Can the EU and Indonesia sign their elusive free trade deal? – The Diplomat
There is a tension between Brussels’ environmental concerns and its desire to strengthen its commercial engagement with Asia-Pacific.
A night view of Jakarta’s central business district.
As the war in Ukraine rages on and continues to disrupt global supply chains, the European Union has worked to accelerate negotiations of free trade agreements (FTA) with third countries. One of the biggest potential partner countries also remains among the most elusive: Indonesia, Southeast Asia’s largest economy. The country of 275 million inhabitants has a GDP of almost $1.2 trillion and is projected by some to be the world’s seventh largest economy by 2030.
Since formal negotiations spear in July 2016, 11 rounds of negotiations took place. But talks have stalled as disputes persist over the EU’s ban on palm oil and Indonesia’s ban on nickel exports. Still, Brussels should prioritize its geostrategic interests in the Indo-Pacific and speed up a deal by opening its single market to more sustainable palm oil products in exchange for negotiating limited nickel exports from Jakarta.
While the EU is committed to increasing its “strategic engagementwith the Indo-Pacific, the bloc’s words are not currently matched by its actions. The EU remains absent from Asia’s two largest trade agreements: the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership. Indonesia has by far the largest economy in Southeast Asia, but is only the EU’s fifth largest trading partner in the region, behind Singapore, Vietnam, Malaysia and Thailand.
Brussels’ economic absence from the region contrasts with growing Chinese economic activity in Indonesia and Southeast Asia. Beijing is Jakarta’s largest trading partner with over $124 billion of bilateral trade in 2021, more than quintupling the $24 billion of EU-Indonesia trade over the same period. Announced in 2021, Brussels’ Global Gateway strategy sought to address this by supporting infrastructure projects in developing countries, positioning itself as an alternative to China’s Belt and Road Initiative (BRI). But China has already supported $740 billion value of BRI projects in Southeast Asia alone, more than double $295 billion that the EU aims to raise by 2027 for Global Gateway projects worldwide. There “global regulatorcannot write the rules of the international trading system in a region where it is insufficiently present.
Moreover, in the court of public opinion, Brussels is well placed to negotiate an FTA with Indonesia. In a context of intensifying competition between the great powers, many Indonesians have much more confidence in Brussels and its intentions than in Beijing or Washington. While 40 and 37 percent of Indonesians view China and the United States as a threat to Indonesia, respectively, only about 2 percent says the same about the EU.
But EU restrictions on palm oil have significantly hampered FTA negotiations. In 2018, the European Parliament announcement plans to phase out the use of palm oil for biofuels by 2030 due to its contribution to land clearance and deforestation. In 2019, Indonesia accused the EU of trade discrimination and filed a complaint with the World Trade Organization (WTO), which remains pending a final ruling. As the world’s largest producer of palm oil, Indonesia considers that the industry which employs 16 million domestic workers as vital. The EU ban arguably does little more than threaten the livelihoods of thousands of Indonesian farmers and could have the opposite effect: Indonesia could completely stop investing in green certification standards for its palm oil and increase its exports to alternative markets like China in order to maintain its profits.
New tensions have emerged after Indonesia banned nickel ore exports in 2020. Nickel is essential for use in electric vehicle batteries and stainless steel production, the latter accounting for 19 billion dollars in annual revenue and more than 200,000 jobs in Europe. While Jakarta was previously the world’s largest nickel exporter, President Joko “Jokowi” Widodo has since restricted this activity to support foreign investment in domestic nickel smelters and downstream operations. As the European stainless steel industry registers its lowest production levels in a decade, Indonesia looks set to become the world’s second largest nickel producer after China. In 2021, the EU sued Indonesia at the WTO, a dispute that Jokowi has recognized Indonesia will probably lose. Yet he refused to change course.
To break this impasse, Brussels can recognize Jakarta’s progress in improving the sustainability of its palm oil production and use its current ban as leverage to negotiate limited nickel ore exports. The EU should open its single market to increased imports of certified sustainable palm oil. In return, it should push Jakarta to export limited quantities of nickel ore to its 27 member states. With Indonesia likely to lose its case at the WTO, a combination of international pressure and palm oil concessions from Brussels could convince Jakarta to adjust its export ban.
To achieve an EU-Indonesia FTA, Brussels should prioritize trade needs and competing geostrategic interests with China in the Indo-Pacific. The bloc should aim to negotiate an agreement like those it has signed with Singapore and Vietnam, which more willingly loose development and environmental standards to advance practical business interests. Indonesia should be no exception.