Is an EU-Indonesia FTA finally on the horizon?

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Could efforts by the EU to increase engagement with Indonesia help kick-start stalled FTA talks?

Free trade agreements (FTAs) with growing economies in Asia have been a top priority for the EU for several years. But while progress has been made with nations including India and the Philippines, one country where talks have stalled in recent years is Indonesia.

This could represent a major opportunity for the 27-nation European bloc, as Indonesia  represents southeast Asia's largest economy and a potential audience of 275 million people for EU goods and services. Indeed, some projections suggest the nation will be the world's seventh-largest economy by the end of the decade.

Despite this, current trade between Indonesia and the EU is muted. The country is only the EU's fifth-largest trading partner of the ten Association of Southeast Asian Nations member nations, with bilateral goods trade accounting for just $24.8 billion (€25.29 billion) last year - less than half of that with Vietnam.

However, efforts are being made to improve this, and revitalizing the stalled FTA talks could play a major role in opening this market up to EU members and facilitating imports from the Asian nation. 

Why have FTA talks failed to advance?

Official negotiations on an EU-Indonesia FTA were launched in 2016 and there have since been 11 rounds of talks seeking to make a breakthrough. However, continued differences on a range of topics have ensured that a deal has remained elusive.

One major sticking point has been the EU's restrictions on the use of palm oil. The Diplomat notes that this industry employs 16 million people in Indonesia and EU plans to phase out the product by 2020 due to concerns over its impact on deforestation could seriously threaten many of these jobs. Therefore, Jakarta has filed a complaint against the EU alleging discrimination against it, which is awaiting a final decision.

Elsewhere, Indonesia's export ban on nickel ore, enacted in 2020, presents another challenge. President Joko Widodo has restricted exports in order to bolster foreign investment in domestic nickel smelters and downstream operations. However, this commodity is set to be increasingly important to EU importers in the coming years as it is a vital component in electronic vehicle batteries. 

As the EU plans to ban the production of petrol and diesel-powered vehicles by 2035, demand for nickel is likely to soar. Again, this dispute is currently in front of the WTO, though President Widodo has acknowledged Indonesia is likely to lose. 

What changes could help progress negotiations?

Trade talks are part of a wider effort to improve EU-Indonesia relations over the past few months, with a spokesperson for the European Commission telling DW in October that the bloc's engagement with Jakarta has "probably never been so intensive".

This has been helped by Indonesia's current presidency of the G20 and included multiple diplomatic visits ahead of and supporting this month's summit in Bali. EU officials visiting the country include foreign policy chief Josep Borrell and trade commissioner Valdis Dombrovskis, who stated on a visit to Jakarta in September that he expects both sides to agree terms on a free-trade deal by 2024.

In a piece for The Diplomat, William Yuen Yee, research assistant with the Columbia-Harvard China and the World Program also suggested several policy moves that could help encourage progression on trade talks. For instance, the EU opening its markets to palm oil that is certified as sustainable in exchange for an easing of rules on nickel exports would go a long way towards building good faith on both sides.

The potential benefits of an EU-Indonesia FTA

One major benefit of an EU-Indonesia FTA would be to help diversify the EU's supply chains in Asia, and in particular establish alternatives to China. Indonesia has been significantly growing its manufacturing sector in recent years, so the prospect of tariff-free imports could help it become a major beneficiary of efforts to pivot away from a reliance on Beijing.

There is also significant potential for green energy and clean technology investment in the nation. As well as nickel, Indonesia is a major producer of raw materials such as bauxite, copper and lead, which are vital for hi-tech products such as computer chips and batteries.

President Widodo claims that this has helped the nation become a "key producer" of lithium batteries for the global supply chain. Earlier this year, for example, Tesla agreed a $5 billion deal to source batteries from an Indonesian subsidiary of Chinese company Huayou.

Kevin O'Rourke, a Jakarta-based analyst and principal at consultancy Reformasi Information Services, told DW: "Broad scope exists for collaboration with EU entities on a clean energy transition that Indonesia may finally be starting; I think that virtually all of the larger EU countries are engaged in renewable energy projects or plans in Indonesia in some way."

While it remains to be seen which way the WTO will rule on the various disputes that are holding up progress, an FTA would clearly smooth the way for future collaboration and trade. With efforts being made on both sides to boost relations, the chances of progress are more positive than for some time.