Indonesia Pushes South Korea for CEPA Investment Commitments

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Trade officials from Indonesia and South Korea will meet in Seoul this week, in critical negotiations surrounding the Comprehensive Economic Partnership Agreement (CEPA). The CEPA, which will be a bilateral deal between Indonesia and South Korea, is similar to an FTA but wider in its scope.  Unlike ordinary FTAs, the CEPA also covers investment and industrial cooperation.

Indonesia has made known since negotiations on the CEPA commenced in 2012 that it wants to target higher Korean investment. Since that time, six rounds of negotiations have been completed, but hit a stumbling block when Korea said it could not make an investment commitment. Indonesia remains optimistic, and expects an agreement could be signed off in May this year.

Bilateral trade between the two countries had been steadily increasing in recent years, reaching US$30 billion in 2012. Indonesian President Susilo Bambang Yudhoyono has indicated the figure could even hit US$100 billion by 2020 if the CEPA agreement were signed.

RELATED: Indonesia Focuses on Improving Investment Climate

South Korea’s exports to Indonesia consist mainly of high value technological products and manufactured items, while Indonesia’s exports are mostly in the energy sector, consisting of natural gas, coal, and crude oil, along with rubber, copper, and textiles. This marks the huge developmental difference between South Korea, and industrialized, innovative and technologically advanced country, and Indonesia, a developing country rich in natural resources. As of 2012, the trade balance between the countries stood at US$4.57 billion, in South Korea’s favor.

While tariffs are already reduced between the two countries by the existing ASEAN—South Korea FTA, the proposed CEPA goes much further and cuts tariffs on over 1,000 more product lines, including automobiles, ships, petrochemicals, steel, and more.  Under the ASEAN—South Korea FTA, more than 90 percent of the goods classified as ‘sensitive’ or ‘highly sensitive’ categories are industrial goods.

RELATED: Vietnam and Indonesia Enter Strategic Partnership

Indonesia is wary of entering into similar pacts such as the ASEAN—China FTA, which many Indonesian businessmen blame for a huge trade deficit with China. While China has sold a wide variety of products en masse to Indonesia under the FTA, the promised investment in return from China to Indonesia has proved elusive.

This time round, Indonesia is pushing for more concrete investment conditions in the CEPA and is targeting investment in its manufacturing industries, especially in electronics, petrochemicals, automotive components and machinery.

Chris Devonshire-Ellis of Dezan Shira & Associates comments: “The bilateral nature of this agreement is an example of doors being opened by the original ASEAN FTA and these then being followed by very specific and bilaterally negotiated treaties. It also marks the desire of countries such as Indonesia to move upmarket in terms of their trade position and compete more with innovative technical and manufacturing processes.”

“Indonesia intends to move its production base upmarket and it will be interesting to see how this agreement pans out and the extent to which Korea will permit competition from Indonesia for goods that are already produced domestically in Korea. If successful, it will help improve Indonesian manufacturing capabilities and ultimately prove beneficial to the end consumer as lower manufacturing costs in Indonesia will help keep global prices down,” he further commented.

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