Economic and Environmental Impact of Trade Liberalization in Manufacturing Sector

This paper analyzes the economic and environmental impact of the Indonesian trade liberalization, specifically tariff reduction in the manufacturing sector. The analysis of liberalization is mainly divided into two periods i.e. 1991-1995 (before the establishment of the World Trade Organization, WTO) and 1995-2001 (after WTO). This paper uses an applied general equilibrium (AGE) model, namely Computable General Equilibrium (CGE) INDORANI. There are close relationships between Indonesian industrial policies and international trade performances. International trade (exports and imports) performance was higher during the Export-Orientation regime than during the Import Substitution regime. The CGE INDORANI simulations yield some conclusions. First, the trade liberalization in Indonesian manufacturing sector is estimated to have negative impacts on some macroeconomic indicators such as economic growth, balance of trade and government finance (saving). Meanwhile, it also has positive impacts on other macroeconomic indicators such as stabilization (inflation), employment and competitiveness. Second, in aggregate sector analysis, the simulation indicated that Agriculture, Refinery, Small Manufacture and Services sectors get benefits - in term of increasing employment and output- from the liberalization. In contrast, output and employment in the Mining, Crude Oil and Large Manufacture sectors decrease due to the liberalization, except employment in Crude oil due the liberalization of 1995-2001. Third, from the environmental perspective, the trade liberalization is estimated to have caused reduction in pollutant emissions SPM, SO2, NO2, CO and BOD.