Indonesia – Philippines: A Comparative Advantage

Indonesia is an 1.905.000 km2 archipelagic country that has many natural resources, and to process their natural resources in order to fulfill it’s need, Indonesia need more advanced technology which will cost too much for processing their natural resources. Meanwhile, there is Philippines, who has advance technology that cost cheaper to process natural resources, but lack on natural resources.

As they have their own shortcoming, Indonesia and Philippines have to tackle the issue in order to fulfill their country needs by having bilateral trade. The bilateral trade that occur between those both countries are based on their effort to fulfill their shortcomings by exchanging things that they cannot make by themselves, either because it will cost them high price or because of they are lack of the resources. The theory of comparative advantage is used in the bilateral trade that occurred between Indonesia and Philippines. In this paper, the implementation of the comparative advantage in the trade relations between Indonesia and Philippines will be explained.

The law of comparative advantages is prevalently credited to David Ricardo and his book 'On the Principles of Political Economy and Taxation' in 1817 (Hayes, 2019). The law of comparative advantage is prevalently credited to David Ricardo from his book “On the Principles of Political Economy” and Taxation in 1817. The definition of comparative advantages is an economic term that used to describe the economy’s capacity of some company or enterprise to make products with lower cost than its exchanges cost. Comparative advantage allows the seller to sell products or even an enterprises t a lower cost than their rivals and make it easier for them to get business agreement. In this case, comparative advantage allows Indonesia and Philippines exchange a natural resources and finished goods. As Indonesia needs sugar which is a finished goods, and Philippines needs natural oil which is a natural resource to make perfumery, cosmetics, and aromatherapy.

Indonesia has very high demand on sugar, but the production of sugar and their people’s needs are imbalanced as the technology that used to make sugar is not advanced enough to produce right amounts of sugar that could fulfill their people’s needs. In order to fulfill their massive demand of sugar, Indonesia has to import sugar from other countries for balancing the demand and availability of sugar. Indonesia’s sugar imports have nearly multiplied in the previous decades as financial development has fueled growing food consumption on the planet’s fourth most-crowded country. (Rusmana, 2018).

In other side, Philippines is one of big producer on perfumery, cosmetics, and aromatherapy in the world. Yet, Philippines is lack of natural oil as the raw material of producing those goods, they have to import it (The Pinoy Warrior, 2016). As they lacked of natural oil to produce their products, they import the natural oil from Indonesia, who has lots natural oil, and geographically near. The bilateral trade between Indonesia and Philippines is occurred using the term of comparative advantage. As they are exchanging goods that needed by each other. Further explanation, Philippines needs natural oil to produce their products, it cost cheaper to import it than try to produce it by themselves. While Indonesia has lots amounts of natural oil comparative advantage of Indonesia occurred as they can produce natural oil and it cost cheaper than other countries. Comparative advantage of Philippines is they have advanced technology to produce sugar, they can easily produce it with cheaper cost than other country.

Indonesia can produce natural oil with cheaper cost, but cannot produce sugar in right amounts to fulfill the demands. Philippines can produce sugar with cheaper cost, but cannot produce natural oil as the material of produce their products. Bilateral trade that occurs between Indonesia and Philippines allowed both countries to fulfill their own needs, sugar for Indonesia and natural oil for Philippines. Comparative advantage allowed Indonesia and Philippines to exchange natural oil and sugar as a replacement, and vice versa.

Bibliography

1. Hayes, A. (2019, Maret 2). Comparative Advantages. Retrieved from Investopedia: https://www.investopedia.com/terms/c/comparativeadvantage.asp
2. The Pinoy Warrior. (2016, June 15). Essential oils in philippines. Retrieved from The Pinoy Warrior: http://www.thepinoywarrior.com/2016/06/essential-oils-in-philippines.html
3. Rusmana, Y. (2018, November 8). Sugar Takes Center Stage in Indonesian Presidential Race. Retrieved from Bloomberg: https://www.bloomberg.com/news/articles/2018-11-07/how-sugar-is-taking-center-stage-in-indonesian-presidential-race