This year, Indonesia introduced a ban on the export of raw minerals, creating a great deal of anxiety in the international mineral markets. Before the ban, Indonesia was the world’s top nickel ore exporter and the largest bauxite supplier to China, accounting for around 12 percent of the global market in both cases.

Law No. 4/2009 on mineral resources and coal mining, which replaced its 1967 predecessor, provides the framework for all the country’s mining concessions (outside oil and natural gas) and has brought about numerous changes to the previous mining regulatory regime. Most notably, this includes a ban on raw material exports and its value added policy.

Based on Government Regulation No. 1/2014, the policy to ban raw material exports is designed to develop higher value-added downstream industries. Subsequently, as part of the Mining Law, as highlighted in the government regulation, companies are required to develop downstream refining and processing industries within Indonesia. This is aimed at generating more benefits of mining wealth to the nation.

The side effects of political quarrels between Indonesia and Japan over the mineral ore export ban have caused trade friction. Japan has complained to the World Trade Organization (WTO) that Indonesia has violated WTO rules by imposing restrictions on selected raw materials, such as nickel and bauxite ore.

The increasing scale and frequency of export restrictions are a reflection of a more fundamental and systemic trend toward growing competition over essential resources.

Restricting the export of natural resources may give downstream producers just the edge they need to stay above the curve in fiercely competitive international markets. Indonesia, a country in a dominant supplier position of commodities with limited substitution, may drive out whole industries in a competing import-dependent country.

As such, the export restrictions on raw materials could be an important incentive for domestic and foreign investment in the high value downstream manufacturing sectors.

However, this policy may also lead to various inefficiencies in the allocation of resources as it may promote sectors that do not have a comparative advantage. Moreover, the intended benefits of such a policy could be offset or dampened if other competitor countries follow suit and impose their own export restrictions.

Export taxes are an important source of government income that rely on the export of raw materials. These taxes could be applied ad valorem, based on the value of exports, and in differential tax form, whereby export taxes would be reduced as the raw material is further processed in the value chain.

Export taxes could also play an important role as part of a fiscal regime to improve the sustainability of natural resource management. An effective fiscal regime is one that would allow governments to achieve certain economic, social and environmental objectives while also providing businesses with a good investment environment to operate within.

The way a tax regime is designed may affect various important variables such as resource output, the pace of extraction, the volume and stability of government revenues.

An export tax, with floating rates based on international prices, could help the fiscal regime to be responsive to market fluctuations. A sliding rate mechanism would ensure that the government’s share of the rent increases when the price of a commodity is high in the international markets.

When the prices are low, the export tax would go down, so that the tax burden on the investors lessens, enhancing the long term feasibility of existing investments. Hence, export taxes with floating rates would bring a built-in mechanism to the fiscal regime that would improve its flexibility to deal with market fluctuations.

This would also improve the predictability of the fiscal regime for the business. If the government is able to commit itself to binding export taxes and define the band within which export taxes will be applied (depending on international prices), investors could take reasonably informed decisions about their investment and production strategies. The ability of the government to channel a higher share of the profit when the prices are high will also improve the security of existing contracts.

Governments often demand the renegotiation of initial contracts when they find themselves in tight contractual arrangements that might put them in unfavorable positions when market conditions change. As a tax regime improves its responsiveness to market fluctuations, existing investment contracts become more secure.

Therefore, as Indonesia is still in a transition period, it is likely that the mining regulatory architecture will keep changing to respond to socioeconomic as well as political environment changes. Uncontrolled changes in the mining regulatory framework, however, contribute to the current uncertain investment climate in Indonesia.