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Home»Finance»New Leadership Creates Fresh Momentum For EU-Indonesia FTA Talks
Finance

New Leadership Creates Fresh Momentum For EU-Indonesia FTA Talks

October 18, 2024No Comments6 Mins Read
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New Leadership Creates Fresh Momentum For EU-Indonesia FTA Talks
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After nearly a decade of negotiations, the proposed EU-Indonesia Free Trade Agreement (FTA) remains elusive. The 19th roundtable was held in Bogor, Indonesia, from 1-5 July 2024, and offered little indication of imminent progress. Despite a lack of momentum, Brussels and Jakarta have expressed a commitment not to withdraw from the table, though several contentious issues remain unresolved. With the political landscape in flux, hopes for breakthrough may rest on the next administration.

In this case, Indonesia expects to conclude negotiations under the incoming administration of President-elect Prabowo Subianto, who will take office on October 20. At the same time, the 27-member European bloc recently unveiled a new College of Commissioners under Ursula von der Leyen’s second term as Commission President which began on 17 September, amid escalating tensions with China over tariffs on Chinese electric vehicle (EV) makers.

The latest roundtable showed that the remaining outstanding issues are largely connected to domestic interests on both sides. Brussels and Jakarta have tended to protect their own turf whenever concerns about protectionist policies arise. Both sides are concerned about protecting domestic industries from being disadvantaged once the agreement takes effect. Since negotiations began in 2016, this has prevented the two sides from finding enough common ground to conclude the agreement. In this regard, the EU has remained firm in enforcing sustainability standards, while Indonesia has faced difficulties in meeting these expectations.

Both parties must now take a broader view of how the geopolitical landscape has shifted. The coming administrations in Brussels and Jakarta share a common goal of “de-risking” from China. For the EU, this strategy follows the sanctions imposed on Russia, prompting a re-evaluation of trade relationships with partners potentially aligned with Moscow, including China. That is because in 2023, Chinese lithium-ion batteries, solar panels, and EVs flooded the European market, making China the EU’s second-largest trading partner for goods after the United States. This situation has intensified the bloc’s effort to aggressively pursue the FTAs with resource-rich countries like Indonesia, as part of its effort to diversify supply chains and reduce its reliance on China.

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Jakarta, meanwhile, has transformed into a nickel mining and processing powerhouse under President Joko Widodo, supported largely by Chinese investment. However, this alignment has come at a cost, as Indonesia has found itself sidelined from Western markets. Jakarta is struggling to qualify for incentives under the U.S. Inflation Reduction Act (IRA) due to environmental and social shortfalls and the fact that Chinese ownership of nickel mining processing companies that exceeds the IRA’s 25 percent threshold. On the other hand, in 2024, the EU saw nickel pig iron (NPI) imports from Indonesia surge to 87.5 kilotonnes, an increase of 475 percent compared to 2015, marking the highest level on record. The EU has therefore emerged as a new haven for Indonesian nickel.

As Prabowo, a U.S.-educated leader, prepares to take office, he is widely expected to shift course economically, particularly on the critical minerals sector. Despite being renowned for his nationalist policy, Prabowo desires to seek out Western partners in trade and investment. This includes accelerating efforts to secure environmental, sustainability, and governance (ESG) certification for nickel mining sites in order to comply with EU and U.S. market standards. His ambition to achieve 8 percent annual economic growth during his first term will be largely driven by foreign investment with a focus on green energy, EV manufacturing, advanced technology, and the digital services sector. Prabowo’s inauguration should therefore be welcomed by the EU as an opportunity to revive the long-stalled FTA talks.

Similarly, securing access to the Indonesian market is the top priority for von der Leyen’s cabinet. That’s because, for Brussels, Jakarta is a sleeping giant, which could help it diversify its economic relationships away from heavy reliance on Beijing.

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In parallel to this, the EU Commission’s proposal to delay the EU Deforestation-free Regulation (EUDR), which was set to impact Indonesian palm oil exports to the EU, offers room for compromise that could help break the deadlock. This delay has prompted renewed efforts by the Ad-Hoc Joint Task Force—consisting of Indonesia, Malaysia, and the EU—could be more intensifying to align palm oil standards with EU regulations to particularly safeguard the interest of micro and small farmers. The EUDR is set to be fully implemented after 30 December 2025 for large companies and 30 June 2026 for micro and small enterprises. Palm oil has been a sensitive topic during the negotiation.

In this context, Brussels would do well to scrutinize the European Free Trade Association (EFTA), a regional trade organization comprising non-EU countries including Switzerland, Norway, Iceland, and Liechtenstein, which has already secured an FTA deal with Indonesia that fully entered into force in 2021. The EFTA-Indonesia FTA includes a robust sustainability chapter, which EFTA members view as a means to advance Indonesia’s progress on sustainability whilst strengthening its domestic market. The EU could draw valuable lessons from this agreement.

Compared to imposing unilateral measures such as the EUDR to dictate terms on key Indonesian commodities, an FTA can be a more effective instrument of external influence. Should the EU’s FTA follow the EFTA’s model, Jakarta will face heightened pressure to meet global sustainability standards. The need to enhance certification processes for critical minerals and plantations is becoming increasingly unavoidable.

For both the EU and Indonesia, the timing is crucial. Prolonged delays risk not only unraveling the progress made but also diminishing the economic gains both sides hope to achieve. It is worth noting that Brussels’ footprint in the Asia-Pacific is overshadowed by other major powers like Beijing and Washington. Ignoring Jakarta will have two consequences: the EU will struggle to secure its EV supply chain independent of China, while Jakarta may pivot toward alternative partners.

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The success of the EU-Indonesia FTA hinges not only on mutual economic interests but also on the political momentum of the incoming administrations. Prabowo and von der Leyen must recognize that the FTA goes beyond securing domestic interests; it is about navigating shifting geopolitical landscapes and building long-term strategic alliances.

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