Indonesia's EU free trade push signals pivot from China-US dominance

Business Times

20-07-2025

[JAKARTA] Indonesia's bid to finalise its long-delayed free trade agreement with the European Union is being seen as a strategic shift in the nation's trade policy, as South-east Asia's largest economy looks to reduce its reliance on major partners such as China and the US.
Known as the Indonesia-EU Comprehensive Economic Partnership Agreement (CEPA), the deal has been under negotiation for more than a decade. But recent high-level engagements, including President Prabowo Subianto's visit to Brussels on Jul 13, signal that the agreement could finally be sealed by September this year.
Analysts said that Indonesia, currently grappling with 19 per cent US import tariff and declining key commodity exports amid China's economic slowdown, could find much-needed relief if the free trade agreement with the EU is finalised.
'This is a new lifeline for Indonesia's industry,' said Andry Satrio Nugroho, head of the Center of Industry, Trade and Investment at the Institute for Development of Economics and Finance (Indef).
Casting a wider net
The agreement comes at a time when many countries are recalibrating their trade relationships due to rising geopolitical tensions and tariff barriers.
Rory O'Donnell, partner for international agriculture, food and trade at Penta Group, noted that the global trade landscape has shifted significantly since the US re-introduced sweeping tariffs under Trump 2.0.
A NEWSLETTER FOR YOU
Friday, 8.30 am Asean Business
Business insights centering on South-east Asia's fast-growing economies.
Sign Up
Sign Up
He said that many Asean countries are currently engaged in trade discussions with the EU, reflecting a broader regional effort to diversify international trade partnerships.
'We have noticed increased trade activity across the world since the announcement of tariffs by (US) President (Donald) Trump in April,' he added.
'One of the big impacts of the tariffs announcements has been countries seeking to diversify their supply chains as some sort of protection against these tariffs.'
The EU estimates that a finalised trade agreement with Indonesia could lift bilateral trade by around eight billion euros (S$12 billion), while Jakarta projects that the pact could drive a 50 per cent surge in exports to Europe.
Coordinating Minister for Economic Affairs Airlangga Hartarto said that the agreement would grant Indonesia zero tariffs on nearly 80 per cent of its exports to the EU, along with the removal of various non-tariff barriers.
Over the long term, the agreement could unlock up to US$60 billion in economic value and open access to new market opportunities across a combined population of 700 million in Europe and Indonesia.
For Indonesia, the agreement represents more than just increased market access.
Expanded access to the European market serves as a ray of hope for Indonesia's labour-intensive industries, such as footwear, which are facing a looming wave of lay-offs and the threat of 19 per cent tariffs from the US.
Yoseph Billie Dosiwoda, executive director of the Indonesian Footwear Association, said that if the CEPA trade agreement is finalised, it could create millions of new jobs at home. Last year, Indonesia's footwear exports to the EU reached US$1.7 million, making it one of the country's top markets after US and China.
Analysts said it reflects a broader strategic shift away from overdependence on the world's two dominant economies.
For decades, Indonesia leaned heavily on China and the US as its primary export markets. But escalating tariffs, geopolitical friction and a slowing Chinese economy have exposed the vulnerability of such reliance.
'Indonesia is clearly looking for other markets, given the uncertainty in its relationship with the US,' said O'Donnell. 'This doesn't mean abandoning the US altogether, but it shows a desire to build more resilience.'
Nugroho from Indef highlighted that China's economic slowdown has underscored the risks of overreliance on a single export market.
The need to diversify has become especially pressing for Indonesia's downstream commodities. Exports such as ferro-nickel, once absorbed largely by China, are now seeking new destinations amid weakening demand. Official data shows that several European countries – including Italy, the Netherlands and Belgium – have already begun importing these products, albeit in smaller volumes.
Indonesia's urgency to finalise the agreement is also shaped by growing regional competition. If successful, the deal would make Indonesia the third Asean country – after Singapore and Vietnam – to secure a free trade pact with the EU.
'Indonesia risks being left behind if it doesn't secure its own deal. This is a necessary move to remain competitive,' said Nugroho.
Indonesian President Prabowo Subianto (centre) in Brussels; the Indonesian government hopes that the deal will boost value-added production in sectors such palm oil, nickel and copper – where the country still exports mostly raw or semi-processed goods despite strong upstream capacity. PHOTO: INDONESIA PRESIDENTIAL SECRETARIAT
Attractive market
European business leaders are welcoming the prospect of a deal. Chris Humphrey, executive director of the EU-Asean Business Council, told BT that EU companies have long regarded Indonesia as a strategic market within South-east Asia.
'Our members have been pressing for the completion of CEPA for many years,' he said. 'While we need to see the final details, there is growing optimism.'
The CEPA is expected to generate mutual gains across a wide range of sectors.
For Indonesia, key beneficiaries are likely to include palm oil, coffee, cocoa, footwear and textiles – industries where the country already maintains a significant global presence but faces various tariff and non-tariff barriers in European markets.
O'Donnell noted other areas such as automotive, green technologies and critical raw materials that would also be important aspects of any deal.
The Indonesian government hopes the deal will boost value-added production in sectors such palm oil, nickel and copper – where the country still exports mostly raw or semi-processed goods despite strong upstream capacity.
On the other side, EU producers could see expanded access to the Indonesian market for high-demand goods such as dairy products, meat, and processed foods.
Last year, total trade between Indonesia and the EU stood at US$30.1 billion (or 27.3 billion euros), with the EU exporting 9.7 billion euros worth of goods to Indonesia and importing 17.5 billion euros in return.
Humphrey from the business council added that the deal could unlock greater investment opportunities, especially if Indonesia addresses long-standing concerns over its local content requirements and non-automatic import licensing – both of which are often seen by trading partners as de facto non-tariff barriers.
'If those issues are tackled, I would expect increased investor interest in Indonesia,' he said. 'It would also enhance Indonesia's role in global supply chains, especially around sustainability and ethical sourcing.'
Indonesia, the world's largest palm oil producer, has repeatedly faced export hurdles in Europe due to ongoing concerns over deforestation. PHOTO: AFP
A high bar to clear
While optimism is growing, experts cautioned that ratification and implementation could take time. Even if the deal is signed this year, it must still be ratified by both the EU and Indonesian legislatures, a process that could stretch into 2027.
Non-tariff barriers remain another major challenge. Nugroho said that EU sustainability rules set a high bar to clear for Indonesian exporters. Indonesia, the world's largest palm oil producer, has repeatedly faced export hurdles in Europe due to ongoing concerns over deforestation.
Most recently, Indonesia faced the EU Deforestation Regulation, which required proof that goods were not produced on deforested land. However, its implementation was delayed after pushback in the European Parliament.
'Many of Indonesian products still fall short of EU certification requirements,' Nugroho said. 'This is where the government must step in, especially to support SMEs (small and medium-sized enterprises) and commodity producers in raising their standards.'