Indonesia Log Export Ban (INDONES)
CASE NUMBER: 35
CASE MNEMONIC: INDONES
CASE NAME: Indonesia Log Export Ban
A. IDENTIFICATION
1. The Issue
Indonesia instituted a log export ban to slow the rate of
deforestation in the country, especially on the island of Borneo.
However, the supposed environmental purpose in doing so has been
questioned because of the huge state subsidies to the value-added
wood export industry, particularly plywood. Many question the
commitment of the government to conservation, believing Indonesian
government policy is simply a means of keeping more value-added in
the country. This case involves a U.S. pencil manufacturer who
submitted a petition for retaliation under section 301 of U.S.
trade law against Indonesia. Indonesian pencil makers enjoy an
inherent market advantage because the government forbids the export
of raw hard wood, including Jelutong, the preferred wood for making
pencils. The U.S. Trade Representative decided against accepting
the petition.
2. Description
P&M Cedar Products, Inc. (P&M) and Hudson ICS (Hudson), are
two companies that produce pencil stock and slat made from U.S.
grown cedar. Pencil slat is the wood that encases the lead and is
coated with paint and usually capped with an eraser. Until
recently, P&M and Hudson, along with other U.S. producers of pencil
slat, have been competitive in the global market place. American
producers export nearly two thirds of their annual pencil
production to other countries.
American producers of pencil slat are now threatened by unfair
competition from low-priced Indonesian pencil slat made from
Jelutong, a tropical hardwood grown in Indonesia and Malaysia.
American producers allege that through a series of strategies
including differential export taxes, substantial underpricing of
government owned timber, and failure to enforce terms of timber
concessions, Indonesian exporters of pencil slat are able to
undersell their non-Indonesian competitors in third country
markets. As a result, American producers of pencil slat have seen
a decline in their exports to such countries as Germany, Mexico,
Japan, Korea, the United Kingdom and Italy.
P&M and Hudson, two companies affected by the Indonesian
government's export targeting scheme, asked the United States Trade
Representative (USTR) to initiate an investigation under Section
301 of the Trade Act of 1974, as amended, which is the U.S. trade
remedy for unfair governmental practices such as export targeting.
P&M and Hudson raise the issue of whether the following aspects of
the Indonesian government's targeting scheme constitute unfair
governmental trade practices as defined under Section 301 of the
1974 Trade Act:
1. The Indonesian government imposes a prohibitive export tax
on the logs and lumber from which pencil slat is made in
Indonesia. P&M and Hudson allege that the Indonesian
government has an explicit policy to increase the exports of
processed wood products. They contend that the government
promotes exports through its system of differential export
taxes. Indonesia currently imposes a steep export tax on the
Jelutong logs and lumber used to make pencil slat. At the
same time, it exempts from an export tax the slat used to make
the pencils. The effect of this differential tax system is to
artificially increase the domestic supply (and lower the
price) of the raw materials for wood processing operations.
As a result, Indonesian wood processors enjoy an unfair
competitive advantage.
2. The Indonesian government deliberately undervalues its
forests, thus reducing the cost of logging to artificially low
levels. P&M and Hudson also assert that the Indonesian
government targets exports of pencil slat by substantially
underpricing its Jelutong and other tropical timber. By
failing to charge the highest price possible for its timber,
the government fails to capture the fully available rent.
As a result, revenue is shifted from the timber owner, which
in this case is the government, to the private
concessionaires. This creates greater than normal profits for
the timber contractor.
3. To even further reduce the production costs of Indonesian
pencil slat producers, the government fails to enforce the
terms of timber concession agreements. Finally, P&M and
Hudson claim that the Indonesian government's underpricing of
its timber is complicated by the nonenforcement of the terms
under which Indonesian logging concessions are granted and
maintained. When the terms of the concession agreement are
not enforced, loggers pay only a fraction of the concession
fees and obtain more logs at a lower cost.
Some allege that this particular case is part of an overall
pattern of unfair trading by Indonesia in the wood sector, where
the ban on raw exports translates into subsidies to domestic
producers. Most notorious is the plywood sector where "Indonesian
plywood production almost equalled that of Japan and together the
two countries accounted for 55 percent of world production."
In sum, subsidies to the forest industry in Indonesia are said
to total $8 billion per year. In addition, for years "the
Government applied tariffs of up to 60% on paper imports, primarily
to protect half a dozen small, inefficient and aging government-
owned mills." Eventually, private investors rushed in to take
advantage of this closed market (including Japanese who were the
leading importers previously), but the result was serious industry
over-capacity as prices fell to world levels. In the end, the
policy only changed the source of deforestation from foreign to
domestic sources, and did little to slow the clearing of tropical
rain forests. Despite Indonesia's huge and rapidly growing
population and the need for wood products, most of the processed
wood has been for export.
3. Related Cases
Keyword Clusters
(1): Trade Product = WOOD
(2): Bio-geography = TROPical
(3): Environmental Problem = DEFORestation
4. Draft Author: Tung-lin Wu
B. LEGAL Clusters
5. Discourse and Status: DISagreement and COMPlete
This action was a petition under Section 301 of the Trade Act
of 1974, as amended, for relief from the Government of Indonesia's
Targeting of Jelutong Pencil Slat Exports. This petition was filed
before the Section 301 Committee of the USTR, but eventually not
accepted by USTR for submission to the GATT. Some believed it was
because of the Indonesia might then challenge U.S. subsidies to its
forest industries (see USWOOOD case).
6. Forum and Scope: GATT and MULTIlateral
7. Decision Breadth: 107 (GATT members)
The case involves Indonesia and the United States but could
impact other low-cost producers. It was intended as a complaint to
the GATT but was not forwarded by the U.S. government.
8. Legal Standing: TREATY
C. GEOGRAPHIC Clusters
9. Geographic Locations
a. Geographic Domain : ASIA
b. Geographic Site : EASIA
c. Geographic Impact : USA
10. Sub-National Factors: NO
11. Type of Habitat: TROPical
Indonesia contains one of the worlds largest tropical forests,
particularly on the island of Borneo, shared with Malaysia (see MALAY case).
D. TRADE Clusters
12. Type of Measure: Export Ban [EXBAN]
The issue centers on Indonesia's ban on the export of raw
logs. In lieu of this ban, the Indonesian government has developed
in-country wood processing facilities, which are said to lose
around $8 billion per year. This loss is covered by the government
through subsidy.
13. Direct vs. Indirect Impacts: DIRect
14. Relation of Measure to Environmental Impact
a. Directly Related : YES PENCIL
b. Indirectly Related : YES WOOD
c. Not Related : NO
d. Process Related : YES DEFORestation
15. Trade Product Identification: PENCIL
There is some uncertainty as to how much wood Indonesia
actually exports. Indonesia data reported to the Food and
Agriculture Organization (FAO) is only half of the annual according
to reports from importer countries. The explanation is that large
amounts of this wood are under-reported to avoid paying export
taxes or that the wood is smuggled. It is suspected that a large
portion of this un-reported wood is bound for Japan. The data in
Table 19-2 shows the discrepancy between what Japan reports as its
imports of wood from Indonesia and what Indonesia reports as its
exports to Japan. Official Indonesia export data is some 50
percent lower than official Japanese import data (see Tables III-
35-1 and II-36-2). The difference is in illegal exports departing
from Indonesia.
Table III-35-1
Comparing UN Commodities Data and FAO Timber Data for
Indonesia
(1988, U.S. $ Billions)
Exports Imports
(1) Raw Wood
UN Partner Data 0.0 0.0
FAO Data 0.0 0.0
(2) Processed Wood
UN Partner Data 2.3 0.1
FAO Data 1.1 0.2
(3) Finished Wood
UN Partner Data 0.1 0.1
(4) Totals
(Not including furniture.)
UN Partner Data 2.3 0.1
FAO Data 1.1 0.2
(Including furniture.)
UN Partner Data 2.4 0.2
Source: UN Commodity Data, Rev. 2 and FAO
Note: Totals may not add due to rounding.
Table III-35-2
Japan's and Indonesia Wood Import Reporting
(millions of metric tons)
Japanese Indonesian
Reported Imports Reported Exports
1980 1.422 1.102
1984 .308 .219
1988 .929 .670
16. Economic Data
As a result of raw log bans, Indonesia's processed exports
increased from $0.3 billion to $2.3 billion between 1980 and 1988.
17. Impact of Measure on Trade Competitiveness: BAN
The ban applies to all raw log exports. There is no perfect
substitute for the prized Jelutong because of its preferred
qualities for making pencils.
18. Industry Sector: WOOD
19. Exporter and Importer: INDOnesia and USA
E. ENVIRONMENT Clusters
20. Environmental Problem Type: DEFORestation
21. Name, Type, and Diversity of Species
Name: Jelutong
Type: Plant/Angiospermae/Dicots
Diversity: 4,311 higher plants per
10,000 km/sq (Indonesia)
22. Resource Impact and Effect: LOW and Structural [STRCT]
Indonesia's "Green Tax" stipulates a certain percentage of
timber royalties be re-invested in wood technology and
reforestation. In most cases these royalties go directly into
government coffers and therefore any public program that has a
reforestation element can be considered as a form of re-investment.
Correctly speaking, it is not export earnings in the developing
countries that are re-invested, but rather, the royalties that are
re-invested. On the whole, the investments in wood research or
reforestation are but a minor portion of the royalties collected.
23. Urgency and Lifetime: Long and 100s of years
24. Substitutes: RECYCling
VI. OTHER Factors
25. Culture: YES
Many of the lands being harvested are ancestral and
traditional home to people's who are neither Malay or Chinese
stock, but are related to the ancestors of Filipinos. They receive
little compensation for the loss of the resource; Malays control
the government, while Chinese are the primary business people in
the country.
26. Trans-Border: NO
There is said to be some harvesting in Indonesian Borneo that
is exported via the Malaysian part of the island. On the whole,
this is not an issue in this case, but one where a rain forest
system crosses a national border (see THAILOG case).
27. Human Rights: YES
The native peoples have long claimed that their lack of
property rights has prevented them from benefitting from the
harvesting of their trees.
28. Relevant Literature
Ewing, Andrew J. and Chalk, Raymond. "The Forest Sector: An
Operational Strategy for Developing Countries." World
Bank Technical Paper No. 83, Industry and Energy Series.
Washington, D.C.: World Bank, 1988.
Forest Products. FAO Yearbook. Rome: Food and Agriculture
Organization of the United Nations, 1988.
Gillis, Malcolm. Forest Incentive Policies. World Bank Policy
Paper. Washington, DC, World Bank (November 26, 1990).
Kallilo, M.; Dykstra, D.P.; and Binkely, C.S., eds. The Global
Forest Sector: An Analytical Perspective. New York, John
Wiley and Sons, 1987.
Nectoux, Francois and Kuroda, Yoichi. Timber from the South
Seas: An Analysis of Japan's Tropical Timber Trade and
its Environmental Impacts. World Wildlife Fund, April,
1989.
Repetto, Robert and Gillis, Malcolm Gillis, eds. Public Policies
and the Misuse of Forest Resources. Cambridge: Cambridge
University Press, 1988.
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