Soon, both Indonesia and the European Union will find themselves under new and renewed administrations. This is a good moment to revive the momentum for ongoing bilateral trade agreement negotiations.
A constructive relationship despite trade irritants
There will be some level of continuity in the approaches to the relationship. However, Indonesia’s new President and a changed European Commission and Parliament will alter the landscape.
Both Indonesia and the EU have a strong and historical respect for human rights and democracy. And both place significant trust in multilateral institutions, and international norms.
This informs a successful cooperative approach in areas such as cybersecurity, and strong relations with EU member states on defence cooperation.
Similarly, cooperation on climate change mitigation and adaptation – particularly in areas such as energy efficiency and renewables – has been productive.
However, trade has been an irritant in an otherwise constructive partnership, and this is well understood in both capitals.
Negotiations in the Indonesia-European Union Comprehensive Economic Partnership Agreement have at times stalled, but this is not unexpected. Any engagement between two large economies will hit obstacles.
The two key products that have strained the relationship are nickel and palm oil.
The EU’s shift towards EVs prompted a greater demand for nickel – of which Indonesia has the world’s largest reserves.
Like many countries – the EU included – Indonesia has been seeking a greater value addition in future renewables industries and imposed an export ban, to which the EU objected at the World Trade Organisation. This dispute is ongoing, but it is clear Brussels is concerned that European manufacturers will not be able to compete with their Asian counterparts in the EV space.
Palm oil to deforestation rules
Not dissimilar to this is the EU’s efforts to keep Indonesian palm oil – in the form of biofuel products — out of European markets. This has taken the form antidumping duties – since removed after a WTO dispute, countervailing duties and a technical regulation, i.e. a de facto ban from the EU’s Renewable Energy Directive.
In the case of palm oil, as with electric vehicles, EU policy sent a clear signal on an energy transition that would result in greater demand. When Indonesia met that demand with a cheap and efficient resource, Indonesia found itself on the wrong end of a campaign by European farm and biodiesel lobbyists.
Now Indonesia has seen tariffs expand to palm-based oleochemcials, and its agricultural products face new technical barriers in the form of the EU Deforestation Regulation.
The key concern from Indonesia on this regulation is that its millions of smallholder farmers – across palm oil, cocoa, timber, coffee and rubber – will find themselves excluded from the EU’s markets.
This is not because they are deforesting against the EU’s rules, but because the compliance requirements are at once both overburdensome and ill-defined.
This is not just a concern of Indonesia, but also of the EU’s other major trading partners, including Brazil, the US, China, Australia, Canada and India.
The path forward for Indonesia and the EU can, however, recover from this ‘trade slump’.
Moving forward on the Comprehensive Economic Partnership Agreement
First, the IEU-CEPA negotiations can and must continue in earnest under the new administrations, with a more liberalising approach that will be less bound by non-trade concerns.
The agreement can form the backbone of a renewed economic relationship across goods, services and investment.
Second, the EU’s commission should continue to heed the concerns of Indonesia and other like-minded countries on the EU deforestation regulation’s burden on developing countries. Indonesia is not calling for the regulation to be rescinded and is supportive of the commission’s proposed delay to the implementation of the law.
However, mechanisms are needed to ensure that smallholders’ livelihoods are not ruined, and that trade between Indonesia and the EU is not disrupted.
Third, and related to the above, Indonesia’s efforts on deforestation, its environmental reforms and its certification systems must be recognised within the EUDR and by European stakeholders more broadly.
Indonesia’s deforestation rates are now at their lowest on record, and 90 per cent below their peak a decade ago. The tired narrative of Indonesia – and its commodity producers – as environmental vandals must be dispensed with.
Taken together, these opportunities can build a successful, durable partnership between the EU and Indonesia.
Musdalifah Machmud is former Indonesian Deputy Minister at the Coordinating Ministry for the Economy. She currently serves as Expert Staff for Connectivity, Service Development, and Natural Resources.
