Report
Trinh Nguyen

Indonesia Secures a Lower U.S. Tariff but Must Be Careful Not to Alienate China

Indonesia is the least exposed to the US in EM Asia in terms of GDP. And the deal announced by President Trump was met with mixed reactions – the US is imposing 19% import tariff on Indonesian goods, down from 32% threatened. The good news is that it puts Indonesia as third lowest in Asia and close to Vietnam’s and the Philippines’ level of 20%. Indonesia has a USD19bn trade surplus with the US and promised to purchase 19bn more American goods, from airplanes to agriculture products, reorientating more purchases towards the US.Why did Indonesia strike the deal with the US? China is Indonesia’s biggest export market, and the US is only half of that.  But the US is a country where it makes the most surplus, followed by India, while Indonesia has a widening deficit with China. Exposure to US export market makes up 2.1% of GDP in 2024 and imports from the US is 0.7% of GDP. In contrast to President Jokowi, Prabowo wants to make Indonesia a larger winner of Trump 2.0 and push for labor intensive manufacturing growth. It is a country with 193m working age population and 59% of employment is in the informal sector. Jokowi’s focus on the metals and mining sector value chain has not absorbed enough excess labor in Indonesia and raised the country’s dependency on China. Prabowo wants to diversify Indonesia’s sources of growth.What are the implications for Indonesia? The deal signals its ambition to grab more of supply chain diversification out of China. With a 19% tariff rate, it is still competitive vis a vis China for US market access for tariff, but it is not the only factor of consideration. One risk of striking a 19% deal is that others may secure a lower rate. The USD19bn purchase promise raises the question of losers of higher US purchase of US goods, potentially compromising other relationships.Exports to China is a staggering 4.2% of GDP and the relationship also includes deep investment links.  There is a penalty on transshipment of goods and that would require a delicate balance. Indonesia is already dealing with an influx of cheaper Chinese goods that outcompete local industrialists, leading to worsening trade deficits. Indonesia exports and investment are more dependent on China than the US, raising potential costs. Unlike Vietnam, Indonesia is least exposed to tariffs in Asia, and the impact of higher tariffs is less muted. By striking a deal, Indonesia is positioning itself open to business for those looking to reshuffle supply chains and raise bilateral ties with the US. Details are unclear, the deal shows the rates that others will face – about the 20% level – and the floor is likely 10%. What’s clear is that the US is an important market, and it needs trade partners, such as Indonesia.  
Provider
Natixis
Natixis

Based across the world’s leading financial centers, Natixis CIB Research offers an integrated view of the markets. The team provides support to inform Natixis clients’ investment and hedging decisions across all asset classes.

 

Analysts
Trinh Nguyen

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