Free Trade Agreement with Indonesia Finalised

Negotiations between the EU and Indonesia began as early as 2016 but have stalled for several years due to disagreements, including over palm oil, which Indonesia is keen to export but which the EU has had concerns about for sustainability reasons. Recent global developments, particularly the new tariff-focused trade policy of the US administration, have restored momentum, making completion possible.

The agreement’s positive effects could be significant, as it opens up the market in a country that is the world’s fourth most populous and has also been characterised by high import tariffs. The agreement also sends a clear signal that the EU is serious about strengthening its competitiveness, productivity, and resilience by creating new opportunities for European companies to diversify. The negotiations were concluded shortly after the EU reached new trade agreements with the Mercosur countries and Mexico.

The main advantages of the agreement lie not least in the tariff reductions. According to the European Commission, the agreement will reduce tariffs on over 98% of tariff codes. A large proportion of tariffs will be removed immediately, and some will be reduced gradually, often over three or five years. Indonesia will remove tariffs on motor vehicles (currently up to 50%), machinery, pharmaceuticals, chemicals, and food.

European Commission President Ursula von der Leyen wrote in a press release that the agreement “provides the EU with a stable and predictable supply of critical raw materials, essential for Europe’s clean tech and steel industry.” Indonesia has good access to critical raw materials, including nickel, cobalt, and lithium. However, the Commission has not provided any details on how the agreement addresses Indonesia’s ban on the export of nickel ore.

The agreement also includes commitments in services trade and digital trade, including that service providers and investors from the EU will not be discriminated vis-a-vis their Indonesian counterparts. The agreement will also make it easier for EU companies to acquire licences as well as simplify the process for companies to temporarily send staff to Indonesia. Sectors covered by the agreement include IT and telecom services, financial services, postal services and manufacturing. Furthermore, the parties promise to ensure data flows by prohibiting unjustified localization requirements.

The next step is for the Commission to publish the full text of the agreement. When the texts have been legally reviewed and translated into all official EU languages, the agreement will first go to the member states in the Council. Once the Council has adopted the agreement, the European Parliament must also give its approval to the text. In parallel, Indonesia will also have to ratify the agreement.