PEKALONGAN, Indonesia—When modern textile factories opened in this small city on the Java Sea in the 1990s, life was transformed overnight. Rice farmers and buffalo herders earned enough money sewing clothes for Americans to swap thatch houses for concrete ones and send their kids to universities.
By 2022, the transformation stalled and factories started closing down. Cheaper Chinese competitors were boxing Indonesian producers out of foreign markets.
Now, President Trump’s trade fight with Beijing means those low-cost Chinese imports are ending up in Indonesia—as China unloads excess stuff it can’t sell in the U.S. It’s the final shove that is pushing factories over the edge, and many workers are returning to rice fields for meager pay.
“I try not to think too far into the future, it makes me dizzy,” said 47-year-old Tabi’in, who like many Indonesians goes by one name. He used to be a union leader at a sarong factory that shut down last year. He and his wife, who also lost her factory job, can’t afford university bills for their 19-year-old son, who hangs around the house.
For a few months, their only relief was a temporary paycheck Tabi’in received to guard the closed factory, making sure copper electrical wires weren’t stolen and sold for scrap. Now he’s trying to make do with odd jobs, like freelance sewing assignments and preparing snacks made of fried flour for local peddlers to sell.
The U.S. global trade war is threatening to close the door on an era of free trade that had opened new opportunities for the developing world.
Other factors had already undercut that momentum, including China’s rise as a manufacturing superpower, which made it harder for other countries to export their way to wealth. At the same time, buzzy new industries, such as tech and the production of electric vehicle batteries, failed to take off, and high debt levels, corruption and lingering aftereffects of the Covid-19 pandemic have taken a toll.
The latest trade framework with Indonesia, announced July 22, puts a 19% tariff on Indonesian goods entering the U.S.—a substantial hike that local businesses worry will slash demand for top products such as clothing, shoes and palm oil. The trade framework also says Indonesian goods that contain a large amount of content from other nations, particularly China, will face tariffs at a higher rate of 40%. How that will be determined wasn’t made plain.
Meanwhile, low-cost Chinese goods coming into Indonesia continue to surge as manufacturers offload products, further straining Indonesia’s makers. In April, when Trump announced new tariffs on China that eventually climbed to as high as 145%, Chinese exports to Indonesia rose 34%. Trade talks between the U.S. and China are ongoing, and meetings took place this week in Sweden.
The U.S. has reached trade deals with many of the world’s biggest economies, including the European Union and Japan, which face tariff rates of 15%, and some developing Asian economies, including, along with Indonesia, Vietnam and the Philippines, which have been hit with higher levies of around 20%. On Wednesday, Trump said he would apply a 25% tariff to products from India.
Starting in the early 1990s, Indonesia and other countries like it were considered economic miracles. Their rapid growth helped them begin to narrow the vast wealth gap with the developed West for the first time in modern economic history.
But aside from a few success stories, such as oil-rich Guyana and Vietnam, which received favorable treatment in trade with the U.S., growth in the developing world has slowed in recent years.
Analysts at investment bank Jefferies reported that growth of the emerging world’s lower middle class—people with spending power between $3.65 and $20 a day—had all but stopped by 2019. Measured per capita, middle-income nations, a grouping that comprises dozens of countries from Nigeria to China, saw incomes drop to 8% of U.S. levels in 2022. The group’s income had been 9% of the U.S.’s in 2014, up from 3% at the turn of the millennium, according to the World Bank.
In per capita terms, Brazil is growing more slowly than the U.S.—disappointing hopes set a few decades ago that the country would do as many developing countries had done before and harness its relatively inexpensive labor to attract investment and become a regional manufacturing powerhouse.
Bangladesh’s leader, who took power after a popular uprising last year, told The Wall Street Journal that official data showing years of rapid growth there were exaggerated by the previous government to make the country look better. Many countries in sub-Saharan Africa have hardly grown at all or have seen livelihoods regress over the past decade because of wars, heavy debt and low commodity prices.
In Indonesia, the number of people classified as middle class dropped by 9.5 million over the past five years, according to the national statistics agency, while the number of people in lower classes has risen. The rupiah currency recently fell to a more than 20-year low.
Stagnation in the developing world means dimmer prospects for billions of people. It also raises the risk of more political instability and more migration pressure. And it reduces opportunities for multinational companies such as Unilever and Nestlé, which had benefited from hundreds of millions of new consumers who could increasingly afford toothpaste, shampoo and chocolate bars.
“I could imagine another era of growth for these countries,” said Indermit Gill, the World Bank’s chief economist in an interview last year. But because of tougher trade policies in wealthy countries, among other factors, “The likelihood of these things happening now is very low,” he said.
Globalization’s end
As recently as 2021, the developing world’s outlook was considerably brighter. That year, a group of researchers including Dev Patel at Harvard University reported that for the first time since about 500 years ago, when Western societies began growing wealthier than everyone else, the rest of the world was catching up.
Developing countries had grown faster than the industrialized world since the 1990s, the authors noted. Many followed a timeworn path to success: exporting their way to wealth, starting with low-end goods such as apparel and then moving to more sophisticated products, such as electronics. Japan and Taiwan had followed similar strategies a few decades earlier.
But the model was already starting to break down by the time of Trump’s first presidency. While Chinese purchases of commodities such as iron ore helped some developing countries, China’s stranglehold on global manufacturing was blocking other nations from grabbing more of the global trade pie, leading some to deindustrialize.
Few other countries could compete with China, which had a unique combination of advantages, including a huge low-cost manufacturing labor force, armies of well-trained engineers, high-quality ports and roads and a strategic government that provided ample industrial subsidies.
Factory owners in Indonesia, India and elsewhere found their clients increasingly asked them to match their Chinese competitors’ prices, and dropped them as suppliers when they couldn’t.
In June 2024, Patel and the same group of co-authors from the previous article, including Arvind Subramanian, a former chief economic adviser to India’s government, concluded that the era of “convergence,” in which the Global South narrowed the gap with the rich world, had stalled, largely because of rising trade barriers.
“The protectionist impulses that are popping up all over the world seem to be really threatening to poor countries,” Patel said in an interview.
Trump’s initial round of tariffs in 2018 did help some developing countries, including Mexico and Vietnam, which gained as American companies relocated production there to diversify out of China and its levies of around 20%. Mexico also benefited from the North American Free Trade Agreement and the U.S.-Mexico-Canada Agreement, which replaced it.
But most developing countries were unable to attract game-changing investment. Even with double-digit tariffs, making goods in China was still cheaper than almost anywhere else. Only a few other countries—including Vietnam and Mexico—had decent infrastructure, cheap energy and a big enough manufacturing labor pool to make it worth the move. Other countries struggled with civil unrest, labor strife and inefficient bureaucracy, or didn’t have enough skilled engineers for high-quality production.
“There was a hope that as labor costs in China rose, there was going to be a shifting of manufacturing to other low- and middle-income countries,” said Dani Rodrik, an economist at Harvard University. “That’s largely not happening.”
With manufacturing becoming more technology-driven, poor countries can no longer rely on their advantage in abundant cheap labor, he said.
Destinations that were once seen as promising, such as Bangladesh, failed to expand into new manufacturing industries beyond garment-making.
Thirty-five years ago, as places such as South Korea and Taiwan became more expensive, investors alighted on the densely populated Indonesian archipelago as a place to make sneakers for Nike and Barbie dolls for Mattel, goods destined for the U.S. and Europe.
While China’s rise created stiff competition, investors still heralded Indonesia as a rising economic star. It had a manufacturing base to build on, ample natural resources and a large youth population. A new president, with a clean image, took office in 2014 and pledged to deliver China-level growth.
Instead, the going got harder. Even as Chinese factory wages rose, Chinese factory owners, backed by government subsidies, were able to stay competitive by investing in automation. Under strain, Indonesian factories stopped investing in the latest machinery, putting them further behind Chinese competitors. Indonesia’s government, which struggles to collect taxes, lacked the budget to provide much support.
Prospects worsened as China’s economy weakened over the past few years, and its factories pumped out more goods than could be consumed at home or in the U.S.
“Once American tariffs came in, China didn’t want to stop [producing],” said Vasudevan Ravi Shankar, chief executive of Asia Pacific Fibers, an Indonesian textile producer. “They just kept dumping.”
In November, Shankar stopped operations at a plant in West Java province that had been operating for three decades, laying off 1,000 workers. This month, the company announced it was too expensive to maintain the idle facility, and said it was planning to close it down for good.
Shankar first got started at the company in the early 2000s, when Indonesia looked poised to be a major global player in synthetic textiles. But soon Chinese manufacturers, who previously had made cotton textiles, entered the sector en masse. “China realized [they had] no polyester, and polyester is the future,” Shankar said.
At first, the development was good—Shankar shipped massive amounts of polyester raw materials from Indonesia to China. Soon Chinese factories got the hang of it and became dominant exporters themselves of both the raw materials and the polyester textiles. “They decided to control the entire chain,” said Shankar.
Over the past few years, Chinese exporters flooded Indonesia’s market with cheap synthetic textiles, at prices Shankar couldn’t match. “The industry got fully disrupted,” he said. “We were shut up.”
Buying a house
Towns like Pekalongan came under increasing pressure. The port city had been a hub of traditional textile arts for centuries, its colorful patterned batik fabrics immortalized in an Indonesian folk song where a husband surprises his wife with beautiful fabrics. A museum dedicated to the city’s textile history sits at the center of town, in a Dutch colonial office building. In the 1990s, many new factories were set up to export all sorts of textiles to the world.
The closure of some of its factories shattered the livelihoods of people who were just entering the middle class.
Yudi Cahyono, in his late 40s, grew up determined to be a provider, unlike his father who had abandoned the family when he was a boy. Cahyono joined a local textile factory as an “office boy,” the lowest position. He eventually became a weaving supervisor, married a woman he met on the factory floor, had a daughter and bought a house.
Life was good, until he and his wife were laid off when the Pekalongan textile factory they worked at for nearly three decades, Dupantex, shut down last year, surprising its workers.
Cahyono said earlier this year that he previously had high hopes that his teenage daughter would become a professional but now worries he doesn’t have the money to pay her college fees. “I wanted her to have a better future than me,” he said. “But look at how things have turned out.”
Indonesia’s government is divided on how to help such workers. One government official told the Journal that Jakarta was wary of pouring scarce public money into propping up factories that aren’t competitive. Last year, the country’s then trade minister promised tariffs of up to 200% on Chinese imports, including textiles, to protect local industry.
China, a major buyer of Indonesian commodities and an investor in Indonesia’s nickel sector, threatened retaliation. The tariffs never came into effect.
Earlier this year, Sritex, a long-ailing Indonesian textile giant, closed its doors, letting go of around 8,000 employees in the central Javanese district of Sukoharjo. In the past, Sritex had supplied Western giants H&M and Inditex, the parent company of Zara.
Battery business
Efforts to build other new industries have yielded limited returns. One idea was to turn Indonesia into a powerhouse in electric vehicles and batteries, taking advantage of its status as a major producer of nickel and other minerals needed to make them. But entering the EV export business meant competing—again—with China, the world’s dominant producer. The Chinese government had developed its industry, providing large incentives for consumers to buy electric vehicles until the industry grew into a global heavyweight.
Foxconn, the Taiwanese electronics manufacturer that makes iPhones for Apple, created a joint venture in 2022 with Indonesian partners to manufacture EVs and batteries in Indonesia, with planned investments reported to be $8 billion. An industrial park in Central Java said it was preparing infrastructure for the impending plant. Although Indonesian officials repeatedly said Foxconn’s investment was imminent, it still hasn’t been built. Foxconn declined to comment.
In April, Indonesia’s government said Korean battery giant LG withdrew from a separate, long-planned $10 billion battery project. Indonesia said it would push forward with the project
Part of the problem is that it isn’t clear who would buy Indonesian EVs. Indonesian car sales have stagnated in recent years, mirroring the declining fortunes of the country’s middle class. A big factory would likely need to sell cars or batteries abroad, but it would have to compete with more-powerful Chinese brands. And manufacturers exporting to the U.S. would face tariffs.
Potential regional sales haven’t been strong enough to draw much investment. Tesla, another company Indonesia has courted aggressively, passed on building a factory over concerns about regional EV demand, according to an Indonesian official. Tesla didn’t respond to a request for comment.
Some companies, including Vietnamese carmaker VinFast, Chinese automaker BYD and Chinese battery-maker CATL, have started building factories in Indonesia to sell locally. The three companies have strategies of trying to build manufacturing facilities in many different countries around the world.
Elusive unicorns
Some economists and political leaders thought they could sidestep overdependence on exports by investing more heavily in tech. A wave of local startups pushed e-commerce, ride-hailing and online banking services, which would boost consumption and provide high-paying corporate tech jobs.
“We have seven unicorns and a lot of soonicorns that are continuously supported to be unicorns and decacorns,” former President Joko Widodo said in 2021, referring to startups with $1 billion valuations, soon-to-be $1 billion valuations and $10 billion valuations. Some of the biggest, like ride-hailing company Gojek, received high-profile investments from the likes of Google and expanded overseas.
By 2022, a brutal tech winter had set in. Many local companies had pitched global investors on the vast market potential of Indonesia’s nearly 300 million people, but found it difficult to make money outside of a few big cities. Indonesia’s penny-pinching middle class abandoned apps as soon as promotion periods ended, and Western funding dried up.
Gojek and another of Indonesia’s biggest tech companies, e-commerce app Tokopedia, have lost more than three quarters of their value since merging to become GoTo, which listed in 2022.
Another firm, a Silicon Valley-backed startup called Dropezy, aimed to deliver groceries to Indonesia’s new urban middle class within 15 minutes of receiving their orders. When it proved hard to make a profit, Dropezy laid off much of its staff. It has reinvented itself as a “dynamic startup redefining the landscape of poultry distribution,” buying frozen birds in bulk and delivering them to restaurants, as well as providing logistical services to the poultry industry. The company, which has a new name, now has far fewer employees. “We don’t need a very big tech team,” co-founder Nitish Chellaram said.
Despite its challenges, Indonesia’s official growth numbers are decent, thanks in part to strong exports of nickel and other commodities to China.
Economic growth over the past decade has averaged 4.2%, compared with 2.5% for the U.S. But that faster pace is partially because Indonesia’s population is growing more quickly, and the economic growth rate is below the 7%-8% that economists say is necessary to generate sufficient high-paying jobs.
The World Bank estimates it could take around 70 years before Indonesians attain just a quarter of U.S. income.
Many young, educated Indonesians have announced plans to seek their fortunes abroad, with discussions on social media using a hashtag slogan that roughly translates as “Let’s escape for a while.”
While some skilled programmers have found their way to the U.S. and Europe, many Indonesian professionals struggle to find good opportunities abroad.
In a speech last week, President Prabowo Subianto addressed the trend, telling Indonesians in a pique to “Just escape then.” Alluding to immigration crackdowns abroad, he warned, “You’ll be chased down.”
Write to Jon Emont at jonathan.emont@wsj.com
