Bilateral agreements aim to boost Indonesian export earnings

Although Indonesia had announced plans to join the Trans-Pacific Partnership (TPP), a free trade agreement (FTA) encompassing 12 Pacific Rim economies, US withdrawal from the trade pact in late 2016 has pushed the country to refocus its FTA priorities.

Trade authorities are now pursuing bilateral deals with actors including the EU, US and Australia. New trade agreements offer the country considerable opportunity to improve export revenue growth, and authorities have made rapid progress towards finalising negotiations with the EU. Australian demand for sugar export markets is also supporting productive FTA negotiations. The outlook for trade growth with the US is cloudier, however, after the administration of US President Donald Trump took recent action to examine its growing trade deficit with Indonesia, including an investigation into unfair trade practices in the biofuel industry, which could see the country’s US-bound export revenues contract.

BACKGROUND: In February 2016 members of the US-led TPP – Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam – which collectively account for around 40% of the global economy, met in Auckland to sign the agreement. The TPP would see 18,000 trade barriers reduced or eliminated, including restriction on textiles and apparel, and the introduction of regulations on fair trade and small business support.

Although Indonesia was not a signatory in Auckland, the country had planned to join. A 2013 study by Johns Hopkins University in the US found that Indonesia stood to gain $62bn from TPP membership. During an October 2015 visit to Washington, President Joko Widodo’s told then-US President Barack Obama that Indonesia intended to join the TPP. During the same visit, he secured $20bn in foreign direct investment commitments from US investors, returning in February 2016 to attend the ASEAN summit in California. Trade relations between the two nations had been warming until the 2016 US elections. President Trump’s first announcement was US withdrawal from the TPP, effectively killing the agreement. Under its terms, countries accounting for at least 80% of the group’s total GDP must join for the deal to be ratified, meaning the absence of the US or Japan would end the pact.

BILATERAL PURSUITS: In January 2017 Australia and New Zealand announced that they hoped to salvage the TPP by convincing Indonesia and China to become signatories, though the response has been tepid from the former. The country is already a member of the Regional Comprehensive Economic Partnership (RCEP), a proposed FTA between China, India, Japan, Australia and ASEAN. Indonesia is the lead RCEP negotiator for ASEAN. China has also proposed a counter-FTA, the Free Trade Area of the Asia Pacific.

Indonesian authorities have increasingly shifted their focus towards establishing bilateral trade agreements, which are less complex and can be ratified in less time. Indeed, in January 2017 Dewi Fortuna Anwar, deputy secretary of the office of the vice-president, told media that Indonesia is more interested in pursuing a bilateral trade agreement with the US now that TPP has been abandoned. The announcement came days after Jusuf Kalla, Indonesia’s vice-president, met with Joseph Donovan, the US ambassador to Indonesia, with the pair discussing how to boost comprehensive bilateral cooperation, including on trade and investment.

In February 2017 Airlangga Hartarto, minister of industry, reiterated the government’s intentions to strengthen bilateral cooperation with the US, particularly in the area of textiles. Indonesian textile and apparel exports to the US are subject to a 12.5% tariff, putting them at a disadvantage compared to other regional exporters such as Vietnam, whose textile exports to the US are not subject to tariffs, after the pair signed a bilateral trade agreement in July 2000. Hartarto said the US is also expected to invest in a network of industrial zones including Dumai in Riau, the Berau zone in East Kalimantan, the Kendal zone in Central Java and the Gresik zone in East Java.

TALKS WITH THE EU: Indonesia is in the midst of negotiations for two potentially significant bilateral trade agreements: a comprehensive economic partnership agreement (CEPA) with the EU and a potential FTA with Australia. Indonesia currently trades with the EU under a generalised scheme of preference (GSP), which offers duty-free access or tariff reductions for around 40% of Indonesian exports to the EU.

In December 2009 the EU announced plans to pursue a number of new bilateral FTAs with individual ASEAN countries. The Indonesia-EU Vision Group was launched the same year, with then-President Susilo Bambang Yudhoyono and José Manuel Barroso, the European Commission president at the time, beginning the talks. The agreement offers considerable economic benefits to the country. In a 2015 study, the Centre for Strategic and International Studies estimated that CEPA would boost EU-bound exports by 5.4% to €802m, of which 62% would be derived from new trade in diversified products.

CEPA NEGOTIATIONS: After an agreement between Indonesian and EU trade officials at the 2016 World Economic Forum to accelerate CEPA, the European Commission (EC) stated in July 2016 that negotiations would take place in Brussels in September 2016. The EC later reported that talks emphasised trade in goods and covered issues including rules of origin, technical barriers to trade, sanitary and phytosanitary measures, Customs and trade facilitation, government procurement, services and investment, intellectual property rights, dispute settlement and competition.

Bali hosted the second round of EU CEPA negotiations in January 2017, where chief negotiators agreed to a detailed timetable to intensify intersessional exchanges on a variety of issues under negotiation. The third round was held in Brussels in September 2017. Areas of interest included the exchange of tariff and trade data, with both parties outlining their views on the EU’s initial tariff offer, as well as energy and raw materials, as Indonesia expressed its interest in renewable energy investment, electrification and palm oil exports. The next round of talks is scheduled for early 2018 in Indonesia. Should the agreement fail to be finalised, and Indonesia’s GSP status is lost as a result of its rapid recent economic growth, the country would lose €1.8bn in export revenues, according to a May 2015 report published by the Austrian government.

EFTA PROGRESS: Negotiations are also progressing for a CEPA with the European Free Trade Association (EFTA), which is integrated with the EU through the European Economic Area and Switzerland-EU Bilateral Agreement. This trade bloc comprises 14m people in Iceland, Norway, Switzerland and Liechtenstein. The 12th round of EFTA CEPA negotiations took place in March 2017 in Geneva, after launching in July 2010, with officials announcing at the end of the talks that the agreement was expected to be finalised by 2018.

TRADE WITH AUSTRALIA: In 2016 bilateral trade between Indonesia and Australia sank to its lowest levels since 2009, although the March 2017 announcement that import tariffs on Australian sugar to Indonesia had been reduced from 8% to 5% kick-started stalled FTA negotiations. Australia is keen to benefit from the same ASEAN tariffs that enabled Thailand to capture a significant share of the Indonesian market. Indonesia removed an import tariff for Thai sugar in 2015, driving Australian sugar imports down from 1.25m tonnes annually to 300,000 tonnes in 2016.

Praising the tariff reduction, Steven Ciobo, Australia’s minister of trade, told media he hoped Australia and Indonesia could finalise a bilateral CEPA by the end of 2017, and President Widodo met with Australian Prime Minister Malcolm Turnbull twice in two weeks in March 2017. CEPA negotiations had stalled since 2007 amidst political disputes, including allegations of Australian spying, and the execution of Australian drug smugglers in Indonesia.

Although economists at the Australian National University noted that ASEAN members tend to adopt a multilateral approach in trade negotiations, Indonesia’s recent moves to form bilateral agreements with the US and the EU have brightened the outlook for a CEPA with Australia. For its part, Australia has agreed to eliminate tariffs on pesticides and herbicides imported from Indonesia, and Indonesia is now moving to negotiate a similar tariff reduction for Australian beef exports.

US TRADE TROUBLES: Although progress on CEPAs with Australia and the EU brighten the prospects for trade growth in Indonesia, the potential for new protectionist policies in the US continues to weigh on the outlook. In April 2017 President Trump signed an executive order launching a 90-day investigation into 16 countries against which the US runs a significant bilateral trade deficit. Indonesia, which has grown its US trade surplus from $3.27bn in 2012 to $8.84bn in 2016, was included on the list.

Nevertheless, during the same month the US vice-president, Mike Pence, visited Indonesia and facilitated the signing of 11 commercial and investment deals valued at $10bn between companies from the two countries during his visit. The next month the US government announced it was launching an investigation into whether Indonesia and Argentina had dumped biodiesel in the US market, after the US-based National Biodiesel Board (NBB) filed a petition with the US Department of Commerce and US International Trade Commission to impose anti-dumping duties on Indonesian biofuel imports.

The EU made a similar move in 2013, after which biodiesel sales to Europe fell by 50%. The NBB’s petition came weeks before Indonesia was set to file a complaint with the World Trade Organisation against the EU for imposing the duties. The result of the investigation could have serious consequences for Indonesian bio-fuel producers. The US is by far Indonesia’s largest bio-fuel market, accounting for 93.8% of exports in 2016, or 350,176 tonnes. Indonesian officials announced plans to boost biodiesel exports to 500,000 tonnes in 2017, although the broader outlook for bilateral trade growth between the two nations remains mixed.