Determinants of Indonesias trade balance in global value chains
Aditya Rangga Yogatama (a*)
a) Center for Strategic Issues Management, the Ministry of Trade
Jl. M.I. Ridwan Rais No. 5, Central Jakarta 10110, Indonesia
* ytc.yoga[at]gmail.com
Abstract
The development of the global value chains (GVCs) in recent years has changed our perspective of international trade. The most important feature of GVC is the fragmentation of global production, where many intermediate goods are produced in different countries and then exported to other countries for further production. This paper aims to identify determinants of Indonesias bilateral trade balance using new measurements based on international input output data, called trade in value-added (TiVA). The use of TiVA can prevent double counting in the estimate of the bilateral trade balance. This estimate is caused by an increase in export production requiring an increase in intermediate imports as a consequence of fragmentation of international production in the GVCs. The method used in this paper is fixed effect data panel, applied to Indonesias trade balance gravity model. The estimation results show that GDP and FDI are the main determinants of Indonesias trade balance in terms of GVCs. The estimation results also show that using measurements based on gross trade balance causes a large overestimation. Finally, the finding suggests that the Indonesian government should develop a trade policy based on TiVA so that the policies will relevant to the development of GVCs.
Keywords: Trade balance; Trade in value-added; global value chains; Indonesia
Topic: Business Strategies on GVC Participation