Conditional Policy Diffusion: Understanding the Expansion of Indonesia FTA Strategy Fanny Siauw-Soegiarto Doctoral Dissertation Prospectus Norman Paterson School of International Affairs, Carleton University Advising Committee: Dr. David Long (Professor of International Affairs and Associate Director, Ph.D. Program) Dr. Dane Rowlands (Professor of International Affairs) Dr. Merlyna Lim (Associate Professor School of Journalism & Communication and Canada Research Chair in Digital Media and Global Network Society) May 2019
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Conditional Policy Diffusion: Understanding the Expansion of Indonesia FTA Strategy
Fanny Siauw-Soegiarto
Doctoral Dissertation Prospectus Norman Paterson School of International Affairs, Carleton University
Advising Committee:
Dr. David Long (Professor of International Affairs and Associate Director, Ph.D. Program)
Dr. Dane Rowlands (Professor of International Affairs)
Dr. Merlyna Lim (Associate Professor School of Journalism & Communication and Canada
Research Chair in Digital Media and Global Network Society)
May 2019
Conditional Policy Diffusion: Understanding the Expansion of Indonesia FTA Strategy
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Prospectus Summary
Phenomenon:
• Indonesia has significantly expanded its free trade agreement (FTA) agenda since 2010 from
to 2 to 22 bilateral FTA initiatives in 2018. As of May 2018, Indonesia’s Ministry of Trade
reported 9 ongoing and 8 upcoming bilateral negotiations. It has also sent bilateral FTA
proposals to 10 different partners since 2015.
• Indonesia has been described as a reluctant participant in the past (Marks, 2015) as it did not
actively pursuit FTAs nor did it possess an overall FTA strategy (Pangestu, et al., 2015).
Prior to 2010, Indonesia only signed one bilateral FTA with Japan while three others were
signed as part of the Association of South East Asian Nation (ASEAN).
Puzzle:
The expansion of Indonesia FTA activities with unprecedented speed came almost two decades
later after start of the FTA proliferation in late 1990s. What makes this policy shift even more
puzzling is the expansion of its FTA activities has also coexisted with a continuation, and even
extension, of its protectionist economic policies.
Research Question
• Why did Indonesia dramatically and belatedly expand its adoption of FTA initiatives in
2010 while maintaining its traditional protectionist policies?
• What are the economic and geopolitical factors that have driven the rapid expansion of
Indonesia’s FTA strategy?
Motivation
• Indonesia is the largest economy in South East-Asia and it is the 4th most populous country
in the world, with half of its population under the age of 30. It has been projected to be the
4th largest economy in the world after China, the United States, and India, which makes
Indonesia as a highly desirable market and therefore FTA partner. In the past, Indonesia had
resisted the pressure from its ASEAN peers to join the FTA race.
• FTA proliferation is the most salient and persistent trend in the global trading system since
the establishment of the World Trade Organization in 1995.
Table 2. Cumulative FTA Numbers: Global vs Indonesia
Year Global in-force
FTAs Indonesia in-force
FTAs Indonesia bilateral
FTA Initiatives
1990 19 1 0
2000 79 2 1
2010 206 7 2
2018 293 8 22 Source: In-force FTAs are WTO -RTA database and FTA initiatives are from Indonesia Ministry of Trade
1 To account for all Indonesia’s FTA activities, the term FTA used in this dissertation refers to all types of bilateral and regional trade agreements (RTAs) that are notified to the World Trade Organization (WTO) and all other preferential trade arrangements (PTAs) that Indonesia made outside the WTO with other countries. In the literature, the term FTA has also been used interchangeably with RTA. 2The WTO classifies trade agreements that cover trade in goods only as Free Trade Agreement (FTA) or Customs Union (CU) as defined in Paragraph 8(a & b) of Article XXIV of GATT 1994; and agreement that include trade in services as an Economic Integration Agreement (EIA), as defined in Article V of GATS (WTO, 2019).
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Bilateral and regional FTAs have dominated the global trading system since the introduction
of the World Trade Organization (WTO) in 1995. The number of FTAs notified to the WTO has
increased by almost tenfold from 32 in 1995 to 311 as of January 2019. All of WTO members
have at least one operational FTAs with the enforcement of Japan-Mongolia FTA in 2016
(WTO, 2019). The prevalence of FTAs since the 1990 makes FTA proliferation as the most
salient and persistent change in international trade.
At first glance, Indonesia’s FTA expansion does not seem to be unusual. More than 90% of
the 37 early FTA announcements and 311 of the in-force FTAs notified to the WTO involved at
least one developing country, with a notable increase in participation from low and middle-
income countries. Competition for shares in the global value chain of production and flows of
global capitals are seen as the main reason for many developing countries such as Indonesia to
join the FTA race. However, Indonesia FTA expansion came almost two decades after the
beginning of the FTA proliferation in early 1990s and a decade later than when the FTAs started
to spread among the countries in the Asia Pacific region (Dent, 2003).
It has also joined the FTA race with an unprecedented speed since 2010. The increase from 2
bilateral FTA initiatives in 2010 to 22 in 2018 represents a cumulative growth rate of 1000%.
Indonesia’s bilateral FTA initiatives have grown 22 times faster than the global cumulative
growth rate of in-force FTAs notified to the WTO that has grown as much as 45% since 2010.
This dissertation examines the factors that triggered this significant change in Indonesia’s FTA
strategy and the processes that drive the rapid intensification of its FTA agenda since 2010. What
makes this policy shift even more puzzling is the expansion of its FTA activities has also
coexisted with a continuation, and even extension, of its protectionist economic policies.
Figure 1. FTA Proliferation Globally vs Indonesia
Source: calculated with FTA data from WTO-RTA Database and Indonesia’s Ministry of Trade (Kemendag RI)
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Cumulative FTA Number 1989-2019
IDN in-force FTAs IDN bilateral FTA Initiatives Global in-force FTAs
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Why did Indonesia dramatically increase its FTA activity after 2010 despite its protectionist
economic policies? To explore this paradoxical policy shift, this dissertation adopts the policy
diffusion framework as the guiding analytical lens. As part of this analysis, the thesis examines
the economic and geopolitical factors affecting Indonesia’s FTA strategy, and evaluates how the
FTA policies of its peers and trade partners have affected Indonesian stakeholder before and after
2010. Empirical evidence shows that policy transitions in international economic policies are
often influenced by the policies of a country’s sociocultural peers or geographical partners.
Temporal and spatial clustering of economic liberalization are evidence of policy diffusion in
international economic policies (Elkins & Simmons, 2005). Policy diffusion occurs when
adoption of a foreign economy policy by a country generates externalities that alter the material
and reputational payoffs of other countries or when it alters the information sets on the costs and
benefits on the adoption of a foreign economic policy (Simmons & Elkins, 2004).
FTAs have inherent features that are conduits for diffusion. Formation of an FTA generates
externalities that cause altered payoffs and altered information sets to non-participating countries
through its trade (and investment)3 creation and diversion effects. The removal of economic
barriers through an FTA will tend to increase trade and investment between the FTA partners
and thus alter the information on the costs and benefits of FTA adoption for non-participants. At
the same time, trade and investment may be diverted from partners outside the FTA to members
of the FTA (Viner, 1950) and thus directly alter the material payoffs of FTA members’ partners
that are outside the FTA. Therefore, the trade creation and diversion effects of FTA generate
externalities that drive the proliferation of FTA. More specifically, trade creation leads to
emulative diffusion while trade diversion brings a competitive diffusion (Solis & Katada, 2009).
In this dissertation, I argue that altered payoffs and policy learning are necessary but not
sufficient conditions for policy diffusion. Trade creation and diversion alone are not sufficient in
inducing an FTA diffusion. The adopting state’s institutional and financial capacity to pursue and
negotiate FTAs and the sensitivity of the sectors affected by the FTA of others in the adopting
country also determine the probability of diffusion. The relationship between the adopting
country, in this case Indonesia, with its peers that have adopted FTAs earlier as well as its
relationship with the countries with which its trade partners are signing FTA agreements also
affect the probability of diffusion. Hence aside from altered payoffs and altered information sets,
the diffusion of FTAs is also dependent on the following four factors: the adopting state’s
financial and technical capacity; the psychological and competitive distance between Indonesia
and the countries adopting FTA earlier (Solis & Katada, 2009); and the political sensitivity of the
sectors affected. The probability of FTA diffusion is higher under the following conditions:
1. The higher the income and technical capacity of the adopting country to negotiate FTAs.
2. The closer the adopting country and countries signing FTA agreements earlier are in
psychological distance as measured by socio-culture and economic development.
3. The closer the competitive distance is between a country and the countries with which its
partners are signing FTA agreements. Competitive distance is measured by the similarity
3 FTAs particularly those that include investment chapters generate both trade and investment creation and diversion. From this here on forward, the trade and investment creation and diversion effects will be referred to as trade creation and diversion effects to represent both effects on trade and investment.
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in export structure by product and destination, which translates into higher competition
with that partner and that will lead to higher trade and investment diversion.
4. The more sensitive the sectors affected by trade and investment diversion from others
FTAs are, the higher domestic pressure to respond with a defensive FTA. In this case,
sensitivity is measured by the sector’s relative economic and political importance.
The analytical framework is divided into three phases and it employs both quantitative and
qualitative research methods. The first phase of the analysis is a quantitative assessment to
examine the evidence of the economic impacts of FTAs on Indonesian economy using statistical
analysis and gravity modelling. The quantitative evidence from the first phase will support the
process tracing analysis of FTA policy diffusion in the second phase. The final phase employs
qualitative structured case-study comparison of completed Indonesian FTA initiatives to assess
the strength of the conditional diffusion hypotheses. These include all FTA initiatives launched
after 2010 that have the signed FTA text published upon completion of negotiations. Assessment
of the completed FTA text will reveal if the identified motives and factors transpire in the text.
This dissertation contributes to the literature in four ways. First, the dissertation will develop
an analytical framework that integrates international economic and political economy theories to
systematically assess the economic and geopolitical factors affecting the domestic stakeholders
involved in the FTA decision making process. Second, the analysis provides the first
comprehensive empirical examination of Indonesia FTA strategy using both quantitative and
qualitative analysis. Third, the dissertation extends the policy diffusion framework of
international economic policies with the conditional diffusion hypotheses. Fourth, the study will
formulate a more precise measurement of FTA trade creation and diversion effects in gravity
trade econometrics modelling. The findings of this dissertation will also inform policy making as
Canada and ASEAN prepares to launch negotiation following the completion of the Canada-
ASEAN FTA joint studies (GAC, 2018). Understanding the motivation and the processes behind
the FTA strategy of Indonesia, which is the largest economy in ASEAN, will be beneficial for
the Canadian negotiating team when it meets its Indonesian counterparts at the negotiation table.
This prospectus is delivered in six sections. The following section analyses the puzzle
surrounding Indonesia FTA expansion. The third section reviews the hypotheses and theories
explaining FTA proliferation from the international trade and international relations literature. In
the fourth section, the theoretical framework and corresponding hypotheses are developed which
then followed by a method section that details the phases of analysis, quantitative models and
estimation technique, and data sources to be employed in this dissertation. Finally, the feasibility
and timeline of the project will be discussed briefly.
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II. The Puzzle of Indonesia’s FTA Expansion
Indonesia is the largest economy in South East-Asia and it is the 4th most populous country in
the world, with half of its population under the age of 30 (OECD, 2018). With a growing middle
class and a young population base, it has been projected to be the 4th largest economy in the
world after China, the US and India, which makes Indonesia as a highly desirable FTA partner.
In the past, Indonesia had resisted the pressure from its ASEAN peers to join the FTA race. It
had criticized Singapore, who was the early FTA adopter in the South-East Asia region, for
undermining the cohesiveness of ASEAN economic community with its FTAs (Marks, 2015).
For many developing countries, especially low-income countries, the potential loss of
government revenues from import tariff and duties due to barrier removals through an FTA has
been identified as one of the main challenges as a signatory (Massa & Stevens, 2015). This
potential loss of government revenues could partly explain Indonesia’s initial reluctant.
However, the loss of protection for domestic industries presents an even bigger challenge for
Indonesia which has had a long-standing protectionist regime. Indonesia’s long history of
colonialization has produced general sensitivity towards possible infringement of sovereignty.
This profound sense of nationalism is reflected through its approach to foreign economic policies
(Chandra, 2008). Safeguarding national sovereignty and interests is explicitly stated as the core
mission of its international trade negotiation directorate general (PPI) under the Ministry of
Trade (Ditjen PPI, 2019). Protection of domestic industries is one of the main objectives in its
long-term economic development plan which includes the promotion of infant industries and
import substitution measures among others (Bappenas, 2005).
Indonesia’s economy has performed well under its protectionist economic policies contrary
to the neoliberal believes that only economic liberalization generates economic growth in the
globalization era. Its GDP has grown by almost 10 times since the 1998 Asian financial crisis
from 95 billion USD to 1 trillion USD in 2017. In the same period, exports of goods and services
as percentage of GDP has fallen from 53% in 1998 to just over 20% in 2017 (World Bank, 2019)
Unlike most developing countries, its remarkable economic growth is a result of strong domestic
economic performance and consumption growth rather than an export-led industrialization.
Figure 2. Indonesia GDP & Export 1990-2017 (World Bank)
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Despite its protectionist stance, Indonesia is not immune to force of globalization that
demands liberalization of the domestic economy for participation in the global economy. Its
trade and investment are also not immune to the trade and investment diversions generated by
the FTA of others. The swinging of Indonesian trade and investment policies between openness
and protectionism demonstrates the challenge Indonesia has faced in maintaining its protectionist
regime while responding to the global push for liberalization. Attempts to open the market and
liberalize trade are often followed by a series of heightened protectionist measures - particularly
Indonesia-Gulf Council Free Trade Agreement 2018 Proposed 2% Source: compiled with data from Asian Development Bank, Indonesia Ministry of Trade, ITC Trade Map and other sources
The rapid intensification of Indonesia’s FTA initiatives since 2010 despite uncertain
economic gains with few clear economic winners is puzzling particularly considering its
protectionist and nationalist economic policies. Therefore, it is necessary to consider other non-
economic factors that might motivate Indonesia to expand its FTA strategy.
WTO, 2003). None of the alternative explanations applied well for Indonesia’s case.
The Asian currency crisis in 1998 triggered the last democratic reform in Indonesia that
brought the three decades of the New Order authoritarian regime under President Suharto to an
end and ushered in the “Reformasi” era which led to changes in the judiciary, legislature, and
executive office structures of the government (King, 2003). Although far from perfect,
Indonesian reformasi’s unusual course of democratization has provided Indonesia with economic
and political stability which has led to remarkable economic growth (Horowitz, 2013).
In the last decade, Indonesia’s economy has maintained a stable growth at ±5% and a
relatively stable government. There is no evident of need to impose domestic reforms through
international commitments in particular through FTAs that would possibly motivate the
intensification of its FTA initiatives since 2010. Furthermore, such FTA would likely be
concluded with a large and important trading partner with considerable economic and political
clouts to lock-in the domestic reforms such as in the case such as the Mexico’s liberalization of
economy and political system in 1993 using NAFTA (Cameron & Tomlin, 2000).
Indonesia also does not have the need to fight for regional dominance in any parts of the
world. Regionally, Indonesia has assumed the leadership role in ASEAN as one of the founding
nations and it is the de-facto leader in the South East-Region through the sheer size of its
economy, geographical area, and population (Arnter, 2017; Quayle, 2017). Indonesia also
adheres to an “independent and active” foreign policy principle since 1948 following its
independence. Its foreign policies are conducted to maintain a neutral position and avoid
involvement in conflicts of others (KBRI Washington, DC, 2017). The geographical
dissemination of Indonesia FTA initiatives, that are spread across different regions and with
countries and economies of varying degree of development, does not indicate motivation for a
regional dominance competition. Indonesia is currently negotiating with advanced economies
such as the European Union (EU), the European Free Trade Association (EFTA), Australia, and
South Korea as well with other developing economies across the different regions of the world
from Asia, Africa, Latin America, and the Middle-Asia.
The likelihood of Indonesia to pursue non-economic strategic interests such as political and
legal through FTAs is also very unlikely. Diplomatic FTAs, with little or no economic gains,
require the demander to have significant political and economic clouts to provide the economic
incentives and side payments to non-economic terms. These high economic and political capital
requirements have made diplomatic FTAs almost to be exclusively initiated and signed mostly
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by highly developed countries or major-power economies (Quiliconi & Wise, 2009). As a
middle-power economy, Indonesia does not necessarily have the economic or political clouts to
compensate its partners in exchange for non-economic terms in FTAs. Although Indonesia’s
market size could suffice as side payments to some potential partners, the political viability of
passing FTAs with no economic gains and at the cost of domestic producers for Indonesia, who
has strong protectionist policies, is very weak or almost impossible. It will carry high political
costs for the reigning political party in a nation with strong nationalism sentiment and
mercantilist bias to conclude diplomatic FTAs with no economic gains and that are made at the
expense of domestic producers. Furthermore, the fact that the international trade agreement unit
is housed under the Ministry of Trade rather than Indonesia’s Ministry of Foreign Affairs
suggests that the mandate for its trade negotiations are focused on economic and trade gains.
The Puzzle
With no clear economic nor political motivation explaining the expansion of its FTA
initiatives, what has really triggered the sudden shift in its FTA strategy and what could explain
the intense rapid intensification since 2010 despite its protectionist regime remain a puzzle. This
dissertation is motivated to systematically assess both the economic and geopolitical factors
influencing Indonesia FTA decision making-process to understand the expansion of its FTA
initiatives since 2010. It examines this policy shift using the FTA diffusion framework proposed
by Solis and Katada (2004) to analyse the influence of its peers’ FTAs on its FTA strategy.
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III. FTA Proliferation Explained in Literature
To understand what factors and processes that have affected Indonesia’s FTA strategy, this
section briefly reviews the general literature on FTAs in the international economics and
international relations literature to understand the factors, the channels, and the dissemination
mechanism used to explain FTA proliferation. This broad review is then followed by a more
focused examination of the policy diffusion framework to develop the argument for how and
why such a framework may apply conditionally.
The Motivation: Why do Countries Seek FTAs?
One of the most important of feature of an FTA as an international trade instrument is that it
provides an exception to the WTO’s Most-favoured nation (MFN) principle (Solis & Katada,
2009) which is the first principle that underlies the multilateral trading system. The MFN
principle is a non-preferential or non-discriminatory treatment rules whereby a country offering a
preferential treatment such as tariff reduction to a WTO member must extend the same treatment
to all other WTO members (WTO, 2019). Through an FTA, WTO members are allowed to
provide preferential arrangements to its FTA partners that are not made available to other WTO
members regardless of their development status6. This exception makes FTAs a powerful tool to
develop deeper trade linkages with specific partners. The continuous stalling of the WTO
multilateral negotiation since the breakdown of the Doha Round, which began in 2001, has made
FTAs a preferred alternative for international trade policy.
The flexibility of an FTA as a foreign economic policy tool also contributes to its popularity
(Solis & Katada, 2009; Whalley, 1998). As foreign economic policy tools, FTAs now frequently
cover more than just trade and tariff provisions. More and more FTAs are including investment
chapters and provisions such as investors-state dispute settlement (ISDS), effectively replacing
other types of international investment agreements like bilateral investment treaties (BITs) (Lo,
2008; Kong, 2013). Besides trade and investment agreements, FTAs may also include other
regulations in areas such as intellectual property, human rights, labour conditions, and
environmental protection. The WTO only monitors the FTA proliferation and maintains a
database of FTA but it does not set a standard on the format of FTAs, giving FTA partners
considerable latitude in specifying conditions that meet its particular interests.
FTAs have also been widely accepted as non-offensive diplomatic instruments. Major
powers have used FTAs to establish or maintain regional dominance, while smaller economies
such as Singapore and Chile have also used their FTAs to enhance both economic partnerships
and strategic security alliances (Rajan, et al., 2001; Low, 2008; Stallings, 2009; Wehner, 2011).
These two smaller countries are among the early adopters of FTAs and have the greatest number
of FTAs outside the European Union. Deeper economic partnerships with larger and major
global powers not only improve their global positioning and visibility in the global economy but
also serve as a defensive strategy. Both countries have positioned themselves as strategic
6 Currently only Least Developing Countries (LDC) are receiving preferential lower tariff treatment under the WTO’s Generalized System of Preferences (GSP).
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regional hubs that give a greater incentive to their FTA partners to protect their stability (Dent,
2003). Aside from securitization and leadership competition, FTAs have been utilized to lock-in
domestic reform (Moravcsik, 1993), advance the interest of domestic constituents through
protectionist clause (Ravenhill, 2005), and enforce legalization of new trade and investment
rules outside the multilateral forum (Pekkanen, et al., 2007).
Countries may well negotiate FTAs to avoid the WTO’s non-discriminatory rule, because of
their flexibility as a foreign economic policy instrument, and because of its versatility as a
diplomatic instrument. These benefits have existed for many decades, however, these
motivations by themselves do not explain the unprecedented rapid expansion of FTAs since the
1990s, or provide a mechanism by which the expansion has occurred.
The Mechanism: How do FTAs spread?
The conventional explanations of FTA proliferation can be classified into three major
categories: “economic interdependence, domestic lobbying and rent-seeking, and state
autonomy” (Solis and Katada, 2009:3). Both economic interdependence and domestic lobbying
are driven by economic motivation with private sectors as the main actors behind the
proliferation, while state-autonomy argues that states and their political objectives are the main
drivers behind FTA negotiations.
Economic interdependence arguments postulate that the increasing interconnectedness of the
global economy through global value chains of production and international trade is the main
driving factor for proliferation of FTA. It hypothesizes that the increase in international trade
concentration propels the formation of FTAs among trading partners. The demand for FTAs
comes from the private sectors in order to reduce the cost of cross-border transactions (Mattli,
1999). Critiques have pointed out that the economic interdependence hypothesis fails to explain
why the economies with the largest trading volume such as China and the United States have the
fewest number of FTAs. It also falls short in explaining the rising of FTAs beyond Europe and
the negotiation of FTAs between partners with low trade volumes (Solis & Katada, 2009).
The domestic lobbying hypothesis also identifies private sector as the main actors behind
FTA initiatives with the proliferation of FTAs being driven by trade creation and diversion
effects. The trade diversion effects of FTAs set off a ‘domino effect’ of defensive FTAs
(Baldwin, 1997). Industries that are affected by trade diversion are expected to lobby their
government to negotiate an FTA to counter the diversion effects. The political viability of an
FTA is determined by the benefits received by the industries affected by the FTA. The economic
gains received by exporters and importers through trade creation must exceed the loss of import-
competing industries, often leading to carve-outs and exemptions in order to protect sensitive
sectors (Grossman & Helpman, 1995). The domino effects of defensive FTAs provide one of the
most compelling accounts of the mechanism driving FTA proliferation. Yet it does not explain
why countries are signing FTAs with Singapore, for example, which has extremely low (mostly
zero) tariffs, as the most open economy in the world (Solis & Katada, 2009). The domestic
lobbying hypothesis accounts for the proliferation of economically-motivated FTAs but not
diplomatic FTAs with limited gains. Furthermore, both the economic interdependence and
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domestic lobbying hypotheses that stress the importance of private sectors activism in driving
FTA proliferation fail to explain the low utilization rate of FTAs by private sectors.
The state autonomy hypothesis centralizes its arguments around the independence of states in
making foreign policy decision-making. FTAs function as a tools to achieve political objectives,
including overcoming domestic hurdles through international obligations (Moravcsik, 1993) or
forming strategic and security alliances (Gowa, 1994; Whalley, 1998). FTAs have been depicted
as “celebrated bargains” made by political elites and state leaders (Solis and Katada, 2009:5).
Critics pointed out that the narrow description of FTAs as a political instrument ignores the
fundamental function of FTA as foreign economic policy tools. It also fails to explain the
increasing similarities of trade terms among FTAs negotiated in recent years which emphasizes
the importance of FTAs as a trade policy tool rather than a political tool alone (Mattli, 1999:29).
Each of the conventional explanations describes only a subset of FTAs, either economic or
diplomatic. In order to consider all the different interests served by FTAs as a foreign economic
policy tool and diplomatic instrument, Solis and Katada (2009) has developed an FTA policy
diffusion framework that accommodates the interaction of multiple competitive objectives.
FTA Policy Diffusion Framework
Policy diffusion challenges the main notion in political science of explaining similarity in
policy outcomes as independent responses to common external shocks where each government’s
domestic policy-making process is solely determined by domestic factors and preferences
(Garrett, et al., 2008). Diffusion theories emphasize the interdependence of government choices,
with prior policy adoption by one government influencing the policy outcome of the remaining
non-adopters (Strang, 1991; Braun & Gilardi, 2006). The interdependence and the
interconnectedness of the global economy have created the perfect environment for the diffusion
of economic policies.
The policy diffusion framework allows the examination of the mechanism that drive the FTA
proliferation. The spread of FTAs and waves of regionalism have been described as examples of
policy bandwagoning or policy mimicry (Oyane, 2003; World Bank, 2000) which suggests that
there is a diffusion mechanism at work. The waves of bilateral and regional FTAs across the
globe also meets the condition of uncoordinated interdependence of policy diffusion (Solis &
Katada, 2009) or clustered transition as defined by Simmons & Elkins (2004).
Simmons and Elkins (2004) are the first to deliver the policy diffusion framework for foreign
economic policies. They hypothesize that the clustered transitions in foreign economic policies
occur when foreign economic policy choice of a country generates externalities that affect the
payoffs (altered payoffs) associated with the adoption of a particular policy and when it changes
the information sets (altered information sets) on the benefit and cost of that particular policy
adoption (Simmons & Elkins, 2004). Solis and Katada’s FTA diffusion framework also posits
that a government’s FTA decision is not solely determined by domestic factors but it is also
influenced by the FTA strategy of others (2009).
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Solis and Katada’s FTA policy diffusion framework distills the four mechanisms of
diffusion in the literature into two: emulation and competition. They argue that it is hard to
distinguish between soft coercion and emulation as in both case the direction of influence is from
the more powerful or successful economies, who has the means to exert its economic power,
onto the less powerful or successful ones, who are assume to want to emulate or copy the success
of leading economies. It is also difficult to differentiate between rational learning and
competition as countries make rational choices of policies to maintain their competitiveness
(Solis & Katada, 2009). They postulate that FTAs proliferate through both competitive diffusion
and emulative diffusion mechanism. A parallel can be drawn between Simmons and Elkins
(2004) foreign economic policies diffusion framework and Solis and Katada (2009) FTA policy
diffusion framework. Competitive diffusion is induced by altered payoffs whether it is material
or reputational as result of direct economic competition while emulative diffusion is induced by
altered information sets.
Altered payoffs arise when the adoption of a policy generates externalities that directly affect
the costs and benefits of the policy for others. For foreign economic policies, altered material
payoffs are the direct results of economic competition for global capital and trade that have
driven the waves of clustered economic liberalization. Countries are adopting liberal economic
policies to attract foreign investment and shares in the global-value-chain of production
(Simmons & Elkins, 2004). In the competitive global economic environment, one government’s
choice of foreign economic policies will not only affect its own investment and trade but also
those of others, with the probability of diffusion being highest among close competitors (Braun
& Gilardi, 2006; Simmons, et al., 2006). The domino effects of trade and investment diversions
(Baldwin, 1997) that generate defensive FTAs are also driven by the same competitive forces.
Altered reputational payoffs come from the pressures of following the prevailing global
norms or trends (Simmons & Elkins, 2004). Governments adopting policies that are against the
global norm risk reputational ramification. In the global economy, capital and trade react
positively to liberal economic policies and signals of liberalization such as FTAs. Simmons &
Elkins (2004) extending Schelling’s (1978) and Granovetter’s (1978) threshold model of
normative consensus hypothesize that the normative pressure of reputational payoffs to adopt a
policy is higher once the number of governments adopting that policy have reached a certain
threshold of critical mass (Simmons & Elkins, 2004). Following this hypothesis, as more
bilateral and regional FTAs are signed more countries are expected to expand their FTA agenda.
In Solis & Katada’s FTA diffusion framework, the competitive diffusion hypothesis states
that countries will pursue FTAs to mitigate the diversion effects from the FTAs of their
competitors. The competitive distance in Elkins et. al. (2006) measures the economic
competition for market shares and capital between two countries. Simmons & Elkins extend it to
not only represent economic competition but also political competition over status or leadership
contests. The main actors driving the FTA diffusion process are not only business and economic
bureaucrats but also politicians and foreign affairs officials. FTAs induced by competitive
diffusion are characterized as “heterogeneous” and “selective” as each is designed to
counterbalance the diversionary effects of a specific FTA (Solis & Katada, 2009).
Conditional Policy Diffusion: Understanding the Expansion of Indonesia FTA Strategy
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There are three channels through which policy diffusion is induced by altered information
sets which include: learning through the success of others; learning through their communication
networks which consist of the private sectors and the policy epistemic communities; and learning
from cultural reference groups (Simmons & Elkins, 2004). Other economies are more likely to
follow the economic policies of more successful economies, i.e. those which are wealthier, more
developed, or faster growing. These successful countries become the key references for foreign
economic policy-making (Dobbin, et al., 2007). Governments are also more likely to adopt the
foreign economic policies advocated through its epistemic policy communities and
communication networks, which may include professional economists, think-tanks, technocratic
bureaucrats, scholars and private sector lobbyists. Lastly, governments often mirror the policies
of their neighbours, as countries whom are more likely to share the highest affinity in socio-
culture. Cultural reference groups provide a higher relevance regarding the appropriateness of a
Second Phase: Qualitative Evidence using Process Tracing Analysis & Interviews
The second phase of the thesis involves tracing the domestic stakeholders and epistemic
policy community networks involved in Indonesia’s FTA policy decision making process, to
examine evidence of FTA diffusion from its ASEAN peers (whether by emulative or competitive
forces) and to analyze the FTA decision-making process. The main methods for the qualitative
analysis process are process-tracing analysis and key-informant interviews. The analysis will be
undertaken using a combination of data sources that include government documents, secondary
data on FTAs collected by different organizations, as well as social media postings of the
Indonesian International Trade Negotiation Directorate General (Ditjen PPI) and the Indonesian
Ministry of Trade to identify and evaluate the domestic stakeholders involved in the FTA
decision-making process. This analysis will be supplemented by key-informant interviews to
identify the policy process from the perspective of key officials, what factors they took into
account in their decision making, and the extent to which they paid attention to different
stakeholders.
Export Trend
2001-2017
'TOTAL All products
'15
Animal or vegetable fats and oils and their cleavage
products; prepared edible fats; animal ...
'08 Edible fruit and nuts; peel of citrus fruit or melons
'27
Mineral fuels, mineral oils and products of their
distillation; bituminous substances; mineral.
'29 Organic chemicals
'23
Residues and waste from the food industries; prepared
animal fodder
'54
Man-made filaments; strip and the like of man-made
textile materials
'70 Glass and glassware
Product
codeProduct label
Conditional Policy Diffusion: Understanding the Expansion of Indonesia FTA Strategy
30 | P a g e
Table 9.Qualitative Variable Definition and Data Source
Data Definition Source
FTA dates Proposal date, negotiation
launch date, signing &
enforcement date
Asian Development Bank (ADB) RTA
Database; WTO RTO Database; Indonesia
Ministry of Trade
FTA text Signed FTA Text Ministry of Trade database of Indonesia and
its partners
Domestic stakeholders &
epistemic community
networks analysis
Social media: Twitter &
Facebook communication
network analysis
Twitter & Facebook analysis using NVivo
Interviews Key-informant interviews
primary sources
Indonesia Ministry of Trade Bilateral Trade
Negotiation Directorate General (PPI)
Indonesia Business Association (KADIN)
The Indonesian International Trade Negotiation Directorate General (Ditjen Perundingan
Perdagangan Internasional (PPI)) under the Ministry of Trade (Kementerian Perdagangan
(Kemendag)) takes a central leadership role in the management of all Indonesia trade negotiation
at the WTO, bilateral, and multilateral level. It is also responsible for Investor State Dispute
Settlement (ISDS) negotiation and proceedings (Ditjen PPI, 2019). An informal interview with
the Indonesian Trade Attaché posted in the Indonesian Embassy in Ottawa informed that the PPI
leads the FTA initiatives and formulates the strategic direction of the overall international
negotiation with the President’s approval. PPI holds consultations with various ministries that are
responsible for the different sectors through out the negotiation process.
This phase of the analysis also identifies the domestic stakeholders involved in the FTA
policy decision making process through their social media interaction of PPI with others. The
NVivo social network analysis tool mapped the social media communication between social
media users and its intensity. Official press releases and media coverage of the negotiation
process will also be used to collect and triangulate the information on the epistemic policy
community networks that influence Indonesia’s FTA decision-making process. A sociogram of
Indonesian Bilateral Negotiation (PPI-bilateral) Twitter is included in Appendix A that maps the
various departments and organizations that the PPI has communicated with. This analysis will
provide further evidence to identify the forces that drive Indonesia’s FTA expansion (H1 & H2)
and the relative sensitivity of the sectors involved (H1a).
To determine the relative sensitivity of sectors and their influence on the FTA policy
decision-making process, joint studies, press releases and news media coverage of the FTA
initiatives negotiations will also be analyzed together with the findings of the trade diversion
quantitative evidence calculated in the first phase.
Key informant interviews will verify the findings from the quantitative and qualitative
analyses and complete the gaps found in the process tracing analysis. Key informant interviews
are planned to be conducted with Indonesian Ministries of Trade – FTA Bilateral Trade Division,
and officers from other ministries identified in the network analysis which may include other
divisions in the ministry of trade (Kemendag), industry (Kemenperin), investment (BKPM), and
also the national business associations (KADIN) to understand their roles and influence.
Conditional Policy Diffusion: Understanding the Expansion of Indonesia FTA Strategy
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In the FTA diffusion process tracing analysis, each of Indonesia’s in-force non-ASEAN FTA
and FTA initiative is a unique observation. Currently, there are 22 enforced and active bilateral
FTA initiatives. The different dates in the FTA process such as proposal date, negotiation launch
date, and signing dates are tracked and compared with those of its ASEAN partners to establish
possible pattern of diffusion from its ASEAN peers as the closest sociocultural peers. However, a
detailed analysis of the various stakeholders involved will only be examined for the completed
FTA initiatives with FTA texts published that will also be used for the case-study in phase 3.
Third Phase: Conditional Diffusion Hypothesis Testing with Case Studies The third and final phase will first investigate Indonesia’s institutional structure and
capabilities in negotiating international trade agreements with particular attention not only to the
structure but also financial allocation by the government. Government documents such as annual
financial reporting and structural change announcements will form the main source of analysis
and it will be completed with key informant interviews with the Ministry of Trade officials.
Understanding how the Indonesian International Trade Negotiation Directorate General (Ditjen
PPI) grew over the years through the size of the negotiation division and the funding it has
received historically inform how Indonesia’s technical and financial capacity develop over time.
This analysis will provide the evidence to test the conditional diffusion hypothesis on state’s
institutional and financial capacity to pursue and negotiate FTAs (H5).
Ideally, a quantitative modelling of FTA determinants such as Baier and Bergstrand (2004)
economic determinants of free trade agreement model will estimate the strength of each variable
and their interactions in determining the probability of FTA diffusion. However, a quantitative
analysis is not possible at that point since this research is only based on a single country analysis
with less than 30 observation points.
Instead, this dissertation will use structured focus case-study comparison to analyse bilateral
FTA initiatives that have been completed and signed with published texts after 2010 in order to
test the correlation found in the quantitative modelling and to confirm the causal relationship in
the hypotheses. Solis and Katada (2004) examine the FTA policy diffusion framework
hypotheses and conclude that if Indonesia’s FTA expansion is driven by emulative diffusion, the
FTAs will have a standard format that mimic the format of its reference countries or peers. A
competitive diffusion will create heterogenous FTAs that act as countermeasure to eliminate
trade diversion effects and the selection of partners is based on the diversionary pressure.
Therefore, a content analysis of the signed published FTA texts is required to determine whether
the initiative is driven by emulative or a competitive diffusion force.
Currently, there are 3 published texts of bilateral FTAs that have been signed since 2010
which include the Indonesia-Pakistan Preferential Trade Agreement (IP-PTA) enforced as of
September 2013, the Indonesia-EFTA Comprehensive Economic Partnership Agreement (IE-
CEPA) signed in December 2018, and the Indonesia-Australia Comprehensive Economic
Partnership Agreement (IA-CEPA) signed recently on 4th March 2019 in Jakarta. The Indonesia-
Chile FTA negotiation was signed in December 2017 but the text has not been made available. If
there is no new FTA text made available in the next 8 months, the bilateral FTA text with Japan
signed in 2008 will be added as the 4th case.
Conditional Policy Diffusion: Understanding the Expansion of Indonesia FTA Strategy
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VI. Research Plan
I will be completing the analytical work of these dissertation in the next 10 months before
proceeding with the interviews. Transcribing and incorporating the interview findings to
complete the dissertation are expected to be completed in the following 8 months. The result
from the first two phase will be disseminated and presented through conferences which include
graduate conferences and Canadian Economics Association conference. The preliminary testing
of the conditional diffusion hypotheses will also be completed prior to the field work and will be
verified and improved with new data from the key-information interviews.
The combination of my economic skills, policy-research experience, network with
Indonesian trade policy community and native proficiency in Bahasa Indonesia will contribute to
my success in completing the dissertation.
i
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