Australia-Indonesia Free Trade Agreement: A Long Road Ahead despite Concluding Negotiations

29 August 2018 Jarryd de Haan, Research Analyst, Indian Ocean Research Programme

Background

Less than a week after taking office, Prime Minister Scott Morrison will travel to Jakarta to announce agreement on a long-awaited free trade deal. The trip, which is due to take place on 30 August, was originally planned by former PM Turnbull as part of a wider tour through South-East Asia. With the recent leadership spill, however, there were fears that the trip would be delayed. While the other legs of the visit, to Malaysia, Thailand and Vietnam, have been cancelled, however, the new leadership has shown much-needed commitment to Indonesia in going ahead with the visit. The actual signing of the trade agreement is scheduled to take place later this year, in September or October.

Comment

Negotiations for a free trade agreement between Indonesia and Australia, known as the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA), have been underway for almost a decade and have been plagued by delays and roadblocks. According to Tim Lindsey, a leading expert on Indonesian law, these delays were caused by a number of factors, including distrust of foreign capital among Indonesian politicians, combined with increasing nationalist sentiments influencing policy decisions. Additionally, Indonesian President Joko “Jokowi” Widodo’s reformist agenda was pushed back by a wealthy oligarchy, creating a large divide between reformist policy announcements and the business environment faced by investors.

Given that these obstacles to the IA-CEPA still persist, it is somewhat surprising that a deal is slated to be announced. As a result, it is likely that the upcoming deal will be of limited scope compared to what was originally proposed for the IA-CEPA. There have been signs for some time that this may be the case. In August 2017, Indonesian chief negotiator Deddy Saleh told the Sydney Morning Herald that negotiators were aiming for a “good quality” agreement, rather than a “high quality” one. The difference was that rather than focusing on fully-opening markets, both parties would instead focus on an agreement that was mutually beneficial. It is not clear what a mutually beneficial agreement would entail, but announcements of agreed tariff reductions on minor commodities, such as raw sugar and pesticides, hardly raises expectations.

While the details of the trade deal will not be made public for a number of months, a poor outcome could be seen to reflect the current state of economic relations between Indonesia and Australia. As observed in a recent Strategic Analysis Paper, Australia could become increasingly less relevant to Indonesian economic interests over the next decade. The trade relationship between the two countries is heavily skewed in Canberra’s favour, with Jakarta facing deficits of around $2.5 billion a year. Given Australia’s relatively small population, Indonesia may not be focused on boosting exports to Australia. It is probably better off seeking to expand trade in other, larger, markets. Historically, China, India and the United States have been Indonesia’s largest and fastest-growing export markets.

Rocky relations and frequent misunderstandings add to Australia’s lack of strategic importance for Indonesia. It is unsurprising, therefore, that negotiations for the IA-CEPA were difficult. In this context, a “good quality” agreement may be the best outcome Australia can expect. Following the agreement, Canberra officials should continue to work on improving ties with Indonesia, laying the foundations for future upgrades to the agreement that will, hopefully, eventually result in a “high quality” agreement.

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