This year is going to be a tough one for trade. The COVID-19 pandemic has prompted an unprecedented cessation of economic activity. The shock is two-pronged, hitting both supply and demand. Travel restrictions and social distancing measures have disrupted the fundamental tools of international business: travel, face-to-face meetings, and large events. Supply chains are collapsing.
But amid the chaos, an unlikely agreement has broken through. The Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA), which has been over a decade in the making, will enter into force in July 2020.
The state of their bilateral economic ties is what makes the agreement a breakthrough. For two neighboring G-20 economies, their trade and investment ties are surprisingly weak. No two G-20 countries trade as little as Australia and Indonesia do, absent a sanctions regime. Indonesia’s share of Australia’s total trade has stagnated at around 2 percent over the past two decades while Australia’s overall trade with Asia has increased.
The investment numbers are equally uninspiring. Australia’s investment in Indonesia is less than 1 percent of its outward flows, and accounts for 1.5 percent of Indonesia’s inward investment.
Negotiations were challenging, starting in 2013 and then stalling until 2016. Both sides concluded the agreement in 2018.
Looking at an overview of some of IA-CEPA’s deliverables it would appear that Australia benefits from the agreement the most, with a number of tariff reductions and tariff rate quotas (TRQs) established for many of its top exports to Indonesia. But this belies the disparity in their trade diplomacy.
Australia is an open economy heavily dependent on trade. It has eschewed protectionism for decades. It is already a member of multilateral trade agreements like the ASEAN-focused AANZFTA and the 11-member CPTPP. Australia now has almost 80 percent of its exports covered by trade agreements.
Indonesia is early in its foray into the regional trade architecture. Most of its existing agreements are through the ASEAN “plus” framework. Japan is its only other G-20 partner with which Jakarta has a bilateral agreement currently in force. IA-CEPA was an exercise preparing Indonesia for its next steps in establishing economic cooperation with other advanced economies in the Indo-Pacific.
IA-CEPA is the first of several subsequent agreements that Indonesia is finalizing or negotiating with advanced partners. An Indonesia-South Korea agreement is now forthcoming and an FTA with the EU is under negotiation. Indonesia is also a part of RCEP. It has expressed interest in joining the CPTPP, which would be a major step, although some analysts doubt Indonesia can comply with its provisions.
The fact both countries, with such differing trade policies, have finished the deal is an achievement given the present climate of trade wars and protectionism. The COVID-19 pandemic is making things worse.
U.S.-China relations are spiraling into an abyss. Existing mistrust from their trade war has been compounded by the suspicion surrounding the origins of the virus and China’s early failings in managing the outbreak. The situation has devolved into a diplomatic row. A post-COVID détente for the sake of the global economy looks unlikely.
Australia is beginning to experience China’s economic bellicosity. A Chinese anti-dumping case against Australian barley, which began in 2019, has turned ugly. China followed through on its threats and placed a total of 80 percent of tariffs on Australian barley on May 17. China followed up with a ban on Australian beef from abattoirs in Queensland under the pretext of food safety. Now around $2 billion in exports are in jeopardy.
The tipping point for China to carry out these threats appears to be linked to Australia’s support for an independent inquiry into the origins of SARS-CoV-2. But a larger trend in China’s relations with the West is also at play. It is apparent that the “firewall” many countries maintained between the economic and political aspects of their relations with China is no longer tenable as Beijing seeks to achieve its geopolitical aims.
China’s actions put IA-CEPA in the spotlight. The agreement has provisions for Australian barley under its feed grain TRQ. Indonesia will allow imports of up to 500 kt of barley for a year after it goes into force, increasing in subsequent years. Australian live cattle and beef have greater access to the Indonesian market under the agreement as well. As Indonesia seeks to stabilize its food market in the wake of the pandemic, its partnership with Australia under IA-CEPA will be critical.
Indonesia can only absorb a small part of what was exported to China. But the current situation creates an opportunity for Australia and Indonesia to build a deeper economic relationship that did not previously exist. Australian barley and beef have a new market starting July 5. If Australia and Indonesia can continue working together, many other opportunities will follow.
Kyle Springer is a senior analyst at the Perth USAsia Centre at the University of Western Australia.