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Can the US-China Trade War Boost Indonesia’s Manufacturing Sector?

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Jun. 12 2019, Updated 12:47 p.m. ET

Indonesia’s demographics

Indonesia is the largest and most populous country in the Association of Southeast Asian Nations. With a population of 264 million and a median age of 30.8 years, Indonesia has a large workforce that it can leverage to benefit from a shift in manufacturing away from China.

The challenge is upskilling and reskilling. Indonesia doesn’t have any high-tech manufacturing capabilities as of now. To take full advantage of the demographics and the global situation, Indonesia needs to have policies that could develop its workforce.

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Exports and manufacturing capabilities

Indonesia’s exports primarily include commodities such as oils, rubber, coal, and textiles. Only a fraction of its total exports of $189 billion in 2017 had overlap with China’s exports to the US. Indonesia’s exports stood at 20% of its GDP in 2017, much lower than the global average of 29%.

While manufacturing accounted for 20% of Indonesia’s GDP, higher than the world average of 15%, a substantial part of this production was the production of commodities.

Thus, Indonesia may not be as well positioned as some of its peers to benefit from production relocation out of China. In fact, Nomura feels that Indonesia will be negatively affected by the trade war, as China is its largest trading partner, and a slowdown in China could hamper its economy.

Investors looking to gain exposure to Indonesian equities can do so by investing in the iShares MSCI Indonesia ETF (EIDO). The ETF has returned 0.76% so far in 2019.

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