Indonesia & Free Trade Agreements: Indonesia-EU CEPA, TPP & EFTA

Another motive to become a member of aforementioned free-trade deals is to attract foreign direct investment (FDI) or safeguard the continuation of existing foreign businesses in Indonesia. If Indonesia refrains from participating in these deals, investors may decide to invest in other countries (for example Vietnam or Malaysia) in order to take advantage of the lower trade tariffs for a wide variety of products.

Indonesian Trade Minister Lembong mentioned the names of Panasonic, Toshiba and Ford - all foreign companies that recently announced they are planning to stop or reduce their operations in Indonesia - as illustrations. He fears foreign companies will move to neighboring peers such as Vietnam or Malaysia (both already have free or easier access to export markets in the EU and also in the USA and Japan through the Trans-Pacific Partnership), whereas Indonesian exports to these regions are still subject to relatively high import tariffs.

Trade Minister Lembong added that the government will remain cautious about participating in any free trade deal and is to carefully study the impact of such a membership first (the impact will also vary on type of industry or sector). Previously there has been resistance in Indonesia about participating in free trade deals on concern that Indonesian products lack competitiveness (mainly due to domestic infrastructure bottlenecks), while it would be easy for foreign products to flow into Indonesia's huge domestic market. As such, Indonesia would merely become a net importer, thus putting more pressure on the country's trade balances as well as the rupiah.

Moreover, participation in free trade deals will also require support from Indonesia's House of Representatives (DPR), not the least because it will require new laws (or the revision of existing laws) to harmonize domestic standards with international ones before membership is allowed. For example, the Trans-Pacific Partnership (TPP) deals with intellectual property protection as well as workers' rights. This would require revisions to Indonesia's existing laws.

Indonesia-European Union (EU) Comprehensive Economic Partnership Agreement (CEPA)

Indonesian Trade Minister Thomas Lembong is eager to reach an agreement with the EU for the establishment of the Indonesia-EU CEPA within two years as this trade deal will improve the investment climate of Indonesia, Southeast Asia's largest economy. Talks about the Indonesia-EU CEPA (involving the reduction of trade barriers and liberalization of government procurement) have been held since 2011. However, these talks were suspended due to Indonesia's 2014 legislative and presidential elections.

Lembong said several commodities are expected to have great potential in the 28-member European trading bloc markets. For example cocoa, palm oil, textile industry, footwear, shoes, and food & beverages.

Trans-Pacific Partnership (TPP)

This trade deal currently involves 12 countries, including the USA and Japan. The deal, signed in October 2015 (after five years of negotiations), created the world's largest free trade area (an area that covers about 40 percent of world trade) and is believed to be intended as a counterbalance to the big economic influence of China. During his state visit to the USA in late October 2015, Indonesian President Joko Widodo told US President Barack Obama that Indonesia intends to join this deal. Indonesia has appointed a team to study the effects of joining the TPP.

Several bottlenecks that occur if Indonesia wants to become a member of the TPP are the TPP's article that stipulates state-owned enterprises of its member nations need to be privatized. This contradicts with Article 33 of the Indonesian Constitution which states "production entities that are vital and affect the people’s lives to be managed by the state".

Meanwhile, United Nations (UN) human rights expert Alfred de Zayas urged nations not to sign the TPP without reaffirming their human rights treaty obligations first.

European Free Trade Association (EFTA)

Established in 1960 as a trade-bloc alternative for those European countries that were unwilling or unable to join the European Economic Community (now the European Union). It consists of non-EU countries Iceland, Switzerland, Norway and Liechtenstein. If Indonesia could manage to arrange a free trade deal with this block it is believed to benefit Indonesia's textile and footwear industries. Currently, import tariffs into these four European countries range between 11 and 30 percent, hence curtailing competitiveness of Indonesian products.

Indonesia exported nearly USD $47 million worth of footwear to the four EFTA countries in 2010. These exports had nearly doubled to USD $93 million in 2014. With lower import tariffs, exports are expected to grow further. Indeed the population size of these four EFTA countries is small. However, the per capita income is relatively high.

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