Can the EU and Indonesia Sign Their Elusive Free Trade Agreement?

pacific money | Economy | Southeast Asia

There is a tension between Brussels’ environmental concerns and its desire to boost its Asia-Pacific trade engagement.

Can the EU and Indonesia sign their elusive Free Trade Agreement?

A view of Jakarta’s central business district at night.

Credit: Depositphotos

With the war in Ukraine continuing to disrupt global supply chains, the European Union has tried to speed up negotiations of free trade agreements (FTA) with third countries. One of the largest potential partner countries also remains among the most elusive: Indonesia, the largest economy in Southeast Asia. The country of 275 million inhabitants has a GDP of almost $1.2 billion forks projected for some to be the seventh largest economy in the world by 2030.

From the official negotiations thrown out in July 2016, 11 negotiation rounds have been carried out. But the talks have stalled as disputes persist over the European Union’s ban on palm oil and Indonesia’s ban on nickel exports. Still, Brussels should prioritize its geostrategic interests in the Indo-Pacific and speed up a deal by opening its single market to more sustainable palm oil products in exchange for trading limited nickel exports from Jakarta.

While the EU has promised to increase its “strategic engagement” with the Indo-Pacific, the block’s words currently do not correspond to its actions. The EU remains absent from Asia’s two largest trade agreements: the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership. Indonesia boasts the largest economy in Southeast Asia, but ranks as the EU’s fifth largest trading partner in the region, behind Singapore, Vietnam, Malaysia and Thailand.

The economic absence of Brussels in the region contrasts with the growing Chinese economic activity in Indonesia and Southeast Asia. Beijing is Jakarta’s largest trading partner with more $124 billion in bilateral trade in 2021, more than fivefold $24 billion in EU-Indonesia trade during the same period. Announced in 2021, Brussels’ Global Gateway strategy has sought to remedy this by supporting infrastructure projects in developing countries, positioning itself as an alternative to China’s Belt and Road Initiative (BRI). But China has already supported $740 billion value of BRI projects in Southeast Asia alone, more than double the $295 billion that the EU intends to raise by 2027 for Global Gateway projects around the world. The “global regulator” cannot write the rules of the international trading system in a region where it is not sufficiently present.

Furthermore, in the court of public opinion, Brussels is well positioned to negotiate an FTA with Indonesia. Amid intensifying competition between the great powers, many Indonesians trust Brussels and its intentions far more than those of Beijing or Washington. While 40 percent and 37 percent of Indonesians see China and the United States as a threat to Indonesia, respectively, only about 2 percent He said the same thing about the EU.

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But the EU’s palm oil restrictions have significantly hampered the FTA negotiations. In 2018, the European Parliament Announced plans to phase out the use of palm oil for biofuels by 2030 due to its contributions to land clearing and deforestation. In 2019, Indonesia accused the EU of trade discrimination and filed a lawsuit with the World Trade Organization (WTO), which is still pending final resolution. As the world’s largest producer of palm oil, Indonesia believes that the industry that employs 16 million domestic workers as vital. Arguably, the EU ban does little more than to threat the livelihood of thousands of Indonesian farmers and could achieve the opposite effect: Indonesia could stop investing in green certification standards for its palm oil and increase exports to alternative markets such as China to maintain profits.

More tensions arose after Indonesia banned nickel ore exports in 2020. Nickel is critical for use in electric vehicle batteries and stainless steel production, the latter of which accounts for $19 billion in annual revenue and more than 200,000 jobs in Europe. While Jakarta was previously the world’s largest nickel exporter, President Joko “Jokowi” Widodo has since restricted this in order to encourage foreign investment in domestic nickel smelters and downstream operations. As the EU stainless steel industry registers its lowest production levels Within a decade, Indonesia looks poised to become the world’s second largest nickel producer after China. In 2021, the EU sued Indonesia at the WTO, a dispute that Jokowi has admitted Indonesia will probably lose. Still, he has refused to change course.

To resolve this impasse, Brussels can acknowledge Jakarta’s progress in improving the sustainability of its palm oil production and use its current ban as leverage to negotiate limited nickel ore exports. The EU should open its single market to increased imports of certified sustainable palm oil. In exchange, it should push Jakarta to export limited amounts of nickel ore to its 27 member states. With Indonesia likely to lose its case at the WTO, a combination of international pressure and palm oil concessions from Brussels could convince Jakarta to tighten its export ban.

To reach an EU-Indonesia FTA, Brussels should prioritize trade needs and geostrategic interests to compete with China in the Indo-Pacific. The bloc should aim to negotiate an agreement like the ones it signed with Singapore and Vietnam, which with greater willingness loosened environmental and development standards to promote practical business interests. Indonesia should not be an exception.

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