Can the EU succeed on closing Indonesia trade deal?

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EU and Indonesian negotiators are meeting in Jakarta this week for their first in-person talks in almost three years over a trade agreement that aims to open market access and increase commerce between Europe and Indonesia.        

EU officials have expressed confidence that the 13th round of talks on the Comprehensive Economic Partnership Agreement (CEPA) will show progress. Negotiations were launched in 2016, and sticking points include consistent complaints from Jakarta over European environmental legislation as well as reservations from both sides over the other’s economic policy. 

After a meeting at the G20 Summit in Bali last November, European Commission President Ursula von der Leyen and Indonesian President Joko Widodo set an objective of concluding the deal before the end of their mandates, which would require an in-principle agreement by the end of this year. 

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A senior EU diplomat told DW on condition of anonymity that Brussels has high expectations of a breakthrough this week, almost seven years after negotiations first began. “It is a critical test to assess the prospects for speeding up the negotiations,” the diplomat said. 

Although the EU is “committed” to a positive outcome, “achieving a deal ultimately depends on enhanced engagement by Indonesia, across all the negotiating areas,” the diplomat added.  

The EU has already secured trade pacts with Singapore and Vietnam. Talks with Malaysia and the Philippines are on hold, although there is optimism they could soon be restarted. An EU fact-finding mission will soon head to Thailand to assess whether to kick-start negotiations.  

However, an economic pact between the EU and the 10-member Association of Southeast Asian Nations (ASEAN) remains elusive.  

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What obstacles must be overcome? 

For Indonesia, the main obstacle is the EU’s deforestation initiative, which would ban imports into EU markets of goods linked to deforestation or forest degradation.  

Added to this, last November, the European Commission approved a measure to phase out palm oil-based biofuel by 2030, of which Indonesia and Malaysia are the world’s largest producers. 

Both countries have taken the EU to the World Trade Organization (WTO) over its palm-oil measures, which they claim amounts to protectionism.  

They also claim the EU’s deforestation regulation would destroy their small-scale agriculture industry, since most local businesses won’t be able to comply with the vast paperwork and bureaucracy the regulation creates.  

In late January, Jakarta again sought WTO dispute consultations, this time regarding the EU’s anti-dumping duties imposed on Indonesian stainless steel in late 2021.  

In the latest chapter of ongoing palm oil disputes, the Malaysian commodities minister and deputy prime minister, Fadillah Yusof, said at a recent industry event that an option would be to completely stop exporting palm oil to Europe “if they keep making it difficult for us.” 

Malaysians are “very serious about an EU embargo,” said Bridget Welsh, an analyst at the University of Nottingham Malaysia’s Asia Research Institute.  

The issue took priority when Anwar Ibrahim, Malaysia’s new prime minister, made his maiden visit to Indonesia in early January. It remains unclear whether Jakarta would cooperate with Malaysia on an embargo, although it would likely work in their favor.  

EU policies ‘need to be better communicated’

Palm oil remains important to European energy production. In December, the European Commission said it thinks palm oil will still account for about a tenth of the EU’s total biodiesel output by 2032, down from around 23% in 2021. 

Europe’s clean energy transition, which is already facing complications due to the war in Ukraine, would be further imperiled if Malaysia and Indonesia imposed an immediate export embargo.

Bernd Lange, an MEP and chair of the European Parliament’s Committee on International Trade, told DW that he now sees “more understanding in Indonesia for sustainable management of the palm oil sector and a more rational approach to export opportunities, so that this conflict is no longer an obstacle to further progress.” 

“But there is no question that EU policies, especially the unilateral legislation, need to be better communicated,” said Lange, who also sits on the European Parliament’s delegations for relations with Southeast Asia.  

“Trade partnerships can only really grow in partnership,” he added.  

European complaints 

Nonetheless, there appears to be some frustration in Brussels that talks stalled amid the COVID-19 pandemic because Indonesian officials prefer face-to-face meetings.  

EU diplomats are apparently fed up with having to repeat that the EU’s proposed deforestation regulation, while potentially impacting the trade pact, is a separate issue and was not designed to solely annoy Indonesia.  

There’s also some disgruntlement about Indonesian regulation requiring all imported food to be halal certified by the end of 2024. 

Last November, the WTO upheld EU claims that Indonesia’s export ban on nickel ore, a means of boosting domestic processing of nickel products, violates WTO rules.  

However, Jakarta hasn’t budged, and Indonesian exports of nickel products were worth around €28 billion last year, more than ten times what they were in 2013, according to data from the Economist.   

And President Widodo has stated that an export ban on bauxite ore, used to make aluminum, could follow in June, and bans on copper, tin and gold exports after that.  

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The EU was also publicly critical after Indonesia’s parliament refashioned the country’s criminal code in early December, outlawing sex outside of marriage and imposing allegedly more restrictions on free speech.  

Widodo has been clear that he doesn’t want to receive any lectures from Brussels. “There must be no imposition of views,” he said at an EU-ASEAN conference in December. “There must not be one who dictates over the other and thinks that my standard is better than yours.” 

For the sake of a trade pact, Brussels might be able to swallow its usual desire to condemn what it considers infringements of human rights. After all, it already has a free-trade agreement with communist-run Vietnam, a one-party state with a chequered human rights record.   

Frederick Kliem, a research fellow and lecturer at the S Rajaratnam School of International Studies in Singapore, reckons that both sides are somewhat justified in wagging a finger at the other.  

“The Indonesians say that the EU is shifting the goalpost during ongoing negotiations, with new legislation that affects the FTA potentially. They do have a point here,” he told DW. 

The “EU believes this to be mostly noise and not an insurmountable hurdle. And I agree with that,” he added.  

Despite numerous sources of contention, analysts agree that both sides would benefit from cracking on with a trade deal.  

Indonesia is Southeast Asia’s largest economy, but is not high on the list of regional trade partners. Bilateral trade in goods worth just €24.8 billion in 2021 was “way below its potential,” an EU diplomat said. It represents almost half of EU-Vietnam trade.

Edited by: Wesley Rahn