Basically there is one reason why the Indonesian government is not keen on signing free trade agreements (FTA), comprehensive economic partnership agreements (CEPA), comprehensive economic cooperation agreements (CECA) or preferential trade agreements (PTA). The reason is that Indonesia is regarded not competitive enough to compete with foreign counterparts on the international market (especially in terms of manufactured goods), while at the same time the huge 260 million population of Indonesia (which is characterized by growing per capita GDP) would become a great market for (cheaper yet higher quality) foreign products imported under the trade deal.

Hence, the government fears these trade deals will only result in a huge inflow of foreign products, while the rise in Indonesian exports would be limited. Therefore, Indonesia is currently only involved in two bilateral trade deals: (1) Indonesia-Japan EPA (2008) and (2) Indonesia-Pakistan PTA (2013).

Hariyadi Sukamdani, Chairman of the Indonesian Employers Association (Apindo), said there exist differences among Indonesian ministries about whether it is positive or negative to engage in trade deals. Meanwhile, Shinta Widjaja Kamdani, Vice Chairwoman of the Indonesian Chamber of Commerce and Industry (Kadin), says the lack of will of the Indonesian government to sign these deals is the logical consequence of Indonesia being late in opening up investment for (foreign) investors. This has resulted in limited investment in, for example, Indonesia's manufacturing industry and therefore these products lack competitiveness (in terms of price and quality) compared to products manufactured by regional counterparts (in Malaysia and Vietnam).

One sector that is negatively affected is Indonesia's textile and textile products sector. In full-year 2016 Indonesia shipped USD $12.3 billion worth of textile and textile products to the European Union (EU). Vietnam's textile and textile product exports to the EU, however, totaled USD $30 billion in the same year, a much more impressive figure. Kamdani said this difference is primarily caused by Indonesian textile exporters having to face import tariffs up to 10 percent, while Vietnam can ship these products to the EU for 0 percent import duties under the Vietnam-EU FTA.

Other examples are processed chocolate products (such as cocoa butter, cocoa cake or cocoa powder). For shipments to the EU, Indonesia competes with shipments from the African continent. While Indonesian exporters need to face import duties up to 9 percent, African counterparts are not disturbed by import duties, thus making the African products more competitive while the quality of the product is more-or-less the same.

Rosan Roeslani, Chairman of Indonesia's Chamber of Commerce and Industry (Kadin), sees the same affect in the palm oil sector. Recently, shipments of Indonesian crude palm oil (CPO) to Turkey declined significantly because Turkish importers shifted to Malaysian CPO suppliers as they can enjoy lower import duties due to the FTA that was signed between Malaysia and Turkey in 2015.

The Indonesian government does understand the importance of partnering in free trade deals and is therefore in negotiations for various deals including Indonesia-EU FTA, Indonesia-EFTA CEPA, Indonesia-Australia CEPA, Indonesia-Chile CEPA, Indonesia-India CECA, Indonesia-Iran PTA, and Indonesia-Turkey PTA. However, these negotiations - if successful at all - require plenty of time as the government is divided about the matter and concerned about the negative impact (a potential surge in imports).

Comparison Bilateral Free Trade Deals:

Indonesia Malaysia Thailand Vietnam
Indonesia-Japan EPA Malaysia-Japan EPA Thailand-Australia FTA Vietnam-Japan EPA
Indonesia-Pakistan PTA Malaysia-Pakistan CEPA Thailand-Bahrain FTA Vietnam-Korea FTA
Malaysia-New Zealand FTA Thailand-New Zealand FTA Vietnam-Chile FTA
Malaysia-India CECA Thailand-Japan EPA Vietnam-EU FTA
Malaysia-Chile FTA Thailand-Peru FTA Vietnam-Eurasian Economic Union FTA
Malaysia-Australia FTA Thailand-Chile FTA
Malaysia-Turkey FTA Thailand-India FTA

Source: Bisnis Indonesia