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Business Updates | Indonesia-EU CEPA Update: Still Progressing, Despite Multiple Challenges

Indonesia and the European Union (EU) completed the 6th round of negotiations on the Indonesia-European Union (IEU) Comprehensive Economic Partnership Agreement (CEPA) in Palembang from 15th - 19th October 2018. Both sides reported significant progress despite disagreements over a number of issues, especially those related to environmental and legal issues.

The agreement has been criticised for being skewed in favour of the EU's interests. In fact, a number of demands put forward by the EU have the potential to violate Indonesian laws. Meanwhile, several key Indonesian demands, particularly the removal of trade barriers to palm oil products, are unlikely to be accepted due to strong public opposition within the EU. That being said, the potential to benefit both sides is clearly apparent and Indonesia stands to gain a lot at this crucial time in its economic development.

Tough Negotiations

After first being proposed following on from the formation of a Vision Group by the former President of Indonesia, Susilo Bambang Yudhoyono, and former President of the European Commission, Jose Manuel Barroso in 2009, the negotiations on IEU CEPA have been bogged down by a number of differences and disagreements.

This has been very disappointing for Indonesia which expected the IEU CEPA to pave the way for the establishment of an FTA with the EU. The latter will serve as the platform from which Indonesia and the EU would work together towards greater market access, capacity building, and the facilitation of trade and investment (See Indonesia and the EU CEPA – Deal or No Deal?).

This is crucial to anticipate the potential disruption arising from when Indonesia is no longer eligible to be included in the General System of Preferences (GSP) and therefore not able to qualify for advantageous tariff and import duty rates granted to emerging markets.

Furthermore, many of Indonesia's main export competitors, such as Vietnam and Bangladesh have already entered into FTAs with the European Union. This has made their products and domestic investment climate more competitive as they are exempted from various import duties.

In the textile sector, for instance, Indonesian products are subjected to import duties of 7 - 12%, while those from Vietnam and Bangladesh pay 0% (See Indonesia's Garment and Textile Sector : Remain Optimistic Amid Mounting Pressure). The IEU CEPA is one of the most ambitious and comprehensive trade agreements the country has ever embarked upon as it would eliminate tariffs on 95% of total trade in goods between the two economies.

In addition, it would also provide greater access for Indonesian products to a huge, potential market which is home to 516 million people with a high level of consumer buying power. In 2017, the overall trade between Indonesia and EU reached $28.8 billion USD or up 14%. Indonesia recorded a trade surplus of $3.8 billion thanks to higher exports of $16.3 billion USD and lower imports of $12.5 billion USD.

The EU accounted for 10% of total foreign investment in 2017 with an investment value of $3.2 billion USD. This was an increase of 20% compared to that of 2016. This placed the EU as the fourth largest investor in the country after Singapore, Japan, and China.

Unfortunately, several irreconcilable issues such as disagreements over tariff reductions, service liberalisation, restrictions on foreign ownership and the enforcement of intellectual property rights caused the talks to cease entirely in 2013.

Three years later, under the President Joko Widodo administration, the IEU CEPA talks were resumed again through a Joint Announcement in Jakarta and Brussels on 18th July 2016, followed by a meeting on 20th-21st September 2016 in Brussels. Next, there were 2nd and 3rd rounds of negotiations held in Bali in January 2017 and in Brussels in September 2017.

Over the course of 2018, there were three more rounds of negotiations, namely the 4th round in Surakarta on 19th-23rd February 2018, the 5th round in Brussels on 9th– 13th July 2018, and the 6th round in Palembang on 15th– 19th October 2018.

During the last three rounds, the two parties discussed various economic issues, particularly market access through exchanging their lists of offers, the rules of origin, sanitation and phytosanitation, customs facilities, e-commerce, the trade of goods and services, SMEs, and many other topics. In addition, the two parties also discussed the legal aspects of the agreement such as intellectual property rights, and labour (See Labour Pains in Indonesia).

Concerns and Challenges

The Indonesian delegation has been forthcoming in maximising the country's interests and voicing concerns over the trade barriers being imposed on its palm oil products following the EU Parliament's decision to phase out the contribution of palm oil-based biofuel by 2021 (See Indonesian Palm Oil Industry Overview – Biodiesel as a New Source of Revenue Growth). Additionally, the country also strongly protested against the restricted access being applied to the country's agriculture, fisheries and industrial products (See Indonesia's Fisheries Sector: Under a New Paradigm).

The EU delegation was particularly concerned with trade restrictions and trade security. The EU demanded that Indonesia commit to investment liberalisation and foreign investor protection (See New Tax Incentives for Investors in Indonesia). Indonesia was asked to remove investment restrictions such as on foreign capital, transaction volumes, export and import volumes, numbers of branches, foreign shareholder limitations, and local content requirements. The EU also sees access to public procurement as a priority and wants Indonesia to provide greater access to SMEs (See Minimum Capital Requirements for Foreign Investment in Indonesia).

The sticking points of the agreement come from the potential to violate various laws and regulations in Indonesia including the Presidential Regulation on Local Content Requirements (See Overview of the Negative Investment List). On the Indonesian side, the paradigm of protecting the country’s fledging SMEs by exempting sensitive, strategic sectors from investment liberalisation rules is in conflict with the EU’s approach.

Other issues are also being picked through, for example, the proposal to include a dispute resolution process in the form of an investor-state dispute settlement (ISDS) or similar means should adhere to the Investment Improvement and Protection Agreement (P4M). This is important to prevent investors from bringing their dispute to the international court of arbitration costing time and money (See Indonesian Oil and Gas Sector: Foreign Investment and Dispute Resolution).

Other EU proposals that have the potential to violate Indonesian laws and put domestic businesses and customers at a disadvantage are those concerning halal label requirements (See Questions Remain Around Halal Certification Compliance in Indonesia), capture fisheries investment, and cattle imports (See Prodding Indonesia’s Local Cattle Industry).

Prospects Ahead

So far, the prospects for successfully concluding the IEU CEPA remain strong as progress remains slow but ongoing nonetheless. Despite various differences, the two parties are still determined to continue the negotiations The draft agreement is expected to be finalised in the first half of 2019.

The Centre for Strategic and International Studies (CSIS) forecasts that Indonesia could see a  5% uptick in exports to the EU following on from the implementation of the CEPA. Textiles (See Indonesia’s Upstream Textile Sector; On the Rise After a Slump), fisheries (See Indonesia’s Aquaculture & Fisheries Sector), and timber and wood (See Trading Timber: Business Insights into the Indonesia-EU VPA) products all stand to benefit from the CEPA’s removal of import duties currently levied against their entry into the EU. Furthermore, textile exports to the continent are predicted to triple within five years upon the IEU CEPA implementation.

Nevertheless, Indonesia has to remain vigilant and well aware of the fact that CEPA negotiations do not always turn out well. EU-Malaysia CEPA negotiations, for instance, came to a halt in the 7th round in April 2012. Similarly, EU-Thailand CEPA negotiation ceased at the 4th round in April 2014. The Indonesian government will, therefore have to weigh up carefully the short-term risks and long term gains to be had given the realities of the current global market place as trade protectionism is on the rise and ongoing trade disputes between the USA and China continue to create uncertainty within two of Indonesia’s most important markets to date.

Global Business Guide Indonesia - 2019

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Indonesia Snapshot

Capital: Jakarta
Population: 259 million (2016)
Currency: Indonesian Rupiah
Nominal GDP: $936 billion USD (IMF, 2016)
GDP Per Capita: $3,620 USD at Current Prices (IMF, 2016)
GDP Growth: 5.0% (2016)
External Debt: 36.80% of GDP (BI, Q2 2016)
Ease of Doing Business: 91/190 (WB, 2017)
Corruption Index: 90/176 (TI, 2016)