Indonesian government has been working hard in engaging with the world market as average tariff keeps on decreasing. However, it seems to rely on Non-Tariff Measures (NTM) rather than tariffs to protect its industries. This paper inspects whether these measures hurt firms by limiting their access to better quality and cheaper foreign inputs. This paper builds on Amiti and Konings (2007) to inspect the impact of trade policy shocks to firm’s Total Factor Productivity (TFP). The results suggest unintended consequences of protectionism: tariff and NTMs hurt firms’ TFP and labour absorption significantly. The impact is less severe for bigger firms, confirming heterogeneous effect of trade policy. As the country is looking to boost foreign investment, the paper makes a strong case for reducing protection to keep mark-up in domestic manufacturing high as an incentive.
Keywords: Total factor productivity, Tariff, Non-tariff Measures, manufacturing, trade liberalization JEL Codes: O14, O53, F14, F15