Indonesia aims to conclude EU trade deal this year despite regulatory disputes

Vice Minister for Foreign Affairs tells The National of progress made in the past three rounds

A street in central Jakarta

Indonesia aims to conclude a comprehensive economic partnership agreement (Cepa) with the EU by the end of this year, despite trade disputes over plantation products, a senior Indonesian official has said.

The EU launched negotiations with the largest economy in South-East Asia in 2016. However, they were frequently hindered by European laws aimed at addressing climate change.

The regulations ensure that goods such as coffee, palm oil, cocoa, and wood are imported into the EU only if they are sustainably sourced and do not involve deforestation for agricultural land.

“Right now we are actually trying to finalise the negotiation of EU and Indonesia Cepa, and we think there is an opportunity to conclude before the end of this year,” Pahala Mansury, Indonesia’s Vice Minister for Foreign Affairs, told The National in an exclusive interview.

“There is significant progress that we have seen in the last three rounds of negotiations."

The EU is a crucial and strategic partner for Indonesia, looking to diversify its trade partnerships amid accelerating economic reforms.

In 2023, trade between the two amounted to about $30 billion. Indonesia exported about $20 billion worth of goods to the EU, including key products such as palm oil, textiles, footwear and machinery.

The EU is Indonesia's fifth-largest trading partner while Indonesia is the EU's 33rd biggest trading partner and the bloc's fifth-biggest trading partner in the Association of Southeast Asian Nations in 2023.

Trade disputes

Despite the promising outlook, trade disputes have posed challenges.

“Indonesia has certain trade disputes with the EU, particularly related to plantation products and the downstream products of the plantation,” Mr Mansury said in Jakarta this week.

“But we hope we will be able to resolve it.”

The disputes primarily involve palm oil and nickel regulations, which the EU argues do not meet its environmental standards.

Under the regulations, companies would need to provide the geographic co-ordinates of where their goods were produced, allowing regulators to check the status of the forests.

Some countries would be designated as high-risk, subjecting their goods to stricter scrutiny. The European Commission estimates that these checks could result in a 31.9 million tonne reduction in carbon emissions from goods consumed across the continent.

“Of course, at the end of the day, the EU will require the downstream products of nickel, for example. So, there will need to be a common understanding between Indonesia and the EU,” Mr Mansury said.

“We need to make sure that Indonesia's products are going to be able to get the right market access. We need to ensure we are on the same page so that the regulations will not discriminate against our products and commodities.”

Climate change poses a significant threat to Indonesia’s economy and environment. The country experiences frequent natural disasters, including floods, landslides and forest fires, which are exacerbated by changing weather patterns.

Rising sea levels threaten coastal cities and communities, putting millions at risk and potentially displacing large populations.

Mr Mansury stressed that his country was committed to addressing environmental concerns related to deforestation.

“Indonesia is very concerned about deforestation. It's not like we don't care about it. Still, we have to make sure that the benchmark, the regulation and how it is being evaluated is internationally recognised, not only unilaterally recognised,” he said.

Developing trade

Concluding the Cepa with the EU is part of Indonesia's broader strategy to diversify its economic partnerships.

Beyond the EU, the nation has signed and is actively pursuing trade agreements with other regions.

The CEPA with the UAE has already shown promising results, driving bilateral trade to around $4 billion.

Emirati investments have also grown significantly, particularly in infrastructure, energy and real estate sectors.

Indonesia's strategic location, straddling key maritime routes between the Indian and Pacific oceans, further enhances its importance in global trade.

The country is rich in natural resources, including palm oil, coal and nickel, making it a key player in global supply chains.

The country’s gross domestic product is about $1.2 trillion, making it the largest economy in South-East Asia.

With a population of about 275.5 million, it has a substantial domestic market. A member of the World Trade Organisation since 1995, Indonesia is also the largest Asean economy, accounting for about a third of the region's GDP.

“SEPA [Single Euro Payments Area] and free-trade agreements will actually play a role in developing trade, as well as investments, but also in addressing some of the issues of market access when we talk about green protectionism,” Mr Mansury said.