Indonesia Australia Trade March 2019

I A – CEPA Trade Ministers (DFAT)


Following years of negotiation, since 2012, the IA-CEPA was signed on 4 March by Trade Ministers Enggartiasta Lukita and Simon Birmingham. This Agreement now has to be ratified by the Parliaments of both nations. No sooner signed than Presidential candidate, Prabowo Subianto, stated that if elected on 19 April the document would be modified to protect Indonesia’s sovereignty and interests. There are prayers that Joko Widodo be re-elected as President.

Currents swirl round this Agreement. Since the Dutch departure from Indonesia some eighty years ago Australia has had difficulty making friendly contact across the Timor Sea. For such close neighbours they are culturally and economically far apart. Raw data does illustrate the difference. Both are among the largest global economies, Australia 13th and Indonesia 16th, but the mismatch in population of 25 million to 250 million highlights the vast difference in living standards, virtually industrial to subsistence, but with a rising Indonesian ‘middle’ class. With current growth rates over 5%, Indonesia is slated to be the 7th largest economy by 2030. Australia wishes to exploit this growing market. In 1991, America and Europe anticipated vast new markets in the Russian Federation – alas history continues.
Despite close proximity, Australia ranks 11th as an export destination to Indonesia and 8th as a source of export income to Indonesia. However, it is in Australia’s economic interest to more deeply penetrate this market. A recent estimate suggests there are some 300 Australian companies operating in Indonesia (12,000 in New Zealand) with a mere $11 billion invested in this 5,200 km archipelago. Bilateral trade historically has been low due to similar export profiles, incompatible culture and Indonesian government policy settings.
In 2017-18 bilateral trade between Australia and Indonesia aggregated $10 billion, about 2.3% of exports. Australia’s principal exports are wheat, cattle, beef, cotton, seafood, sugar, aluminium and crude and refined petroleum; imports from Indonesia include crude and refined petroleum, aluminium structures, timber and footwear.

Australia’s objective is primarily to increase exports into Indonesia couched in soothing language that will hopefully achieve a goal of “economic cooperation which will assist in the implementation of the agreement, support trade and provide a pathway for future liberalisation”.
This translates to:
* a reduction of impediments to trade goods,
* a reduction of impediments to the exchange of services and investments.

Beside agricultural products will be the establishment of university campuses with majority Australian equity: this is seen as a growth industry since there have been an influx of Indonesian students into Australia. In return, guest workers would be permitted into the workforce ensuring Australian dollars would be remitted to Indonesia. Ostensibly, this initiative is to forge economic relations to the next level but it is to build stronger ties between two peoples who are poles apart – a stealthy case of improving national security. Trade Minister Birmingham has spoken seductively of opportunities for agricultural exports but Indonesia depends heavily upon and is actively seeking to become self-sufficient in food production. Agriculture accounts for 50% employment and contributes 14% to GDP. Principal exports are palm oil, rubber, cocoa, coffee, rice, cassava, maize, fruit and seafood. For Australia, the agriculture, food and fibre sectors only account for 13% employment and 3% to GDP. (NFF)
Indonesia’s reliance on food production and quest for self-sufficiency could present a prickly front door to Australia’s food exporters. The Indonesian breeding protocol is a problem for Australian cattle exporters. Each five cattle destined for a feed lot must be accompanied by a breeding cow: this is a significant financial impost on exporters.

Despite close proximity markets will not immediately open. Much work is required to foster a closer commercial relationship. To achieve trading, two diametrically opposed objectives must be harmonised:
*Australia wishes to export agricultural produce, education and services into a rising market. This is starting from a low base, 2017-18 exports were only wheat $1.1 billion and cattle, sugar, beef, cotton, milk $1.6 billion. There was another $4.6 billion, aggregating 2.3% of total exports.
*Indonesia wishes to increase self sufficiency and protect its important agricultural sector.

Other issues facing Australian exporters are that:
* the Indonesian cattle trade has been opened up to India, Brazil, and Mexico.
* wheat supplies can now be imported from United States, Canada, India and the Black Sea.
* Indonesia favours local fruit growers by imposing seasonal restrictions, also local markets are being opened up to Northern Hemisphere producers.

Indonesia’s insistence that the trade deal includes guest workers for Australia raises an issue. Germany, the Gulf States and other countries bring in workers for construction, agricultural and domestic industries thus relieving their own citizens. Australia relies on back packers, Pacific Islanders, Asians, and now probably, Indonesian labour to work where Australian youth is not wanted or where there are perceived travel and or accommodation problems. For Australia with a fiction of 5% unemployment (which hides underemployment) and a 10% youth unemployment and foreigners doing unpopular work, social issues in Australia will not improve. Another problem, Australia is among the highest in the OECD in terms of labour rates: not good for exports and a probable source of friction with itinerant labour.
In a chance conversation, an exporter from America has stated that Australia is a difficult import market due to a plethora of bi-lateral trade agreements. A dark purpose might be revealed in a restrictive import policy that reduces Australia’s negative terms of trade.

Australian Trade Relationships with Indonesia. Australian Parliament, 2018.
Export Markets – Indonesia. DFAT, 2018.
Indonesian Trade Agreement. New Daily, 2018.

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