President Joko “Jokowi” Widodo’s visit to Australia earlier this week, culminating in a speech to Australian Parliament, bodes well for Australia-Indonesia relations. Over the past ten years, they have expanded their cooperation despite occasional diplomatic rows. However, there is one area that has been left behind in an otherwise improved friendship: their economic relations.
For two neighboring countries of the Group of 20 with complementary economies, one would expect higher levels of trade and investment.
In fact, Indonesia and Australia have the lowest trade volumes of any two G20 neighbors. In 2018, less than 1 percent of Australia’s foreign investment went to Indonesia. Two-way trade with Indonesia has stagnated at around 2 percent for the entire decade.
To remedy this problem, they have signed a long-awaited free trade agreement, the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA).
A decade in the making, the deal was approved by Indonesia's House of Representatives last week, just in time for Jokowi’s arrival in Australia, and paving the way for its entry into force.
It is hard to find a satisfying explanation for the lack of trade and investment. In Australia, some advocates of increased business ties with Indonesia point to cultural differences.
This is rather unconvincing, given Australia’s success doing business with other cultures around the Indo-Pacific region. More compelling is the fact that Australian boardrooms and executives do not yet have a narrative of the opportunities Indonesia presents to compel them to take a risk there.
Whatever the reasons behind this missing piece in their relations, it is important to understand that Australia has a strong incentive to improve economic ties with its close neighbor: diversification.
Australia’s trade is currently dominated by China and the United States is its top investment partner.
In the shadow of the US-China trade war, and increasing competition between the two superpowers, Australian government and business are looking for other opportunities.
Jokowi reminded Australia’s parliament in his speech on Monday that Indonesia is an emerging economic heavyweight right on their doorstep.
In this context, it is hard to overstate IA-CEPA’s importance as a platform to improve economic relations. One of the aims of the treaty is to increase investor confidence. Investor State Dispute Settlement, which establishes a pathway for investors to enforce the protections guaranteed to them under the agreement, is a step in the right direction.
It also establishes a system of tariff quotas and for the first time, Australian exporters of key commodities such as live cattle will have a known quantity Indonesia will allow to be imported tariff-free.
At face value, it might look like IA-CEPA benefits Australia more than it does Indonesia. However, when examining the agreement you have to take into account that Australia now has almost 80 percent of its exports covered by free trade agreements.
Australia’s trade dependent economy has eschewed protectionism for decades. Tariffs are already low. This is a disadvantage in trade negotiations, giving Australia less to put on the table when making a deal with a large economy like Indonesia.
Neither does Australia have investment restrictions similar to Indonesia’s negative investment list, or DNI.
Instead, only investments over a certain threshold and in high-risk assets trigger a review by the Foreign Investment Review Board. Known as the FIRB, this body approves more investment deals than it denies. In short, Australia is open for Indonesian business.
President Jokowi spoke of advocating economic openness in the face of rising protectionism in his speech on Monday.
This signals that Indonesia is prepared to engage with the new economic architecture in the region, of which Australia is an advocate and participant.
Indonesia’s exercise in negotiating an agreement with Australia, one of only two bilateral trade agreements Indonesia has with another G20 country, has built its capacity to pursue its economic diplomacy.
Australia places a strategic value on IA-CEPA because it sees Indonesia as occupying an important place in the Indo-Pacific region.
The Indo-Pacific concept, which Australia has championed, places Indonesia at the center of a region holding the keys to Australia’s economic future.
One of the pillars of their strategic partnership is cooperation to ensure the prosperity and stability of this region. Jokowi’s speech echoed this sentiment and it resonates in Australia.
Jokowi did not mention it directly, but the region’s “infrastructure gap” offers another area of cooperation, one that an economic treaty like IA-CEPA cannot solve.
This gap constrains economic growth and integration in the region. Indonesia alone needs billions of dollars of investment to bridge its own gap.
Meanwhile, infrastructure initiatives in the region have emerged as new geopolitical tools to wield influence and snare countries in "debt traps".
Collaboration on infrastructure is another way to increase trade. Australia stands to benefit just as much from infrastructure development in Indonesia as it would itself.
For example, improved port facilities across the archipelago would open up new markets for Australian agricultural products, which can be shipped within days from ports in Australia.
It is more “win-win” situations like this that Jokowi wants. With the positive momentum in Australia-Indonesia relations and IA-CEPA as a platform, we should be able to identify many more economic opportunities that benefit both sides in this way.
The IA-CEPA, after all, is only as good as what the countries choose to do with it.
Senior analyst at the Perth USAsia Center at The University of Western Australia
Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.