The EU and Indonesia – Enhancing a Global Partnership
As Indonesia’s economic clout on the global stage has risen, so has its trade and economic relations with its major trading partners. The EU and Indonesia build on sound economic relations and, over the last two decades, EU trade and investment has increased significantly. Today, the EU is the fourth largest trading partner of Indonesia, and the third most important source for foreign direct investment, with approximately EUR 1.8 billion in FDI in 2013. Investment by EU companies underpins over 1.1 million jobs in value-adding industries such as infrastructure, manufacturing, pharmaceuticals, and banking. These companies also bring technology – helping Indonesia to climb the value added chain.
However, even at a record high of EUR 25 billion in bilateral trade in 2012, EU-Indonesia trade volume is well below that of some neighbouring countries in the region, such as Singapore (EUR 52 billion), Malaysia (EUR 35 billion) and Thailand (EUR 32 billion), despite the fact that Indonesia is the largest economy in ASEAN. Even more striking is the fact that Indonesia received only 1.6 % of all EU FDI going into Asia, and only 6 % of all EU investments flowing into ASEAN. In 2012, Indonesia ranked 30th out of the EU’s top trading partners.
Moving Towards a Comprehensive Economic Partnership Agreement (CEPA)
Despite the relatively modest level of trade and FDI, many opportunities exist to step up relations between the complementary economies of Indonesia and the EU, particularly in the manufacturing sector.Mutual benefits could be much higher, if barriers to trade were removed and the huge potential for further bilateral trade and investment was untapped.
Against this background, Indonesian President Yudhoyono and European Commission President Barroso tasked a joint Vision Group of eminent people from the EU and Indonesia to explore ways to boost two-way trade and EU investments in Indonesia. The experts recommended commencing negotiations for an ambitious Comprehensive Economic Partnership Agreement (CEPA) based on a free trade area and a triangular architecture that comprises market access, capacity building and facilitation of trade and investment.
The focus of the agreement would be to boost trade and investment between the EU and Indonesia. In both word and substance, CEPA is more than a Free Trade Agreement and goes beyond simply liberalising trade and investment. CEPA includes support by the EU for capacity building efforts to strengthen Indonesia’s trade and investment climate.
CEPA will also provide much greater market access for Indonesian companies looking to penetrate the substantial EU market. The Indonesian business community is keenly aware of the benefits of CEPA and is urging its Government to accelerate talks. CEPA, according to experts, will add an additional EUR 9.2 billion ($12.6 billion USD) to Indonesia’s export value and an extra 1.3% growth to the country’s GDP. More investments and jobs with higher wages will also benefit the country.
It is therefore critical for Indonesian decision makers to acknowledge and appreciate that a deep and robust economic relationship with the EU has long-term benefits and will not prove costly in the short-term. The EU can play a constructive role in the revitalisation of Indonesia’s industrial sector by investing in higher-value added sectors where domestic firms are absent.
To bring EU-Indonesia economic relations to the next level and move towards such a CEPA, it is therefore essential that all stakeholders engage in a proactive dialogue and identify areas of common interest as well as issues of concern. EuroCham aims to contribute to this dialogue through its continuous and constructive advocacy work, including the publication of the annual EuroCham Position Papers.