In the meantime, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CP-TPP) and Regional Comprehensive Economic Partnership (RCEP) have entered into force without the EU participating, pushing a further urgency for the EU to reinforce its geo-economic and geopolitical presence in the Indo-Pacific. One way to do so is to improve its strategic ties with key allies in the region by way of trade and investment, including re-calibration of its relationship with Indonesia, the largest emerging market in the Association of Southeast Asian Nations (ASEAN) and a crucial political ally for the EU in the region.
Capturing current priorities
While the European Union’s trade relations with Indonesia have strengthened over the years, they have also seemingly come to a standstill. With a volume of bilateral trade in goods valued at 24.7 billion EUR (24.84 billion USD) in 2021, the EU was Indonesia’s fourth largest trading partner that year. In 2009, the EU even beat the United States and Australia to the chase at signing a Partnership and Cooperation Agreement (PCA) with the Southeast Asian country, aimed at enhancing strategic bilateral ties. The Agreement provides a legal framework for both partners to engage and cooperate across a wide spectrum of policy fields, including broader political dialogue and trade. The Agreement entered into force in 2014 and governs the overall relations between the EU and Indonesia.
Following successful exploratory discussions to further deepen trade and investment relations, negotiations for a free trade agreement (FTA) — called the Indonesia-European Union Comprehensive Economic Partnership Agreement (IEU-CEPA) — were launched on 18 July 2016. The FTA is expected to eliminate 95 percent tariffs on goods and services, expand foreign direct investment, and level the playing field between private businesses and state-owned enterprises. However, discussions have been bogged down by a range of non-tariff barriers. As of today, 11 rounds of negotiations have taken place without significant progress. Key issues which require political concessions remain unsolved, such as those surrounding market entry liberalization (patent issues and foreign equity caps), digital trade (data localization laws), as well as trade and sustainability standards (mainly regarding palm oil and nickel exports). Both the EU and Indonesia have separately approached the World Trade Organization (WTO) to adjudicate on the latter two issues.
On the other hand, two mega regional trade agreements, namely the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CP-TPP) and Regional Comprehensive Economic Partnership (RCEP), have entered into force in the Indo-Pacific without the EU participating. Current trade figures also confirm recent trends for Indonesia where regional suppliers are becoming more important: two thirds of all Indonesia’s foreign purchases today come from the East Asian region or other members of the Association of Southeast Asian Nations (ASEAN), while North America only accounts for 7 percent and Europe hardly more than 5 percent.
While direct economic impact on the European market from the CP-TPP and RCEP may be minimal, the political and strategic value of these agreements are not negligible and should encourage the EU to act accordingly. With Brussels having historically focused more on its surrounding neighbors, there is arguably an already urgent need for the EU to reinforce its geo-economic and geopolitical presence in the Indo-Pacific. One way to do so is to improve strategic ties with key allies in the region by way of trade and investment, including re-calibration of its relationship with Indonesia, ASEAN’s largest emerging market player and a crucial political ally.
A partnership in the making
Economic relations between Indonesia and the EU are generally healthy. The start of Indonesia’s relations with the EU can be traced back as far as the normalization of diplomatic relations with its member states in the 1940s. In 1980, the two entered into a formal trade agreement under the EU-ASEAN Cooperation Agreement. Nowadays, cooperation under the PCA has enabled enhanced bilateral collaboration on areas such as education, healthcare, and governance. Indonesia is also in the process of ratifying a separate FTA with the European Free Trade Association (EFTA), whose member countries consist of Switzerland, Liechtenstein, Iceland, and Norway.
Since 2010, Indonesia’s trade balance with the EU has always recorded a surplus, although its value fluctuates. While the Covid-19 pandemic has negatively impacted Indonesia’s exports to the EU, its impact was not significant enough to leave a dent in bilateral trade volume. For Indonesia, the EU remains a top export destination, immediately below China and the United States and above Japan and India. Indonesia’s main exports to the EU market include vegetable oil products – including palm oil, which in 2021 reached 3.5 billion USD total value and contributed to 15 percent of the total value of Indonesia’s exports to the EU – as well as electronic machinery, footwear, rubber and chemical products. Out of the 27 EU Member Countries, The Netherlands is the main destination for Indonesian exports, followed by Germany, Spain, Italy and Belgium. Meanwhile, Germany is the main source of Indonesian imports from the EU, with products mostly in the category of mechanical machinery and equipment and motorized vehicles. This is followed by Italy, France, the Netherlands and Belgium, who mostly export high-tech products to Indonesia.
The Indonesian economy itself has grown exponentially in recent years, flourishing throughout the 2000s and early 2010s after a period of decline during the Asian financial crisis of the late 1990s. In 2012, it outgrew India to become the second-fastest growing economy among the G20 countries, behind China. At 1.1 trillion USD, it also accounted for more than one third of ASEAN’s total gross domestic product (GDP) in 2020. Indonesia’s booming internet economy has also surged to become the largest in the region by a wide margin, achieving a gross merchandise volume of 70 billion USD in 2021 with projections of an increase up to 146 billion USD by 2025. Indonesia is also poised to become the next great start-up hub, having thus far produced the most tech unicorns in ASEAN – the term for privately held start-ups which have reached a valuation of over 1 billion USD – such as on-demand multi-service platform Gojek and e-commerce giant Tokopedia. Indonesia’s large potential in the digital economy has become the government’s chief talking point for attracting foreign investors to the technology sector and beyond.
However, there is also a duality within the policy playbook of President Joko Widodo (often referred to as Jokowi) which has characterized his international economic engagement. While boosting foreign direct investments and ramping up an industrial revolution to enhance connectivity and digitization has been his term’s priority, dubbed ‘Industry 4.0’. Jokowi’s economic and trade policies have generally adopted a nationalist and protectionist outlook, including on matters relating to digital trade. For example, in 2019 Indonesia’s ICT Ministry issued a regulation which requires all electronic service providers (including e-commerce and fintech platforms) to register their system to the government prior to utilization of their services or risk being blocked. Its draft Personal Data Protection bill, notably based on the EU’s General Data Protection Regulation (GDPR) framework, reportedly contains provisions which impose additional requirements for data transfers and restricts cross-border data flows. This protectionist approach has also directed the responses by his administration to the EU’s policy on palm oil, which the bloc had categorized as a high-risk commodity in 2017.
The great stagnation
General EU-Indonesia diplomatic relations have been contested by past events, such as the prohibition of Indonesian airlines from operating within EU airspace from 2007 to 2018 due to safety concerns. Today, the relationship is mostly shaped by the ongoing disputes on the EU’s policy on palm oil and Indonesia’s nickel export ban – although concerning two separate commodities, both issues are inherently intertwined.
As the world’s largest palm oil producer and exporter of crude palm oil (CPO), the palm oil industry consistently accounts for most of Indonesia’s GDP and is a vital source of its export revenues and local employment. The EU is one of its primary export markets. However, in December 2018, the EU adopted its revised Renewable Energy Directive (RED II) which classified CPO as unsustainable due to its high use of indirect land. It also cited studies which show poor labor rights conditions in plantations and extensive deforestation involved in the process of CPO production. For this reason, RED II mandates the phasing out of imports and use of palm oil-based fuel between 2023 and 2030, in line with commitments to the United Nations Sustainable Development Goals and the Paris Agreement to reduce carbon emissions by 45 percent by 2030. Additionally, the EU has also imposed anti-subsidy duties of 8 percent to 18 percent on Indonesian biodiesel, to which it retaliated by threatening to impose a 20 percent to 25 percent tariff on EU dairy products (although this was never implemented).
Indonesian officials argue that the allegations against palm oil are ‘pseudo-scientific’ as it is 8 to 10 times more productive than other plant-based oils relative to land use. Jokowi has even stated that this will essentially provoke a trade war as the EU’s sustainability claim was made through a biased calculation favoring the bloc’s rapeseed and sunflower oil, which are relatively higher in price than palm oil. In December 2019, Indonesia filed a lawsuit at the World Trade Organization (WTO) against the EU for alleged trade discrimination against palm oil, claiming the bloc’s restrictions are unfair and breaches global trade principles. Indonesia’s escalation to the WTO was a move made partly in response to a similar complaint made by the EU in November 2019 against Indonesia’s export restrictions on nickel, a main component used in stainless steel manufacturing and electric vehicle (EV) batteries.
Central to Jokowi’s Industry 4.0 plan is its EV battery industry strategy, in which the government announced its ambitious goal to become ASEAN’s EV battery hub by 2030. On 1 January 2020, the government issued a regulation which banned the export of unprocessed nickel – it must first be processed in domestic smelters before being exported, part of Indonesia’s scheme to domestically develop an end-to-end EV supply chain by 2024. This includes mining the ore, refining it, then manufacturing the batteries and the vehicles. The strategy has been criticized for potentially being unfeasible as Indonesia currently lacks the capacity and basic infrastructure to process nickel, and manufacture EVs. In the WTO nickel dispute, the EU alleged that the ban has hindered the bloc’s efforts to excel in the stainless steel industry. Jokowi has insisted that the ban is solely aimed at incentivizing development of Indonesia’s local nickel industry through which the state also intends to widen local job opportunities.
It takes two to tango
Though the disputes over palm oil and nickel have become sticking points in FTA negotiations between the EU and Indonesia, it is unlikely to affect other areas of EU-Indonesia bilateral relations. In 2021, Indonesia was only the EU’s fifth largest trading partner in ASEAN. Both countries also still rely on each other in other areas which they have continuously collaborated in, such as education, tourism, and even defense and security. However, given the EU’s historically relatively lower level of emphasis on the Indo-Pacific region, it has not always prioritized its relations with Indonesia and ASEAN in general. Yet with increasing economic activity and significant geopolitical shifts occurring in the east, especially as RCEP is entering into force, the EU should strike while the iron is hot if it wants to remain influential in the region. With Indonesia slated to become one of Asia’s largest digital economies by 2025, it would be in the EU’s best interest to maintain the competitiveness of its goods and services, especially to widen the already high market demand for its imports of machinery, vehicles, and high-tech products.
Equally, the EU has not been a priority as a main cooperation partner for Indonesia, either. Jokowi’s sentiment for economic protectionism has turned his ministers to reach closer to home, prioritizing cooperation with countries in the Asian region. Given the size of its market potential and geopolitical role in the ASEAN realm, the gap in EU-Indonesia trade volume compared to other ASEAN countries should at the very least be closed. Brussels has recently made stronger efforts to formally recognize the need for improved ties with Jakarta, including a high-profile visit by top EU foreign policy chief Josep Borrell to the capital city in June 2021. He expressed how the ongoing palm oil dispute cannot jeopardize a broad approach to stronger cooperation with Indonesia. The statement in itself already sends a more optimistic message from Brussels towards coming to a middle ground than it would have three years ago, at the height of the dispute. However, his visit has not proven to be as fruitful as no concrete follow-up actions on the cooperation have been made since then.
Fortunately, there is a range of EU strategies which already include a focus on ASEAN in general and Indonesia in particular within their scope, such as the renewed EU Strategy for Cooperation in the Indo-Pacific. Yet while the strategy champions ASEAN centrality and a deeper EU-ASEAN partnership to ”reinforce the rules-based international order”, it has so far remained a ‘strategy’ on paper. With the Indonesian digital economy becoming a potential niche market in the upcoming years, the EU could also re-center its collaborative focus on the Global Gateway, which aims to mobilize EU 300 billion in investments between 2021 and 2027 to support global economic recovery vis-a-vis sustainable connectivity in digital, energy, and transport sectors. Coupled with an additional momentum in Indonesian politics, such as the ongoing construction of its new smart and carbon-neutral capital city, Nusantara, in east Borneo, this provides a fresh opportunity for cooperation in digital and green connectivity. An example of a quick win would be a collaboration in the country’s ambitions to implement self-driving eco-friendly cars in the new capital, which will send a strong signal of the EU’s commitment to the Indo-Pacific region while also effectively advancing the EU’s climate change diplomacy.
Indonesia is often regarded as ASEAN’s ‘natural leader’ since its formation in 1967. Other than its strategic geographical dimensions, Indonesia also continues to play an active role in both the political and economic dynamics of ASEAN, such as when it successfully convinced other members of the bloc to start negotiations for an RCEP agreement in 2011. ASEAN’s conflict-resolution mechanism (also known as the ASEAN Way) can even be attributed to Indonesian authorities who advocated its traditional norms of consultation and consensus (‘musyawarah and mufakat’). Coupled with the country’s upcoming ASEAN chairmanship for the third time in 2023, Indonesia holds a strong impetus to tilt the strategic balance in the Indo-Pacific.
Although the EU has already signed FTAs with Singapore and Vietnam – the latter often cited as one of Indonesia’s closest market competitors in the region – renewed trade relations with Indonesia would arguably fortify the EU’s geo-economical presence in ASEAN. Not only would the move ensure a higher chance of competitiveness of EU goods and services in the region, but a timely partnership will also play into the diversification of global investment and restructuring of the global supply chain which has taken place since the slowdown in industrial activity in China due to Covid-19. Overall, both Jakarta and Brussels would stand to achieve valuable geo-economic and geopolitical gain from improved relations.
Author: Virginia Segara, EIAS Junior Researcher
Photo credits: Flickr