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How to Break the Deadlock in the Indonesia-EU Trade Talks

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Pacific Money | Economy | Southeast Asia

How to Break the Deadlock in the Indonesia-EU Trade Talks

The two sides could incorporate a “built-in agenda,” putting off thorny issues until after FTA comes into force.

How to Break the Deadlock in the Indonesia-EU Trade Talks

President Joko Widodo holds a meeting with Ursula von der Leyen, the president of the European Commission at Hiroshima, Japan, May 21, 2023.

Credit: Facebook/Kristia Budiyarto

Negotiations for a Free Trade Agreement between the European Union and Indonesia (EUI FTA) have undergone 16 rounds since 2016. During each round, the usual rituals have been observed and both sides have conveyed supportive diplomatic rhetoric and set ambitious new targets, the latest of which was Indonesia’s hope that the negotiations could finally be concluded sometime this year.

However, with the target once again likely to be missed, both sides should contemplate the value of continuing the negotiations, given the current slow progress and contentious pending issues. All options that lead to a conclusion should be considered, including sequestering contentious issues in a “built-in agenda,” a provision that specifies certain issues to be revisited or renegotiated after the FTA enters into force.

Following the 16th and most recent round of negotiations last month, the EU reported that despite some progress, the two sides had not moved much closer to substantial conclusions on most of the outstanding issues. On the trade in goods, the two parties were still preparing revised offers for market access. Export duties, import licensing procedures, and the acceptance of remanufactured goods were discussed “without narrowing respective positions.” Progress on rules of origin was limited to “closing several articles.”

On the question of services, progress was limited to the finalization of the Guidelines on Mutual Recognition, updates on the preparation of revised offers, and flexibility in enhancing the initial proposals submitted by the two sides at the beginning of negotiations. On investment, discussions covered outstanding issues in liberalization and protection, along with preparations for revised offers. Talks on investment dispute settlement, centering on the form of the mechanism, the EU said, “remained inconclusive.”

Regarding government procurement, first offers were discussed, revealing “substantial divergences” between the two sides in both coverage and ambition. The discussions of the text of this chapter of the FTA centered around the few remaining provisions yet to be agreed upon, including nondiscrimination in goods and services and the application of the dispute settlement regime.

The EU reported that progress has been made in the areas of State-Owned Enterprises, Subsidies, Trade and Sustainable Development, and Sustainable Food Systems. However, further extensive work appears required to conclude talks in these areas. To date, out of the 16 proposed chapters in the FTA, eight have been concluded, including the chapters covering customs and trade facilitation, sanitary and phytosanitary measures, economic cooperation and capacity building, and dispute settlement.

Leaving aside these outstanding issues, the prospect of concluding the FTA this year has been complicated by Indonesia’s general elections next month and the EU’s parliamentary elections in June. If the negotiations are to be continued, priority should be given to efforts at seeking compromise on the two parties’ respective resistance points and ambitions.

For example, the EU may need to lower its expectation of market access for government procurement and state-owned enterprises. Conversely, Indonesia ought not to attempt to leverage the FTA negotiations to seek the EU’s recognition of its Sustainable Palm Oil standard. This is an issue that should be managed by the Joint Task Force that both sides recently established for implementing the EU Deforestation Regulation. This would be reciprocal to the EU’s position of not tabling its World Trade Organization (WTO) dispute with Indonesia over its nickel ore export ban.

There is one way potentially to break the deadlock. Contentious issues without a clear prospect of being reconciled could be assigned as a built-in agenda to the FTA, outlining the issues to be revisited after the agreement comes into force.

Built-in agendas are common in trade agreements, including in the WTO. For instance, many accords agreed upon during the Uruguay Round of multilateral trade agreement talks in 1994 specified future dates for continuing reviews or negotiations in specific sectors or subject areas like sanitary and phytosanitary measures, technical barriers to trade, dispute settlement, government procurement, and others.

A built-in agenda treats the FTA as a dynamic and living document subject to periodic reviews, in order to optimize its benefits and keep it commercially relevant.

Indonesia, within the Association of Southeast Asian Nations (ASEAN), has some experience with built-in agendas, evident inter alia in the ASEAN-Australia-New Zealand FTA. This agreement includes a built-in agenda for ongoing work and prioritized implementation within a specified period after it enters into force.  The EU in general seeks to establish FTAs with the widest scope and the highest level of commitment from both sides. However, there is a sort of built-in agenda on investment expropriation in the EU-Canada FTA (Annex 8.D), i.e. an agreement to review the relation between intellectual property rights and investment disciplines within three years after entry into force, or at the request of a Party.

Absent a convincing prospect of concluding the FTA negotiations, whether or not by including a built-in agenda, pausing the negotiations makes sense. The two parties need to weigh whether stubbornly defending points of contention will incur an opportunity cost, resulting in the loss of potential FTA benefits. If bearing the cost is acceptable for one or both parties, putting the negotiations on hold is a justified tradeoff. Otherwise, desperately struggling to conclude the negotiations when neither side is willing to compromise on key issues is just a waste of time and resources.

For instance, if Indonesia can wait “another seven years” for the EU to recognize existing export standards for sustainable palm oil and wood products, it can bear the cost of missing opportunities to gain better market access in the EU for many other products. Suppose the EU insists on the highest level of commitment in government procurement. In that case, it accepts the cost of losing the chance to boost investment in Indonesia through the FTA.

The EU has put on hold its negotiations for FTAs with India (2007-2013), Malaysia (2010-2012), and Australia (2018-2023). In 2022, the EU restarted negotiations with India, but “only if there will be access to the real market, without which the deal would be emptied.” This hints at a possibly similar fate for the prospective FTA with Indonesia.