Inside Australia's new trade deal with Indonesia

As tensions with China rise, a new trade deal with Indonesia may be the key to more market opportunities in the region, writes Greg Earl.

Australia has signed or revised eight trade deals with Asian countries since the Coalition came to power in 2013. The latest one, with Indonesia, which takes effect from 5 July, is intended to fill a longstanding chasm. Despite Indonesia being Australia’s closest Asian neighbour, with growing strong bilateral government ties, economic connections remain thin.

Indonesia is Australia’s 13th largest two-way trading partner, accounting for about two per cent of all trade. Australia ranks about the same for Indonesia. The investment relationship is even weaker, official figures showing Indonesia accounting for just 0.3 per cent of Australia’s offshore stock of outbound foreign direct investment ($2.3b). Indonesia’s share of foreign investment into Australia is even lower at $1b (0.1 per cent). However, these figures may be understated because of investment coming into the two nations via third countries such as Singapore.

These thin economic connections have long been blamed for a lack of “ballast”, or real depth, in the relationship when diplomatic relations get rocky. That is largely explained by Australia and Indonesia being mostly competitive commodity exporting economies. Many Australian business leaders also find Indonesian business culture and regulatory practices too complex and opaque.

Despite more than a decade of negotiations, Prime Minister Scott Morrison has claimed the new Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) as his own by declaring, during February’s visit by Indonesian President Joko Widodo, it was “the very first item of business after I became Prime Minister. We look forward to the movement and flow of capital, people, investment and trade.”

The real deal

With the agreement finally in place, what has changed? Instead of the frequent business memorandums of understanding that often mark such leaders’ foreign trips, the striking thing about Widodo’s visit was the solitary new business deal that was announced. IA-CEPA reduces tariffs and other restrictions on goods trade, boosts people movement — particularly with training and working holiday visas for Indonesians into Australia — and lifts the Australian ownership limit to 67 per cent for many Indonesian industries, including professional services, tourism, telecommunications, transport and health. Some, such as in the energy sector, are even higher.

Monash University has been approved as the first foreign university to set up a campus in Jakarta, underlining how the commercial relationship between Australia and Indonesia is shifting into new sectors from traditional areas such as mining investment and the cattle trade. Ironically, the Monash venture will occur under a broader liberalisation of foreign participation in the higher education and vocational training sectors in Indonesia rather than the bilateral trade deal. But IA-CEPA should make the movement of staff and materials easier, and the trade deal negotiations created a positive environment for an Australian university to get the first foreign approval.

“This will help accelerate the strengthening of our education system and deepen the social, economic and technological links between Australia and Indonesia,” said Indonesian Minister for Education and Culture Nadiem Makarim. “This partnership will be the first of many other partnerships to come.”

Points of difference

The IA-CEPA has three distinct features not included in Australia’s other Asian agreements, which negotiators and businesspeople say should make it a more “living” agreement, responsive to future problems and economic changes.

It is the first Australian trade agreement with a separate chapter on the non-tariff barriers that often emerge in response to tariff cuts. Any new impediments to trade are supposed to be declared and then subject to review by a special committee of government officials. Secondly, this is the first Australian agreement that has sought input from a formal business partnership group — the Indonesia-Australia Business Partnership Group — drawn from peak industry groups in the two countries. While the parties didn’t get everything they wanted, participants say it has created better communication and trust between the two business communities, which may make it easier to deal with future challenges.

Thirdly, unlike other bilateral deals, this agreement has a formal link to Australian development aid in Indonesia, intended to make it more palatable in a country where there is still popular resistance to trade and investment liberalisation. Adhi Lukman, chair of Indonesia’s Food and Beverage Association, underlined the importance of this development cooperation in making the agreement work during Widodo’s visit by saying Indonesian business needed Australian help in adding value to the country’s food products. “We want a sustained relationship, not just raw materials,” he said.

New progressive economy

While the PM talked up the agreement for changing the ground rules for greater Australian business activity in Indonesia, the way the newly returned Widodo government deals with longstanding impediments to all foreign investment may prove more decisive in whether Australian companies take up this opportunity. Sunsuper non-executive director Elizabeth Hallett GAICD, who was a lawyer in Indonesia in the 1990s and is now on the advisory committee of a company with operations there, says the business environment has changed a lot.

“The country is now a democracy, is focused on making foreign investment easier and is working hard to deal with corruption,” she says. “The Indonesian economy has transformed in recent times with the growth of fintechs and companies offering digital services. The consuming middle class continues to grow and drives the economy and demand for services.”

It says a lot about Widodo’s campaign to redeem his country’s reputation as a difficult place for foreign investment that he now has three top officials on the case, reporting directly to him. The president has expressed alarm that Indonesia is getting little benefit from the shift out of China by some global companies, while neighbours such as Vietnam and Malaysia are doing well. Indeed, a Rabobank study lists Indonesia as only the ninth most attractive relocation country for companies exiting China.

Attracting investment

Former general turned businessman Luhut Pandjaitan is now Indonesia’s Coordinating Minister for Maritime Affairs and Investment. He has the task of attracting new multinational investment to the country, especially in strategic industries such as nickel processing.

Australian-educated economist and former US ambassador Mahendra Siregar is responsible for economic diplomacy and drawing in US capital, while young entrepreneur Bahlil Lahadalia has been appointed Indonesia Investment Coordinating Board (BKPM) chair and given a task that speaks volumes about his country’s image. Rather than just promote Indonesia to new investors, he has been told to unlock previously approved projects halted due to land and regulatory disputes. Widodo has given him a KPI of pushing Indonesia up the World Bank Ease of Doing Business index from its current ranking of 73 to at least 50 — preferably 40 — by 2023.

“I know what is going on in the mind of entrepreneurs, having come from that background,” said Lahadalia during Widodo’s visit. “The government is fully aware of the problems facing investment, not only in laws… but also in how to execute the investment projects themselves and settle the issues in the field.”

In another change in business regulation, the new Widodo administration has abandoned its first-term proclivity for serial deregulation packages, which eventually totalled 16. Instead, the president is pushing three so-called “omnibus” reform packages through the legislature this year. They are focused on tax, labour and general business issues, which will be less confusing than the many deregulation packages and possibly have a faster impact on foreign business perceptions of his country.

Greg Earl is economic diplomacy columnist for the Lowy Institute’s The Interpreter and edits Asia Society Australia’s Briefing Monthly.