Indonesia's Intra-Trade of Halal Food Products with ASEAN.

• Date: 01 April 2024
• Author: Abimanyu, Anggito,Imansyah, Handry,Al Tamimi, Raeef Abdullah,Abimanyu, Anggito^Imansyah, Handry^Al Tamimi, Raeef Abdullah

1. Introduction

Halal products have created new businesses for trade in Indonesia and ASEAN (SGIE 2023). Given that halal does not only mean products that have been made according to Islamic law but also refers to healthy products (Naeem et al. 2020; Vanany et al. 2019), the halal markets have become a global phenomenon (Othman et al. 2016). According to SGIE (2023), the related food business is estimated to reach US$1.89 billion by 2027.

Among ASEAN countries, Malaysia and Indonesia are the two biggest players in the world's halal food market (SGIE 2023). Indonesia legalized the trade in halal products through Law Number 33 of 2014, and Government Regulation Number 36 of 2021 concerning guaranteed protection of halal products in the country, as well as the establishment of the Indonesian Halal Product Assurance Organizing Body (BPJPH) to supervise production. The results of a study by the ASEAN Secretariat (2022) and market researchers in ASEAN, Al-Fatih and Esfandiari (2020), showed that halal markets play a key role in increasing intra-trade. However, the harmonization of halal product standards among ASEAN countries remains a challenge. Othman, Shaarani, and Bahron (2016) and Abimanyu and Faiz (2023) found that coordination among various authorities is still needed to harmonize the integration of halal products and certification in ASEAN to increase intra-trade.

Another important factor in boosting this intra-trade has been the implementation of a free-trade zone through gradual reductions in import tariffs since the establishment of the ASEAN Free Trade Area (AFTA) in 1995 (Widarjono 2008). Additionally, economic output, degree of openness, the level of complementarity and foreign direct investment (FDI) are also determining factors (Muryani and Pratiwi 2018).

Existing halal market publications have focused on government regulations and public awareness, research and development, quality of human resources and institutional capacity, and adoption of production technology (Borzooei and Asgari 2013). Moreover, studies on the halal market of each ASEAN country have also been conducted (Acas and Loanzon 2020; Deuraseh and Brunei Darussalam 2020; Dorloh 2021; Jaswir et al. 2021; Liba et al. 2018; Mutmainah et al. 2022; Warjio 2016).

This study, however, examines the competitiveness of Indonesian halal food products in ASEAN. It estimates the impact of various factors, such as output, overall competitiveness, degree of complementarity, and regulations on Indonesia's halal food intra-trade with the Association. This paper contributes to the literature by focusing on the economic factors that have not been explored before. Moreover, it offers suggestions to Indonesian halal trade policymakers on possible ways of expanding operations both regionally and internationally.

The paper is structured as follows. The next section includes a general overview of Indonesia's halal trade. A review of existing literature on regional intra-trade is undertaken in the third section. The subsequent section focuses on estimating the competitiveness of Indonesia's trade in halal food products in ASEAN. The relevant determinant factors are uncovered in the fifth section, while the final section concludes and provides policy recommendations.

2. Indonesia's Halal Trade

This research covers halal food products in the Harmonized System category in Trade or HS 11, and 15-22. In 2022, Indonesia exported US$42.1 billion worth of food products to the world, whereas the import value was US$6.9 billion. The most dominant category of food products exported was HS 15 (animal-vegetable oil) at US$35.1 billion, while that of imported was HS 17 (sugar and sugar confectionery) amounting to US$3.4 billion. Notably, 98 per cent of exports and 91.2 per cent of imports pertain to the halal category (Table 1).

Identifying halal and non-halal trade data is crucial. Three Indonesian agencies handle this task, namely the Directorate General of Customs and Excise (DGCE), the Central Bureau of Statistics (BPS), and the Indonesian Halal Product Assurance Organizing Body (BPJPH). To do so, they use the 8-digit HS code system. Data extraction is manual, based on BPJPH's halal standards (excluding pork, wild animal meat, meat from animals that live in two worlds, drinks containing alcohol, and the like).

The growth of trade in Indonesia's halal products to ASEAN over the 2017-22 period has averaged 10.6 per cent (Table 2). This growth jumped from 0.22 per cent (2019) to 17.37 per cent in 2022. The product category with the highest increase was edible preparation (HS 21), followed by meat preparation (HS 16), animal-vegetables (HS 15) and sugar and sugar confectionery (HS 17).

2.1 Indonesia's Halal Food Trade with ASEAN

In 2022, the total trade value (exports plus imports) of Indonesian halal food products with ASEAN was US$7.8 billion or 17.6 per cent of its total global halal food trade (US$44 billion); this was an increase from US$3.8 billion or 14.4 per cent in 2017. Surprisingly, even though Indonesia's total halal food trade experienced a decline in 2018 and 2019, the trade balance with ASEAN remained in surplus at around US$4 billion, and trade increased sharply post-COVID (Figure 1).

During the five years of observation (2017-22), all types of Indonesian halal products experienced a trade surplus with ASEAN. The country enjoys a surplus with Malaysia, the Philippines, Vietnam, and Singapore, but a deficit with Thailand (Figure 2).

When measured in terms of the ratio of the value of exports to imports of halal food products, HS 15 (animal and vegetable oil) shows the largest ratio. A ratio above 1 indicates a trade surplus. However, it can be seen that this ratio gradually decreased from 4.26 per cent in 2020 to 3.31 per cent in 2022 (Table 3).

The export value of Indonesian halal food products with ASEAN-6 shows an increase, on average, from 0.91 (2017) to 1.26 (2022). The increase in export value will certainly be an incentive for exporters of halal products (Table 4). The highest export value is that of HS 15 (animal-vegetable oils), followed by HS 18 (cocoa), HS 21 (edible preparation), and HS 19 (cereals).

3. Literature Review

International trade flows are influenced by intra-industry trade (IIT) and product specialization. Both are driven by factors such as technological advances, production inputs, and product differentiation. Understanding their precise determinants can offer valuable insights into the trends and dynamics observed in global trade (Muryani and Pratiwi 2018).

IIT pertains to the trade of similar or closely related products between different countries, involving the concurrent import and export of goods within the confines of the same industry (Badan Pusat Statistik 2022; Vidya and Prabheesh 2019). Economic growth, trade liberalization, technological advancements, product differentiation, and leveraging comparative advantage are key factors contributing to IIT. He, Huang, and Zhang (2016), for example, highlighted a high concentration of agricultural product trade between China and the Belt and Road countries due to competition. Notably, a substantial portion of this trade is conducted with countries in Southeast Asia like Indonesia, Malaysia, Thailand and Vietnam.

The notion of competitiveness is mainly based on the work done by Balassa (1965), which not only examined the long-term effects of trade liberalizatin and the reallocation of resources that follows the freeing of trade barriers, but also explored where the comparative advantage of industrial countries lies in their trade with each other. The competitiveness measurement mostly uses the Revealed Comparative Advantage (RCA) index to identify the advantage of trade among major trading partners (Jagdambe 2019; Oelgemoller 2012; Sahoo, Rath, and Le 2022; Seyoum 2007; Wosiek and Visvizi 2021; Zahra Saki et al. 2018).

Competitiveness refers to the capacity to sell and generate revenue, aiming to offer products that align with the substantial demand of the global market (Petersen 2021). Applying the Revealed Comparative Advantage and the Trade Complementarity indices, He, Huang, and Zhang (2016) discovered that although competition is present, complementarity seems to be more prominent. Hence, competition should be reduced among ASEAN nations; instead, they should expand their finished goods market via vertical integration and prioritize investments in technology and research to enhance efficiency relative to larger competitors (Hamid and Aslam 2017).

The emergence of free trade agreements in ASEAN countries caused the member states to compete with each other to export into the collective food market. Indonesia has the largest Muslim population, thereby becoming both a major destination and exporter to other countries. In this regard, the requirement to transform into a key exporter is to have a comparative advantage. Widyasanti (2010) demonstrated that Indonesia is performing satisfactorily within the ASEAN market, having secured a portion of the market for certain products. However, the study added that Indonesia missed opportunities, particularly in the segment of vegetable products.

Hamid et al. (2022) asserted that larger economies, regional trade agreements, shared borders and a common language between trading partners positively affected exports. Conversely, distance, income level of the exporting nation, exchange rates, and being landlocked were associated with a significant negative impact on Malaysian Halal F&B exports to OIC countries. Moreover, according to Kabir et al. (2019), high demand for selected halal food products has significantly influenced halal trade in Malaysia. Anis Mardiana (2021) stated that distance and shared borders have a negative impact on halal trade flows. In contrast, halal certification and the presence of a Muslim population in the importing country are identified as positive factors influencing such trade in Malaysia.

Furthermore, a study...