There is hope the newly implemented Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) will dramatically shift economic relations, paving the way for a stronger, long lasting bilateral relationship. But first, there are challenges to overcome.
Earlier this year, Australian Prime Minister Scott Morrisson stated that Australia and Indonesia are “not just close neighbours, but great friends”. However their economic relationship has often been neglected, with little work being put in to strengthen and optimise trading relations. Internationally, no other neighbouring G20 nations trade as little as Indonesia and Australia. Reasons for the low trade intensity include competition over product exports and tariff and non-tariff barriers.
Against this backdrop, the IA-CEPA came into effect on 5 July 2020, after more than a decade of negotiations. In November 2019, the Australian parliament passed the bill as part of the Customs Amendment (Growing Australian Export Opportunities Across the Asia-Pacific) Act 2019. Both countries ratified the agreement by February 2020, along with the agreed termination of the 1992 Australia- Indonesia Bilateral Investment Treaty (BIT). Under the BIT, investors were eligible to commence arbitration proceedings through investor-state dispute settlements (ISDS). The treaty mechanism was argued to expose the Australian government to long, expensive arbitration proceedings. According to the Department of Foreign Affairs and Trade, IA-CEPA aims to eliminate 99 percent of export charges on agricultural and manufactured goods to Indonesia by 2025, while all Indonesian exports will be tariff free. This is notable in comparison to the 85 percent export exclusion rate under the ASEAN-Australia-New Zealand Free Trade Area (AANZFTA).
The agreement aims to support a multitude of sectors, particularly food and agriculture. Indonesian food consumption is expected to quadruple by 2050, giving increased importance to the new opportunities being provided particularly to the beef, dairy and horticulture industries. The agreement also looks to significantly improve service sectors such as education, tourism and mining. It plans to provide new systems to address non-tariff barriers for Australian services such as health care systems and schooling. Monash University has taken this opportunity to establish the first foreign owned campus in Indonesia, a move that will generate Australian investment, while boosting Indonesia’s civilian skill-set. Other areas of development include immigration; for example, the number of working holiday visas available for Indonesian citizens will increase from one thousand annually to over four thousand. This is significant as many Indonesian’s who have travelled to Australia under working holiday visas have spoken of the skill-set boost they received upon returning home.
Although there is much anticipation surrounding expected trading improvements under the IA-CEPA, the prior trading relationship leaves much to be desired. During the 2018-19 financial year, two-way trade in goods and services between Indonesia and Australia totaled $17.8 billion. In comparison, Australia‘s two-way trade with China for the same year totaled $235 billion. Yet the two nations possess enough shared economic and regional incentives for Australia and Indonesia to promote a productive economic partnership.
Despite the potential of the IA-CEPA, challenges remain. For example, while the agreement presents economic opportunities, it is also tied to foreign policy. This became apparent during Australia’s 2018 decision to move its Israeli embassy from Tel Aviv to Jerusalem. This caused a delay in the reviewing of the IA-CEPA, as Indonesia has historically expressed solidarity with Palestine. Ultimately, the move has been put on hold.
Furthermore, as the IA-CEPA finally seemed ready to commence, it is now jeopardised by COVID-19. Indonesia’s handling of COVID-19 is beginning to take a negative turn as numbers continue to grow, with more than 290,000 infections and 10,800 deaths as of this writing. This has caused manufacturing production and exports to drop dramatically. The previous push for Australian tertiary investment is also likely to be put on hold. It is likely the initiative to close the gap in skills and tertiary education in Indonesia will also be impacted. Closed borders and restricted international travel between the two nations will also play a large factor in tertiary education and upskilling in Indonesia. The pressures the Widodo and Morrison governments are facing due to COVID-19 may also result in a shift to prioritise national economic interests above bilateral relations.
Other concerns facing Australia under the IA-CEPA are the numerous complaints filed with the World Trade Organisation against Indonesia. From 2014 to 2018, eight complaints were lodged against Indonesia. A 2017 complaint filed by Brazil accused Indonesia of preventing the import of poultry. In 2018, the U.S also filed a complaint challenging Indonesia’s import restrictions on certain food items, triggering trade and investment barriers against the U.S. This suggests that perhaps the proposed increase in the trade of goods through the IA-CEPA should be met with scepticism.
In sum, while the establishment of the IA-CEPA seems to be a step in the right direction, the agreement must overcome many obstacles if it is to establish itself as a long lasting bilateral agreement. The current international climate will test its endurance, but perhaps there is too much pressure on this one deal.