Indonesia is one of the fastest growing economies in the Asia-Pacific region, with a sustained average annual growth rate of 5.6% over the past fifty years (World Bank). Pre COVID-19, it was projected to be a top five global economy within the decade, with a burgeoning middle class of at least 60 million people and their maturing consumption a key driver of future economic growth.
As Australia's closest neighbour, Indonesia is one Australia's most important bilateral relationships, especially in driving regional prosperity and security. The two countries have strong government-to-government relations; are proactive members of the MIKTA strategic influencing alliance of Mexico, Indonesia, South Korea, Turkey and Australia; and have already have preferential trade arrangements through the ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA). Indonesia is Australia’s 13th largest trading partner and Australia is Indonesia's 8th largest trading partner.
Australia and Indonesia's legacy
Geographical proximity has not easily translated into any deep trade and investment ties. Total two-way trade was $17.8 billion (predominantly focused on resource and agricultural commodities) and investment was $6.6 billion in 2018-19. These figures represent less than 3 per cent across each other’s total trade and investment flows and accounts for the lowest bilateral trade volumes of any "contiguous pairing" within the G20.
Some of the reasons put forward for this historical legacy range from: differing trade agendas and absent complementarity; high perceptions of risk and uncertainty; resource nationalism; non-tariff measures and technical barriers to trade; language and cultural barriers; and under-developed infrastructure. The Agreement is not be a panacea, but we expect that both governments and businesses will work hard to overcome these legacies and create meaningful economic ties that achieve the goals envisaged for the Agreement.
The IA-CEPA will make it easier to do business in Indonesia
The Indonesia-Australia Comprehensive Economic Partnership Agreement is more comprehensive than the usual free trade agreement, extending beyond a reduction in tariffs, trade in services, and investment. It also goes above and beyond the established mechanisms in the AANZFTA. Some of the overarching highlights of the Agreement for Australian organisations include:
- Elimination of tariffs on over 99% of commodity exports and phased in reductions on other key exports.
- Non-tariff mechanism rules and review through specialist subcommittees.
- The automatic issue of import permits for key agricultural goods.
- Improved access and certainty for service providers and investors in some key sectors such as architectural, engineering and construction services; mining services; education; healthcare and tourism.
- Reciprocal skills exchange, especially people with tertiary level education to gain six months of experience in each other's markets (across finance and insurance, mining, healthcare, infrastructure development, engineering, and information and telecommunications).
- The free flow of data for businesses with protections for consumers and privacy.
- Investor-state dispute settlement through an independent arbitral tribunal.
We envisage five broad new opportunities coming out of the Agreement. These are detailed below:
Access for agriculture
Australian agricultural exports already represent more than a third of Australia’s total exports to Indonesia, This makes it Australia's fifth largest export market for agricultural products. The new reduction in tariffs above the AANZFTA will create real price advantages for Australian exporters. However, on the face of the Agreement, it is arguably the new focus on non-tariff mechanism rules and the automatic issue of import permits for some goods that will create real practical advantages over other competitors in relation to access and administrative certainty.
Enablement of foreign investment in particular sectors
The Indonesian Government has taken recent steps in labour, investment and tax reforms to help boost the economy, develop value-added industries and help it escape the "middle-income trap". The Agreement does set in place increased protections for Australian investors and certainty around ownership limits in some sectors. Examples of new ownership limits available from DFAT.
Given Australia's expertise in many of these sectors and the longer-term opportunities that may present themselves, we would expect that Australian investors would consider their investment options and the unique advantages these provide them. We would hope that these sectors are just starting points for further opportunities in other sectors down the track which can provide Australian investors with unique competitive advantages that could enable them to position or entrench themselves in future major projects, growing sectors and areas of growing consumer spending.
Supply chain diversification
The Agreement has the potential to enhance mutually beneficial and complementary joint ventures. For example, this could include combining Indonesia's raw materials and relatively low operational and labour costs with Australia's design, engineering and technology expertise to create new and alternative offerings or value-adds for Australian imports or export offerings across the region. Given the ongoing supply challenges being faced throughout the US-China trade war and COVID-19, the Agreement could facilitate these collaborations to provide Australian organisations with alternative supply sources as part of any renewed supply chain diversification.
Export market diversification
Similarly, the ongoing demand challenges being faced by increased global protectionism and China's recent focus on Australian exports, provides Australian organisations, especially those reliant on the China market, with an important opportunity for longer-term diversification of export markets. Whilst Indonesia does not provide equivalent scale, the Agreement, coupled with recent reforms, could enable expansion into a growing and proximate market, provide longer-term diversification opportunities and provide a China +1 mitigation strategy.
Indonesia has numerous economic, digital and social infrastructure gaps. The World Bank estimates that Indonesia needs to invest US$500 billion over the next five years to support its continued growth. With more than 206 major infrastructure projects currently in the pipeline, including the US$33 billion construction of the new capital at Kalimantan Timur in Borneo, the Government is seeking greater foreign investment and technical expertise to assist in the development of these projects. The Agreement sets in place unique opportunities for Australian organisation to finance, construct, provide related services to or own particular assets in the future.
With the new Agreement, the historical economic legacies that may have created barriers may now provide Australian businesses with a viable new option for market growth. Well-prepared and patient organisations who can successfully build local partnerships could utilise the Agreement to create successful trade and investment opportunities.
To discuss how you can take advantage of the opportunities in Indonesia, contact our South East Asia partner.