Asia, explained.
Cargo is unloaded at the Jakarta International Container Terminal on 7 August 2025 as the United States begins enforcing a new 19 per cent tariff on Indonesian imports (Yasuyoshi Chiba/AFP via Getty Images)
EU trade with Southeast Asia has been undercooked, but a recent agreement augurs well for others in the pipeline.
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Europe notches an early win in Indonesian free trade dealEurope notches an early win in Indonesian free trade deal
European trade negotiators have surely never been busier. Europe, like all major industrial economies, is facing the dual threat of mercurial US tariffs and Chinese overcapacity – which despite rhetoric to the contrary, shows no real signs of abating.
“European” exports to China have for many years been disproportionality dominated by the German auto sector, albeit with strong linkages to central European supply chains. With German car sales in China in secular decline and Chinese peers looking abroad, the auto sector is not the dependable economic foundation for the Old Continent that it once was.
In June, European Commission President Ursula von der Leyen warned of a new “China shock” after reports emerged of sharp increases in EU-bound shipments of Chinese industrial goods. The EU is also increasingly concerned about overreliance on Chinese critical minerals.
The EU desperately needs new markets and supply chains.
The EU desperately needs new markets and supply chains. Less prosaically, Brussels wants to show that global trading rules and multilateralism still work. In early September, the European Commission formally submitted for ratification finalised texts of previously moribund agreements with Mexico and the Mercosur trade bloc, which will eventually eliminate almost all tariffs on EU goods. Ratification of a previously agreed trade deal with Mexico languished for seven years.
Labyrinthine negotiations with Mercosur first started in 1999 and are an instructive case study on aspects of the EU’s approach to trade. In the pre-Trump 2.0 era, French President Emmanuel Macron derided the Mercosur deal’s lack of climate and biodiversity protections. The President’s overriding concerns were actually much more parochial.
After much wrangling, Brussels will submit an “additional text” to the Mercosur agreement in order to placate Macron and his country’s habitually irascible farmers. While bypassing the need to renegotiate the agreement, this safeguard mechanism will make it easier to re-impose restrictions on more competitive South American agricultural exports.
European Commission President Ursula von der Leyen has warned of a new “China shock” after reports emerged of sharp increases in EU-bound shipments of Chinese industrial goods (European Union/EP/Flickr)
This episode is reflective of a broader European impulse to pursue a maximalist regulatory and policy harmonisation agenda, while also reserving the right to exempt European farmers from meaningful competition. Being a huge market (even larger than China) for imported goods means the EU can afford to do this, but only up to a point.
European exceptionalism has never been particularly productive in Southeast Asia, a major lacuna in the EU’s extensive network of free trade agreements. In 2014, Brussels suspended negotiations with Thailand after yet another military coup. This quixotic approach, however admirable, makes it difficult to get things done in a country that has had 13 successful coups since 1932.
Negotiations with the Philippines were put on ice in response to former president Rodrigo Duterte’s egregious campaign of extrajudicial killings. Malaysia walked away from negotiations in 2012 because of disputes over palm oil.
Somewhat ironically given that Indonesia is Southeast Asia’s most protectionist major economy by some margin, Brussels and Jakarta kept negotiations alive through 19 rounds of talks since 2016. Negotiations that at times were going through the motions gained perceptible momentum earlier this year. In late September, both countries formally signed a Comprehensive Economic Partnership Agreement (CEPA), which will eventually eliminate almost all tariffs affecting bilateral trade.
The EU’s trade with Southeast Asia is generally undercooked but has substantial growth potential and synergies.
The true depths of the EU’s ostensibly newfound pragmatism will become clearer during the ratification process, when the EU Parliament and member states have their say on agreements with Indonesia, and indeed Mercosur.
There are several obvious friction points, including disputes over Indonesia’s use of export bans on metals, most prominently nickel, and European tariffs on palm-oil derived biodiesel. Both have been subject to cases at the World Trade Organisation. Despite the CEPA eliminating tariffs on palm oil, there are deep concerns in Indonesia that the EU will use the forthcoming Regulation on Deforestation-free Products (EUDR) – which bans the import of agricultural commodities grown in deforested areas – to suppress Indonesian palm oil. There may also be temptations in Indonesia to adopt its own equally convoluted ratification process to secure exemptions from the EUDR.
Still, the fact that the EU has got to this point with Indonesia is a good sign for its broader Asian trade ambitions. Having revived talks with Thailand (2023), the Philippines (2024) and Malaysia (2025), the EU Commission now wants to finalise texts with all three countries by next year.
If the EU can shepherd all four agreements through the ratification process, it would have secured access to the vast majority of ASEAN’s US$4.13 trillion economy. Earlier agreements with Singapore and Vietnam were ratified in 2019 and 2020, respectively.
The EU’s trade with Southeast Asia is generally undercooked but has substantial growth potential and synergies. In its first four years of operation, the EU–Vietnam agreement led to a 50% increase in Vietnam’s exports to the EU and a 40% gain in EU exports. Though slightly lower down the value chain, Southeast Asian nations are also heavily exposed to a glut of Chinese exports and are hurting from US tariffs.
A patchwork of free trade agreements covering Europe and most of Southeast Asia would ultimately have major (and salutary) economic and geopolitical implications. Call it a Trumpian silver lining.
About the author
Henry Storey
Henry Storey is Manager - Projects, Research and Analysis at Dragoman with a focus primarily on Asia and the South Pacific.
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