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Economic partnership talks launched by Indonesia and Peru

ASEAN Briefing - 22 August 2023

Economic partnership talks launched by Indonesia and Peru
By Ayman Falak Medina

Indonesia and Peru have begun negotiations on establishing the Indonesia-Peru Comprehensive Economic Partnership Agreement (IP-CEPA). The IP-CEPA negotiations have been stalled since 2017 with the aim of tapping new bilateral trade and investments. Importantly for Indonesia, this partnership with Peru showcases the country’s shift in expanding its trade network with non-traditional export markets.

Indonesia enjoys a trade surplus
Indonesia has enjoyed a trade surplus with Peru over the last five years. Total bilateral trade reached US$554 million in 2022 with Indonesia’s exports reaching US$442 million.

Most of Indonesia’s exports to Peru comprise vehicles (US$157 million) with the archipelago being one of the fastest-growing sourcing destinations for cars in Peru. This was followed by footwear (US$56 million), articles of paper (US$44 million), chemical products (US$34 million), and fertilizers (US$36 million).

Peru mainly exports cocoa and cocoa products (US$47 million), fertilizers (US$28 million), and mineral fuels (US$13 million) to Indonesia.

Indonesia expanding its trade network
Under President Joko Widodo’s administration, Indonesia has been active in expanding its trade network, particularly in non-traditional export markets, such as South America and Africa. Further, the government has been pushing to develop the country’s downstream mining industry as one of the core pillars of economic development.

Indonesia has a large and unprospected variety of mineral deposits and is the world’s biggest exporter of tin, palm oil, and thermal coal, as well as a major exporter of nickel, copper, bauxite, rubber, manganese, zinc, and lead, among other resources. Mining roughly accounts for over one-tenth of Indonesia’s GDP and has been integral to its economic growth.

The country began to slowly phase out exports of raw commodities, such as nickel, to encourage investments in local smelters and boost the export of higher-value processed commodities.

However, the ban on raw commodity exports has caused complaints among some of Indonesia’s traditional export markets like the EU, which rely on its raw commodities. The EU lodged a complaint with the World Trade Organization (WTO) in 2019 arguing that Indonesia’s ban unfairly harmed the EU’s stainless-steel industry. In November 2022, the WTO ruled in favor of the EU, citing that Jakarta’s ban was not in line with global trade rules. Indonesia has appealed the ruling.

Further, the EU is finalizing a new anti-deforestation law that would restrict the imports of coffee, palm oil, timber, soy, printing paper, and rubber if they were sourced from deforested land after December 31, 2020. Indonesia has protested the new law, claiming it to be discriminatory as it would be challenging to implement for smallholder farms, which make up most of the mentioned sectors.

As a result, Indonesia sees fresh opportunities for its exports in new markets in South America and Africa—Indonesia already has a Comprehensive Economic Partnership Agreement with Chile, for example. Despite the purchasing power of the countries in these continents not being on par with European countries, they show promise in terms of market size and trade competition. Further, trade barriers are also not as complex as most European nations.

 source: ASEAN Briefing