Global Trade Future: a Perspective of Indonesia

INTRODUCTION

Climate change provides economic opportunities because Indonesia, which is located on the equator, is known to be the world's oxygen factory, which is increas- ingly needed by the world.
The global economy is predicted to experience three important problems that are the opposite of what happened in the previous decade, namely: (1) fragmenta- tion due to geopolitical changes with increasing economic barriers; (2) increasing volatility in all important economic indicators (output, interest rates, prices), and
(3) increasing state intervention in the economy.
Recently, the Economist and the Financial Times also highlighted the future of the global economy. Their reviews relate to the International Monetary Fund (IMF)'s semi-annual publication, World Economic Outlook (WEO), October 2023. The IMF highlighted the trend of fragmentation of the world economy and the eco- nomic costs of the increasing disintegration of global trade.
Globalization despite many criticisms such as those conveyed by Joe Stiglitz (Nobel Prize winner in Economics from Columbia University) and Dani Rodrik (Harvard University) has provided positive benefits to the world economy. The global economy has grown by 4-5 percent per year for the past three decades aher declining to 2-3 percent per year in the early 1980s.

However, the world economy has also become multipolar with the addition of China as a new economic driver. Economic growth gradually has reduced poverty worldwide, especially in China, India, Indonesia. Previously closed countries are growing faster and are able to reduce poverty levels significantly.
In 1990, the percentage of poor people in China with a poverty line based on purchasing power parity (PPP) of 1.9 US dollars/capita was 66 percent. In 2000, with the same poverty line, the figure was only 0.1 percent. The biggest decline occurred aher China joined the World Trade Organization (WTO).
A similar picture has occurred in India. The decline occurred aher Prime Minis- ter Manmohan Singh abolished the license Raj regime and opened up the economy. Indonesia and Russia have a growing economic relationship, with potential for trade that can still be increased, especially in the agriculture, energy, and invest- ment sectors. The value of Indonesia-Russia trade in 2022 reached 3.56 billion US dollars, up 29.87% from 2021, but there is still potential to be increased. Indonesia's exports to Russia include palm oil, machine parts, rubber, processed foods, and cocoa butter. Russia is also a supplier of grains, fertilizers, and metals to Indonesia. The Indonesian and Russian governments have held bilateral meetings to dis- cuss potential trade and investment, including through the Joint Commission on
Trade, Economic, and Technical Cooperation.
Indonesia has joined BRICS (Brazil, Russia, India, China, South Africa) in January 2025, which is expected to boost access to trade and investment between Indonesia and member countries.
In addition, Indonesia and Russia are also seeking to further enhance cooper- ation in the fields of agriculture, energy, and investment, including through tech- nology transfer, increasing employment, and economic diversification.
However, the phenomenon of globalization that has spread throughout the world, despite much criticism, as expressed by Joe Stiglitz (Nobel Prize winner in Economics from Columbia University) and Dani Rodrik of the Harvard University has provided positive benefits to the world economy.
Indonesia experienced three waves of poverty reduction. The first wave occurred in the 1970s, the result of the green revolution that increased agricultural productivity, thus reducing rural poverty, and indirectly urban poverty through sta- ble rice prices.
The second wave occurred through the labour-intensive industrial revolu- tion. The expansion of labour-intensive industries to serve the global market also reduced poverty, both in rural and urban areas, through the labour market (which accommodated elementary and junior high school graduates) and increased wom- en's participation in the labour market. This second wave lasted from the mid- 1980s to the late 1990s when the Asian financial crisis occurred.
The third wave occurred due to a combination of increased palm oil produc- tion and international trade. Like the cases of India and China, the decline in pov- erty in Indonesia is also associated with economic openness and free markets.

INDONESIA, WORLD ECONOMY AND ECONOMIC COSTS

For Indonesia today, there are at least five important points that need to be con- sidered regarding the future of global trade, namely: 1) Geopolitical uncertainty can affect investor and market confidence; 2) Currency fluctuations impact export and import competitiveness; 3) Fluctuating global commodity prices affect the econ- omies of producing countries; 4) Digital economic opportunities are increasingly open in 2024; 5) Indonesia really needs the right fiscal strategy and economic policy. The current geopolitical uncertainty ohen creates tensions in international trade relations. Trade conflicts between major countries can result in the imposi- tion of detrimental tariffs, restrictions on imports and exports, and other barriers that disrupt the flow of goods and services. This can trigger a decline in global eco-
nomic growth by inhibiting free trade.
Changes in political policies in various countries ohen have significant impacts on the global economy. For example, elections in major countries or regime changes can affect trade and investment policies. This uncertainty ohen makes market play- ers cautious, delays investment, and reduces the growth of economic activity.
Further, 2024 has brought new challenges and opportunities for the global economy. Although Indonesia's economy is still stable, geopolitical uncertainty and currency fluctuations add to the pressure. The World Bank has warned of the risk of an economic slowdown, although the domestic economy is still considered strong. In the midst of this situation, Indonesia needs to rely on gross domestic product and take advantage of export opportunities to overcome the negative impact of the weakening global economy.
Market players and investors’ confidence is greatly influenced by geopolitical stability. When there is tension or conflict, investors tend to withdraw from risky markets, seeking safer places to invest their capital. This can lead to volatility in financial markets and affect currency exchange rates and stock prices.
Facing geopolitical uncertainty, it is seen that more and more countries are try- ing to strengthen their domestic economies to reduce dependence on unstable inter- national markets. This strategic step aims to maintain sustainable economic growth despite the turmoil on the global and regional stage that is still being watched out for.
Currency fluctuations are also ohen a source of uncertainty for international business players. When a country's currency exchange rate weakens, exports become cheaper and more competitive in the global market, increasing its com- petitiveness. However, on the other hand, imports become more expensive, which can trigger domestic inflation. This is a challenge for countries that rely heavily on imported raw materials for production.
Sudden changes in exchange rates can disrupt the stability of trade relations between countries. For example, if the currency of a major trading partner depre- ciates, the country may reduce imports from other countries, including Indonesia. This can affect the trade balance and affect overall economic growth.

Currency fluctuations not only affect the prices of imported goods, but can also spill over into the prices of domestic goods and services. This can lead to higher inflation, forcing central banks to adjust their monetary policies. Policies such as interest rate hikes can be used to curb inflation, but they can also slow economic growth. Therefore, maintaining exchange rate stability is one of the top priorities in macroeconomic policy.
Currency volatility can be a double-edged sword. On the one hand, it opens up opportunities for more competitive exports, but on the other hand, it threatens domestic economic stability through inflation and policy uncertainty. Managing these risks is key to maintaining sustainable economic growth.
However, one consequence of the fragmentation of the world economy is the duplication of production. Multinational companies are forced to have factories in several countries or regions rather than concentrating in a particular country with the lowest production costs.
This strategy is partly justified in dealing with natural phenomena such as global pandemics massive spread (COVID-19) in the beginning of 2020. However, some of it is a cost that could actually be avoided if fragmentation had not occurred. The increase of the production costs is not only due to the loss of opportuni-
ties to reduce average costs due to economies of scale and allocation inefficiencies due to being forced to build factories in countries with high production costs and increased monitoring costs from the head office.
Volatile global commodity prices are a headache for countries that rely on commodity exports. When prices rise, producing countries can enjoy a surplus, but when prices fall, they can be trapped in an economic crisis. These countries must be smart in managing their income when prices are high to cope with times of low prices.
Although commodity prices are unstable, there are gaps that can be exploited. Developing countries should immediately seek new markets in Africa and Central Asia or strengthen relations with existing trading partners. This is clearly the right time to diversify products so as not to be too dependent on one type of commodity. Thereaher, even if the price of one commodity falls, there is still an opportunity to earn foreign exchange from other export commodities.
Therefore, to face global price uncertainty, countries must have a good strat- egy. Some steps that can be taken include:
1)    Building financial reserves when prices are high to be used in times of crisis.
2)    Developing sectors other than commodities to reduce dependency.
3)    Strengthening fiscal and monetary policies to be more flexible in dealing with price changes.
Changes in commodity prices are indeed challenging, but with the right strat- egy, countries can survive and even thrive amidst these fluctuations. It's about how they manage resources and policies to deal with uncertainty.

This fragmentation also inhibits what is known as creative destruction as con- veyed by the great economist Joseph Schumpeter. The opportunity for new, more innovative companies to oust inefficient old companies is reduced. Partly because of the reason of too big to fail or the political ties of the old owners with the rulers. Moreover, will this fragmentation of the global economy lead to deglobalization? Some economists, such as Douglas Irwin from Dartmouth College, USA, and for- mer Chief Economist of the World Bank Pinelope Golberg, suspect that this wave of fragmentation will not lead to an extreme point similar to deglobalization.
This wave of fragmentation will be more directed towards regional global- ization or known as trade and investment blocs such as the European Union, the ASEAN Free Trade Area (AFTA), and the Regional Comprehensive Economic Partnership (RCPP). These trade blocs are an alternative choice so that the costs of regional globalization will be lower than deglobalization, although still quite large. The IMF in the October 2023 WEO estimated the economic costs to reach 7 per- cent of gross domestic product (GDP).
Increased volatility will clearly increase costs significantly. World eco- nomic growth will decline because empirical studies show that increased vola- tility is associated with a decline in the rate of economic growth. Volatility will increase insurance costs due to most economic actors generally avoiding the risk of consecutive losses, which ultimately reduces the development of busi- ness innovation.
Volatility is also synonymous with increasing global inflation which ulti- mately increases interest rates and capital flows tend to move back to their home countries (safe haven). This not only strengthens the impact of allocation ineffi- ciencies caused by capital that should flow to countries with higher rates of return on capital, but also causes costs due to increasing countries in the supply chain to be doubled. According to economist Anne Krueger, state involvement in the economy in the form of policies must be paid for (historically costly). However, some economists such as Dani Rodrik or to a certain extent Joseph Stiglitz con- sider state involvement is needed because of market failure/coordination failure. The commitment made by European countries in order to deal with climate change, for example. The form can be in the form of policies, such as taxes on fossil fuels, subsidies for environmentally friendly fuels, or a ban on the use of fossil fuel- based vehicles. It can also be in the form of government spending, in the form of
incentives for every activity that leads to climate improvement.
The Inflation Reduction Act in the United States is another example of a pol- icy for the purpose of addressing climate change. Handling COVID-19 would also not be as fast as it is now without government intervention, including guarantees of vaccine purchases for pharmaceutical companies that make vaccines. Although not all have succeeded, this policy is quite successful, including returning the world economy to its original direction.

The realization of optimal balance in globalization through geopolitical changes, domestic political transitions, and the experience of the global pandemic seems to be just a theoretical illusion. In order to manage risk, companies will be forced to build factories in various locations and use inputs from various sources, even though these decisions are not globally optimal solutions.
From a domestic political perspective, maintaining domestic manufacturing with certain incentives is also a solution to overcome the emergence of politi- cal transition costs. In short, some fragmentation is indeed necessary in order to maintain a larger goal.
CONCLUSION

Indonesia, which is the largest country in Southeast Asia and has stable eco- nomic growth, still needs to take advantage of the gap as a necessity, considering two important reasons, namely:
First, the demographic transition gap that Indonesia has is very limited. With the total fertility rate (TFR) and female labour force participation rate (FPR) assumed to be the same as now, the population engine can only contribute fully to economic growth until 2045. This means that when Indonesia celebrates its 100th anniversary, Indonesia must be a rich country with an income of 18,000 US dollars/ capita. To achieve this, the economy must grow by around 6 percent over the next 20 years.
Second, Indonesia has almost succeeded in eliminating extreme poverty. However, the near-poor and vulnerable groups still dominate our population struc- ture. Therefore, growth of around 6 percent must be dominated by this population group. The per capita income of this group must grow above 6 percent to lih the growth engine sustainably.
Therefore, with these conditions, what are the requirements for Indonesia to meet it? First, world historical experience and the arguments above show that the Indonesian economy must remain open.
The reasons that make economic openness a necessary condition is: (i) eco- nomic growth requires capital. Indonesia's national savings are inadequate to finance investment needs, so it requires foreign savings to finance the expansion of national economic capacity. Then (ii) another important source of growth is pro- ductivity. Increased productivity is associated with technology. Indonesia's abil- ity to innovate is still low, so it still has to rely on technology imports. In addition,
(iii) relying on the global market and encouraging Indonesian companies to always produce efficiently; and (iv) an open economic system allows Indonesia to choose (specialize) activities that produce the highest rate of return.
The 20-year time for the Indonesian government and related stakeholders in the country to utilize the demographic dividend is very short. There is no room for

mistakes. Gambling and experimenting can be risky and cause us to lose opportu- nities and time to correct.
Planning at the national level to the company level must be improved. The existence of policy integrators and program integrators during planning is a must. The role of project integrators and implementers in the field is no less important. The existence of integrators at the planning to implementation levels will reduce pet projects (projects that are not or not yet needed) and cost overruns (project costs over run).
Indonesia must actually take advantage of this fragmentation for our benefit. Indonesia's neutral position allows us to be opportunistic to attract foreign inves- tors from various economic blocks. So far, we have indeed attracted many investors from China who have utilized the downstream program. However, investors from Japan, America, and Europe have not been interested, even leaving Indonesia.
These three global investors seem to still see the risk of investing in Indone- sia. Changing policies or investment protection are one of the reasons they do not invest in Indonesia. We must simultaneously fix the legal and security system (law and order). Future changes are also related to the threat of global climate change. All countries are entering new territory. Indonesia must be smart in choosing a niche market that is carefully selected and pursued. We must learn from Russia which continues to maintain high economic growth in the world, Nordic coun- tries, such as Finland, which once soared with Nokia, or Denmark with its highly advanced pharmaceutical industry with diabetes drugs that are a global mainstay.