Indonesia Free Trade Agreement a Possibility as Canada Looks to the Indo-Pacific

22 June 2021 Leighton G. Luke, Research Manager, Indo-Pacific Research Programme

For Canadian exporters and service providers, ICA-CEPA presents an opportunity to expand into a youthful, growing and technologically-aware market that is also the largest economy in South-East Asia. It will also complement the rising awareness in Canada of the increasing strategic and economic importance of the Indo-Pacific.

 

Background

Indonesia and Canada have commenced negotiations for a free trade agreement or, as it is known officially, the Indonesia-Canada Comprehensive Economic Partnership Agreement (ICA-CEPA). The announcement was made jointly and simultaneously on 21 June (Jakarta time) by Indonesian Trade Minister Muhammad Lutfi and the Canadian Minister of Small Business, Export Promotion and International Trade, Mary Ng, on 20 June (Ottawa time). The first round of negotiations is expected to commence later this year.

For Canadian exporters and service providers, ICA-CEPA presents an opportunity to expand into a youthful, growing and technologically-aware market that is also the largest economy in South-East Asia. It will also complement the rising awareness in Canada of the increasing strategic and economic importance of the Indo-Pacific.

 

Comment

With the Canadian Government increasingly looking towards the Indo-Pacific, Indonesia, with its large and growing economy, stands out as a natural partner. The two countries already enjoy a generally warm political relationship and solid trading relations, albeit ones that stand to benefit from further expansion.

According to Global Affairs Canada, the Canadian Government’s Department of Foreign Affairs and Trade, two-way merchandise trade totalled C$3.4 billion ($3.65 billion) in 2020, with trade in both goods and services slightly in Canada’s favour. Indonesia is already Canada’s largest export market in South-East Asia, giving a solid basis upon which to further build. In 2020, Canadian goods exports to Indonesia were valued at C$1.78 billion and imports from Indonesia to Canada were worth C$1.61 billion. That same year, Canadian services exports to Indonesia were worth C$189 million, while Canadian companies imported C$172 million worth of services from Indonesia. For Indonesia, Canada is also an important source of foreign direct investment, valued at C$3.5 billion in 2020.

For Canadian exporters, Indonesia is already a solid market for agricultural and manufactured goods and natural resources, and ICA-CEPA should enable those to increase. The agreement should also, once ratified, hold potential for Canadian companies operating in the aerospace, infrastructure, education – a source of potentially greater competition with Australian education providers – and oil and gas sectors to enhance their presence in Indonesia.

The often difficult business environment in Indonesia will still need to be factored into account by Canadian firms looking to do more in Indonesia but, citing increases in business and government efficiency (the 2020 Omnibus Law on Job Creation) and improved economic performance despite the COVID-19 pandemic, the International Institute for Management and Development moved Indonesia up by three positions into thirty-seventh place among the 64 countries covered by its annual World Competitiveness Rankings report.

A little less positively, perhaps, Canada slid six places from eighth to fourteenth, due to factors that may negatively affect future exports under ICA-CEPA and which include:

‘… shortage of skilled talent in high-growth sectors: technology, digital health and advanced manufacturing; challenges in scaling up small to medium enterprises to develop intellectual property, commercialise and export; and challenges leveraging trade agreements to build international supply chains.’

For Indonesia, the ICA-CEPA, once ratified, not only has the potential to increase exports but could also improve the range and quality of imported products and services available to Indonesian consumers. On the Canadian side, the series of public consultations and roundtables held by the Canadian Government across Canada in January and February to discuss ICA-CEPA reportedly received an overwhelmingly positive response. For the Canadian negotiators, the challenge ahead may well lie in securing the best possible access to an economy that, while large and growing, is often still quite protected and protectionist.

Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of Future Directions International.

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