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Indonesia’s ‘Losers’ Reshape Policy as TikTok Exits Online Retail

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Pacific Money | Economy | Southeast Asia

Indonesia’s ‘Losers’ Reshape Policy as TikTok Exits Online Retail

For all its short-term benefits, such protectionism will not benefit the country’s economy in the long run.

Indonesia’s ‘Losers’ Reshape Policy as TikTok Exits Online Retail
Credit: Depositphotos

TikTok’s abrupt suspension of its online retail business in Indonesia last week, in order to comply with the government’s social media e-commerce ban, dealt a heavy blow to its rapidly expanding e-commerce operation. This situation is not one of governments picking losers, but rather of losers shaping policy, as declining businesses often seek to protect their remaining profits.

Just one week before the ban was announced, Tanah Abang, Jakarta’s colossal wholesale market, came under the government’s scrutiny. Local sellers told government officials that they were hemorrhaging profits, with losses surging past 50 percent, due to the significantly lower-priced imported products readily available online.

Accusations were levied against TikTok Shop, the Chinese social media network’s e-commerce platform, for its alleged role in this dire scenario. Government officials claimed that its “predatory pricing” had caused substantial harm to local small- and medium-sized businesses. After the ban’s announcement, TikTok Indonesia voiced regret about the impact that it would have on millions of TikTok Shop sellers, even as it promised to comply with the order. However, the ban raises questions about the government’s timing and motives, and the likely repercussions for local businesses.

The government’s overhaul of Trade Regulation No. 50/2020 created a sharp division between social media and social commerce, which provided the legal basis for the ban, reserving the latter solely for the promotion of goods and services. Yet if the government’s objective of this regulation was to reinvigorate traditional markets such as Tanah Abang, it faces a daunting challenge.

The COVID-19 pandemic has reshaped consumer habits, and online shopping is here to stay – whether directly on the major e-commerce platforms or through direct social media interactions with sellers. As a result, this ban could deal a harsh blow to the small and medium enterprises (SMEs) reliant on social media for promotion and sales, while allowing large e-commerce operators like Lazada to continue to reap large profits through the sale of cheap imported goods.

The ban reflects a pattern in Indonesia whereby struggling sectors lobby for government intervention in order to protect their interests. Responding to pressure and to keep the situation under control, it implemented the ban to curb competition and support traditional businesses. It thus shows how “losers” can influence government policy in a dynamic market environment.

The government’s ban was accompanied by new rules limiting foreign merchants to selling items over $100 on traditional e-commerce and social media platforms. Consumers have since taken to social media to express their nostalgia for affordable online shopping.

No doubt, the government faced intense pressure to make a decision on this issue ahead of next year’s election – and nothing sells like economic nationalism backed by sufficient business support. It is also true that the Indonesian ban is in line with a rise in protectionist policies across the globe. In the United States, the government is aiming to boost self-sufficiency and reduce foreign import reliance in key industries like electric vehicles, semiconductors, steel, and aluminum. China’s “dual circulation” policy and the European Union’s “open strategic autonomy” initiative also prioritize economic self-interest.

But Indonesia still needs to boost the competitiveness of its products to thrive in both domestic and international markets. This means crafting high-quality products that meet global standards while maintaining competitive pricing.

Indonesia’s self-protective stance and aversion to foreign influence can impede progress. Dominant narratives like anti-import, anti-foreign ownership, and domestic product protections are roadblocks. To succeed in the economic sector, overcoming fear of foreign economic influence is crucial. The government embraces competition rather than shying away from it.

An example of the adverse effects of fearing competition is Indonesia’s limited global economic integration. In contrast, consider Vietnam, a Southeast Asian nation with a trade-to-GDP ratio of 200 percent, showcasing a far more open approach. By contrast, Indonesia’s ratio stands at a meager 35 percent, reflecting its less integrated position in the global economy.

Again, the Indonesian government’s protectionist stance could have wide-ranging negative implications, starting with potential harm to foreign tech companies, which could, in turn, send unfavorable signals to foreign investors, ultimately impacting Indonesia’s investment climate.

While protecting SMEs is vital, Indonesia’s sustainable economic growth demands a more dynamic approach that marries safeguarding with digital adaptation. To the government, the imperative lies in formulating judicious regulations that afford every market participant an equitable chance.

And SMEs must embrace change. To improve their competitiveness, the government can take steps to fund SME clusters, extend low-interest financing, upgrade infrastructure, and offer robust training initiatives. To shy away from competition will do the Indonesian economy, and the Indonesian people, no good in the long term.