Market Overview

Indonesia and Australia sign new free trade agreement

Indonesia and Australia sign new free trade agreement

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Trade ministers from Indonesia and Australia signed a new free trade agreement (FTA), the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA), in Jakarta, Indonesia, on March 4. The are a wide range of beneficial outcomes from the agreement. For instance, the new agreement allows 99 percent of Australia's goods to enter Indonesia tariff-free, or under "significantly improved or preferential arrangements," and 100 percent of Indonesia's goods to enter Australia tariff-free.

A wide variety of non-trade barriers will also be removed. For instance, Indonesia will also guarantee the automatic issue of import permits for a wide variety of products including live cattle, meat, feed grains, rolled steel coil and some fruit and vegetables.

Both governments must now ratify the free trade agreement before it enters into force.

"Bolstering economic ties between our nations will create new trade opportunities for Australian and Indonesian businesses, boost two-way investment and increase prosperity in both countries," said Australian trade minister Simon Birmingham.

"With a population of 270 million and high levels of economic growth, Indonesia is on track to become one of the world's largest economies. This makes the strengthening of our ties both strategically and economically important… A stronger economic partnership with Indonesia will provide a major boost for Australian farmers. Under the agreement, producers of grains, live cattle and meat, dairy and horticulture, and many other products will benefit from lower tariffs and improved access to Indonesian markets. For example, Australian grain growers will be able to export feed grains into Indonesia tariff-free, building on our substantial milling wheat exports… IA-CEPA will also support Australian manufacturing in areas such as steel, copper and plastics," Birmingham said.

Industry reaction was also generally favorable.

Russell Wilkinson, a customs expert and the founder of World Customs Portal, tells FreightWaves: "It's a great strategic initiative by the Australian Government to secure the IA-CEPA, on top of the current ASEAN FTA (mainly for the goods trade), providing increased access of goods and services to an economy boasting 262 million people and circa 1 Trillion in GDP. The low base of export services of A$1.6b is set to increase dramatically in many key areas such as Education, Health, Tourism, Mining Services, Architecture and Engineering and a range of other knowledge-intensive Business Services. Ecommerce set to increase, and Start-Ups should assess the country's future potential."

Also voicing his support was Innes Willox, the CEO of the Australian Industry Group, the leading business advocacy and representative organization, who commented that: "members often nominate at the border and behind the border barriers as the biggest obstacles to expanding in to the Indonesian market. The ground breaking agreement to dedicate an entire FTA Chapter to non-tariff measures, as well as streamlining the export documentation requirements, will give Australian exporters the confidence to have another look at this growing market."

According to the Australian Department of Foreign Affairs and Trade, Indonesia is "one of the world's fastest-growing emerging economies." By 2050 it is forecast to become the world's fourth-largest economy as measured by nominal gross domestic product (GDP).

Two-way trade between Australia and Indonesia in goods and services stood at AU$16.8 billion in 2017-2018, according to the Australian Department of Foreign Affairs and Trade, which is up 1.6 percent over a five-year period. Australia exported AU$8.4 billion in goods to Indonesia in 2017-2018, which is up 5.9 percent over five years. Australia imported AU$8.4 billion in goods from Indonesia in 2018-2018, which is down 1.9 percent over a five-year period.

Major Australia exports to Indonesia include crude petroleum – AU$1.3 billion; wheat – AU$950 million; live animals – AU$575 million; and coal – AU$572 million. Indonesia's major exports to Australia also include crude petroleum – AU$1.02 billion; refined petroleum – AU$376 million; worked wood products – AU$206 million; and tobacco – AU$160 million.

A study into the effects of FTAs by the Asia-Pacific Economic Cooperation organization in 2015 found that they do increase the volume of trade by a statistically significant amount.

"Preliminary analysis of the effects of FTAs on exports showed that the average exports five years after an FTA is enforced is higher and statistically significant vis-à-vis the average exports five years before... Results demonstrated that FTAs are correlated positively and significantly to real exports. Specifically, regional, North-South and ‘modern' FTAs are correlated positively and significantly to real exports while the correlations are not significant for bilateral and ‘older' FTAs. Moreover, these FTAs also significantly reduce the cyclicality effect of importer GDP on exports," the report reads.

It also added that the "quality" of the FTA matters. FTAs that address non-tariff barriers to trade were noted as being trade boosters.

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