In an effort to strengthen ties and improve access to Southeast Asian markets, the European Union and Indonesia have built on their already solid relationship, which was formalized through a Partnership and Cooperation Agreement (PCA) in 2014. While the EU initially pursued a region-to-region free trade agreement with ASEAN starting in 2007, negotiations were suspended in 2009, prompting a shift toward bilateral agreements with individual ASEAN member states. Against this backdrop, Indonesia and the EU began informal discussions to explore mutual interests, leading to a scoping exercise that laid the foundation for talks on a bilateral free trade agreement. These efforts culminated in the official launch of negotiations in July 2016.
Nine years have elapsed since the European Union and Indonesia convened in Brussels in 2016 to start their negotiations on a bilateral free trade agreement (FTA). Despite the 19 completed rounds of talks and repeated declarations of goodwill from both sides, the deal remains elusive to date. Former President Joko Widodo had set the goal of concluding the agreement by 2024. Although that objective was not achieved, Indonesia’s new President Prabowo Subianto shares the same ambition of diversifying the country’s trade relations and strengthening ties with the European Union. They now aim to finalize the agreement by June 2025. However, turning this agreement into reality and fostering deeper cooperation between the two parties requires several challenges to be addressed. At the heart of the complexity of the negotiations lies a fundamental clash between economic pragmatism and environmental responsibility—serving as a microcosm of the broader dilemmas facing globalised trade in the 21st century.
The negotiations have real consequences for businesses on both sides, particularly for small and medium-sized enterprises (SMEs) that lack the resources to navigate increasingly complex regulatory landscapes while remaining competitive in global markets. As a result, these smaller businesses are subjected to a system that simultaneously demands economic efficiency and environmental sustainability without providing adequate support for achieving both objectives.
The free trade agreement between Indonesia and the EU holds the potential to enhance competitiveness for businesses on both sides, while simultaneously advancing environmental standards. However, to reconcile these seemingly conflicting objectives, concrete measures will need to be implemented to ensure the agreement is both effective and balanced, also for SMEs.
The Tension Between Theory and Practice
The principle of comparative advantage, articulated by David Ricardo over two centuries ago, continues to serve as the intellectual foundation for free trade. In its classical formulation, this theory suggests that countries should specialise in producing goods where they hold a relative efficiency edge, then trade with others to maximize collective welfare. For Indonesia, this theoretical framework points toward leveraging its vast reserves of natural resources—palm oil, nickel, timber, and pulp among them—to supply global markets.
Indonesia holds a comparative advantage primarily in the production of raw materials. For example, it supplies around 60% of the world’s palm oil. The European Union, in contrast, specialises in processing these raw materials into finished goods for consumer markets. A case in point is the company Ferrero, which uses palm oil to manufacture Nutella. In theory, this division of labor should promote mutual benefits through greater efficiency and economic growth.
However, comparative advantage is neither static nor purely economic in nature. It is increasingly shaped by a country’s institutional framework, environmental context, and evolving societal values. In EU-Indonesia relations, Indonesia’s advantage in palm oil production is now routinely scrutinized through the lens of environmental sustainability. The EU’s evolving regulatory landscape following its Green Deal and Clean Industrial Deal—most notably through the Corporate Sustainability Due Diligence Directive (CSDDD) and the European Deforestation Regulation (EUDR)—reflects a growing consensus in Europe that economic gains cannot come at the expense of planetary health.
There lies a fundamental contradiction in Western and European outsourcing of polluting industries and low-cost production to countries with weaker environmental and labor regulations, in the name of comparative advantage. At the same time, the multinational companies involved often demand increasingly strict compliance and standards from these producers, which raises production costs and undermines the very rationale for outsourcing.
While these regulations aim to promote responsible business practices, they place enormous pressure on producers, especially smaller enterprises. For Indonesian SMEs, compliance with ever-shifting EU standards represents a significant financial and operational burden. Many lack the capital, expertise, and infrastructure to implement the required changes while remaining price-competitive in global markets. Essentially, these businesses are caught between contradictory imperatives: meet stringent environmental standards or lose access to lucrative European markets, all while competing with larger corporations that can more easily absorb compliance costs.
Supply Chain Complexities
The complexity of these trade-offs is vividly illustrated in the global supply chains of major European brands. Consider Ferrero, the Italian confectionery giant behind Nutella, whose business model depends heavily on a steady supply of palm oil from Indonesia and hazelnuts from Italy and Turkey. Its strong and near-monopolistic market position allows it to exert significant pressure on suppliers, demanding ever-higher yields and lower prices while simultaneously projecting an image of environmental responsibility to European consumers.
In Italy’s Upper Lazio region, hazelnut farmers have little choice but to intensify pesticide use and adopt plant enhancers to meet Ferrero’s exacting standards. This has led to documented environmental degradation, including soil depletion and water pollution, especially in ecologically sensitive areas like Lake Vico. In practice, the situation creates an unbalanced incentive structure. When Italian producers struggle to meet Ferrero’s demands, the company threatens to shift even more sourcing to Turkey, where environmental regulations are less stringent and labor costs are lower.
Approximately 70% of Ferrero’s hazelnuts already originate from Turkey, illustrating how global competition can systematically undermine local sustainability efforts, ultimately leading to a race to the bottom. In this regard, Turkey’s compliance track record with related EU directives has not been that favourable. Of 286 non-compliant fruit and vegetable exports to the EU, 180 originated from Turkey, particularly violating the Maximum Residue Limit (MRL) directive, which prohibits excessive pesticide use.
For small-scale farmers and processors in both Europe and Indonesia, this reality creates an intricate situation, requiring to simultaneously satisfy the cost and yield demands of powerful multinational corporations while adhering to increasingly stringent environmental regulations. SMEs in Indonesia face particular challenges in this regard. Only approximately 30% of them can currently provide Indonesian Sustainable Palm Oil (ISPO) certification. Yet, the EU is pushing for 100% alignment with the more demanding Roundtable on Sustainable Palm Oil (RSPO) certification. While the environmental benefits of such an initiative are promising, the transition phase presents complexities that require careful management and clear planning.
These small producers face substantial pressure from multinational buyers to increase productivity and reduce costs, while simultaneously being required to invest in sustainability measures that often do not yield short-term financial returns. Without access to the capital, technology, and expertise available to larger corporations, these SMEs frequently find themselves unable to compete in an increasingly regulated global marketplace.
Smallholders in Indonesia have been informed about the RSPO certification, but most have limited understanding of its implications and lack the time and resources to meet its requirements. As a result, they face unbalanced competition, as larger companies are better equipped to comply with these standards.
The Toilet Paper Paradox
The challenges facing SMEs are not limited to agricultural products. Also consumer goods like toilet paper reveal the contradictions in the global trading system. The EU accounts for approximately 26% of global tissue consumption, making it a major player in the international pulp and paper market. While most toilet paper sold in European markets is produced locally, a significant portion of the pulp used in its manufacture is imported—including from Indonesia, which supplies the EU with approximately 325 million EUR worth of pulp, paper, and paperboard annually.
In this sector as well, the push for sustainability collides with entrenched consumption habits and economic realities. Producing toilet paper from virgin pulp is energy– and resource-intensive, contributing to deforestation and biodiversity loss across supplier countries including Indonesia. Recycled toilet paper represents a more sustainable alternative, but European consumers have been slow to embrace it—only about 30% of consumption comes from recycled sources despite its environmental benefits.
This persistent consumer preference for soft, white toilet paper made from virgin pulp does little to encourage sustainable practices throughout the supply chain. Pulp production remains a major driver of deforestation in Indonesia, where small-scale suppliers lack the resources to implement more sustainable harvesting and processing methods. Yet these businesses must somehow reconcile contradictory demands, supplying a significant share of global demand for toilet paper while complying with the European directive on deforestation, which prohibits exploitation of areas deforested after December 2020.
For small pulp producers in Indonesia, these requirements are particularly difficult to reconcile. They lack the sophisticated tracking systems needed to verify the precise origin of their raw materials, the capital to invest in more sustainable production methods, and the bargaining power to command price premiums that would offset these additional costs. Even EU norms tacitly acknowledge this tension, essentially allowing continued exploitation of already-deforested areas while placing the compliance burden disproportionately on producers rather than consumers or large corporate buyers.
Cultural differences in hygienic practices also reveal certain contradictions in environmental discourse. In Southeast Asia, including Indonesia, the widespread use of water for personal hygiene is culturally rooted and widely considered to be more hygienic than the European reliance on toilet paper. While this practice may differ from European norms of consumer convenience, it carries a significantly lower environmental impact. Given the substantial deforestation associated with global toilet paper production, it could be valuable for European consumers to reflect on these impacts when discussing sustainability and environmental responsibility, especially in the context of Southeast Asia.
The Plight of SMEs: Victims of the System
Caught between global market pressures and sustainability imperatives, small and medium enterprises have thus fallen victims of this contradictory system. In Indonesia, like in other parts of the world, these businesses represent the backbone of the economy, employing millions of people and providing essential livelihoods in rural communities. Yet they face mounting challenges.
As a result, small producers are increasingly required to contend with:
- Regulatory Complexity: Navigating an ever-changing landscape of certification requirements, traceability mandates, and environmental regulations that often exceed their administrative capacity.
- Capital Constraints: Lacking access to the financing needed to implement sustainable practices, upgrade equipment, or invest in certification processes.
- Market Pressure: Facing relentless downward pressure on prices from large buyers who demand both sustainability and low costs.
- Knowledge Gaps: Missing the technical expertise and information needed to effectively implement more sustainable practices.
- Competitive Disadvantage: Competing against larger corporations that can more easily absorb compliance costs and benefit from economies of scale.
The situation is comparable for small agricultural producers in Europe who face similar pressures, being subjected to a global trading system that prioritizes short-term economic efficiency over long-term environmental sustainability.
Without addressing these fundamental contradictions, the EU-Indonesia FTA risks further marginalizing these smaller businesses, potentially driving them out of formal markets or forcing them to cut corners on sustainability to survive. This outcome would serve neither environmental goals nor economic development objectives.
Addressing the Core Dilemma: Empowering Consumers for Sustainable Trade
The EU-Indonesia FTA negotiations epitomize a fundamental question facing our globalized economy. How can we create a trading system that promotes both economic prosperity and environmental sustainability while ensuring the long-term competitiveness of small and medium enterprises.
The EU-Indonesia FTA negotiations encapsulate a broader dilemma facing policymakers worldwide. Should the EU prioritize economic growth and consumer convenience, or make a decisive shift toward environmental sustainability—even if it means higher costs and reduced consumption? The answer remains elusive, reflecting deep tensions between our economic systems and environmental imperatives.
On one hand, lowering trade barriers could strengthen European industries that depend on Indonesian raw materials, supporting jobs and innovation. On the other, without robust safeguards and support mechanisms, this could accelerate environmental degradation, undermining the EU’s climate commitments and global leadership on sustainability.
To meet the dual challenge of boosting competitiveness and promoting environmental sustainability, the EU–Indonesia FTA can activate a powerful lever: consumer empowerment. Rather than relying solely on regulation, the agreement could use market dynamics—particularly informed demand—to drive ecological responsibility.
Existing regulations, while steps in the right direction, often fall short in practice and place disproportionate burdens on smaller businesses. The EUDR, for example, only applies to land cleared after December 2020, allowing “business as usual” in previously deforested areas. Certification schemes like RSPO are undermined by weak enforcement, loopholes, and implementation costs that fall heavily on producers. Meanwhile, consumer demand for products like Nutella and soft, white toilet paper shows little sign of abating.
Until a trading system is created that genuinely balances economic, social, and environmental objectives—and protects the small businesses caught between these competing demands—agreements like the EU-Indonesia FTA are likely to continue to face fundamental challenges. The consequences of this contradiction are felt not only by the negotiators in Brussels and Jakarta, pressed by their respective industrial lobby groups, but also by the millions of small business owners, farmers, and workers whose livelihoods hang in the balance.
Any viable solution must acknowledge the central role of SMEs in both economies and provide them with the support, resources, and transition periods needed to adapt to more sustainable practices. This might include enhanced dedicated financial assistance, technical capacity building, phased implementation of standards, and mechanisms to ensure that large corporations share the costs of sustainability rather than passing them down the supply chain.
Author: Yanis Bourbon, EIAS Junior Researcher