J

ust two months ago, the World Trade Organization (WTO) established a panel to hear and rule on the EU-Indonesian dispute on biodiesel. This is considered progress, since Indonesia filed its complaint in July 2014.

What'€™s next? From the procedural side, the WTO must now nominate the panel members in order to start the proceedings. Indonesia'€™s first dispute against the EU, on fatty alcohol, has also been delayed since 2012. The panel was set up in 2014, but no substantial work has been done since then.

The biodiesel case will take some time, considering the amount of pending cases at the WTO dispute settlement body. On the other hand, Indonesia'€™s biodiesel exports continue to decline, because of the anti-dumping duty imposed by the EU.

In general, Indonesia'€™s trade with the EU has been shrinking. Eurostat recorded in 2014 that Indonesia accounted for less than 1 percent of the EU'€™s total imports and ranked as the 31st partner of the EU in total trade. Among Indonesia'€™s neighbors, Singapore held position 17 and Malaysia stood at 27.

Indonesia may further lose relevance in the EU market, but the EU still heavily relies on Indonesian exports of certain commodities, such as palm oil. For Indonesia, the EU remains an important trading partner. It ranks as the third-largest export destination after Japan and China.

Indonesian-EU trade negotiations remain slow. The planned Indonesian-EU Comprehensive Economic Partnership Agreement (CEPA) has been stagnant since 2012. Vietnam, which had started the Free-Trade-Agreement (FTA) negotiations with the EU around the same time, reached a trade agreement in August this year.

Indonesia is still regarded a developing country by the EU. This actually brings benefits for Indonesia, because it allows Indonesia to enjoy the Generalized Scheme of Preference (GSP). The EU applies reduced duties for goods exported from GSP beneficiaries with some exceptions made for certain products that are already considered competitive in the EU market. Indonesianproducts such as live animals, animal products, animal or vegetable oils, fats, and waxes; chemicals other than organic and inorganic chemicals '€” are exempted from the scheme.

There are at least two main challenges that in the current state of Indonesian-EU trade relations.

First is the negative perception that Indonesia and the EU share. The EU believes that Indonesia has become more protectionistunder the current administration, with many protectionistrules introduced at the beginning of President Joko '€œJokowi'€ Widodo'€™s leadership, and that the approach to trade has become more nationalistic. On the other hand, the Indonesian government argues that it is now getting more difficult to export to the EU market due to higher health and environmental standards being promoted by the EU.

Second, the uncertain regulatory environment in both markets also hampers trade and business activities. Since the beginning of 2015, the Indonesian Ministry of Trade introduced several import regulations for forestry products, textiles, and horticulture goods. Export regulations have also been made more stringent, particularly for agriculture and forestry products.

However, in September the government announced deregulation policies to relax sustainability standards for wooden products.

This is good news for the traders, but whether this policy will be sustained in the long runis highly uncertain. As for the EU, the growing number of environment and social clauses in EU trade agreements left its trading partners with two options: either to comply with EU standards or to look for other markets.

Moreover, it could be somewhat worrisome for Indonesia if the EU adopted a more stringent environmental policy for crude palm oil (CPO) imports, as it is currently the biggest commodity export to the EU. Exports declined by 20 percent in 2014, and the potential to decline further is high, since the EU is going to put a 7 percent cap on crop-based biofuels by 2020, as decided in its new energy policy.

That means the use of palm oil for biodiesel imports will be significantly reduced, and Indonesian CPO exports will need to rely on palm oil demand for non-energy use (such as food, cosmetics, etc.).

Political will and reform commitments are key to strengthening the trade relations between Indonesia and the EU, especially if both parties are still eager to conclude CEPA negotiations. Willingness alone is not enough; the leaders must play a role in moving things forward. In the case of Indonesia, three leadership changes at the Ministry of Trade within the last 5 years may also have contributed to its poor overall work performance, because organizational transition takes time to adjust.

Moreover, improving inter-ministerial coordination will support the negotiations, particularly with the Ministry of Foreign Affairs. Diplomacy is central to supporting trade negotiations. We need a figure with subtle diplomatic skills to bilaterally engage with the stakeholders in Brussels.

On the policy side, industry policieswith potential impacts on trade need to be carefully reviewed and synthesized consistently with trade policy. The recent debate about Indonesia'€™s relaxation of export regulations on timber is one amongst many examples that shows inconsistency between industry and trade policies.

Indonesia'€™s attractiveness as a trading partner (not only to the EU, but also to rest of the world) may have diminished due to the emergence of new Asian players such as Vietnam, Malaysia and Thailand'€“ and now the TPP.

The main homework for Indonesia would be to redefine its trade policy strategy, a task long overdue, and to improve market access by progressively opening the market in order to catch up with its neighboring countries that are benefitting from trade growth.
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The writer is a graduate student of the World Trade Institute, University of Bern, Switzerland.