Free trade agreements to bring stability to Indonesia amid changing international trends

Indonesia has made significant progress in expanding trade relationships with two major trade partners under the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) and the Indonesia-European Free Trade Association Comprehensive Economic Partnership (IE-CEPA), with both deals set to reduce trade barriers and provide new investment opportunities for foreign businesses in Indonesia. Against a backdrop of increased US and global protectionism, these two agreements demonstrate Indonesia’s commitment to globalisation and economic liberalisation, and could see foreign direct investment (FDI) inflows from both the EU and Australia increase in the coming years. At the same time, both deals pose some challenges.

IA-CEPA will eliminate tariffs on a broader selection of Australian products, putting Indonesia at risk of seeing its existing trade deficit with Australia grow even larger in the coming years, while opportunities to expand Indonesian exports to Australia remain limited.

Negotiations for IE-CEPA face similar challenges, with the EU fair competition prerogatives appearing somewhat one-sided, as evidenced by the recent imposition of anti-dumping tariffs on Indonesian biodiesel. The European Parliament’s recent legislation mandating the elimination of biofuel consumption by 2030 has also raised questions about the long-term benefits of a free trade agreement with the bloc.

Development

In August 2018, following a meeting between President Joko Widodo and Scott Morrison, the Prime Minister of Australia, the government announced it had finalised negotiations on the IA-CEPA, which had been under way since November 2010.

The authorities reported to international media that the IA-CEPA will “open new markets and opportunities in multiple sectors, including the Australian education sector, with the proposal of opening an Australian university campus in Jakarta, as well as businesses, primary producers, services providers and investors”. The agreement was signed in March 2019 and is expected to be officially ratified by both Parliaments by the end of the year or in the early months of the following year.

Building on the ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA), IA-CEPA gives Australia, Indonesia’s 10th-largest trade partner, preferential tariff treatment on a host of major export categories including sugar and cattle, with the Australian Department of Foreign Affairs and Trade (DFAT) reporting that 99% of Australian goods exports by value to Indonesia will be duty free by 2020 under the agreement, compared to 85% under AANZFTA.

Indonesia will also guarantee automatic issue of import permits for products including live cattle, frozen beef, sheep meat, feed grains, rolled steel coil, citrus products, carrots and potatoes, with the DFAT reporting that import licences have been “a major irritant for many Australian exporters into Indonesia”.

Key outcomes for Indonesia, according to the DFAT, include the elimination of all remaining tariffs on Indonesian imports into Australia, including textiles, coffee and palm oil. Services and investment will also benefit from open policy settings, or exceptions that preserve policy flexibility in certain areas, such as public health and education, social services, culture and broadcasting, indigenous policy and maritime transport. Specific provisions include providing 200 Indonesians per year with six months’ worth of job training in Australia, and raising the number of working holiday visas available to Indonesians from 1000 per year to 4100.

IA-CEPA Challenges

In March 2019 Australian labour unions voiced strong objection to any provisions that would allow more temporary visa holders into the country, telling local media that they would lobby a future Labour government to renegotiate IA-CEPA prior to parliamentary ratification.

Indonesia runs a large and growing trade deficit with Australia, with the DFAT reporting $6.8bn ($5.1bn) worth of exports to Indonesia in 2017-18, against $4.5bn ($3.4bn) of imports. Statistics from Indonesia’s Ministry of Trade (MoT) paint a more negative picture, reporting that its trade deficit with Australia rose from $667.7m in 2013 to hit $699.1m in 2014, $1.1bn in 2015, $2.1bn in 2016 and a five-year high of $3.5bn in 2017.

Although the deficit moderated to $3bn in 2018, it nonetheless represented a four-fold increase on 2013 levels, driven mainly by a sharp increase in oil and gas imports from Australia, which rose from $208.7m in 2013 to $965m in 2017 before moderating to $664.8m in 2018. Indonesian exports to Australia have simultaneously trended downwards, falling from $5bn in 2014 to $3.7bn in 2015, $3.2bn in 2016 and a seven-year low of $2.52bn in 2017. Overall, exports rose to $2.8bn in 2018, an increase of 10.9% on 2017, though a decline of 35.9% on the $4.4bn recorded in 2013.

Limited Manufacturing Benefits

The Indonesian Automotive Industry Association reported in October 2017 that it had high hopes for boosting auto exports to Australia under IA-CEPA. However, exporters will face several challenges in achieving this objective.

Indonesia’s auto industry generally specialises in manufacturing multi-purpose vehicles with room for up to seven passengers, a style that is not popular or in demand in Australia. Meanwhile, Australian emission standards are currently much higher than Indonesian standards, meaning that Indonesian exporters would have to invest significant amounts to upgrade their facilities in order to sell to the Australian market. While relaxed origin requirements for electric vehicles could help support Indonesia’s nascent electric vehicle manufacturing industry, challenges related to vehicle styles and passenger volumes will likely persist.

Additionally, manufactured goods comprise a relatively small proportion of exports to Australia. Although the MoT reports that non-oil and gas products dominate its Australian export base, accounting for $2.2bn of total Australia-bound exports in 2018, against $636.8m of oil and gas exports, the DFAT reports that crude petroleum accounted for the bulk of its Indonesian imports, or A$1bn ($752.9m), in FY 2017/18, while wood products and manufactured tobacco accounted for a combined A$355m ($267.3m), indicating low demand within Australia for Indonesian-manufactured goods.

IE-CEPA 

Similar challenges persist with IE-CEPA, which seeks to build on a partnership and cooperation agreement signed in November 2009, and which entered into force in May 2014. In July 2016 the EU and Indonesia officially launched negotiations on IE-CEPA, hosting six rounds of talks until October 2018, with international media reporting that the seventh round concluded in mid-March 2019 in Brussels. The EU was Indonesia’s fourth-largest trade partner in 2017, accounting for €25bn of total trade recorded.

During the sixth round of negotiations, the European Investment Bank and the government of Indonesia signed a memorandum of understanding (MoU) to promote European investment in green sectors, bolstering the country’s resilience to natural disasters and improving livelihoods. Potential areas of collaboration under the MoU include renewable energy, transport, efficient energy generation, and waste and water management.

Apart from the MoU, few details of IE-CEPA negotiations have been made public, prompting the Netherlands-based Centre for Research on Multinational Corporations (SOMO) and local NGO Indonesia for Global Justice (IGJ) to call on the EU to improve transparency in an October 2018 press release.

The EU reports that IE-CEPA seeks to enable the free flow of goods, services and investments between the two partners, while “embracing sustainable development, intellectual property rights, fair competition and economic cooperation”. However, SOMO and IGJ have raised concerns about potential problems with the agreement, many of which relate to the negative impacts of economic liberalisation on Indonesian domestic development. These include the extension of intellectual property rights and its potential impact on affordable medicine and food security, the abolition of performance requirements binding incoming FDI to national development objectives, and the potential for foreign investors to challenge government regulations under an investor-state dispute settlement mechanism.

Biodisel Case Study

EU fair competition prerogatives, as well as ongoing efforts to reduce biofuel consumption, could also pose a challenge. In 2013 the EU moved to impose anti-dumping tariffs of between 8.8% and 23.3% on Indonesian biodiesel imports, with international media reporting that the decision was part of an effort to protect European biofuel producers. Although the European Commission (EC) does not publish detailed statistics on biodiesel imports, animal and vegetable fats and oils were the largest single category of Indonesian products exported to the EU in 2017, accounting for 19.3% of the total.

Indonesia maintains a trade surplus with the EU, which reached a high of $10.6bn in 2011. However, the surplus contracted to $5.6bn in 2013 and a 10-year low of $5.1bn in 2016. According to the EC, Indonesia’s trade surplus rebounded to $7.8bn in 2017, the most recent year for which statistics are available, while the European External Action Service reports that EU palm oil imports from Indonesia increased by 27% in the same year to surpass $2.9bn.

The EU is the second-largest importer of Indonesian palm oil after India, although this will likely change in the coming years. In November 2018 the European Parliament unveiled plans to phase out high-emitting biofuels made from palm and soybean oil, passing a law that states no EU member can expand biofuel consumption above 2019 levels, and implementing a gradual reduction of palm and soy biofuels consumption with the goal of completely eliminating use of the fuel by 2030.

Indonesia won an appeal against EU-imposed anti-dumping duties in March 2018, when the European Court of Justice ruled that the bloc must eliminate biodiesel duties on Indonesian imports. However, the imposition of elevated import duties to protect European domestic industries means that IE-CEPA regulations could potentially harm Indonesian exporters, while longer-term plans to phase out EU biofuel consumption raised serious doubts regarding the long-term benefits on offer to Indonesia in the terms of the agreement.