Comparative Advantage: Indonesia Exports Rubber To Japan And Sends Back As Tire To Indonesia

The theory of comparative advantage is economic theory used in international trade to explain how the pattern of trade runs. This theory was put forward by economist David Richardo in 1816, stating that the comparative advantage is the ability of a country to produce both high quality products and produce goods which better and cheaper compared to another countries (Costinot & Donaldson, 2012). Comparative advantage emphasizes that the efficiency of an industry could increase production. This theory could be affected to the international trade, therefor the state is recommended to export goods in high quality and better in competitive advantage and import goods with a low in competitive advantage then will produce economic efficiency (Gallardo, 2005) Comparative advantage emphasizes the magnitude of efficiency relativity. By utilizing resources owned in a country to produce goods or services that have comperative advantages rather tahn other countries, that is the reason why countries tend to specialize in producing in specific products (Kılı¸c, 2002)

This theory determines the form of patterns of specialization that connect the world to each other like the price of goods in the world currency. This theory also emphasizes four pillars, known as, workers get a salary according to what they do, goods must be produced in a certain place, workers will choose places with high income and the last is competitive prices (Ruffin, 2002)Comparative advantage is very influential on international trade, also in the Asia-Pacific region. Some countries have the comparative advantages such as bilateral relation Indonesia and Japan. As an agricultural country with the overflow of natural resources, Indonesia is the second largest of the countries that has rubber production in a global market. Arround 95% percent of Indonesia’s rubber is exported and 22% exported to Japan (Indonesia Investment, 2018). Indonesia exports rubber to Japan in the high prices with the aim that later this raw material will be processed by Japan to be made into finished materials or production products such as materials that will be used for other products. This is because Japan, which is unable to produce rubber because the country is not an agricultural country but a technology-producing country (Asia-Pacific, 2018) The amount of Indonesia’s rubber export to the world is $7,7 billion (4,6%) in 2017 the amount is $997. 7 billion. As known that Indonesia is the biggest trading partner of Japan into the rubber with the value US$834. 8 million (Workman, 2018)Two different industrial backgrounds between the two countries have their own advantages for Indonesia itself, the rubber industry is still the biggest with $ 100 billion. However, due to the limitations of processing raw materials into finished materials, it is more efficient if Indonesia exported the rubber with good quality and expensive prices that Japan cannot produce and it would be increases state revenues (Lindblad, Wee, Purwanto, & Suryo, 2002)

However, even though Japan has the capability in the field of technology far above Indonesia this one is the advantage that Japn has rather than Indonesia and even though Japan is unable to produce rubber raw materials, they are able to manage these raw materials into finished materials that no-capable managed by Indonesia. One of that product is truck tire, 11R22. 5 produce by Japan technology that the rubber imported from Indonesia (Booth, 2007)Seems like Indonesia, Japan imported rubber from Indonesia as a raw material for making tires, this caused efficient production to minimize expenditure by producing better products which would later be exported back to Indonesia the producing the product. Known that Japan is the largest of Indonesia trading partner for decades which the partner of this trade reach 14,14% in 2013 and Indonesia import from Japan as well as the rubber tire reach amount 10,18% (Tijaja & Faisal, 2014). Japan needs rubber imported from Indonesia because Japan is one of the countries that are engaged in industrial rubber which will later be processed into automotive basic materials. While the total that Japan produce in this industry arroun 20% (2,3 trillion yen) in 2014 and this industry is the the one of largest industry in Japan so that’s why Japan needs raw rubber to produce (Japan Industry, 2015)Rubber produced by Indonesia and then sent to Japan to be processed into finished materials, such known as rubber tires as basic material for cars is one case that shows the economic theory of comparative advantage. Indonesia as the second largest rubber producing country in the world cannot manage raw materials into finished materials due to the lack of adequate infrastructure and not comparable with the technology owned by Japan. Like wise vice versa Japan imports rubber from Indonesia and is processed to treat tire-made materials due to the high quality of Japan which has adequate technology and infrastructure and supports processing raw materials. Both countries have mutually beneficial comparative advantages.

Indonesia is high quality in rubber and Japan is high in technology. As a comparative advantage theory explains that the ability of the state to produce better quality and better products. Later, these tires will be sent back to Indonesia and traded. As a theory advantage explains that production in relativity is efficient and productive labor (Takii, 2004)

References

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