Other BriefingsAn Overview of Indonesia’s Free Trade Agreements
Indonesia has signed a number of free trade agreements as an independent market as well as a member of the Association of Southeast Asian Nations (ASEAN). These trade agreements provide Indonesian consumers and businesses with improved market access for goods and services, new technologies, and investment opportunities.
Indonesia-Japan Economic Partnership Agreement
The Indonesia-Japan Economic Partnership Agreement (IJEPA) was signed in 2007 and has been in force since 2008 and was Indonesia’s first bilateral trade agreement. The IJEPA removes or reduces tariffs for 90 percent of goods, particularly for agricultural and industrial products that Japan exports to Indonesia, as well as for Indonesian agricultural products that are exported to Japan.
Services are an important part of IJEPA, and the agreement enabled Japanese businesses to establish service centers in Indonesia, particularly for electronic and IT equipment. Importantly, IJEPA also enables crucial technological transfers and training of the Indonesian workforce.
Japan was Indonesia’s third-largest trading partner and the fourth-largest source of foreign investment in 2022. Bilateral trade reached a total value of US$42 billion in 2022.
Indonesia-Korea Comprehensive Economic Partnership
The Indonesia-Korea Comprehensive Economic Partnership (IK-CEPA) began with negotiations in 2012 between the two countries. The negotiations were suspended in 2014 before being resumed in 2019 and were officially implemented on January 1, 2023.
The IK-CEPA eliminates 95 percent of Indonesia’s tariffs on exports to South Korea and 92 percent of South Korean tariffs on exports to Indonesia. The agreement will boost Indonesia’s fisheries and agriculture sectors while also strengthening South Korea’s automotive and industrial sectors.
For South Korea, Indonesia is a potential production base, especially for automotives, petrochemicals, and steel. Automaker Hyundai is noted as being a significant investor in Indonesia and has recently invested US$1.5 billion to build an automotive plant to produce electric (EV) as well as combustion engine (ICE) vehicles. The company has also joined a consortium with LG to build Southeast Asia’s largest EV battery plant cell in Indonesia.
South Korea was the seventh largest investor in Indonesia for 2022, with bilateral trade reaching US$20 billion.
Indonesia-Australia Comprehensive Economic Partnership Agreement
Indonesia and Australia ratified the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) in 2020.
The framework of the IA-CEPA is based on five principles: enhancing economic and development partnership, connecting people through social, arts, and cultural collaboration, maritime cooperation, and contributing to the prosperity and stability of the Indo-Pacific region. Further, the increased market access for services and investments in the agreement means Australian companies can enjoy majority ownership of businesses in specific sectors in Indonesia, such as telecommunications, construction services, wastewater management, and tourism.
Indonesia and Australia will also allow their citizens with tertiary levels of education to gain work experience in each other’s market. This applies to finance, mining, healthcare, infrastructure development, and engineering, among others.
Importantly, the agreement provides greater market access for agricultural products and livestock for both countries. This is especially important for the Australian cattle industry to which Indonesia is its largest market. Indonesia imports more than 600,000 live cattle annually from Australia.
Indonesia-European Free Trade Association Comprehensive Economic Partnership
Signed in 2018 and entering into force on November 2021, the Indonesia-European Free Trade Association (EFTA) Comprehensive Economic Partnership (IECEPA) eliminates tariffs for the majority of merchandise traded between Indonesia and the EFTA states. The EFTA states comprise Iceland, Liechtenstein, Norway, and Switzerland.
The IECEPA covers trade in goods and services, investments, intellectual property rights, government procurement, cooperation, capacity building, and sustainable development.
The main exports from Indonesia to the EFTA states are clothing accessories and footwear, whereas the main imports are pharmaceutical products, organic chemicals, and electrical machinery. The total merchandise trade between Indonesia and the EFTA states reached 1.5 billion Euros (US$1.6 billion) in 2022 with the EFTA states importing 876 million Euros (US$948 million) worth of goods from Indonesia.
Indonesia-Chile Comprehensive Economic Partnership Agreement
The Indonesia-Chile Comprehensive Economic Partnership Agreement (ICCEPA) was signed in 2017 and came into effect in 2019. The agreement saw a gradual elimination of tariffs on over 9,000 items exported from Chile to Indonesia and for over 7,000 items exported from Indonesia to Chile.
Total bilateral trade between Indonesia and Chile has increased since the signing of the ICCEPA. This reached US$433 million between January and September of 2022, an increase of 45 percent from the same period in 2021.Indonesia’s main exports to Chile are vehicles, footwear, fertilizers, electrical equipment, and rubbers. Meanwhile, Chile’s main exports to Indonesia are copper, pulp wood, mollusks, crustaceans, and edible fruits.
Indonesia-Pakistan Preferential Trade Agreement
A free trade agreement signed between Indonesia and Pakistan in 2012, the Indonesia-Pakistan Preferential Trade Agreement (IPPTA), initially saw tariff reductions on over 200 Indonesian products and over 300 goods from Pakistan.
Major items that benefit from the IPPTA are Pakistani Kinnow oranges and palm oil imports from Indonesia. Pakistan exported some US$23 million of Kinnow oranges to Indonesia when trade flows peaked in 2017.
Pakistan imports 87 percent of its palm oil needs from Indonesia, amounting to an average of three million tons per year. The commodity is used for the manufacture of vanaspati oil, which is widely used in Pakistani cuisine.
Preferential Trade Agreement Among D-8 Member States
The Developing-8 comprises of Bangladesh, Egypt, Indonesia, Iran, Malaysia, Pakistan, Nigeria, and Turkiye. The trade agreement was signed in 2006 and came into force in 2011. Tariffs were gradually reduced from between 25 percent to 10 percent for various products.
The D-8 has a combined GDP of nearly US$4 trillion and accounts for 90 percent of exports (except for oil and gas) among the Organization of Islamic Cooperation members. The group has an annual trade of US$1.6 trillion of which 6.5 percent stems from D-8 intra-trade.
Indonesia–Mozambique Preferential Trade Agreement
The Indonesia-Mozambique Preferential Trade Agreement (IM-PTA) has been in force since June 2022 and represents Indonesia’s first bilateral agreement with an African country.
Mozambique has reduced import duties for 217 Indonesian products, which include for palm oil, fruits, rubber, paper products, and fishery products. Meanwhile, Indonesia has reduced import duty rates for 242 products from Mozambique, which includes cotton, tobacco, nuts, vegetables, and certain fish products.
The agreement allows Indonesia’s textile and garment manufacturers to diversify their sources of fiber by importing cotton from Mozambique, in addition to traditional suppliers in China and the US.
Moreover, the creation of the IM-PTA can incentivize Indonesian businesses to expand not only into Mozambique but also to use the country as a gateway to other parts of Africa, particularly in the southern regions.
The Regional Comprehensive Economic Partnership
Indonesia’s parliament approved the country’s membership into the Regional Comprehensive Economic Partnership (RCEP) trade pact in August 2022 and became the latest country in ASEAN to join in what is the world’s largest free trade agreement.
The RCEP is estimated to cover 30 percent of the global GDP of US$25.8 trillion and comprises 30 percent of the world’s population. Further, the RCEP sets to eliminate 92 percent of tariffs on goods traded among its 15 members. For Indonesia, the RCEP could boost the country’s trade surplus by US$979 million, more than double the current trade surplus of US$383 million by 2040.Moreover, Indonesia could see GDP growth by 0.07 percentage points and an increase in exports and imports by US$5 billion and US$4 billion, respectively.
In addition to its participation in free trade agreements as an individual market, Indonesia is also a signatory in free trade agreements through its membership in ASEAN.
ASEAN Trade in Goods Agreement
The ASEAN Trade in Goods Agreement (ATIGA) was established to consolidate and streamline all the provisions under the Common Effective Preferential Tariff for ASEAN Free Trade Agreement (CEPT-AFTA).
To ensure the free flow of goods in ASEAN, the ATIGA comprises elements such as tariff liberalization, trade facilitation, and removing non-tariff barriers.
ASEAN-Australia-New Zealand Free Trade Area
The ASEAN-Australia-New Zealand Free Trade Area (AANZFTA) came into force in January 2010 and currently eliminates 90 percent of goods traded between ASEAN, Australia, and New Zealand. The FTA covers approximately a population of 653 million and over US$4.3 trillion. The AANZFTA was updated on November 2022.
By upgrading the AANZFTA, the participating countries hope to spur post-pandemic growth, facilitate trade, make supply chains more resilient, and encourage sustainable development. The upgrade comes at a time when many developed economies – including Australia and New Zealand – are increasing their footprint in Southeast Asia to diversify their supply chains and reduce trade risks.
The upgrade introduces three new chapters to the AANZFTA: government procurement, micro, small, and medium-sized enterprises (MSMEs), and trade and sustainable development. They also introduce new provisions on education services and augment provisions on e-commerce, competition, and consumer protection, customs procedures and trade facilitation, trade in goods, rules of origin, trade in services, and investment.
ASEAN-China Free Trade Area
The ASEAN-China Free Trade Area (ACFTA) was signed in 2004 and was implemented in July 2005.
Through this FTA, China has consistently ranked as ASEAN’s largest investor over the last decade, with total trade of over US$731 billion in 2020.
The FTA reduced tariffs on more than 7,000 product categories — or 90 percent of imports — to zero by 2010, although initially only applicable to Indonesia, Malaysia, Singapore, Brunei, the Philippines, Singapore, and Thailand. The remaining ASEAN members (Myanmar, Laos, Vietnam, and Cambodia, followed suit in 2015. In 2019, ACFTA was upgraded to simplify rules of origin (ROO), trade facilitation measures, investment procedures, and customs procedures.
ASEAN-India Free Trade Area
The ASEAN-India Trade Area (AIFTA) entered into force on January 1, 2010. The signing of the agreement paved the way for the creation of one of the world’s largest free trade area markets, creating opportunities for over 1.9 billion people in ASEAN and India with a combined GDP of US$4.8 trillion. The agreement set off tariff liberalization on over 90 percent of products, including palm oil, pepper, black tea, and coffee.
India and ASEAN have agreed to review the scope of the FTA to address certain barriers to trade, namely tariffs. India is treated differently from other ASEAN trade partners where it does not have an economic agreement with the bloc. For instance, Japanese car imports face a five percent duty in Indonesia and Thailand while a 35 percent tariff is imposed on Indian automobiles.ASEAN-Republic of Korea Free Trade Area
The ASEAN-Republic of Korea Free Trade Area (AKFTA) came into force in 2007 and sets up preferential trade arrangements between ASEAN member states and South Korea. Tariff elimination for 90 percent of products traded between South Korea and ASEAN members Brunei, Indonesia, Philippines, Malaysia, and Singapore was scheduled in 2010, whereas tariff eliminations for Vietnam, Laos, and Myanmar were scheduled by 2018.
South Korea’s combined exports to all 10 ASEAN members reached over US$80 billion in 2019, with two-way trade reaching US$160 billion. South Korea and ASEAN made a pledge to increase this to US$200 billion during a summit in Busan to mark 30 years of ties.
ASEAN-Japan Comprehensive Economic Partnership
The ASEAN–Japan Comprehensive Economic Partnership (AJCEP) came into force in December 2008, covering trade in services, goods, investments, and economic cooperation. Tariff eliminations for the ASEAN-6 and Vietnam were completed some 10 years from the entry into force of the agreement, and the rest of ASEAN three years or so after.
The FTA provides for the elimination of duties on 87 percent of all tariff lines and includes a dispute settlement mechanism. It also allows for back-to-back shipment of goods between member countries, third-party invoicing of goods, and ASEAN cumulation.
Advantages for Indonesian exports
Free trade agreements will play an increasingly important role in Indonesian exports, which could rise to US$300 billion in 2024, an increase from the US$268 billion recorded in 2022. The country is looking to develop its downstream commodities industry, which is fast becoming the backbone of total exports – Indonesia enjoyed an export boom due to rising commodity prices.
The country is aiming to regulate the exports of more commodities, such as tin, copper, and bauxite. Indonesia is also the world’s largest exporter of thermal coal, palm oil, refined tin, nickel-based steel, and rubber, among other resources.
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ASEAN Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia and maintains offices throughout ASEAN, including in Singapore, Hanoi, Ho Chi Minh City, and Da Nang in Vietnam, in addition to Jakarta, in Indonesia. We also have partner firms in Malaysia, the Philippines, and Thailand as well as our practices in China and India. Please contact us at asean@dezshira.com or visit our website at www.dezshira.com.
