Indonesia’s lack of FTAs

Indonesia, ASEAN’s largest economy in terms of nominal GDP, is under increasing pressure from the business community to sign more free trade agreements (FTAs). Currently it has only two agreements, with Japan and Pakistan, falling behind Malaysia which has additional agreements with New Zealand, India, Chile Australia and Turkey, as well as Thailand and Vietnam.

Indonesian business associations such as the Indonesian Employers Association and the Indonesian Chamber of Commerce and Industry have urged the central government to sign more bilateral FTAs because Indonesia’s export products currently miss out on competitiveness as regional counterparts can enjoy little or zero import duties under such agreements with specific trading partners. The EU-Vietnam FTA allows Vietnam to ship its textile for 0 per cent duties to the EU, resulting in US$30 bn in 2016, while Indonesian products face import tariffs up to 10 per cent. In 2016, Indonesia’s textile exports to the EU were less than half of Vietnam’s.

The government is in negotiations with the EU, EFTA, Australia, Chile, India, Iran and Turkey but is held back by concerns that Indonesia is not competitive enough to compete with foreign counterparts on the international market, as well as fears that trade deals will result in huge inflow of foreign products.

In July 2017, Indonesia and Iran agreed to finalise its trade negotiations within the year. The legal base for this agreement was signed in 2005, but since then only three rounds of negotiations have taken place.