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ASIA TRADE – EU Indonesia free trade agreement: hope springs eternal

Perhaps in the triumph of hope over experience, the EU and Indonesia have recently announced their intention to accelerate progress on their stalled free trade agreement. But political factors and deep-rooted disagreements over the EU’s sustainability and deforestation policies mean that finalising a deal will remain a tall order.

Some history: the EU ASEAN trade agreement saga

The European Union has long wanted to secure a free trade agreement with the member states in the Association of Southeast Asian Nations.

Negotiations on a region-to-region agreement got underway in 2007, but were suspended in 2009.  The gaps between ASEAN members and the EU on a range of issues was seen as too great to be easily bridged.

The EU then turned towards a new strategy of working with specific ASEAN member states.  By building up a network of similar, or even identical, FTAs with individual members, it might be easier to create a final region-to-region agreement.

Singapore went first.  As the country has always been famously tariff-free on nearly all product lines, has almost no agricultural sensitivities, and was built on a foundation of openness to trade, Singapore has often been seen as a relatively “easy” FTA partner.  Singapore was also the largest EU trading partner in ASEAN.

Talks got underway in 2009, concluding in 2012 for goods and services and 2014 for investment.  Negotiations were not as easy as originally anticipated.  There were several hiccups along the way that stretched out both the talks and the date of entry into force.

Accommodating other trade agreements: GI example

Two points were particularly problematic.  First, the EU wanted Singapore to agree to a long list of protected Geographical Indications. However, Singapore was simultaneously involved in the Trans-Pacific Partnership negotiations with the United States.  The EU and the US had opposing views on the wisdom of expanding GIs beyond alcohol.

Singapore dragged its feet for as long as possible in wrapping up the EU negotiations in the hopes of finding a suitable compromise.

In the end, the TPP members agreed to allow GIs that represented “compound names” such as Parmigiano Reggiano cheese, Irish Whiskey, or Darjeeling tea, and Singapore agreed to set up a GI register for products from the EU.

Managing a dense web of trade commitments and ensuring consistency and alignment among them is an increasing challenge for many Asian governments as the number and variety of FTAs has grown.

The second issue that held up the entry into force of the EUSFTA for years was internal to the EU.

The European Court of Justice ruled that the investment provisions were subject to mixed competencies, which meant that the investment elements had to be split into a separate agreement and approved by the European Parliament and by individual member states.

The net result was a lengthy delay between the conclusion of negotiations and entry into force for the FTA in November 2019 and provisional application of the investment elements at the same time.

A winding path

During the long pause with Singapore, the EU continued to pursue a range of bilateral negotiations with individual ASEAN members.

Only the talks with Vietnam yielded a substantial conclusion in 2015.  As with the Singapore agreement, entry into force was a lengthy process stretching until August 2020.

EU negotiations on an FTA with Malaysia were launched in 2010 and suspended after seven rounds in 2012.  The talks with Thailand were started in 2013 and suspended a year later after Thailand’s government was replaced by military leadership.

Despite the mixed results from bilateral negotiations in the region, the EU then entered into talks with ASEAN’s largest market, Indonesia, in July 2016.

Negotiations got off to a relatively strong start, with multiple rounds, but two factors significantly slowed progress.  The start of the Covid-19 pandemic threw a wrench into negotiating processes.

A bigger problem has been fraught talks over the EU’s plans for the Trade and Sustainable Development chapter.  Both sides have had different views on the topic of sustainability and the relative importance of various elements to be covered by chapter commitments.

Smallholder politics

While much of the focus of both sides has been on the issue of palm oil and systems for ensuring sustainable production of the product, palm oil is just the most visible sign of the disconnect between the two sides.  To simplify greatly, the EU has been primarily concerned with the environmental implications of trade in palm oil.

As one of Indonesia’s largest exports, and one of the biggest export sectors to the EU, Indonesia has been particularly worried about the economic implications of changes to regulations regarding palm oil.

Given the dominance of small farms in the palm oil process, Jakarta has argued that sustainability must take into account the economic future of millions of Indonesian farms and workers involved in the sector.

The difficulties in reconciling different interpretations of sustainability are not just rooted in palm oil.  Indonesia believes that only economically sensible outcomes will be sustainable, while Europe has been much more concerned about the environmental impact of policies.

The EU’s latest regulation on deforestation is likely to lead to similar tensions between the EU and Indonesia.

But Indonesia has a highly contested presidential election also set for 2024.  Trade has always received lukewarm support in Indonesia and the periods leading up to elections tend to feature strongly protectionist moves.  The current Indonesian president is up against term limits, leaving the contest for the top job quite open at this point.

Indonesia, like many other economies globally, has been grappling with rapidly changing economic circumstances, including a sudden, sharp rise in fuel prices.  These new conditions have led to growing protests across the country over the past few weeks.

The idea that Indonesia will be open to compromise at this time on economic conditions outlined in the EU’s FTA, and particularly to accept commitments on sensitive issues like environment and labour during an election cycle, is highly unlikely.

The EU appears to be banking on the fact that the current Indonesian government may want to leave a legacy behind of successfully concluding these long-running FTA negotiations.  However, it is more likely that this hopeful resumption of talks will falter once more.


Deborah Elms is founder and executive director of the Asian Trade Centre in Singapore.

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