Indonesia will reportedly relax some of its local content requirements as a possible concession to the United States during the two nations’ ongoing negotiations on tariffs and trade.
Reuters news agency reported yesterday that President Prabowo Subianto has signed off on “new rules to allow the government to procure goods with lower locally-produced content.”
According to Reuters, the new regulation, signed by Prabowo on April 30, will permit any state ministry and institution to buy products with a 25 percent locally produced content, down from the current minimum of 40 percent.
The TKDN on government procurements is among the longest-standing of Indonesia’s local content requirements (Tingkat Komponen Dalam Negeri, or TKDN, in Indonesian) that are designed to promote the growth of domestic manufacturing and technological capacity, and to satisfy important domestic political constituencies. These rules compel the use of locally produced goods and services in numerous sectors, including power generation, electric vehicles, and smartphones.
For instance, last year, Indonesia barred Apple and Alphabet’s Google from selling their flagship smartphones in the country on the grounds that they failed to meet TKDN rules, which require them to contain at least 40 percent locally manufactured components. It then used this to extract from Apple a pledge to invest $1 billion in the country, including in an AirTag production facility on the island of Batam and a factory to manufacture iPhone components in Bandung. Apple also agreed to begin research and development training for Indonesian software engineers.
In addition to lowering the local content threshold on government procurements Reuters reported that the new rules the Indonesian government will also be able to purchase goods with less than 25 percent local content “if faced with supply constraints” and to import goods “if they are unavailable domestically.”
In a report yesterday, the state news agency Antara quoted Industry Minister Agus Kartasasmita as saying that the government was “taking a more progressive approach to protecting the domestic industry” and that it was “pursuing deregulation to accelerate and facilitate business activities.”
While he did not mention it, the issue likely arose during the ongoing trade negotiations between Jakarta and Washington. In a recent report, U.S. trade representatives said that Indonesia’s TKDN on government procurements was among the numerous non-tariff barriers that impeded the flow of U.S. goods to Indonesia and contributed to its $17.9 billion goods trade deficit with Indonesia.
This trade deficit formed the basis for the punishing 32 percent “reciprocal tariff” that President Donald Trump imposed on Indonesia in early April. The imposition of Trump’s tariffs has since been postponed until July, and Coordinating Minister for Economic Affairs Airlangga Hartarto and Finance Minister Sri Mulyani Indrawati led an Indonesian delegation to Washington last month for trade talks. Airlangga has said that Indonesia is willing to negotiate the various trade barriers identified by U.S. officials, on top of buying billions of dollars worth of U.S. products, in exchange for a lower tariff.
“In principle, what Indonesia is offering … is appreciated by America,” he told reporters on April 28, promising that the two nations would reach a “win-win solution.”
While there are key differences of both kind and degree between Indonesia’s economic nationalism and the firehose protectionism of the Trump administration, both are based on similar principles, as the Jakarta Post acknowledged in an editorial on April 7.
“We, too, bear some of the blame, because all governments, including ours, care about fair trade only where it serves national or certain vested interests, and they object to it where it runs counter to those interests,” the editorial argued, under the headline “Killing trade together.” “If we are being painfully honest, the U.S. economic policy impulse is no different from ours.”
Whether this shared explicit commitment to putting their national interests first helps facilitate (or impede) a resolution to the current negotiations before the tariffs come into effect remains to be seen.