Trade between the European Union (EU) and Indonesia appears to be at a precipice. Unless quick action is taken to reinvigorate talks, Indonesian exports to the EU could drop by as much as a fifth, doing real harm to the economy of the world’s fourth most populous nation.
Trade Talks Are Stalling
According to an EU official, Indonesia might see its exports to the union drop by 20% annually if trade talks don’t improve soon. The talks in question concern the bilateral Comprehensive Economic Partnership Agreement (CEPA). The EU appears to be frustrated with Indonesian parties for what they see as a failure to quickly conclude negotiations over the deal.
According to the union, the losses would likely be the result of Indonesian products losing a competitive edge. The theory is based on the idea that Indonesia may lose ground to its peers in the Association of Southeast Asian Nations (ASEAN). Both Singapore and Vietnam have effective free trade agreements with the EU, so it’s not hard to imagine European firms choosing to do business with partners in those countries if a similar deal with Indonesia cannot be worked out.
The Trade Deal Drama
Indonesia's economy can also be further harmed by the EU's decision to remove the Southeast Asian country from its Generalised Scheme of Preferences (GSP). This is a preferential tariff reduction arrangement that applies to a range of different products given to developing countries. However, this move appears to be unrelated to the CEPA dispute and will result from Indonesia being classified as a middle-income country.
Also at play is the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which is a huge trade pact involving countries with Pacific coastlines. The agreement began as a means of limiting China's influence in the Pacific, but China and Taiwan have now both asked to join. The UK appears to be on board, and Indonesia has expressed interest as well. If Indonesia joins, it may be a sign of the country deciding that it no longer needs to trade with the EU. Indonesia can also work more closely or move further away from China.
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