Who are Indonesia's new regional trade partners?

Indonesia’s government is pursuing a raft of trade deals to complement the successful ratification of the Indonesia-Australia Comprehensive Economic Partnership Agreement, which took place in February 2020. The bilateral agreement is viewed as a win for Australia’s grain exporters, who will enjoy an initial 500,000-tonne quota for feed grain, coupled with pledges to invest in flour milling and other food industries. The deal also helped pave the way for Australia’s Monash University to establish Indonesia’s first foreign campus. This landmark event indicates that President Joko Widodo, better known as President Jokowi, is serious about improving Indonesia’s educational environment and the development of human capital. International education is one of Australia’s largest exports, contributing $35bn to the Australian economy in 2018. Indonesia is also poised to sign a free trade deal with South Korea that removes tariffs on steel, automobiles, machine parts and textiles in return for tariff exemptions on bunker oil, sugar and beer. The bilateral agreements pave the way for Indonesia to achieve greater readiness for more sophisticated regional agreements.

Free Trade

Chief among the deals set to boost Indonesia’s trade environment is the Regional Comprehensive Economic Partnership (RCEP), comprising the 10 members of ASEAN and its regional dialogue partners China, India, Japan, South Korea, Australia, New Zealand and possibly India. The RCEP is earmarked to be signed off in 2020, though it remains to be seen if India can be tempted back to the table after withdrawing from talks on concerns over market access, rules of origin and automatic safeguard mechanisms. Even without India, the RCEP would be the world’s largest free trade area, accounting for 30% of global GDP and population, and contains provisions for trade, investment, dispute settlement, technology and e-commerce, and intellectual property rights. On trade, the deal will streamline free trade agreement rules between member countries, making the bloc more attractive to foreign investment and galvanising regional supply chains – a boon for Indonesia, in particular, as it seeks to reduce its dependence on imported raw materials and develop downstream processing. President Jokowi has also set a target for his trade negotiation team to sign off on deals with more than a dozen partners.

Palm Oil

Perhaps the most significant of these is the free trade and investment agreement with the EU, which has been under discussion since 2016. Modelling suggests such an agreement could lift Indonesia’s GDP by €5.2bn by 2032, and boost both global and bilateral trade by at least €5bn, depending on the extent to which non-tariff barriers are removed.

However, negotiations have stalled due to a European Commission decision to phase out palm oil from transport fuel by 2030, thereby eliminating the majority of products from a 7m-tonne segment that accounts for approximately one-fifth of Indonesia’s exports. The decision was reinforced with five-year anti-subsidy duties on biodiesel exports. Furthermore, the commission concluded that palm oil results in excessive deforestation and should not count towards renewable energy targets – a significant blow to the industry’s international image.

The move led Indonesia to lodge a complaint with the World Trade Organisation (WTO), while the EU launched its own complaint over Indonesian restrictions on raw materials used in steel-making, including nickel, and obligations for domestic market access. While trade talks and WTO actions are officially separate, there is increased pressure within Indonesia for retaliatory restrictions on EU dairy exports and alcohol. The country’s palm oil businesses are an important political bloc, and while there is potential for Indonesia to move forward with an EU deal regardless of ongoing disagreements over the substance, it would come with significant domestic risk.