UK and Indonesia Promote New Economic Ties

Posted by Written by Dezan Shira & Associates Reading Time: 6 minutes


By Bob Savic, Advisor to Dezan Shira & Associates

On Monday, 26 April 2021, the UK and Indonesia concluded the first round of exploratory trade talks and committed to further strengthening their trade and investment links, which rose to a record level of £3 billion of bilateral trade in 2019, through a new joint trade dialogue. 

Indonesia has been a priority post-Brexit partner for the UK given it is one of the world’s fastest-growing economies with one of the largest international professional services firms, PwC, predicting it will become the world’s fourth-largest economy in 2050, behind China, India, and the US.

New Economic and Trade Working Group

The UK and Indonesian governments have announced a shared commitment to realizing the potential growth of bilateral trade through the signing of a Memorandum of Understanding (MoU) on the Joint Economic and Trade Committee (JETCO) between Indonesia’s Minister of Trade and the UK Secretary of State for International Trade. The JETCO will aim to deepen our bilateral trade, boost cooperation, and discuss market barriers in areas such as renewable and green energy, food and beverages, and agricultural commodities.

The announcement follows a Joint Trade Review (JTR) which was carried out by the UK and Indonesian governments over the last 18 months to explore opportunities for increasing trade and investment in and identifying priority sectors to deepen their trading relations.  As such, the JTR identified nine key sectors for enhanced cooperation, including education and training, financial and professional services, healthcare and life science, and the earlier stated sectors.

As well as establishing the JETCO, Indonesia also welcomed the UK’s proposal to discuss a new agreement to facilitate trade by the UK’s official export credit agency, UK Export Finance (UKEF). 

The UK’s premier international government financing agency will support the Indonesian Government with up to £4 billion of competitive long-term finance in the delivery of its development objectives.  There would also be mutual support for the extension of the MoU for Cooperation in the Field of Creative Industries that will incorporate new areas of bilateral development in digital technology to help foster Indonesia’s creative economy and increase copyrights management capacity. 

There will also be a shared commitment to realizing investment potential, which in 2020 saw a 35 percent growth of UK investment into Indonesia, following the reforms to improve ease of investing and doing business in Indonesia introduced by the Omnibus Law 2020 and its implementing regulations.

Both countries also agreed to a mutual commitment in strengthening the multilateral trading system for promoting investment, increasing productivity, and integrating economies into global supply chains.

According to the UK’s International Trade Secretary, Liz Truss, the “agreement sets out our ambitions to strengthen our trade and investment ties, deepen our collaboration across a range of sectors, from financial services and technology to renewables and open new markets for UK businesses.

We want to strengthen trade links with like-minded countries like Indonesia who share our belief in democracy and the international rules-based system and help strengthen Global Britain’s dynamic partnerships with ASEAN and Southeast Asia.”

Opportunities and challenges for economic co-development

The UK has not traditionally been one of Indonesia’s largest trading partners.  In 2018, it was ranked as the country’s 17th largest trading partner. While the UK’s exports to Indonesia have exhibited a steadily growing trend over the last five years, albeit marked by falls in 2019 and 2020, Indonesia’s exports have been declining over this period.

Indonesia’s main exports to the United Kingdom are nickel and footwear. While it is the second-largest nickel exporter to the United Kingdom, after the United States, it still lags behind many European exporters of footwear products to the UK.

Significant opportunities arise for Indonesia to increase its exports across a range of commodities such as palm oil and natural rubbers. The palm oil sector may be the largest beneficiary from the agreement which could allow it to ramp up additional exports. Prior to Brexit, the largest palm oil exporters to the United Kingdom were European countries trading under no tariffs, while Indonesia faced a tariff rate of 9.3 percent. This important trading sector of the Indonesian economy and its ability to access the UK market is likely to change under the JETCO dialogue.

Data processing machines and food commodities including rice and papayas are also expected to be among the initial beneficiaries for Indonesia in the new dialogue.  However, Indonesian companies are seldom able to benefit from trade agreements principally because they struggle to achieve the standards set by their trade partners. This may change under the new UK-Indonesia dialogue given that the former’s diverging post-Brexit strategy is anticipated to be a lowering of environmental standards which could increase trade with Indonesia, subject to risk controversy and reputational damage for the UK.

Nonetheless, a recent market-share analysis of Indonesian and UK trade data presented a significant potential for expanding trade in tissues, footwear, wooden construction material, cocoa butter, and cooking fats and oils. The analysis was based on bilateral patterns of trade over the last five years and takes into account both countries’ competitiveness, and their industries’ abilities to adapt to each other’s domestic markets subject to changing conditions in local demand.

However, the analysis also pointed out that based on the current bilateral economic relations, the UK is more likely to be in a position of expanding its investments into Indonesia rather than increasing its exports. This is mainly driven by the Indonesian government’s economic reforms and support for its integration into global value chains, which involves bundling together market liberalizing investment and the development of local production operations. Some specific sectors which could benefit from potential cooperation in this area include infrastructure investment into Indonesia, alongside e-commerce and technology services which have recently been opened to foreign investment and which the UK has some comparative advantage. Perhaps, most importantly, is that each of these sectors is viewed as highly strategic by the current Indonesian government.

Competition faced by UK players in Indonesia

Indonesia and the European Union are also negotiating the Indonesia–EU Comprehensive Economic Partnership Agreement (IEU-CEPA). The two economies began talks in 2016 and the tenth round of negotiations was scheduled for early 2020 before being postponed due to the COVID-19 pandemic. The agreement is expected to erase many existing trade barriers and will of course not include the UK given its post-Brexit status.

The EU includes substantial trade facilitation packages in its ongoing economic cooperation with Indonesia.  The most recent was a €10 million program entitled ‘ARISE Plus’ which has been operational from 2018 to 2023 to coincide with its CEPA negotiations. The UK could include similar programs to support Indonesian companies, such as through UKEF, in order to meet standards for trading with the UK and thereby avoid a so-called race to the bottom in terms of environmental and other standards.

While such EU economic packages are generous, they are often accused of being significantly overambitious and wide-ranging in focus. As a result, a typical complaint arising from Indonesian stakeholders involved with the EU program has been that its administrative procedures are complex and slow. Alternatively, the UK may be in a position to adopt a more agile approach by providing targeted and practical measures for trade and investment facilitation.

This is an approach that would sit comfortably with Indonesian President Joko Widodo in light of this background in running a small business, prior to his role in politics, and in supporting Indonesia’s entrepreneurial spirit. As a result, The UK government could be in a strong position to build on a long-term multifaceted commitment which other countries have so far practiced successfully with Indonesia. 

This is particularly the case with the Netherlands and Japan, which have traditionally maintained more intensive trade and investment relations. While the Netherlands operates within EU rules, it has almost double the level of trade and investment to that of the UK.  For the UK, to compete on a higher level, the promise of JETCO’s wide-ranging cultural and educational activities should be a significant step in laying the groundwork for a UK-Indonesia economic relationship that would rival some of these more established players in Indonesia.

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