Saturday, December 2, 2023

EU-Indonesia CEPA and Diplomatic Pathways for Beneficial Trade

Suzie S. Sudarman
February 21, 2023 | 7:53 am
A woman browses the footwear displayed at a festival in Bandung on Jan. 29, 2023. The Indonesian footwear and apparel industry considers the conclusion of EU-Indonesia CEPA as crucial for job creation and investments in Indonesia. (Antara Photo/Raisan Al Farisi)
A woman browses the footwear displayed at a festival in Bandung on Jan. 29, 2023. The Indonesian footwear and apparel industry considers the conclusion of EU-Indonesia CEPA as crucial for job creation and investments in Indonesia. (Antara Photo/Raisan Al Farisi)

The free movement of goods and services can bring welfare benefits to a variety of nations, but these flows can be volatile. Linda Weiss finds that globalization stimulates changes in the domestic structure of governance. Whether the changes become capacity constricting or enhancing depends to a large degree on the prevailing norms and state-society linkages in the domestic environment (Weiss, Linda, 2003).

A policy can thus have consequences on the societal organization of a nation aside from the fact that the shape of the policy itself is heavily influenced by that organization (Hall, Peter, 1986).

Policymakers must make important decisions most often in less-than-ideal circumstances. There are nonlinearities to consider such as a period of bad economic performance can be translated into a prolonged period of higher unemployment.

Economic Internationalization
Although liberal trade flows are not identical to liberal capital flows, both are subject to speculation and surges. Free movement of goods and services does bring welfare benefits but these flows are volatile. Better financial regulation is always desirable but intrinsically, we must not overestimate the ability of financial regulation to overcome macroeconomic incentives.


Another important aspect is the composition of capital flows—foreign direct investment is becoming more valuable now as several systematic studies failed to find any relationship between capital account liberalization and growth or investment (Rodrik, 1997). Nearly 50 years after Keynes, a new school of thought emerged on the real business cycle theory. This theory argues that all fluctuations in output are efficient movements to new equilibria given by the ever-changing technology and tastes of the economy.

Internationalization, Trade Disputes, and Prospects
In July 2016, the EU-Indonesia CEPA (Comprehensive Economic Partnership Agreement) negotiations began and this laid out a comprehensive program of regional tariff reduction with a view to strengthen bilateral ties and boost economic growth. Eleven rounds of negotiations have taken place, but several chapters essential to the conclusion of the talks still remain outstanding.

The WTO’s ruling in November against Indonesia’s ban on raw nickel ore exports complicates the already complex relationship rooted in disagreements over Indonesian palm oil production. Talks continue on trade remedies, trade liberalization, export duties, digital trade chapter, state-owned enterprises, dispute settlement, investment dispute settlement, institutional provisions, economic cooperation, and capacity building.

The EU’s new trade and sustainable development chapter is expected to be difficult, although negotiations have not yet been broached. This negotiating round that began on Feb. 6, 2023, expects some commitment from Indonesia or a signal to conclude the EU-Indonesia CEPA, as the trade deal will be a long-lasting legacy for Joko "Jokowi" Widodo's presidency.

With the war in Ukraine raging and continuing to disrupt global trade, Brussels’ economic absence from the Indo-Pacific region contrast with the growing Chinese economic activity in Indonesia and Southeast  Asia. What hindered FTA negotiations were the EU’s palm oil restrictions, and further tension has emerged with Indonesia’s ban on nickel ore exports in 2020. In 2021, the EU sued Indonesia at the WTO, and Indonesia lost.

Without the CEPA in place, Indonesia may lose out to countries like Vietnam. In 2020, the neighbor ratified the EU-Vietnam Free Trade Agreement (EVFTA) that has been in the works since 2012. After the deal goes into effect, the EU will lift 85 percent of its tariffs on Vietnamese goods and gradually cut the rest of its tariffs over the next seven years. Vietnam will lift 49 percent of its import duties on EU exports, phasing out the rest over the next 10 years. It will also increase export turnover to the EU by around 20 percent in 2020 and 44 percent by 2030. In ratifying the deal, Vietnam committed to implementing sustainable development standards, protecting labor rights, and upholding its pledges to tackle climate change under the Paris Accord (DW,  Aug. 6.,  2020).

The Indonesian footwear and apparel industry considers the conclusion of the EU-Indonesia CEPA as crucial for job creation and investments in Indonesia. The EU-Indonesia CEPA would be an ideal follow-up to the FTAs with South Korea and Australia. The footwear and apparel industry looks forward to strengthened trade relations with the EU.

For instance, Nike footwear exports from Indonesia have surpassed 215 million pairs in 2021 or reaching nearly 50 percent of Indonesia’s total footwear exports. Indonesia’s footwear market share only reached 3.87 percent as compared to Vietnam’s market share which amounts to 10 percent. Thus, Indonesia's footwear export is lagging behind Vietnam due to the ratification of the EVFTA (Nadya Zahira, KataData, Sep. 13, 2022).

Prudent Approach to Resolving Long-Standing Issues
Lessons learned in EU-Vietnam FTA negotiations: EU and Jakarta must take a prudent approach and develop a substantive diplomatic pathway that would include resolving long-standing issues that have managed to create difficulties in EU-Indonesia relations.

It has been argued that Brussels can acknowledge Jakarta’s progress in improving the sustainability of its palm oil production and use its current ban as a diplomatic path to negotiate limited nickel ore exports (Yee, 2022).

It is also important to further leverage other negotiations. For Indonesia, underscore the potential loss of trade and investment that may be better able to guarantee a more just future for Indonesia and the life of its people. For the EU, highlight how the potential conclusion of RCEP could affect its goals with Indonesia and ASEAN more generally.


Suzie S. Sudarman is a senior lecturer and researcher at the Department of International Relations Faculty of Social and Political Science Universitas Indonesia. The views expressed in this article are those of the author.

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