Indonesia’s Strategic Shift: The EU Free Trade Agreement
A New Era in Trade Relations
Indonesia is on the cusp of a strategic transformation in its trade policy, as it seeks to finalize a long-delayed free trade agreement with the European Union (EU). This move comes in the wake of rising geopolitical tensions and is aimed at reducing the nation’s reliance on significant trading partners like China and the United States. Dubbed the Indonesia-EU Comprehensive Economic Partnership Agreement (CEPA), this deal has been in negotiations for over a decade, and recent high-level engagements, including President Prabowo Subianto’s visit to Brussels, indicate that a resolution may be on the horizon.
The Urgency for Change
The backdrop to these negotiations is a challenging economic landscape for Indonesia. With a 19% tariff on US imports and diminishing key commodity exports, notably in light of China’s economic slowdown, the timing for this agreement is crucial. Andry Satrio Nugroho, head of the Center of Industry, Trade and Investment at the Institute for Development of Economics and Finance (Indef), referred to the CEPA as a "new lifeline for Indonesia’s industry," emphasizing its potential economic benefits.
Broader Regional Shifts
As countries worldwide recalibrate their trade relationships due to increasing tariff barriers, many ASEAN nations are similarly pursuing trade discussions with the EU. Rory O’Donnell, partner for international agriculture, food, and trade at Penta Group, pointed out that the global trade landscape has shifted profoundly since the US re-introduced sweeping tariffs. The CEPA is part of a broader regional effort to diversify economies and minimize vulnerability to external pressures.
Economic Potential of CEPA
The potential economic implications of the CEPA are significant. The EU estimates that finalizing the trade agreement could boost bilateral trade by approximately €8 billion (around SGD 12 billion). Jakarta is projecting a 50% surge in exports to Europe, a promising scenario for the Indonesian economy. Airlangga Hartarto, Coordinating Minister for Economic Affairs, mentioned that the agreement could grant Indonesia zero tariffs on nearly 80% of its exports, thereby eliminating various non-tariff barriers.
Over the long term, CEPA could unlock up to USD 60 billion in economic value and provide access to a combined population of 700 million across Europe and Indonesia. This expanded access not only bolsters Indonesia’s economy but also offers a beacon of hope for labor-intensive sectors like footwear, currently threatened by impending layoffs and substantial US tariffs.
Diversification of Trade Partners
For decades, Indonesia has relied heavily on China and the US as primary export markets. However, the growing geopolitical friction and recent tariff escalations have highlighted the risks associated with such dependency. O’Donnell contended that Indonesia’s efforts to diversify its trading partnerships signify a desire to build economic resilience rather than abandoning existing relationships altogether.
The Role of Downstream Commodities
With China’s economic slowdown impacting demand for Indonesian exports, the need for diversification has intensified, particularly for downstream commodities. Once primarily exported to China, goods like ferro-nickel are now seeking new markets. European countries, including Italy, the Netherlands, and Belgium, have already started importing these products, albeit in smaller quantities, indicating shifting tides in trade.
The Competitive Landscape
In a rapidly changing regional landscape, Indonesia’s urgency to finalize the CEPA is amplified by the competitive nature of trade negotiations. Securing this agreement would position Indonesia as the third ASEAN country to establish a free trade pact with the EU, following Singapore and Vietnam. Nugroho emphasized the importance of swift action, warning that failure to secure a deal could leave Indonesia lagging in the competitive global market.
Market Attractiveness for European Businesses
European business leaders view Indonesia as a strategic market. Chris Humphrey, executive director of the EU-Asean Business Council, stated that EU companies have long pressed for the completion of the CEPA. The anticipated outcomes of this agreement are vast, with sectors like palm oil, coffee, cocoa, footwear, and textiles poised to benefit significantly. These industries face various tariff and non-tariff barriers that a finalized agreement could help mitigate.
In addition to these sectors, O’Donnell identified automotive, green technologies, and critical raw materials as key areas of interest in the trade discussions, all critical for fostering sustainable economic growth in Indonesia.
Addressing Export Hurdles
However, while optimism surrounds the prospective deal, challenges remain. Any agreement must navigate the complex processes of ratification and implementation in both the EU and Indonesian legislatures, which could extend into 2027. The concern over non-tariff barriers, particularly regarding EU sustainability regulations, poses another significant obstacle for Indonesian exporters.
Indonesia, as the world’s leading palm oil producer, has frequently faced scrutiny over environmental concerns, impacting its export capabilities. Compliance with the EU Deforestation Regulation, which requires proof that goods are not produced on deforested land, adds another layer of complexity. With many Indonesian products still falling short of the EU’s certification requirements, there is an urgent call for the government to assist small and medium-sized enterprises (SMEs) in meeting these standards.
In summary, Indonesia is strategically positioning itself to take advantage of global trade dynamics by pursuing a comprehensive free trade agreement with the EU. With significant potential economic benefits on the horizon, the successful completion of the CEPA could mark a pivotal moment in Indonesia’s economic evolution and regional trade relations.
