Indonesia and the United States reached a trade agreement recently. According to this agreement, the tariff on goods shipped from Jakarta is reduced from 32% to 19%. The exemption is especially significant for Palm oil, accounting for 9% of Indonesia’s exports
Reuters- Indonesia and the United States have reached a trade agreement to reduce US tariffs from 32% to 19% on goods shipped from Jakarta. Southeast Asia’s largest economy secured tariff exemptions for its top exports, including palm oil, coffee, cocoa, spices, rubber, and other commodities. The exemption on palm oil is the most significant, as it accounts for 9% of Indonesia’s exports.
The agreement was signed in Washington by the US Trade Representative Jamieson Greer and Indonesia’s senior economic minister Airlangga Hartarto after a series of negotiations.
The deal is considered a win-win situation for both countries, as highlighted by Airlangga during a press conference.
The 19% rate is justified if compared with US deals with other Southeast Asian countries, including Malaysia, Thailand, Cambodia, and the Philippines. However, Vietnam has a comparatively higher rate of 20%.
The deal has matured after facing several setbacks at the start of the year. The prominent setbacks included the recent warning from index provider MSCI that there is potential for an equity market downgrade to “frontier” status due to concerns regarding transparency.
Two weeks ago, Moody’s also downgraded the country’s credit rating outlook because it cited concern over a less predictable policy-making process during this period.
The confidence among investors could be improved if Jakarta were able to use the recently negotiated U.S. trade agreement as an opportunity for additional reforms, according to Yose Rizal Damuri, who is the Executive Director of CSIS Indonesia.
Damuri further stated that if Indonesia could “multilateralize” some of the commitments made to the United States in the context of this agreement and use those commitments as a foundation for deregulation, it would help to build greater confidence in Indonesia and also act as a positive step to maximize opportunities in Indonesia.
Indonesia Accepts US Product Standards
According to Airlangg, the textiles from Indonesia will be subjected to zero percent tax through a quota mechanism that is yet to be determined. This quota will be determined based on U.S. material requirements- such as cotton and man-made fibers (e.g., polyester) in textiles – supplied by Indonesia.
The U.S. abandoned all efforts to expand non-economic provisions of the agreement (e.g., South China Sea, nuclear reactor developments). Conversely, Indonesia will remove tariff barriers on all U.S. products in nearly every sector and resolve various non-tariff barriers- such as local content rules/requirements. Additionally, Indonesia will accept U.S. standards for vehicle safety, emissions, and medical/devices as pharmaceuticals.
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Deal to Assist US Interests in Crucial Minerals
According to analysts, the agreement will also address the issue of China’s dominance in many essential minerals and the offshoring of Chinese companies to places like Indonesia.
The agreement also establishes limits on excessive production from foreign-owned mineral processing plants by ensuring that all production meets the Indonesian mining quotas. The agreement includes many minerals such as nickel, cobalt, bauxite, copper, and manganese.
Additionally, Indonesia has agreed to take appropriate action against foreign government-owned or controlled companies operating in Indonesia and causing injury to the US trade interest in any manner.
Further, Indonesia will assist U.S. investment in essential minerals and energy and will work with U.S. businesses to expedite the development of its rare-earth sector. This agreement will become effective after 90 days, when both countries have completed the required legal requirements. However, if both parties agree, changes may be made to the agreement.
Airlangga stated that Indonesian President Prabowo Subianto has travelled to Washington for both the agreement and to meet with U.S. President Donald Trump for the first leaders’ meeting of Trump’s Board of Peace.
On Friday, Prabowo and Trump signed an agreement entitled “Implementation of the Agreement Toward a NEW GOLDEN AGE for the U.S.-Indonesian Alliance,” which, according to the White House, will enhance the economic security and growth of both nations. Earlier this week, both Indonesian and U.S. companies executed agreements for a total of $38.4 billion in value.
