logo logo

Indonesia’s hardship in dealing with the EU is increasing

All the versions of this article: [English] [Indonesia]

Kompas - 01 February 2023

Indonesia’s hardship in dealing with the EU is increasing
By Hendriyo Widi

The hardship on the Indonesian government and exporters of dealing with a number of disputes and trade barriers imposed by the European Union is growing. As a result, Indonesia must strengthen its negotiating team and expedite the completion of the Indonesia-EU Comprehensive Economic Partnership Agreement, or IEU-CEPA.

Indonesia filed a WTO complaint against the European Union (EU), alleging that its Renewable Energy Direction (RED) II policy discriminated against palm oil derivative products, specifically biodiesel. Indonesia has also filed an appeal against the EU in the case of the nickel ore export ban.

Recently, Indonesia filed a WTO consultation because the EU imposed a balancing import duty (BMP/Bea Masuk Penyeimbang) or countervailing duty and anti-dumping measures (BMAD/Bea Masuk Anti Dumping) on stainless steel cold-rolled flat (SSCRF) on January 24, 2023. The BMP increased by 21% and BMAD by 10.2-31.5 percent.

Outside of the WTO, Indonesia will be subject to the EU’s Carbon Border Adjustment Mechanism (CBAM). On October 1, 2023, the EU will implement the first phase of the policy for cement, fertilizer, steel, aluminum, and electrical equipment and devices. This also includes the commodities’ downstream products or derivatives.

"The EU will implement the first phase of the policy on October 1, 2023 for the commodities of cement, fertilizer, steel, aluminum, as well as electrical equipment and devices.

Benny Soetrisno, Chairman of the Association of Indonesian Export Companies (GPEI), stated on Tuesday (31/1/2023), that the hardship for the Indonesian government and exporters would be even greater in the face of the EU. If the government is serious about dealing with a series of disputes and potential trade barriers from the EU, it must strengthen the negotiating team and immediately implement the IEU-CEPA.

The negotiating team is made up of more than just civil servants and lawyers who are well-versed in trade and international law. Accountants who are familiar with international business law and governance are also required on the team.

"This is significant because allegations of subsidies or dumping against specific countries or companies are bound to involve audits of financial statements. "When contacted in Jakarta, a number of large companies frequently hire chartered accountants, internationally certified professional accountants," he said.

In the case of the Indonesian stainless steel subsidy, the accountant was able to prove that the subsidy accusation was incorrect based on an audit of financial statements, according to Benny. As a result, the defense of these allegations can include evidence of an audit of financial statements as well as references to trade law.

Subsidies are one of the EU’s allegations in the stainless steel case. The Chinese government has provided funds to certain companies that invest in the development of Indonesia’s steel industry.

Indonesia objected to the false claim because it lacked the specificity required by Subsidy and Offsetting Action Agreement Articles 1.1, 2.1, and 2.2. (SCM). According to Article 1.1, a subsidy is deemed to exist if the product receives income or price support under Article XVI of the General Agreement on Tariffs and Trade (GATT) 1994 (Kompas, 31/1/2023).

"By involving professional accountants, Indonesia can provide financial evidence whether the company really benefits or not from the grants or subsidies. So it’s not just legal defense," Benny explained.

Economic Fragmentation
Benny also believes that EU disputes and trade barriers can be settled bilaterally. For example, by effectively utilizing the IEU-CEPA negotiation forum to reach trade or investment agreements, such as in the steel, nickel, and CBAM sectors.
Meanwhile, the government and exporters can look for new markets for their products. If Indonesia’s export products are barred from entering the EU, the goal is to redirect them to new markets. For stainless steel, for example, Indonesia can divert it to Asia, Africa, the United Arab Emirates, and Saudi Arabia to support these countries develop their property and infrastructure.

"Indonesia can also increase domestic steel absorption to support infrastructure, real estate, and automotive development," Benny added.

According to data from the Ministry of Trade, Indonesia’s steel exports to the world have increased by 53.84 percent over the last five years (2017-2021). In 2017, the export value was $3.34 billion, but by 2021, it had skyrocketed to $20.93 billion. The export value was $14.48 billion in January-June 2022, up 64.88 percent year on year.

China dominates the steel export destination market in Indonesia, compensating for 64.17 percent of total steel export value in the first semester of 2022. The EU just provided 4.87 percent. Belgium, Spain, and the Netherlands are among the countries in the region that are among the top 20 for Indonesia’s iron and steel exports.

Fithra Faisal Hastiadi, an international trade observer at the University of Indonesia, stated that the EU is one of the world’s largest stainless steel producers. Because domestic production is disrupted, the EU applies BMP and BMAD to one of the types of Indonesia stainless steel.

This is also linked to Indonesia’s ban on nickel ore exports. The EU requires Indonesia nickel ore as a raw material for stainless steel. Meanwhile, downstream nickel ore is required by Indonesia to support the steel industry and electric vehicle batteries.

To address this issue, according to Fithra, Indonesia can look for alternative markets for new steel. Aside from that, Indonesia can reach an agreement with the EU in order to negotiate the creation of the IEU-CEPA.

Regardless of the dispute, the world is facing an increasing risk of division or fragmentation as a result of the US-China trade war and the Russia-Ukraine conflict. This fragmentation manifests itself, among other things, as protection or trade restrictions, as well as a reduction in international cooperation.

"Many countries eventually focus on improving the economy as well as the development and protection of domestic industries. This is good for the country, but it will have an effect on the global supply chain or a number of related countries," he explained.

At the World Economic Forum (WEF) in Davos, Switzerland, in January 2023, the International Monetary Fund (IMF) also mentioned the risk of fragmentation. In a worst-case scenario, global trade fragmentation could result in a loss of 0.2 percent of global GDP (GDP). In the worst-case scenario, the world will lose 7% of its GDP.

 source: Kompas