Indonesian Trade Deficit with China: Background and Grey Forecasting

Abstract

Indonesia's trade balance with China has remained negative since 2010. The current study forecasts Indonesia's trade deficit with China for five years using the Even Grey Forecasting model EGM (1,1,α,θ). The sample was conducted by collecting the data of traded deficits for the past ten years. Data were collected from the official websites of Indonesia's Central Bureau of Statistics of (BPS), Ministry of Trade, among others. By building upon the literature, the study argues that trade deficits might have occurred from internal and external factors, such as the lack of infrastructure, the depreciation of the Rupiah (Indonesian currency) against the U.S. dollar, and the ASEAN-China Free Trade Agreement. Comparative analysis with Linear Regression (LR), Exponential Regression (ER), and Exponential Triple Smoothing (ETS) revealed the superiority of the grey forecasting model for trade deficit prediction. The study found that the trade deficit was minimum during the COVID-19 pandemic. It also showed an increasing trade deficit in the post-COVID period. The study concludes with some recommendations for Indonesia to minimize the trade deficit.