Prabowo and Trump strike tariff deal – but at what cost to Indonesia?

Straits Times

7 days ago

Indonesian President Prabowo Subianto said his conversation with US President Donald Trump heralded 'a new era of mutual benefit' between both sides.
SINGAPORE – The trade deal announced on July 15 lowering US tariffs on Indonesian goods is seen by some as a diplomatic win for President Prabowo Subianto, though others warn that he may have overpromised and burdened Indonesia with costly commitments.
US President Donald Trump broke the news on his Truth Social platform, saying that he had
struck a trade pact with Indonesia following negotiations with Mr Prabowo to avoid steeper tariffs.
'They are going to pay 19 per cent and we are going to pay nothing... We will have full access into Indonesia, and we have a couple of those deals that are going to be announced,' he later told reporters.
No details have been given about the deal, which comes after deals Mr Trump
has made with Vietnam and the United Kingdom. The US President had threatened Indonesia with a 32 per cent tariff rate starting Aug 1 in a letter last week.
Mr Prabowo on July 16 said his conversation with Mr Trump heralded 'a new era of mutual benefit' between both sides.
As part of the deal, Indonesia has committed to purchasing US$15 billion (S$19 billion) in US energy, US$4.5 billion in American agricultural products, and 50 Boeing jets, many of them 777s.
The sheer scale of Indonesia's purchase commitments, and the lack of clarity on how they will be financed and integrated with national strategies, has raised eyebrows, with experts warning that the deal could set a precedent for other trade partners to demand similar 'full access' terms.
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Associate Professor Yohanes Sulaiman of Jenderal Achmad Yani University in West Java highlighted the plan to buy the Boeing jets, noting that national carrier Garuda Indonesia is still struggling financially and unlikely to be in a position to take on large-scale purchases.
In the first quarter of 2025 alone, the state-owned carrier recorded a net loss of US$75.9 million, surpassing its already-large net loss for the entire 2024 fiscal year.
When asked about the planes on July 16, President Prabowo said that Indonesia needs to grow the national carrier's presence, and to do so, new aircraft were needed.
There are also doubts about the energy component. While Indonesia does import liquefied petroleum gas and other fuels, analysts say a US$15 billion commitment would run counter to the government's ambitions to reduce fossil fuel dependency and boost renewables.
The scale of the energy imports is not aligned with Indonesia's energy transition goals, and this could introduce fiscal strain and policy contradictions down the line, noted Dr Siwage Dharma Negara, a senior fellow at the ISEAS-Yusof Ishak Institute.
'The arrangement doesn't necessarily reflect a balanced, win-win outcome,' he said, warning that Indonesia has to keep in mind the longer-term costs. 'It remains unclear whether the economic benefits fully justify the scale of concessions offered by Jakarta.'
Indonesia's goods trade with the US reached nearly US$40 billion in 2024, with a roughly US$18 billion surplus, and key exports including electronics, footwear, car tyres, palm oil and frozen shrimp.
Indonesia's central bank on July 16 delivered its fourth interest rate cut since September, trimming its benchmark rate by 25 basis points to 5.25 per cent in a bid to support the economy amid weakening global trade and sluggish domestic demand.
Sluggish household spending had already weakened growth in the first quarter, while the outlook for subsequent quarters has been clouded by the impact of US tariffs on global trade.
Some observers found the direct negotiation between the two leaders notable. This growing personal rapport was most visibly demonstrated in November 2024, when Mr Prabowo posted a video of his congratulatory call to Mr Trump, in which he offered to fly over in person, and referenced his American military training.
Bank Permata economist Josua Pardede said Mr Trump singling out Mr Prabowo and calling him 'highly respected' was more than symbolic, chalking it up as a win for the Indonesian leader and his foreign policy approach.
'Such direct acknowledgment from a global leader underscores President Prabowo's capability to manage complex international relations and signals strength and credibility to both domestic and international stakeholders,' he said.
The agreement signals that Mr Prabowo is willing to make bold economic moves to safeguard Indonesia's interests, said Dr Siwage.
'Mr Trump's public acknowledgment of a direct deal with Mr Prabowo suggests that Indonesia took an active role in shaping the outcome,' he said, adding that this highlights how both leaders prefer a personal, transactional style of diplomacy.
Other experts, however, cautioned that the deal may carry ripple effects across Indonesia's wider network of economic relationships.
Mr Muhammad Habib Abiyan Dzakwan from the Centre for Strategic and International Studies (CSIS) warned that the nature of the arrangement, involving significant import concessions, could prompt demands from other economic partners.
'What I am concerned the most is the extent of this unusual arrangement would then affect Indonesia's relations with Asean neighbours and Free Trade Agreement partners. More partners will likely demand the same concession from Indonesia,' he said.
In particular, countries like China, the archipelago's largest trading partner and one of its top investors, may view Jakarta's increasingly close economic overtures to the US with suspicion, he added.
However, he cautioned that the government must ensure it has sufficient budget and fiscal space not only to meet these obligations, but also to prepare for future uncertainties that may arise.
While the figures in the deal appear large, Mr Josua said that the commitments are likely to be staggered over time, and may align with Indonesia's long-term infrastructure and aviation ambitions.
But whether they benefit Indonesia in the long run will depend on how they create jobs and drive productivity, and how Indonesia integrates these commitments with domestic policy objectives.
'Careful negotiation and execution will be critical to ensuring that benefits are maximised and commensurate with the substantial financial outlays involved,' he said.