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Japan stands as one of the most technologically advanced states in the world, and its innovations have been its gifts to the world since its economic boom in the mid to late 20th century. But they are not without their drawbacks. Japan has little to no natural resources such as minerals and natural gas. For that reason, Japan pursued an aggressive expansionist policy in the early 19th century to gain natural resources from its neighbors. Nowadays, Japan goes about fulfilling its need for natural resources by engaging in international trade. One of their top trading partners is Indonesia, a country filled to the brim with natural resources, yet still lacks in technological advancement. Hence, this paper will delve into the relationship between Indonesia and Japan and further analyze the comparative advantage they have towards one another by using data and findings of their bilateral trade.
To dissect the trade relations between Indonesia and Japan, the principle of comparative advantage plays a major role in constructing international trade. Comparative advantage itself refers to a state’s ability to produce goods or services at a lower opportunity cost and then engage in trade with another country. This concept was first introduced by David Ricardo, a British political economist, and one of the founding fathers of classic economics, through his book “On the Principles of Political Economy and Taxation” in 1817 (Hayes 2019). The idea was that self-sufficiency is deemed to be ineffective and costly. So, manufacturing products one country specializes in and then conducting trade with the other not only can cut its production cost and time but also increase profit (Ruffin 2002).
Japan is one of the leading countries in the world for its vast technological advancement. It is known for its massive manufactured vehicles, machinery, and many industrial parts. In 2017, Japan’s three major exports were cars with a worth of over $101B dominating 15% of the total export, followed by vehicle parts ($34.9B), and $26.5B of integrated circuits (The Observatory of Economic Complexity 2017). Unfortunately, despite its great specialty, Japan doesn’t own many natural resources such as oil, natural gas, minerals, and else to provide the raw materials used in production (Hays 2009).
Traveling south from Japan was Indonesia. Located across the equator, Indonesia is one of the world’s largest archipelagos loaded with abundant natural resources. In 2017, Indonesia’s top exports were $18.9B worth of coal briquettes which hold 10% of the total export, palm oil at $18.2B controlling 9.6%, rubber, petroleum gas, as well as agricultural products and clothing (The Observatory of Economic Complexity 2017). The downside is Indonesia still lacks labor power and advanced technology to process its resources. This is where comparative advantage is taken into account.
The comparative advantage that Indonesia has over Japan is the ability to extract natural resources and process them into raw materials. Japan has a comparative advantage in the production of manufactured goods such as cars and machinery over Indonesia due to Japan’s technological superiority and excellent labor quality that far surpasses Indonesia’s. So, they both conduct trade with one another. 1958 was the year Indonesia and Japan began their modern diplomatic and economic relations and for the past decade, their trade ties have tremendously expanded since the establishment of a free trade agreement called the Indonesia-Japan Economic Partnership Agreement (IJEPA) in 2008 (Oxford Business Group n.d.).
If either countries decide to be self-sufficient and rely only on their abilities to excavate natural resources, process them, and turn them into processed goods, neither country would gain the maximum amount of goods since they would not utilize the sectors their industries specialize in and consider the opportunity cost of production. Since Japan specializes in making vehicles, Indonesia imports cars, motorcycles, and other means of transportation from Japan. Likewise, Japan imports coal, oil, gas, nickel, iron ore, and other natural resources from Indonesia to fulfill its necessity to produce those commodities. Thus, the comparative advantage they have towards one another is essential in achieving a win-win solution and generating more profit along the way.
In short, comparative advantage is what constructs international trade. It happens when one country can produce more products or services with lower opportunity costs. In this case, Indonesia produces more minerals, such as coal more efficiently than Japan since it is filled with natural resources, so Japan produces more cars with the benefit of technological advancement. Afterward, they can trade their goods to gain more profit and achieve lower production time and cost.
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