Written by: Valerie Yang and Muhammad Maharadja Alief
While Indonesia's digital economy is rapidly developing due to growing e-commerce activities, international platforms such as Temu and Shein plan to enter the Indonesian market. These fast-fashion platforms are known to be low-priced, making them highly competitive with local businesses and generally challenging the domestic economy; Indonesia has imposed a series of regulatory restrictions to protect domestic Micro and Small Medium Enterprises ("MSMEs") from possible foreign monopolization. This article further looks at the legal basis of such restrictions, discusses how the possible entry of Temu and Shein intersects with the commitments of Indonesia under the General Agreement on Trade and Services ("GATS"), and analyses the nuanced balance Indonesia tries to reach between the protection of the local economy and upholding its obligations to eventually facilitate and encourage international trade.
International competitors such as Temu and Shein become grave concerns to a government that has espoused MSME protection as one of the strong pillars of economic stability. As MSMEs amount to roughly 61% of Indonesia's Gross Domestic Product, direct-to-consumer is considered an imminent threat created by international platforms. Using economies of scale, such platforms can sell at very competitive prices while avoiding traditional retail chains and crowding out local businesses that are unable to compete.
Indonesia has implemented, among others, Law Number 7 of 2014 concerning Trade, which regulates the access of foreign businesses into Indonesia’s economy. It’s further supported by Law Number 11 of 2020 about Omnibus Law to simplify business licensing and requirements of Foreign Direct Investment ("FDI") to provide a clear structure of the framework of market entry to Indonesia. It is evident that the current regulations in Indonesia's digital market are not effectively preventing foreign investors as China is still able to profit from Indonesia’s digital market. Although these steps have been taken to foster a legitimate digital economy, they also stand in the way of foreign platforms like Temu and Shein, since, in that case, compliance standards would need to be met for legal operation in Indonesia.
Meanwhile, Temu and Shein's barriers to entry to Indonesia also raise questions about Indonesia's compliance with international trade obligations under the GATS. As a member of the World Trade Organization ("WTO"), Indonesia is supposed to be obligated to GATS provisions that espouse market access and non-discriminatory treatment for foreign services. More specifically, GATS Article XVI on market access and Article XVII on national treatment obliges Indonesia to provide equal opportunity for foreign service providers to gain access to its domestic market. However, the commitments are accompanied by exceptions, thus allowing Indonesia some degree of freedom in safeguarding local interests, provided that certain conditions are satisfied.
For instance, Indonesia could invoke Article GATS XIV, allowing exceptions for measures necessary to protect public morals, maintain public order, or ensure safety. Thus, Indonesia might argue that such restrictions constitute a GATS-permitted exception by framing the restrictions placed on foreign e-commerce platforms as necessary for the protection of local economic stability and ensuring fair competition. This implies that Indonesia must demonstrate that such measures are necessary, proportionate, and not unduly restrictive, as failing to do so could make a dispute with other WTO members virtually unavoidable. For example, should the government be overly aggressive in restricting Temu and Shein, other member countries may well protest against such moves and argue that those moves could violate Indonesia's market liberalization commitment.
Indonesia's trade policy shifts between protecting local industries and cautiously opening up to the world. On one hand, strict regulations could block platforms like Temu and Shein. Meanwhile, reforms like the Omnibus Law show Indonesia’s effort to attract foreign investors and simplify business processes. However, even these reforms have their protectionist policies in Indonesia, especially in key industries, for instance, a requirement for a certain percentage of locally made components in tech products, which discourages foreign players and protects the local industry; taking the current example of smartphone regulation in Indonesia where 40% must include local content preventing the renowned electronic brand, Apple, from selling iPhone 16.
Indonesia's balancing act is further explained by its trade agreements, which include the ASEAN-China Free Trade Agreement ("ACFTA"). While the ACFTA offers a number of benefits in terms of regional cooperation, Indonesia has kept protective measures in certain sectors that make it difficult for foreign providers to enter the market. This layered approach in trade policies and relations thus enables Indonesia to comply with the parameters set out by GATS while protecting interests at home. However, the probable market entry of Temu and Shein into Indonesia, means Indonesia will continually have to review its policy positions, attempting to keep them in tune with both regional and international commitments.
Article XX of GATS encourages members to liberalize their service sectors gradually, allowing progress toward a more open world economy. Indonesia has moved toward implementation, but full opening in the e-commerce market is still a sensitive issue due to its exceptionally high contribution to the economy through the MSME sector. Therefore, the entry of Temu and Shein would test Indonesia's true commitment to Article XX because it would force Indonesia to reconsider the scope and timing of its liberalization efforts. While foreign platforms like Temu and Shein could disrupt local businesses, Indonesia must adjust its policies gradually, ensuring they meet the country’s goals without violating international trade commitments like those under the WTO; these enable Indonesia to protect both the domestic market and also maintain global trade rules.
To address the challenges posed by the market entry of platforms like Temu and Shein, Indonesia can create a framework that focuses on strengthening its local industries and fostering a competitive market while honoring its commitments under the WTO's GATS. One way to do this is by boosting the competitiveness of Indonesian MSMEs. In 2017, the e-commerce sector was valued at $8 billion and was projected to grow eightfold by 2022, potentially creating jobs and increasing accessibility for consumers. However, Indonesia lacks in logistical issues, land limited cashless payments, therefore, the government could invest in digital infrastructure, offer training programs, and provide incentives for e-commerce growth. Local businesses could receive subsidies or grants to help them build a stronger online presence, improve logistics, and use data analytics more effectively to understand their customers better. Additionally, increasing public investment in internet connectivity and logistics would benefit both local businesses and foreign e-commerce platforms, creating a healthier and more competitive digital market.
Promoting equitable competition through partnerships between overseas e-commerce platforms and domestic businesses can complement infrastructure development in Indonesia. In place of an outright foreign entry restriction policy, the country could have a policy favorable to joint ventures or local partnerships that would enable foreign platforms like Temu or Shein to operate within a model that fortifies local supply chains. The idea is to allow foreign investors to contribute to the economy while ensuring protection for local businesses. Partnerships may range in scope from mandates for local sourcing, technology transfer, or revenue-sharing agreements, provided these are consistent with Indonesia's economic development objectives. In this regard, Indonesia can achieve a balance by maintaining a competitive landscape in e-commerce that is supportive of local industries without violating international trade commitments, which may then allow it to achieve sustainable development of the digital economy.
The Access to cheap goods from international markets alone, more specifically from China, presents both an opportunity and challenge for the local Indonesian market. From a positive perspective, affordable imports make essential and needed goods more accessible to consumers, particularly in lower-income households (which may have issues maintaining a decent quality of life), providing immediate economic relief by keeping living costs low yet meeting ends meet. However, this entry of inexpensive goods can harm local MSMEs as they may struggle to compete with the price advantage of imported foreign products. This competition can lead to factory closures, job losses, and diminished innovation within local industries as productivity may decrease. Over time, excessive reliance on foreign goods could slow down the growth of domestic manufacturing, potentially limiting Indonesia's long-term economy. This is the same for the entry of Temu and Shein as they provide the imported goods from China to the Indonesian market which as previously said, can harm the local economy but benefit consumers.
In order to combat the issue, Indonesia has imposed tariffs on imported goods to limit the supply of cheap foreign goods in order to maintain the local economy. Other than that, Indonesia also focuses on increasing investments in infrastructure to ensure the productivity of local businesses to prevent them from leaving the market. Financial support from local governments has also benefited MSMEs in Indonesia to increase quality and allow them to produce more to counteract the cheap imports. These supports come in many forms such as financial investments and tax incentives which allow Indonesia’s MSMEs to become more competitive and level the playing field. This is Indonesia’s way to minimize the negative impact of importing cheap imported goods from China. In regards to Temu and Shein, the same can be implemented as well to combat the price advantage that the Chinese goods present through Temu and Shein.
In conclusion, Indonesia's approach to Temu's entry and the potential arrival of Shein highlights the country's challenge of balancing an open economy with the protection of its domestic industries. Indonesia uses consumer protection laws, selective market entry requirements, and exceptions under GATS in an attempt to find a balance between its MSMEs' protection from foreign competition and its international obligations. As Indonesia continues to develop its digital economy, it would need to take into consideration how such regulations may affect both domestic market stability and the relationships that involve international trade. The emergence of foreign giants in e-commerce, such as Temu and Shein, is all the more important a test case for Indonesia to think through policies that protect local interests while being responsive to WTO standards, engineering long-term growth with an increasingly integrated global economy.
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