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Another Trade War? Escalating Friction in Indonesia-EU Relations

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Another Trade War? Escalating Friction in Indonesia-EU Relations

The discord between Indonesia and the EU over nickel and deforestation issues reflect broader challenges facing the global order. 

Another Trade War? Escalating Friction in Indonesia-EU Relations
Credit: Photo 71594869 © Tan Kian Yong |

Amid the escalating rivalry between the United States and China, the geopolitical landscape is witnessing the emergence of another contentious relationship, this time involving Indonesia, a rising regional power in Southeast Asia, and the European Union (EU). 

Trade relations between Indonesia and the EU have increasingly deteriorated in recent years, particularly in sectors such as raw nickel and palm oil. One significant issue is Indonesia’s imposition of an export ban on raw nickel and other mineral ores. Additionally, the EU has implemented strict deforestation regulations affecting Indonesia’s export of palm oil and other agricultural products. While these bilateral tensions undoubtedly impact the associated industrial sectors, they more importantly underscore the evolving dynamism of global fragmentation and the further shift toward a multipolar world order.

Indonesia, home to significant reserves of key raw minerals such as nickel, bauxite, and copper, has been leveraging these resources to advance its economic nationalism. The government implemented an export ban on raw nickel in January 2020, followed by a ban on bauxite ore in June 2023, with plans for other raw resources in the pipeline. This strategic move regarding nickel is part of the flagship policy of the outgoing Joko Widodo administration, known as the downstreaming (hilirisasi) policy. While the policy encompasses various raw materials, nickel holds a prioritized position within the policy.

The aim is to develop the country’s smelting and processing industries, particularly in anticipation of increased demand driven by the green transformation, which emphasizes batteries and related products. For nickel and other key minerals, the ultimate goal is to attract substantial foreign investment to advance downstream processing for batteries and significantly boost electric vehicle (EV) production, positioning Indonesia as a regional hub for EV manufacturing. There has been a noticeable increase in foreign investment in smelting and processing industries following these policy implementations, although the long-term impact of the policy itself requires further review.

The European Union has contested Indonesia’s policy at the World Trade Organization (WTO). Their primary assertions are that Indonesia’s bans on nickel ore exports and requirements for domestic processing of nickel ores contravene Article XI:1 of the GATT 1994, which prohibits member countries from imposing quantitative restrictions on imports and exports. Nickel, crucial for batteries, holds significant importance for the EU’s green transition agenda. Ensuring an adequate supply of critical minerals is fundamental to their policy aims. Therefore, despite the EU’s direct imports of ore from Indonesia not being extensive, there is profound concern about potential disruptions in the upstream supply chain in Indonesia, a leading nickel reserve.

In November 2022, the panel ruled in favor of the EU, prompting Indonesia to appeal to the Appellate Body the following month. However, the Appellate Body is currently dysfunctional as the United States has suspended the naming of panel members. The ruling has effectively been “appealed into the void,” potentially buying time from Indonesia’s perspective. Indonesia has argued that its policies are exempt and permissible under the GATT 1994, stating its intention to continue the legal battle. 

Beyond legal arguments, however, there is a significant claim that now is the best and perhaps final opportunity for Indonesia to grow its industry, which some believe the EU or the West are attempting to hinder. There is a discourse suggesting this situation mirrors a new form of colonialism or imperialism, likening the EU’s actions to forced exports, analogous to forced plantations under Dutch rule. This perspective is not necessarily radical in Indonesia; it is widely shared across the political spectrum. It implies that the existing rules, as interpreted by the EU, are not perceived as fair by Indonesia, though Indonesia does not reject the rule-based order itself. Indonesia’s proposal for an Organization of the Petroleum Exporting Countries (OPEC)-style resource management organization is one example of its intention to challenge the current order while remaining within a rule-based framework.

Nickel and other raw minerals are crucial to the green transition, a priority for the EU. However, other contentious issues between the two sides revolve around deforestation. In 2023, the EU adopted strict regulations called the EU Deforestation Regulation, set to be implemented starting December 2024 for major corporations and June 2025 for small and mid-sized companies. These measures aim to restrict the import of products linked to deforestation and require proof that imported products are not sourced from deforested areas after December 2020. In a broader context, these regulations are part of the EU’s efforts to exert influence through rule-making, enabling them to enhance their strategic autonomy. This approach often leads the EU to promote the development of substitute industries, such as the sunflower seed industry. 

These measures have been met with a harsh response from Indonesia, which views them as another impediment to its economic growth. While this is not a complete import ban on certain products or targeting of a specific country, it affects Indonesia significantly as a major exporter of products that are targeted, especially palm oil. Deforestation and its associated environmental issues are certainly perceived as problems in Indonesia, but the EU’s approach is seen as too radical and swift in the eyes of Indonesia. For many agricultural products including palm oil, the majority of producers are small or medium-sized, and there are numerous difficulties in fulfilling the requirements imposed by the regulations. From that sense, the policy is seen as a de facto import ban or market access prohibition.

The discord between Indonesia and the EU over nickel and deforestation issues is not isolated; rather, it reflects broader challenges facing the global order. Indonesia, like other rising economies, is gaining influence by leveraging its growing domestic market and strategically vital natural resources. Concurrently, global trends such as the dysfunction of the WTO and the energy transition are bolstering the ascent of these emerging economies. In contrast, the EU, which seeks to secure its strategic space through rule-making, finds its interests increasingly challenged by these rising powers. As the United States and China continue to deepen the global divide, emerging economies and the EU are also striving to assert their strategic interests and advantages, inevitably leading to clashes.

The China-U.S. relationship is frequently regarded as the central issue in global geopolitics. While this perspective holds some truth, the Indonesia-EU dynamic offers another critical dimension to the current global landscape. The world is not simply bifurcated into two opposing camps; emerging economies and the EU are also striving for autonomy to prioritize their own interests. This pursuit fosters a more fragmented, multipolar world.

Although there is a general consensus on the importance of adhering to a rules-based order, the legitimacy and impartiality of the existing rules are increasingly questioned. The EU maintains that these rules embody universal values, yet emerging economies such as Indonesia contend that this is not necessarily the case. When historical contexts and values like environmental protection or human rights are considered, resolving these disputes becomes particularly complex.

Once an established order begins to disintegrate, restoring it proves challenging. While plurilateral initiatives like the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) can offer interim solutions for some countries, a multipolar world is becoming the new norm. Consequently, confrontations akin to those between Indonesia and the EU are likely to arise in other parts of the world in the future.