Is Indonesia Looking to the US to Balance China Influence?

9 October 2019 Jarryd de Haan, Research Analyst, Indo-Pacific Research Programme

Background

Indonesian Coordinating Maritime Affairs Minister, Luhut Pandjaitan, recently met with Jared Kushner, the Senior Adviser to the US President. According to comments he made in Jakarta on 3 October, one of the topics addressed by the pair was closer collaboration on infrastructure projects in Indonesia. As a result of the discussions, Indonesia will reportedly offer the US projects in North Sumatra, North Kalimantan, North Sulawesi and Bali, which make up the four regional comprehensive economic corridors. Indonesia had previously offered the same projects, worth US$91.1 billion, to China.

 

Comment

The comments by Luhut follow a series of developments in the past month, which have shown an increased interest in the economic ties between Washington and Jakarta. The Indonesian trade minister discussed a scheme of generalized system of preferences and also issues of market access and investment regulations with the US. Meanwhile, the US Dairy Export Council expressed interest in increasing its dairy exports to Indonesia.

An exchange of emails that recently surfaced also showed that, late in 2018, US trade officials had convinced Indonesia to loosen rules governing its new domestic payment network. On top of those developments, trade has also grown steadily in the past five years, with two-way trade growing by four billion from 2014 to 2018 reaching $28.7 billion.

In advancing its infrastructure development, Indonesia hopes to seek funding through the recently formed United States International Development Finance Corporation (IDFC). The IDFC, which merges a number of investment and aid programmes, will begin operations this month. It will provide $60 billion in loans, loan guarantees and insurance to companies seeking to do business with, or invest in, developing countries. According to some analysts, that programme is strongly intertwined with US foreign policy ambitions, namely to counter the influence of the Chinese Communist Party in those developing countries.

In Indonesia, however, Tokyo has already positioned itself as a strong and reliable alternative to Beijing as a source of infrastructure investment. In fact, although it was overtaken by China in 2017, Japan has since reclaimed its place as the second-largest source of investment, behind Singapore.

Investment from the US, on the other hand, is around a quarter of what Indonesia receives from Beijing and Hong Kong combined. With the IDFC beginning its operations this month, that scenario could change and investment from the US may increase significantly. For that to happen, however, Indonesia will need to compete with many other developing countries and is not guaranteed to get a large slice of the pie.

From Indonesia’s perspective, taking advantage of the IDFC is less about safeguarding itself from Chinese influence and more about securing much needed investment to fill the country’s significant infrastructure gap. As noted in a previous Strategic Weekly Analysis, Japan already plays a significant role in counterbalancing Beijing’s Belt and Road Initiative (BRI), through its foreign policy of a Free and Open Indo-Pacific (FOIP). Through that initiative, the Japanese Government hopes to improve the environment for investment, further promote quality infrastructure, promote the use of Japanese technology and also strengthen connectivity in the region. Indonesia has also been cautious about Chinese investment, setting strong terms for their initial offer of investment projects to China.

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