What's Happening?
Indonesia and the European Union have successfully concluded a free trade agreement after nine years of negotiations. This deal aims to enhance exports and investments between the two regions while mitigating the impact of tariffs imposed by U.S. President Donald Trump. The agreement will see the removal of import duties on over 90% of products, with most duties being eliminated immediately upon the deal's implementation. Indonesia anticipates that bilateral trade, valued at $30.1 billion in 2024, will double within the first five years. The EU, in turn, expects to save approximately €600 million in Indonesian duties and plans to increase exports of chemicals, machinery, automobiles, and food products to Indonesia. The agreement is set to come into force by January 1, 2027, pending legal checks and formal consent from EU governments and the European Parliament.
Why It's Important?
This trade agreement is significant as it represents a strategic move by the EU to diversify its trade partnerships and reduce reliance on China, especially for critical minerals needed for its green transition. For Indonesia, the deal is an opportunity to boost exports of palm oil, coffee, textiles, and clothing to the EU, a major market for these products. The agreement also opens doors for potential collaborations in battery and electric vehicle production, aligning with global shifts towards renewable energy and sustainable practices. However, challenges remain, such as the EU Deforestation Regulation, which could impact the effectiveness of the trade agreement by imposing non-tariff barriers on Indonesian palm oil exports.
What's Next?
The next steps involve the legal vetting of the agreement and its translation into the EU's official languages. Following this, the deal requires formal approval from EU member states and the European Parliament. Indonesia is also in discussions with EU automakers to establish partnerships in battery and electric vehicle production. Additionally, the Indonesian Palm Oil Association is addressing the EU Deforestation Regulation, which poses a potential hurdle for palm oil exports. The resolution of these regulatory issues will be crucial for the full realization of the trade agreement's benefits.
Beyond the Headlines
The trade deal highlights the ongoing global realignment of trade relationships in response to protectionist policies, such as those implemented by President Trump. It underscores the EU's efforts to secure access to essential minerals and reduce dependency on single markets. For Indonesia, the agreement is a step towards achieving upper-middle-income status, which will eventually phase out preferential duties granted to developing countries. The deal also reflects broader trends in international trade, where environmental regulations and sustainability considerations are increasingly influencing trade policies.
