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International business management

Indonesia to prioritize Free Trade Agreement with European Union

Hendra Kurniawan  International Trade Specialist

Hendra Kurniawan  International Trade Specialist

Recently, the Indonesian government is realizing just how important the impact of the free trade agreement with the EU is.

The cooperation between participating countries within the Indonesia-European Union (EU) Comprehensive Economic Partnership Agreement (CEPA) was designed to enhance the economic cooperation between Indonesia and the countries that are members of the EU.

Plans to implement this free trade agreement had surfaced during the reign of President Susilo Bambang Yudhoyono. However, as a result of the 2014 electoral process and the change of presidency, the plan was delayed and returned for discussion with the current President Joko Widodo.

President Joko Widodo had met with the European Parliament President Martin Schulz, European Council President Donald Tusk, and European Commission President Jean-Claude Juncker to discuss the progress of CEPA. In a joint statement with the European Commission President, Jean-Claude Juncker and President Joko Widodo stated that ‘Scoping Papers’ (the main requirements to conduct negotiations) and CEPA, which had been discussed for many years, had finally been resolved.

This trade agreement between Indonesia and the EU is crucial for Indonesia to expand the market for Indonesian products in Europe and increase exports to the EU. In addition, this trade agreement prevents large corporations from relocating their factories to Vietnam, which often happens due to the existing FTA agreement that Vietnam has with the EU and benefits provided to corporations that reside in Vietnam.

To date, Indonesia has always been in a surplus position with the EU in trade, and the implementation of CEPA is expected to result in benefits for both parties through investment and development opportunities.  The below table shows the early commit of EU trade with Indonesia moving in a positive direction.

Indonesia – EU “Trade in Goods” statistics trade in goods 2013-2015 (in Euro Billions)

Year Indonesia Export to EU Indonesia Import from EU Balance
2015 15.4 10.0 5.40
2014 14.4 9.5 4.90
2013 14.4 9.7 4.70

Source: European Commission

The Indonesian government continues to conduct discussions and negotiations in order to export products from Indonesia and go to the European market eliminating customs duties. The idea is that this will increase exports for Indonesia and provide EU consumers access to Indonesian goods with a lower price point, due to the elimination of the import duty.

The difficulty for the government of Indonesia is a request from the EU to remove import duties of as much as 95 percent of their tariff lines as part of this agreement. Indonesia is looking for greater trade with the EU, though it is believed this all-encompassing reduction would have an adverse effect on the domestic industry. To support this concern is to evaluate how Indonesia approaches all agreements. In addition to negotiating for other free trade agreements, the Indonesian government is very careful in negotiating any products that can compete for entry into EU countries and any European products that are likely to flood the Indonesian market.

If an agreement is reached, the 750 million people in Europe will become a wide-open market for Indonesian products, which proves to be a great plus for Indonesian exporters. This agreement will also help Indonesia of getting greater access to the EU, which the neighboring countries (Vietnam and Malaysia) have already accomplished in their agreements with the EU.

President Joko Widodo has given a deadline of two years to his ministers to complete the discussion of CEPA with the EU delegation. With the signing of the ‘Scoping Papers’ at least there is a plan for movement in a positive direction. If there are no significant barriers, it is expected in late 2017 this free trade agreement will be implemented.

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ONESOURCE Global Trade For Free Trade Agreements

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