The relationship between Indonesia and Australia is not defined solely by their geographical situation, but also through long historical and diplomatic ties. Through the ups and downs in their relations, both understand that working together is necessary in facing regional, even global challenges and uncertainties. On March 4 this year, Indonesian Trade and Industry Minister Enggartiasto Lukita and Australia’s Trade, Tourism, and Investment Minister Simon Birmingham, signed the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) after almost a decade of negotiations.
One of the highlights of the IA-CEPA is trade, where Indonesia will see 100% of its goods enter Australia tariff-free, while over 99% of Australian goods to Indonesia will enter duty free or under significantly improved and preferential arrangements. Previously, Indonesia and Australia
had been conducting free trade arrangements through the ASEAN-Australia & New Zealand Free Trade Agreement (AANZFTA), which came into force for Indonesia in 2012.
The IA-CEPA does not focus merely on trade. It is a higher-level, more of an economic, agreement specifically designed to boost Indonesia and Australia, covering points for the whole regional economy.
“It [the IA-CEPA] will be more modern as well because AANZFTA is currently being looked at to be updated because it’s just a free trade agreement, whereas the closer economic partnership is broader and is focused more on the latest economic opportunities as well. The new service areas, new technologies and startups, and broader cooperation in supply chains,” says Gary Quinlan AO, who is appointed as Australian Ambassador to Indonesia since February 2018.
Both countries are members of the G20, among the world’s largest emerging economies—Australia being the 13th largest and Indonesia the 15th. Despite economic stability and strong relations however, trade and investment between the two nations have been stagnant, indeed lower than with other countries.
According to Indonesia’s Trade Ministry, total trade between the two countries in 2018 amounted to $8.64 billion, only increasing by 1.3% from 2017. The fact that both countries produce the same sort of natural resources and are dependent on commodity-based exports in the past decades, means there is limited complementarity that could boost trade. Moreover, opportunities in Indonesia have been hindered by the complex regulations of doing business. However, opportunities have improved in line with respective developments in both countries, Australia becoming a major services economy, and Indonesia’s improvements in business policies.
“So, we’re quite a diversified economy, a different economy with a better feel for Indonesia’s economic needs. And Indonesia’s economy is becoming reformed. President [Joko “Jokowi”] Widodo’s policies are making it easier to do business, he’s clearing the way, I think, for companies in Australia to look again at the Indonesian market and see the opportunity,” says Quinlan.
The problem now is that both are “too heavily dependent on the trade in particular on one economy, and that’s China”. Indeed, China is currently Indonesia’s largest trading partner with a total trade worth $60.1 billion, as it is with Australia with total trade of $132 billion.
Investment between the two countries is also low. According to the Investment Coordinating Board (BKPM) in the period of 2014-2018, total FDI from Australia was only $2.1 billion. As a comparison, the largest investor remains Singapore with total investment of over $38.5 billion. Despite both Indonesia and Australia aiming to achieve a more integrated economy through investment, it remains a tough trick to pull off. Moreover, in the past 12 months a couple of major Australia investors in the resources sector have left as a result of the Indonesian government’s 51% divestment requirements.
“At the moment the level of investment is really very small, some in the financial services and some limited amounts of mining. [The total investment] is built up of relatively small investments in a number of areas,” says Quinlan. In the near term, Australia hopes to see more investment
in infrastructure—more specifically in the services associated with it, such as skills development in project design and implementation, planning preparation and training.
This is where the IA-CEPA comes in to boost further explorable trade potential and address the particular gaps in the services sector. Other than boosting trade in goods between the countries, the agreement can also encourage both countries to diversify their focus from China and look toward the new big opportunities which Quinlan emphasizes in the services and technology industries. This could range from new startups, health care and health services, tourism and its infrastructure, and education.
Since the agreement allows Australia to open universities, campuses and institutions in Indonesia, students will not have to travel far anymore. Data from Australia International Education in May 2019 states that Indonesia is the fifth largest source market for the Go8—a group of eight leading Australian universities. This point could strongly support Jokowi’s vision of developing nation’s human capital.
Vocational education in particular is included in the IA-CEPA with a skills development package for Indonesians as one of the key benefits, including increased commitment to internships and working holidays. Australia will set the working holiday quota from the current 1,000 to 4,100 upon IA-CEPA enforcement, and gradually raise this number until it reaches 5,000 in the sixth year. These stays in Australia will benefit tourism; last year the number of Indonesian tourists in Australia increased by 7%. In return, the IA-CEPA also provides incentives for Australian tourism investment in Indonesia through developing more tourism infrastructure across the archipelago, attracting more Australian visitors. Australia is the fifth largest source of tourists to Indonesia, with 1.3 million visitors last year with a higher average spend than other tourists.
Lastly, the IA-CEPA also aims to strengthen both countries’ economic resilience, especially in facing so many fast-changing challenges in the region. Quinlan points to the current trade dispute between the United States and China, which is beginning to impact the international economic situation, with no sign of ending anytime soon. He says that both Indonesia and Australia are working closely in trying to preserve the international trading system through the WTO.
The only thing now is to wait for ratification, the process of which may be protracted, given the changes in the legislatures of both countries this year. The current Indonesian House of Representatives finishes their term at the end of September, and the new one will require a 60-day period to assess the agreement. But both sides are confident that it will be completed before this year ends, probably in November.
“Certainly the Indonesian government sincerely wants to complete the process before the end of the year. The benefit is so obvious to both economies, that we’re confident about ratification proceeding,” says Quinlan.