A Big Deal: EU-Indonesia FTA Negotiations Concluded to Expand Trade and Investment

After almost a decade of negotiation, Indonesia will be a third Asian country other than Singapore and Vietnam to have a Comprehensive Economic Partnership Agreement (CEPA) with the EU. The CEPA covers 21 areas of cooperation, including tariff elimination, trade in goods and services, investment, and sustainability. For Indonesia, the prize is not just exporting more Indonesian goods to the EU but also attracting investment from firms that want to take advantage of Indonesia’s vast 215mn working age population to export to the EU market. After a decade of focusing on moving up the value chain for metals and minerals, Indonesia labor intensive manufacturing has fallen behind and this deal would provide the country with a lift in competitiveness. For the EU, with rising barriers to the US market and greater competition from China, expanding access to Indonesia’s resource rich and fast-growing market is part of its strategy to diversify trade and investment.Currently Indonesia enjoys reduced tariffs under Generalized System of Preferences (GSP) for key exports such as agriculture, footwear and textile to the EU. That will be replaced by the CEPA once it comes into effect around 2027. Under GSP, Indonesia faced scrutiny for its palm oil, but this issue is expected to be resolved under the CEPA. Finally, for the EU, the CEPA represents reciprocal liberalization while the GSP is only reduction of tariff for the less developed countries.Top exports to the EU are palm oil, metals, footwear and textile. Now, the EU is only 7% of Indonesia’s global export share, versus China’s 22% and the US 10%. For processed palm oil and footwear, the EU is more than 20% of the market share. Indonesia imports defense technology, industrial machinery, vehicles and pharmaceutical products from the EU, making up 6% of its total imports. It imports a staggering 31% of its goods from China.Based on Vietnam’s experience with the EU FTA, there is plenty of scope for Indonesia and EU trade and investment relationship to grow - FDI inflows from the EU and trade have expanded rapidly. Already, the EU is rising in prominence in Indonesia’s FDI. The conclusion of the FTA will likely lead to more interest in Indonesia as a market on its own as well as a place to manufacture for the EU market.