Jakarta. Indonesia is embracing a government procurement strategy in an attempt to cut pharmaceutical imports without needing to worry about getting sued at the World Trade Organization (WTO).

Indonesia is heavily reliant on imported pharmaceutical ingredients and medical devices. To address this overreliance, Jakarta today has a local content policy that promotes domestic inputs or resources in industrial production. The rules apply to Indonesia's public procurement which lets governments -- including government-owned hospitals -- shop online via an e-catalog. Goods that meet a certain level of local content get prioritized on the digital catalog system. This way, Indonesia can develop its domestic industry without breaching the rules of the World Trade Organization (WTO), according to Health Minister Budi Gunadi Sadikin.

Budi recalled the time when Indonesia grappled with the Covid-19 pandemic. Indonesia already had the capacity to produce medicines. However, Southeast Asia’s largest economy at the time had to import almost 95 percent of the pharmaceutical ingredients needed for its production.

“About two years and 10 months have passed since I became the health minister. Out of the top 10 pharmaceutical ingredients [that Indonesia uses most], we are now able to produce six of them domestically. We [the government] are telling pharmaceutical producers to purchase domestically produced [ingredients]. If not, the government won’t buy their products,” Budi said at the Investor Daily Roundtable hosted by B-Universe in Jakarta on Thursday evening.

“So why are we undertaking this government procurement strategy to encourage the local pharmaceutical industry? Because it does not violate the WTO rules,” Budi told the forum.

The former banker said that although the procurement system might still need some improvements, imported goods in the health sector had dropped.

“We have told government-owned hospitals to buy locally produced products via the e-catalog. The system may not be perfect. However, my [the Health Ministry’s] spending is around Rp 20 trillion [$1.3 billion], but we have slashed imported goods from 90 percent to almost 50 percent,” Budi said.

WTO agreements in general adopt the so-called “national treatment” principle, which calls for countries to not discriminate against imported goods in favor of their locally produced counterparts. This includes the General Agreement on Tariffs and Trade (GATT) of which Indonesia is a signatory. The GATT, however, states that government procurement is exempted from the national treatment principle.

Indonesia is also a party to WTO’s Agreement on Trade-Related Investment Measures (TRIMS), which promotes equal treatment of goods. 

Jakarta’s local content rules have sparked concerns among member countries in past TRIMS Committee meetings. For instance, the European Union (EU) found the local content policy worrisome as Indonesia imported over 95 percent of its active pharmaceutical ingredients. The EU tried to nudge Indonesia into focusing on policies that incentivize more investment in the local pharma industry rather than imposing local content policies. Although just like GATT, the local content rule on products purchased for government purposes would not be considered a violation of the TRIMS pact.

The exclusion of public procurement in WTO’s agreements prompted a number of countries to negotiate trade rules on the matter. Thus the Government Procurement Agreement (GPA) came into existence. It requires countries to refrain from giving domestically produced products special treatment in government procurement. However, the GPA does not apply to Indonesia as it has not inked the agreement. GPA’s signatory parties include the EU and the US. Indonesia, however, is an observer of the GPA.

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