The way Indonesia deals with US, EU could set bad precedent for countries looking to forge similar deals

CNA

20 hours ago

JAKARTA: The latest trade deal between Indonesia and the United States could set a 'bad example' for countries looking to make similar arrangements with the Western superpower, according to some experts.
And as US President Donald Trump's tariff threats spread ripples of economic uncertainty, analysts also cautioned against the potential pitfalls of a recently finalised agreement between the Southeast Asian archipelago and the European Union (EU).
In Trump's plans to impose lofty 'reciprocal' tariffs on goods imported from almost every country and territory around the world, Indonesia was initially hit by a 32 per cent tariff on Apr 2, which was then abruptly postponed for three months to leave room for negotiations.
At first, talks between Jakarta and Washington appeared to have been fruitless, with Trump informing Indonesia on Jul 7 that the tariff would remain at 32 per cent.
But he has backtracked on that decision, announcing on social media on Wednesday (Jul 16) that the US tariff on Indonesian goods will be lowered to 19 per cent.
The uncertainty triggered by the tariff threats could cause some countries to look towards other trade alliances, experts told CNA.
'Suddenly, every country is looking to diversify their markets and seek more reliable trading partners,' Yusuf Rendy Manilet, an economist from the think tank Center of Reform on Economics (CORE), told CNA, adding that Trump's tariff decisions have so far been subjective and arbitrary.
'Trump's policies have been unpredictable and without solid grounds. He is even hitting his allies with lofty tariffs.'
But as countries around the world rush to find new markets, some nations might be tempted to roll back long-standing policies and water down key environmental and industrial protections in exchange for sealing the deal quickly, said analysts.
Analysts warned such rushed negotiations could lead to trade imbalance, job losses and environmental damage, as they also cautioned against countries potentially sacrificing their domestic interests.
INDONESIA-EU'S TUG OF WAR
Amid the backdrop of Trump's ever-changing policies, which have so far caused panic buying, stock market crashes and threats of retaliation - Indonesia and the EU agreed to expedite negotiations on a proposed economic agreement.
Diplomats from Jakarta and Brussels have been locked in a nine-year political tug-of-war, struggling to work out details of the potential partnership, which has been under negotiation since July 2016 and discussed in more than a dozen rounds of talks.
However, on Sunday (Jul 13), President of the EU's executive branch, the European Commission, Ursula von der Leyen announced that both sides were ready to finalise the agreement.
'We're living in turbulent times, and when economic uncertainty meets geopolitical volatility, partners like us must come closer together,' von der Leyen said at a news conference in Brussels alongside Indonesian President, Prabowo Subianto.
Officials from both sides still need to iron out some details of the final document, which is expected to be signed in September.
Analysts say the Indonesia-EU treaty could be the first of many agreements forged by countries around the world as they navigate the uncertainty caused by Trump's tariffs.
Indonesia is also looking to expedite its economic partnership negotiations with the Eurasian Economic Community - a union of five former Soviet states including Russia and Kazakhstan - and the South American economic bloc, Mercosur – comprising six countries including Brazil and Argentina.
The tariff imposed on EU countries went from 20 per cent on Apr 2 to 30 per cent as of Jul 12. The EU is still negotiating the tariff before it becomes effective on Aug 1.
Meanwhile, the EU is resuming its free trade negotiations with Malaysia, whichstarted in 2010 but were halted in 2012 due to disagreements over issues such as market access and the EU's environmental regulations affecting Malaysia's palm oil industry.
The EU is also resuming talks with the Philippines, which began in 2013 but stalled in 2017 over concerns about the human rights record of the then-President of the Philippines, Rodrigo Duterte.
'The only good thing from Trump's tariffs is that they bring countries closer together and have them set aside their differences,' Teuku Rezasyah, an associate professor in International Relations at Padjadjaran University, told CNA.
LONG TIME COMING
The EU is Indonesia's fifth biggest trading partner, with US$31 billion worth of goods traded between the two countries in 2024 and Indonesia enjoying a trade surplus of US$9 billion. Members of the European bloc also invested US$29.1 billion in Indonesia in 2023.
"We consider Europe to be very important to us. That is why we would like to see more European presence and more European participation in our economy," Prabowo said in Brussels on Sunday.
However, Indonesia is only the EU's 33rd largest trading partner.
The bloc's largest trading partner is the US, with volume reaching US$975.9 billion worth of goods in 2024. Of the figure, the EU enjoyed a surplus of US$236 billion.
'With the US threatening a 30 per cent tariff on European goods, it is imperative that the EU finds a new market for its products and few markets are as big as Indonesia,' Achmad Nur Hidayat, an economics and public policy lecturer from the Jakarta National Development University, told CNA.
Indonesia is the world's fourth most populous country with a population of around 286 million.
The Indonesia-EU agreement aims to eliminate tariffs on 80 per cent of the goods and services traded between both sides, along with swifter customs procedures and more investment incentives.
Before Trump's tariff plans, these benefits seemed far-fetched with numerous rounds of negotiations ending in a deadlock, said experts.
The EU has been critical towards Indonesia's local content requirement policy, which European carmakers see as a barrier to selling their products more competitively in Southeast Asia's biggest economy.
The local content requirement is a set of regulations designed to protect domestic industries and manufacturing.
Meanwhile, Indonesia has been opposing Europe's anti-deforestation law which requires Indonesian exporters to prove their palm oil, timber or other agricultural products do not contribute to forest destruction.
In April, Prabowo said that Indonesia is willing to be 'flexible' and 'realistic' on its local content requirement, acknowledging that Indonesia does not yet have the infrastructure, technology or resources to produce certain products domestically.
Meanwhile, the EU is making it easier for companies to comply with its anti-deforestation law: requiring them to submit a due diligence statement annually instead of each shipment. The EU will also categorise countries based on their risk of having products linked to unsustainable practices with low-risk countries subjected to fewer compliance requirements.
These new EU requirements, which were also announced in April, will take effect in December.
Officials in Indonesia and the EU have refused to say whether their respective policy rollbacks are part of the economic agreement.
Uli Arta Siagian from the Indonesian Forum for the Environment (WALHI) criticised the EU's decision to relax its requirement.
'It will drive the expansion of palm oil plantations on a massive scale, jeopardising forests and wetlands, which are crucial to local wildlife and the indigenous population,' she told CNA.
Analysts are also criticising Indonesia for rolling back its local content requirement.
'Our manufacturing industry is already suffering and it will suffer even more if the requirement is removed,' said economics lecturer Achmad.
He argued that the local content requirement offers a big incentive for companies to set up factories in Indonesia and removing it would reduce potential investments from companies looking to enter the Indonesian market.
It will also upset companies such as Korean electronics giant Samsung or Chinese mobile phone manufacturer Oppo, which have invested billions of dollars to comply with the regulation.
A WORRYING TREND?
The US has also been critical towards Indonesia's local content requirement, describing it as a non-tariff trade barrier and one of the factors hindering American companies from entering the Indonesian market.
In a Truth Social post, Trump wrote that 'US exports to Indonesia are to be tariff and non-tariff barrier free' in exchange for lowering Indonesia's tariff from 32 per cent to 19 per cent. 'This landmark deal opens up Indonesia's entire market to the US for the first time in history,' he continued.
Trump said Indonesia had also committed to purchasing US$15 billion worth of US energy and US$4.5 billion in American agricultural products, as well as 50 Boeing jets.
'For the first time ever, our ranchers, farmers, and fishermen will have complete and total access to the Indonesian market of over 280 million,' Trump wrote.
Speaking to reporters on Wednesday, Prabowo defended the deal calling it 'mutually beneficial.'
'I have calculated everything. What matters to me are my people. What matters is that I have to protect my workers,' he said, adding that Indonesia is only purchasing what it needs from the US.
The president highlighted that Indonesia does not produce its own wheat and soy, something which the US can supply. The Boeing jet purchase, he continued, will be used to grow its national airline, Garuda.
'I have spoken with President Donald Trump. It was tough negotiation. But in the end there was an agreement. We understood their needs and they understood our needs,' Prabowo said.
Harry Su, research director of Jakarta-based securities firm Samuel Sekuritas Indonesia, questioned if Indonesia should call this a 'win'.
'Is this a good deal for Indonesia? Trump called it a landmark deal. Simply put: US won a lot as Indonesia opens up its entire market to the US,' he said in a statement on Wednesday.
But Wijayanto Samirin, an economist from Paramadina University believed that the US deal might not be all that bad.
With a tariff lower than most countries, US demands for Indonesian products will increase, Wijayanto argued, paving the way for more investment needed to revitalise Indonesia's manufacturing industry.
The economist also highlighted that Indonesia has been importing wheat from Australia and Canada and soy from the US and Argentina.
"We need those products. It is just where we import them from that will be different. So it won't affect our trade balance as a whole," Wijayanto said as quoted by Kompas newspaper.
Indonesia can also benefit from cheaper US goods, particularly technologies and machinery needed to support the country's defence, telecommunication and manufacturing sectors.
Still, economics lecturer Achmad said Indonesia is setting a bad example with the way it handles negotiations with both the US and the EU.
'Prabowo often says: 'One enemy is too many, a thousand friends are not enough', but it should not come with sacrificing domestic interests in exchange for quick deals,' he said.
By backpedalling, Indonesia could jeopardise future negotiations with Eurasia and Mercosur blocs, which might make similar demands for Indonesia to impose zero tariffs and eliminate trade barriers for their products.
'And this is bad for other countries which are now trying to negotiate their own deals with the US or the EU, both of which are now expecting to get the same deal as they did with Indonesia,' he said.