing that decision. Given that the WTO’s appeal system has been effectively stymied, a final outcome could be a long time coming. In the meantime, several foreign investors, mostly from China, have built nickel smelters in Indonesia. Clearly, Jakarta simply wants to replicate nickel’s success.