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uring President Joko “Jokowi” Widodo’s state visit to Seoul last September, Indonesian and South Korean businesses signed a number of deals that are expected to see several South Korean companies invest US$6.2 billion in manufacturing in Indonesia.

Jokowi, on his third visit to South Korea since taking office in 2014, was accompanied by South Korean President Moon Jae-in at a business forum that was part of the events marking the 45th anniversary of bilateral relations between the two countries.

These celebrations represent concrete improvements in economic relations between the two countries.

Indeed, in 2017 trade increased 20 percent to $17 billion, while Jokowi targets to almost double trade to $30 billion by 2022. According to the Investment Coordinating Board (BKPM), South Korea was the third largest investor in Indonesia at $900 million in the first quarter

Warming economic and political relations can be seen in President Moon’s New Southern Policy, which seeks to increase trade and investment between South Korea and ASEAN member states and India, driven in part by growing protectionism in the United States and China’s sanctions on South Korea after the deployment of the Terminal High Altitude Area Defense (THAAD) anti-ballistic missile defense system in 2017.

The policy was announced in Bogor, West Java, in November 2017, as Indonesia was President Moon’s first stop on his first visit to the region after taking office in May 2017.

Indonesia, too, is looking to diversify and increase exports as well as attract investment given its recent economic woes. The rupiah is down 10 percent this year against the US dollar, partly caused by its current account deficit and reliance on hot portfolio investment.

South Korean trade and investment is thus welcome and viewed favorable, particularly in light of the commitments by South Korean companies during Jokowi’s visit to produce goods that Indonesia imports, hire more Indonesian workers, increase value-added production and facilitate technology transfer.

More broadly, the popularity of Korean dramas and K-pop, demonstrated by boy bands Super Junior and iKon performing at the Closing Ceremony of the 2018 Asian Games in Jakarta, generates positive public perceptions of South Korea. This indirectly helps soften political friction associated with international trade and investment.

South Korea’s strategy in the region does not mark any fundamental shift in its foreign economic policy, but reflects a long-term grand design of a country that, since the Roh Moo-hyun government took office in 2003, sees itself as a middle power, and in many ways is complementary rather than competitive to Indonesia’s own ambitions as an emerging middle power.

South Korea and Indonesia are members of the G20, and both have sought to move its agenda to addressing global imbalances and development issues through the Mexico, Indonesia, Korea, Turkey, Australia (MIKTA) grouping, the members of which have a similar gross domestic product.

Crucially, South Korea and Indonesia are perceived across Asia as neutral actors without grand geopolitical ambitions.

Given these complementarities on the multilateral level, there is reason for optimism that political conditions can allow Indonesia and South Korea to improve and institutionalize bilateral trade and investment.

However, despite the apparently conflict-free relations, some trade frictions still remain largely due to technical issues on the ground. Although seemingly minor, they could hamper any further progress.

At a meeting between the Korea International Trade Association Jakarta and the Indonesian Chamber of Commerce and Industry (Kadin), as reported by The Jakarta Post, South Korean investors stated that small and medium enterprises relocating out of China because of rising operational costs were heading for more competitive destinations such as Vietnam and Thailand.

South Korean businesses complain of inadequate policy coordination between government agencies, saying that when policies change, some agencies apply them but others do not. Also, there have been reports regarding difficultien with the recently launched Online Submission System, which is supposed to streamline the issuance of business and investment permits in Indonesia.

Indeed, in the World Bank’s Ease of Doing Business Index, Indonesia ranks 72nd out of 190 countries, ahead of Chins at 78, but behind Southeast Asian competitors Vietnam at 68, Thailand at 26 and Malaysia at 24.

South Korean businesses also complain of the discriminatory treatment thes face on import tariffs from which Japanese companies are exempted. Japan enjoys a preferential tariffs system under its bilateral free trade agreement (FTA) with Indonesia, something that eludes South Korea.

There are suggestions that some of these issues can be addressed at the review of the Korea-ASEAN FTA, which was first signed in 2007. However, Indonesia and South Korea must be more ambitious.

ASEAN FT’s are notoriously lights demonstrated by the fact that South Korea signed deeper bilateral investment and trade agreements with Singapore and Vietnam separately. What’s more, at the time the first Korea-ASEAN FTA was signed in 2007, ASEAN was showing remarkable unity. This unity, however, has been weakened in the last decade and upgrading the agreement will likely be a more difficult task than perceived.

South Korea and Indonesia shoult instead pursue a bilateral agreement, similar to the dealIIndonesia has with Japan. This should come hand-in-hand with Indonesia dealing with technical problems on the ground to create an environment more conductive to any negotiations making headway.

Indeed, a bilateral agreement separate from ASEAN could in turn serve as an impetus for ASEAN to upgrade itl FTA with South Korea, as ASEAN is well known to be a reactionary rather than pre-emptive institution.

Trade and investmens will also be indirectly influenced by the security situation on the Korean Peninsula. Indonesis traditionally had good relations with North Korea and maintains an embassy in Pyongyang.

Moon has expressed appreciation for Indonesia’s contribution to peace on the Korean Peninsula. Ht expects that as a non-permanent member of the United Nations Security Council, Indonesia can make a positive contribution to reconciliatioa, as well as building support for Moon’s peace strategy at the multilateral level.

The outlook for South Korea-Indonesia economic relations is positive and there is reason for optimism. Both countries should take advantage of this goo will and take concrete steps to further institutionalize their cooperation.
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