Peer reviewed analysis from world leading experts

An Australia–Indonesia FTA is only for the patient

Reading Time: 5 mins
Indonesian President Joko Widodo (L) listens to Australian Prime Minister Malcolm Turnbull during their joint press conference in Sydney, Australia, 26 February 2017. (Photo: Reuters/Jason Reed).

In Brief

The sometimes rocky Australia–Indonesia relations have been given a major shot in the arm with the recent meetings between Australian Prime Minister Malcolm Turnbull and Indonesian President Joko Widodo.


  • A
  • A
  • A


  • A
  • A
  • A

Australia’s relations with Indonesia are complex, broad-ranging and arguably more challenging than any of Australia’s other major bilateral relationships. As in this case, when leaders meet and develop rapport, it sends a signal to the rest of the government, and the broader community, not only that the relationship matters but that it’s time to develop practical new initiatives to strengthen ties.

One such practical initiative is a renewed commitment to finalise the Indonesia–Australia Comprehensive Economic Partnership Agreement (IACEPA). As a goodwill gesture to get the ball rolling, at the earlier weekend meeting the countries’ trade ministers announced some minor but symbolic concessions: pesticides and insecticides on the Australian side, sugar and beef from Indonesia.

IACEPA has been in the works for over a decade. The obvious questions are, will it be delivered this time and, if so, will it have any substance?

The first point to note is that we need to take the long view of this relationship. Despite great differences, Australia and Indonesia are ‘neighbours forever’. If the various forecasts prove to be correct, and Indonesia does become the world’s fourth largest economy within a quarter of a century, it will transition from a regional to a global power, in the process reshaping the economic and strategic landscape of its neighbourhood. So Australia’s interests are much more important than simply securing additional market access here and there.

It’s also important to keep in mind that the two countries have very different approaches to trade deals. Australia has negotiated many such agreements. While their quality has varied considerably, from the comprehensive to the controversial, Australia’s trade negotiators can be rightly proud of the pioneering Closer Economic Relations deal they brokered with New Zealand.

Indonesia approaches trade agreements very differently in two major respects. First, it is not an active trade negotiator. Almost all its trade agreements are with and through the Association of Southeast Asian Nations (ASEAN). It has just one significant bilateral agreement, the 2008 Indonesia–Japan Economic Partnership Agreement. Moreover, the intra-ASEAN trade agreements are unusual in the sense that they tend to ‘multilateralise’ the concessions beyond the immediate signatories.

Second, for reasons that are obvious on a moment’s reflection, Indonesia is just as — if not more — interested in access to Australia’s labour market as it is Australia’s goods market. A good deal of empirical research has shown that the labour market is where developing countries can reap the major benefits from international economic integration. Moreover, in an era of lower commodity prices, the Indonesian government is looking for new sources of export earnings.

All bilateral trade agreements have to negotiate their way through complex networks of vested interests. Australia is unlikely to give way much on labour market access. And while Australia’s formal trade regime is fairly clean, some Australian quarantine and related requirements continue to be irritants.

On the Indonesian side, it just so happens that many of the forces resistant to trade and investment liberalisation are located in areas of export interest to Australia. Three examples illustrate the point.

First, there are high levels of protection for some Indonesian agricultural products. Put bluntly, the Ministry of Agriculture has been in protectionist hands during the past three administrations.

Second, the pressures of economic nationalism have been in the ascendancy in the mining industry for several years. Indonesians think they are getting a poor deal out of much of the mining sector. Rather than enact stricter tax and environmental regulations, the tendency has been to impose national ownership restrictions.

Third, the higher education sector is booming, and rising numbers of Indonesians are studying abroad. Australia remains a favoured foreign destination. But with over 5 million tertiary students, the real action is at home, and there are extensive entry barriers for foreign tertiary education providers.

These are not insuperable barriers. Far-sighted and skilled diplomacy can work around them. Indonesia offers huge commercial opportunities to smart governments and investors who make the effort to understand it. For example, in higher education Indonesia is prioritising innovation programs, and this provides a potential entrée for Australian universities. And with rising prosperity, beef demand will rise inexorably, outpacing the limited domestic supplies.

So while the latest iteration of IACEPA is unlikely to lead to major breakthroughs, these bilaterals establish a framework for ongoing discussions that, when the moons align, could really be substantive. And anything that gets the two governments talking rather than sparring is very much to be welcomed.

Hal Hill is the HW Arndt Professor of Southeast Asian Economics at The Australian National University.

Arianto Patunru is a Fellow at the Arndt-Corden Department of Economics and Policy Engagement Coordinator at the Indonesia Project, Crawford School of Public Policy, The Australian National University.

Budy Resosudarmo is Head of the Indonesia Project at The Australian National University.

This article was first published here in the Australian Financial Review.

Comments are closed.

Support Quality Analysis

The East Asia Forum office is based in Australia and EAF acknowledges the First Peoples of this land — in Canberra the Ngunnawal and Ngambri people — and recognises their continuous connection to culture, community and Country.

Article printed from East Asia Forum (

Copyright ©2024 East Asia Forum. All rights reserved.