Australia-Indonesia trade deal: Dealing with great expectations

Australia and Indonesia have committed to completing the Indonesia Australia Comprehensive Economic Partnership by the end of 2017. The second get-together in just over a week of President Joko Widodo and Prime Minister Malcolm Turnbull, plus their trade ministers, underlines the importance both nations place on stronger economic linkages.

However, following the sixth negotiating round in Canberra in February, there are questions about how comprehensive and substantial the agreed IA-CEPA will be by the end of the year, and how close it will come to realising the ambitious goals of the two nations' trade ministers.

In March 2016, Australia’s Trade Tourism and Investment Minister Steven Ciobo and the then Indonesian Trade Minister Thomas Lembong used expansive language in setting objectives for the IA-CEPA. They said it marked a ‘radical shift in our trade and investment ties’, that the two economies had ‘stunning complementarity’, and wanted the IA-CEPA to ‘go beyond last generation trade agreements and address 21st Century opportunities and issues’. Lembong even channelled free marketeers, declaring that the two governments should work to ‘rejuvenate the animal spirits that we all know drive economies’.

President Joko Widodo and Prime Minister Malcolm Turnbull were similarily ambitious, saying the IA-CEPA should ‘transform our economic partnership’.

The more conservative Enggartiasto Lukita took over from Lembong as Trade Minister in mid 2016, but Lembong, now chairman of the Indonesian Investment Coordinating Board, remains engaged in IA-CEPA discussions. Along with Lukita and Foreign Minister Retno Marsudi, Lembong was alongside the President, Joko Widodo on his recent visit to Australia.

Whether negotiators will be able to deliver an agreement that meets the rhetoric remains to be seen, but it seems that at least one new approach is gaining traction, with the term ‘powerhousing’ entering the trade lexicon. This refers to Lembong’s exhortation for business in the two economies to work together to tackle third markets that neither nation could fully access on its own.

Powerhousing refers not only to developing joint supply chains in goods – current examples include safety footwear and commercial kitchen equipment, with joint meat supply chains an aspiration – but also in services and investment. Vocational training cooperation to achieve Australian and therefore international competency standards amongst Indonesian workers has been identified as a priority by negotiators to enable workers to access labour markets elsewhere, as well as lifting performance in Indonesia.

More generally, there is significant potential for mutually beneficial cooperation in education and labour markets but these areas are also among the most difficult to negotiate. The Indonesian government has tightened regulations for foreign professionals wishing to work in Indonesia, including sorely-needed English language teachers (p54). This is a counter-productive policy, developed in part as a response to the mistaken public perception that foreign workers - particularly Chinese - are flooding the Indonesian labour market.

Developing joint e-commerce capability is another priority for negotiators, but the Indonesian policy of data localisation threatens to cut off Indonesian businesses from global e-markets.

While tariff reductions now may have lesser priority than addressing non-tariff barriers to goods trade, particularly given the reduction timetable set in the ASEAN-Australia-New Zealand Free Trade Agreement, tariffs adjustments are still being pursued in the IA-CEPA. The announcement during the President’s visit of reductions in tariffs on Australian sugar entering Indonesia and Indonesian pesticides and herbicides coming into Australia, show there is still scope for further and faster reductions.

Sectors where Australia and Indonesia have strong but differentiated complementarities include mining, agriculture and food, education and training, and services generally. These sectors are also those with barriers to open trade and investment. Opening them up presents major challenges to negotiators and the government agencies.

While in Australia Thomas Lembong noted that the Indonesian regulatory system presented a major barrier to Australian investment. He admitted to journalists that many Indonesian regulations were ‘poor’.

Mining investment is arguably the most fraught by conflicting, confusing and constantly changing policy, influenced in large part by resource nationalism. The consequence has been a flight by mining investors (and crucially for the long-term, exploration investors) to other destinations. Chinese firms appear to be the only ones that as a group are increasing investment significantly in mining projects. Nevertheless, Australia remains one of the larger mining investor nations in Indonesia. Importantly for Indonesia, Australian firms provide diversity, high benchmarks for sustainable practices and the latest technologies.

Liberalisation of trade in agricultural products presents a tough set of issues for negotiators, including protectionist policies in Indonesia and facilitating Indonesian supply of foodstuffs through the rigorous Australian quarantine system.

Indonesia has identified Australian education and training as providing world-class approaches to its skill development needs. The government is reforming policy in science, technology and higher education, including tasking universities with lifting qualifications of staff and quality of research outputs. There is also a need to implement consistent bridging programs to build competencies of school leavers to enable them to access international-standard universities. The Indonesian university sector, however, is effectively closed to foreign providers.

Growing investment in services is a policy priority for Indonesia, while Australia seeks to grow its services trade. But despite some liberalisation of Indonesia's Negative Investment List, many sectors where Australia and Indonesia have strong complementarities remain closed to foreign investment or tightly controlled. These include legal, audit, health and mining services.

The IA-CEPA will include a chapter on ‘economic co-operation’, making it only the second agreement that Australia has under negotiation to do so. The other is the Regional Comprehensive Economic Partnership (RCEP).

Economic cooperation refers to joint capacity-building activities that target impediments to trade and investment. Large scale examples include the soon-to-be-launched 10-year $300 million Australian-funded infrastructure program and the Indonesia Infrastructure Initiative. On a smaller scale, a trade facilitation program is proposed for the IA-CEPA to help overcome market failure between the economies.

As has been well canvassed by ministers and commentators, the Indonesia-Australia economic relationship is underdone relative to the size, proximity and complementarity of the two economies. A key reason is business market failure borne of past experience, focus on other markets and mutual misunderstanding of opportunities and cultures. In addition, negotiators and agencies responsible for regulation need the backing of business to liberalise trade and investment in key sectors.

For these reasons, negotiators are seeking to expand the bilateral business linkages established through the Indonesia Australia Business Partnership Group*. Both governments want business to back a far-reaching IA-CEPA.

*The author is an adviser to the Australia Indonesia Business Council and a member of the Indonesia-Australia Business Partnership Group that is advising both governments on the IA-CEPA.

Ian Satchwell