Indonesia-South Korea Free Trade Agreement to Take Effect

Posted by Written by Alexander Chipman Koty Reading Time: 4 minutes

The free trade agreement (FTA) between Indonesia and South Korea is set to take effect, after Indonesia’s parliament recently ratified the deal.

The two countries concluded negotiations for the deal, officially called the Korea‑Indonesia Comprehensive Economic Partnership Agreement (CEPA), in 2019, but it had to be ratified by the respective parliaments before taking effect.

The deal, which was ratified by Indonesia’s parliament in August 2022, will provide a boost to Indonesia’s fishery and agricultural sectors, and strengthen South Korea’s industrial and automotive sectors.

The CEPA is poised to add additional momentum to the growing economic relationship between Indonesia and South Korea, a partnership at the forefront of South Korea’s pivot towards South and Southeast Asia.

Auto and industry for South Korea, agriculture for Indonesia

The CEPA is a trade agreement that will reduce trade tariffs and increase bilateral market access. The deal will eliminate import tariffs on 95.5 percent of Indonesia’s exports to South Korea and 93 percent of South Korea’s exports to Indonesia.

Tariff reductions from CEPA mark a significant increase compared to the ASEAN-Korea Free Trade Agreement, which removed 90.2 percent and 80.1 percent of export tariffs from Indonesian and South Korean exports, respectively. The ASEAN-Korea Free Trade Agreement is an FTA between South Korea and the entire ASEAN bloc, of which Indonesia is a member.

In terms of market access, Indonesia will have greater ability to export fishery and agricultural products to South Korea under the CEPA. On the other side, South Korea will be able to export industrial and automotive products to Indonesia more easily, and will also enjoy increased investment access and protections.

For instance, South Korean exports of many steel products will benefit from the elimination of tariffs that previously had rates of 5-15 percent, including steel-based auto components, while automobiles and auto parts will enjoy the removal of 5 percent tariffs. Indonesian exports of a variety of fishery, food, and agricultural products – such as fish, some farm produce, and beer – will have tariffs eliminated.

However, while Indonesia will have increased market access for fishery, food, and agricultural products, many major agricultural items were excluded from tariff cuts. This is in large part due to resistance from South Korean farmers, who have argued that trade deals will negatively impact their livelihoods.

A deal over a decade in the making

Indonesia and South Korea formally adopted the CEPA, a free trade agreement (FTA), after over a decade of negotiations.

CEPA negotiations first began in 2012 but fell apart in 2014 due to disagreements and changes in governments, before reviving in 2019. CEPA’s revival was borne out of steadily expanding ties between Indonesia and South Korea, as Indonesia has been at the forefront of the South Korean government’s efforts to deepen economic and political ties with South and Southeast Asia.

Most notably, the South Korean government has made a concerted push to strengthen relations with ASEAN and India through its New Southern Policy. Then-South Korean president Moon Jae-in paid an official visit to Indonesia in 2017, when the two countries upgraded their bilateral relationship to a “special strategic partnership.”

Indonesian and South Korean trade ministers concluded negotiations in 2020, but the deal was only ratified by the South Korean parliament in December 2021 by the Indonesian parliament in August 2022. The Indonesian parliament also ratified the Regional Comprehensive Economic Partnership (RCEP) – which South Korea is also party to – at the same time.

During the CEPA negotiations, the South Korean side emphasized benefits to the country’s auto industry, while the Indonesian side sought commitments for South Korean investment in automotives and smartphones. The South Korean auto company Hyundai and electronics company LG are already among the top investors in electric vehicles (EVs) and batteries in Indonesia, in part because of Indonesia’s nickel reserves, which are used for batteries.

The importance of the deal to the EV sector has been emphasized by a number of symbolic gestures. For example, when Indonesia hosted the G20 summit in November 2022, the government chose Korea’s Genesis G80 EV and Ionic 5 as the official vehicles, representing the hopes for what CEPA will bring.

Expanding economic and political ties

Relations between Indonesia and South Korea have grown steadily closer since CEPA negotiations first began. Indonesia is now South Korea’s second largest destination for foreign direct investment (FDI) in ASEAN, after Vietnam. In 2021, trade between Indonesia and South Korea grew by 39 percent to reach US$19.28 billion.

Indonesia’s main exports to South Korea include raw materials like coal, copper, rubber, plywood, and tin. South Korea’s main exports to Indonesia include industrial products like synthetic rubber, flat steel products, electric circuits, and yarn.

If the CEPA plays out as envisioned, the agreement will lead to increased investment momentum of Indonesia’s automotive and electronics industries, including in EVs and batteries. This would increase the manufacturing ecosystem around these industries, which is still underdeveloped compared to the country’s manufacturing potential.

More broadly, the ratification of the CEPA bodes well for foreign investors in Indonesia. In recent years, the Indonesian government has increasingly embraced international trade deals, such as with Australia, Chile, and RCEP.

Deals such as the CEPA are slowly improving Indonesia’s trade and investment landscape, which continue to present numerous barriers to foreign entities. As a result, Indonesia, as the largest economy in Southeast Asia, is transforming into a more attractive partner for international trade and investment.

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