Bloomberg | 12 March 2017
Sugar breakthrough paves way for Indonesia-Australia trade deal
by Karlis Salna and Matthew Burgess
Australia is pinning its hopes on sugar to revitalize exports to Indonesia, as it seeks momentum for a free trade agreement that has been mooted for nearly a decade.
With two-way trade at its lowest since 2009, Australian Trade Minister Steve Ciobo hailed a recent deal to reduce sugar tariffs from 8 percent to 5 percent, bringing the country into line with rate for Southeast Asian nations. Australia is now working on a conclusion of the broader pact “by the end of this year,” he said.
“The gains in terms of sugar — to have the Asean tariff rate extended to Australia — are important because Australia was losing market share in Indonesia, losing it to Thailand,” Ciobo said Wednesday in an interview in Jakarta, referring to the Association of Southeast Asian Nations.
Amid slumping global trade, Australia and Indonesia are accelerating efforts to reach an agreement on a comprehensive economic partnership — in essence a free trade deal. It was first mooted in 2007 and reactivated last year after negotiations stalled amid political disputes over spying allegations and Indonesia’s execution of Australian drug smugglers.
Australia is Indonesia’s 9th-biggest trading partner — the countries had two-way trade in 2015 of $9.3 billion, though that is down from $12.26 billion in 2012.
Low Hanging Fruit
A flurry of recent ministerial visits — Ciobo said he had met or spoken with his Indonesian counterpart 15 times since July — was capped last week with the second meeting in two weeks between Indonesian President Joko Widodo and Australian Prime Minister Malcolm Turnbull, this time in Jakarta.
“There’s always offensive and defensive interests in any negotiation, that’s completely understandable but there is a commitment to getting a deal done and that’s what were both focused on,” Ciobo said.
Still, the deal on sugar may not give major traction to the broader agreement, according to Arianto Patunru, an economics fellow at the Australian National University. “Sugar is easy to deal with, it’s a low hanging fruit.”
"Indonesia’s approach to trade agreements is quite different to the approach taken by Australia,” he said. “Indonesia, usually, and Asean countries, they try to multilateralise their agreements and they’re not really heavy on bilateral.”
Indonesian Trade Minister Enggartiasto Lukita said the frequent contact with Ciobo shows “how willing we are to bring our trade and investment relations to the next level.” He cited agricultural supply chains, education and tourism as sectors on the agenda.
“I do not believe that this is a zero-sum game,” he said last week at a business dinner in Jakarta. “This is about developing a future partnership between friends, between two close neighbors, the two largest economies in Southeast Asia.”
The sugar deal was struck under the auspices of an existing deal between Asean, Australia and New Zealand. It will come into effect by the end of the year, according to a spokesman for Agriculture Minister Barnaby Joyce.
The higher tariffs had seen sugar exports to Indonesia slump to 300,000 tons a year from 1.25 million tons before Indonesia cut the tariff for Thailand in 2015, according to Warren Males, head economist at Canegrowers, Australia’s chief sugar lobby.
The industry is relatively small, but highly dependent on exports. Australia is expected to export 4 million tons this year, making it the world’s third largest sugar exporter, according to the U.S. Department of Agriculture.
"We’ve got good relationships with Indonesia’s refineries," Males said. "It’s really been the tariff that’s caused the decline in Australian trade."
Turnbull in Jakarta talked up the prospects for the broader trade deal. He said Widodo, known as Jokowi, is “enthusiastic” about ties and strengthening the prospects for pact.
While Australia has agreed to eliminate tariffs on pesticides and herbicides coming from Indonesian suppliers, Turnbull singled out the agreement on sugar as well as new rules that would enable more live cattle exports from Australia as evidence Jokowi “understands that trade means jobs.”
“He is pushing back against the tide of populist protectionism that you see swirling around the world at the moment and he knows that protectionism is not an answer. It’s a dead end,” Turnbull said at the Jakarta business dinner.
The neighbors are also seeking progress on a 16-nation pact led by Southeast Asia and backed by China, while Australia is hoping to revive the Trans-Pacific Partnership. The TPP, which does not include China, was thrown into disarray after President Donald Trump abandoned the deal, seen as a key plank of U.S. engagement in Asia.
Ciobo will be in Chile this week for a meeting of remaining TPP countries. China has been invited.
The Chile gathering comes amid concerns about the direction of U.S. trade policy under Trump, who has threatened a trade war with China and attacked the World Trade Organization.
“We’ll be having the meeting in the context of still having some questions about U.S. trade policy which in due course will be made more clear,” Ciobo said. “We’re buoyed by China’s desire to continue engaging in and around trade so they’ll be an important voice at the Chile meeting.”
Despite the setbacks around the TPP, Ciobo said he did not view it as a race between competing deals. China is championing the separate Regional Comprehensive Economic Partnership.
“We can walk and chew gum at the same time,” he said. "They are all part of the landscape that is global trade. If we turn our backs on trade we turn our backs on economic prosperity and on jobs.”