The Diplomat - 7 October 2025
The Indonesia-EU Free Trade Agreement, explained
By James Guild
Last month, the European Union and Indonesia concluded negotiations on a free trade deal, called the Comprehensive Economic Partnership Agreement. The two sides had been negotiating the pact for nearly a decade, but things gathered steam only in July when Indonesian President Prabowo Subianto traveled to Brussels and announced that a political agreement had been reached. The final version emerged soon after, and now will await review and ratification before going into effect, likely in 2027.
What does this agreement do for each side, and why did it come together so quickly? Indonesia agreed to remove high duties on certain industrial products imported from the EU, including motor vehicles, machinery, electrical equipment, pharmaceuticals, and chemicals. It also eliminates duties on European agri-food products such as dairy, meat and processed foods. Indonesian rice and sugar, which play a key role in domestic agriculture, will remain protected. Around 80 percent of the tariff reductions will take place when the agreement goes into effect, and the rest will be phased in over a five-year period.
EU duties on most Indonesian goods will be eliminated. The agreement also streamlines regulatory standards and processes, and looks to improve non-tariff barriers like licensing and certifications. For instance, if Germany exports a car to Indonesia that has already been certified under EU standards, Indonesia is required to accept the certification and not subject the car to re-testing. There are also mechanisms for information sharing and dispute resolution.
It’s a relatively straightforward free trade agreement, the goal of which is to remove frictions and increase the flow of goods and investment between the two parties. According to government data, the EU invested $3.6 billion in Indonesia in 2024, led by the Netherlands with investments in the food, energy, transportation, and chemical industries totaling almost $2 billion. Under the agreement, Indonesia will open up several more sectors, including finance, manufacturing, telecom, and mining. This should increase investment from the EU in the years ahead, which is clearly a priority for the Indonesian government.
Indonesia currently runs a bilateral trade surplus with the EU. According to the central bank, Indonesia exported $17.3 billion worth of goods and services to the EU last year, and imported $12.8 billion. Indonesia’s primary exports are palm oil and other commodities, while it imports a lot of services and higher-value finished goods like chemicals. The agreement is expected to give a boost to European farmers, while Indonesian palm oil and textile exporters also stand to benefit.
This deal cannot be divorced from the broader churn in the global economy. In April, the United States announced sweeping tariffs on the world, including Indonesia and Europe. A trade deal between Indonesia and the EU, which had been making incremental progress for nearly a decade, suddenly coming together within months of Trump’s tariffs is quite the coincidence. As the United States looks to disrupt the global economy for reasons that are not always clear, countries around the world are making their own plans.
In particular, there is some urgency in Indonesia to find new export markets for textiles. In 2023, Indonesia exported $20 billion in textiles, $7.7 billion of which went to the United States. Even before this year’s tariff drama, the textile industry in Indonesia was being battered, with high-profile bankruptcies and mass layoffs. If a free trade deal with the EU helps Indonesia find new markets for textile exports, while boosting investment inflows, it will probably be seen as a pretty solid win. It also underscores the importance of diversifying beyond the U.S. during these turbulent times.
A few sticking points remain, and they have to do mainly with commodities. One is palm oil. The recently enacted European Union Deforestation Regulation requires suppliers of certain commodities, including palm oil, to meet sustainability standards to gain access to the EU market. Indonesia and Malaysia supply the majority of the world’s palm out. They have fiercely opposed the requirements, arguing that they place an excessive regulatory burden on producers, and especially smallholders. Last year, the EU pushed the deadline for compliance back.
Another contentious issue has been Indonesia’s nickel downstreaming policy. For several years, Indonesia has banned the export of unprocessed nickel ore in an attempt to force foreign investors to build local smelters and refine the nickel in Indonesia. The EU filed a complaint against the export ban at the WTO. It’s unclear whether or how the new agreement will impact these ongoing tensions. That a free trade deal between the two sides came together so quickly, and in spite of these unsettled issues, speaks to the urgency with which countries around the world are looking to make back-up plans as the global economy becomes an increasingly uncertain and risky place.