Analysis of determinants of Indonesian agricultural exports

Abstract

This paper analyses determinants of agricultural exports and imports from Indonesia, including a set of demand and supply factors capturing effects of income, market size, prices, tariffs, exchange rates and variables related to logistics, competitiveness, trade policy, and innovation. A specific focus is on trade creation and diversion effects possibly arising as Indonesia experienced a deep liberalization of markets through the implementation of multiple Free Trade Agreements (FTAs). A gravity model helps to analyze the determinants of trade and the impacts of the various trade agreements, applied to two categories of agricultural exports: raw goods and food. The dataset comprises 50 countries with data on exports and imports from 2007 until 2017. The results find trade creation effects for both categories, with larger effects in exports within agricultural raw goods, and higher trade creation effects through imports in food. Indonesia also experienced trade expansion with non-free trade partners, suggesting that demand variables (e.g., income, market size, sophistication) are a more critical driver of growth rather than agreements. Price factors affect agricultural goods, with food products experiencing elastic price demand, while raw goods are affected by prices and exchange rate. Gains in competitiveness, logistics performance, and innovation is supporting agricultural exports (imports as well), although Indonesia is behind most of its trade partners. The current implementation of the FTA should be critically evaluated concerning food products as imports have expanded more rapidly than exports, and domestic goods may have experienced pressure from liberalization.