Beyond Bali and Bintang beer – it’s time for a stronger future with Indonesia
A year ago, Indonesia’s President Joko Widodo became the 15th world leader to address the House of Representatives in Canberra. It was hoped that the visit would be the trigger for an upsurge in strategic co-operation between the two countries but with COVID-19 hitting the world immediately afterwards this has not happened, with the relationship remaining one of unfulfilled potential.
But the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA), now in force, still provides a huge opportunity for the two countries to strengthen that relationship.
The Agreement means that over 99 percent of the current value of Australian goods exports to Indonesia now enter duty-free or under significantly improved preferential arrangements. With Indonesia’s economy accounting for around half of ASEAN’s GDP, the incentive is there for Australia to move beyond Bintang and Bali and better understand and engage with our nearest Asian neighbour.
There’s another imperative as well – security and prosperity in these uncertain and challenging times requires more and better cooperation among countries. Indonesia and Australia both share concerns about regional security and building stronger ties will allow us to collaborate more closely on achieving our shared interests.
For many years, the Australia-Indonesia relationship has focused on tourism – in 2019, 1.2 million Australians made the trip north, contributing towards the 6.1 percent share of GDP that tourism represents to the Indonesian economy. There have been efforts over recent years to deepen the relationship, but only limited success, given different perspectives and cultural approaches.
The IA-CEPA agreement, which came into force in July 2020, represents over a decade of challenging negotiations, with delays and roadblocks arising from factors including political sentiment on both sides. It should act to unlock the latent potential for economic co-operation, which in turn allows the development of stronger connections in other fields, including security.
Indonesia’s 260 million-strong populations are digitally savvy, growing in wealth and appreciative of Australian brands. Goods and services trade was valued at $17.8bn in 2019, but in a COVID-19 world where distance can be tyranny, Australia and Indonesia reciprocal trade should and must grow.
In Australia, the disruption induced by the COVID-19 crisis, along with profound geopolitical shifts in the region, have brought a sharp focus on diversifying and rebuilding regional export and import supply chains. To avoid over-dependency on any single country, governments and companies are critically re-examining their supply chains to restructure flows and networks to build economic resilience. This includes boosting local Australian sourcing for critical industries onshore while also continuing to look for reliable, low cost market suppliers regionally, including from Indonesia.
Australian business leaders recognise the need to develop greater diversity in export destinations and rebuild localised low-cost supply chains throughout the ASEAN region. The IA-CEPA provides increased certainty to Australian businesses and services suppliers in the Indonesian market with 67 percent Australian ownership allowed for most services sectors while some Australian products may be imported into Indonesia duty free or under a reduced tariff rate through a Tariff Rate Quota (TRQ).
TRQs provide Australian exporters with preferential tariff access to Indonesia for male live cattle, potatoes, carrots, citrus fruit, feed grains and rolled steel coil. Exporters can also access automatic permits without seasonality for female live cattle, beef, sheep and goat meats, while some can expect to see tariffs disappear for goods within 5 years and ongoing growth in volume quotas.
The IA-CEPA comes with a healthy support package in the form of an Economic Cooperation Program designed to kickstart trade in three priority sectors: Agri-food, Advanced Manufacturing and Technical and Vocational Education and Training. This program will include industry liaison to share knowledge and support businesses and government implement the agreement.
Major opportunities include:
- High quality food and beverage manufacturing targeting Indonesia’ growing wealthy and middle classes
- Financial services including technical services in support of strengthening Indonesia’s capital markets and new infrastructure financing through public private partnerships
- Defence, aerospace and cyber security, and
- Electrification and decarbonisation towards emissions friendly exports.
Another key opportunity is the exponential growth of Indonesia’s digital economy. With the country’s large penetration rate of smartphone and internet usage, this sector has remained resilient throughout COVID-19. While more established e-commerce businesses providing transportation, food & beverage and travel services slowed down, health-tech and ed-tech have seen sizeable growth as Indonesians pivot on how they have health services and education delivered.
There remain significant challenges to the implementation of IA-CEPA in the form of non-tariff barriers that both governments will have to work through to see the benefits of IA CEPA achieved. To do so it will be essential that both governments work closely with industry to understand the realities of the regulatory environment.
Another challenge facing Australian businesses in achieving long-term success in Indonesia is insufficient awareness of the broader geopolitical context. There are three main areas of potential risk that Australian businesses should factor into strategic planning: the nuances of the China-Indonesia relationship; ongoing challenges in the Australia-Indonesia relationship; and Indonesia’s own domestic socio-political situation.
That we are in uncertain times has become a cliché – but for good reason. Deepening partnerships through mechanisms like the IA-CEPA will develop the kind of resilience that will continue to be needed for security and prosperity for decades to come.
Geopolitics is no longer an optional extra for business – it has to be understood and considered in companies’ market strategies when dealing in markets such as Indonesia. But they should be actively looking at the great potential for increased trade with our northern neighbour.