Examining The Impact of ASEAN-China Free Trade Agreement on Indonesian Manufacturing Employment

There are very few studies that explicitly examine the costs and benefits of participating in regional trade agreements (henceforth RTAs), especially for developing countries. This is an important research question given that many developing countries are currently involved in negotiating RTAs, such as the Trans-Pacific Partnership (TPP), the Regional Comprehensive Partnership Agreement (RCEP) and the Pacific Alliance. This paper attempts to address this gap in the trade literature by analyzing the impact of the ASEAN-China Free Trade Agreement (ACFTA) on Indonesian manufacturing employment. It finds that even though the increase in the preference margin for China decreases employment by 2.60% (80,000 jobs lost), the reciprocal increase in the preference margin for Indonesia increases employment by 0.81% (25,000 jobs created) in export-oriented industries. These results highlight that the trade-off in an RTA is not merely between improving long-run productivity and increasing short-run unemployment in import-competing industries, as conventional trade literature may suggest. Within employment, there is a further trade-off between the contraction of import-competing industries and the expansion of export-oriented industries. Further, plant-level analysis reveals that these employment changes are attributed equally to job creation and job destruction. In addition, there is no evidence that the ACFTA increased the rate of job reallocation. Finally, this paper also shows that the impact of trade liberalization differs according to plant and worker characteristics. In Indonesia, large domestic plants are more severely affected by import competition than small plants or foreign plants. However, they are also the only ones that leveraged on the reduction in trading partner’s tariff rates and expand. In terms of workers, I find that employment changes are more volatile for production workers than non-production workers.