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Jokowi’s visit to Washington: An opportunity for the US
A limited FTA would also help build Indonesia’s own supply chains rising all the way to the production of full EV batteries and EVs.
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President Jokowi and the US President Joe Biden at The Apurva Kempinski Bali, on Nov. 14, 2022. (Bureau of Press, Media, and Information of Presidential Secretariat/Laily Rachev)
P
resident Joko “Jokowi” Widodo’s visit to Washington to meet United States President Joe Biden in connection with the Asia Pacific Economic Cooperation (APEC) Summit on Nov.14-16 is not merely an opportunity to celebrate progress in Indonesia-US relations before both countries hold elections next year. Far more important, it offers a unique opportunity to transform Indonesia-US economic relations for the better -- if leaders and governments will seize the opportunity.
To be sure, the summit can also build on considerable progress. While bilateral trade is still too low at US$47.5 billion in 2022, it has grown, primarily from rising Indonesian exports. During the successful ASEAN Summit in Jakarta early last month, Vice President Kamala Harris and President Jokowi agreed that Indonesia-US ties should be upgraded to a “comprehensive strategic partnership” -- a status signaling closer relations than the “strategic partnership” agreed in 2015.
Indeed, the countries, already cooperating closely in maritime security, climate, regional geopolitical issues, defense, and economic issues, have many opportunities to strengthen and expand ties. Nowhere is this truer than in the imperative to deepen bilateral economic ties. Indonesia, already the world’s tenth-largest economy in purchasing power parity terms, will only grow in importance, and the US is beginning to take notice.
For Indonesia, already the largest economy in ASEAN, this is an opportunity to double or triple the value of its trade. The development of potential renewable energy resources – solar, wind, and geothermal -- as well as the push to develop batteries for electric vehicles (EVs) – offers a significant possibility of expansion of trade and investment between Indonesia and the US.
\And of course, this would help accelerate the transition to renewable energy in Indonesia, reducing dependence on coal. In just one important step, the Indonesian government is currently encouraging the use of solar panels on several islands such as Batam and Bintan, to increase market demand for solar panels, which will itself help develop domestic supply chains for the panels that do not rely on China.
The Biden administration’s economic policy in Asia has been quite active. In particular, it has reinforced ties with Japan, Korea, and Taiwan and while not encouraging decoupling from China -- which would damage both countries and global economic growth -- it is encouraging US companies to think about the resilience of their global supply chains and vulnerability in the event of conflict. This aspect of the policy is known as “friendshoring,” an alternative to reshoring (bringing production back to the US).
Friendshoring is fine so far as it goes -- and we believe Indonesia can succeed in it -- but it is time to take the bilateral economic relationship to a deeper and more durable level, raising Indonesia’s place in the global value chain and at the same time strengthening economic and commercial links between Indonesia and the US in that global value chain. Here’s how to do so.
Last year, in the Inflation Reduction Act (IRA), the US Congress took a major step forward in promoting the green economy: the law provided for up to $384 billion for measures relating to climate and energy. Over two-thirds of this ($271 billion) constitutes tax credits for clean energy production of all types, including nuclear, biodiesel and renewable diesel, and products related to clean energy. The law also includes grants and loans.
Yet to obtain the full tax credit for battery production, at least 40 percent of the materials must be made in the US or in countries with which the US has a free trade agreement; the percentage will rise to 80 percent by 2027. Even now, therefore, Indonesian companies can work with U.S companies as partners to help obtain the tax credit. But our ambitions should be higher.
A particular focus of the law is products for the energy transition, notably electric vehicle (EV) batteries. Yet the incentives in the IRA are limited to countries with which the US has a free trade agreement. The solution, therefore, is for the US and Indonesia to negotiate a limited free trade agreement (FTA) putting Indonesia among the countries where production will entitle US companies to the full tax credit.
Greater ambition in negotiating an agreement will yield greater results. But at a minimum, a trade agreement should cover clean energy, including EV battery minerals and other critical minerals, along the lines of the agreement that Japan and the US negotiated.
Indonesia’s own ambitions in “upshoring” under President Jokowi’s economic initiatives have had many successes, not least the tens of billions of dollars China has invested in Indonesian nickel operations. Further advances are challenging but achievable, particularly with a strong US connection. Indeed, if the US does not seize this opportunity for a limited FTA, Chinese investment in Indonesian nickel will continue to accelerate -- a result that is good neither for Indonesia’s wish to diversify its export markets nor the U.S desire to accelerate the transition to EVs without relying on China.
In March, the Treasury Department announced guidance stating that clean vehicles eligible for the tax credit “may not contain any battery components that are manufactured by a foreign entity of concern” – a direct reference to China. So while China has invested heavily in nickel processing facilities in Indonesia, a limited free trade agreement with the US would not harm that investment but simply expand opportunities for US investment and for Indonesian exports, providing an alternative to China from a reliable and important supplier.
US foreign direct investment in Indonesia fell 7 percent last year (even as the Jakarta Composite Index stock market outperformed peers in the Asia-Pacific); a trade agreement would revive investment from the US almost immediately. As we know that Indonesia has the largest potential critical mineral reserves in the world for raw material components for batteries and electric vehicles in the world.
A limited FTA with the US would also spur environmental progress, as US investors would seek less carbon-intensive supply chains. Indonesia is already making progress on reducing the carbon intensity of its nickel production. Improving environmental, social, and governance (ESG) policies in all types of mining and refining operations in Indonesia will raise Indonesia’s attractiveness as a destination for investment, along with the tax benefits from the IRA.
A limited FTA would also help build Indonesia’s own supply chains rising all the way to the production of full EV batteries and EVs, securing critical mineral investments from the US and also from Japan, which has a similar agreement with the US.
A trade agreement, however, limited, is thus a stepping stone for even further cooperation. Indonesia can be the preeminent friendshoring choice for US investors seeking to diversify supply chains to a country with a large and growing domestic market and an educated workforce, along with sophisticated manufacturing – and shared democratic values.
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Daniel A. Witt is president of the International Tax and Investment Center, Washington, DC. Esther Sri Astuti is program director at the Institute for Development of Economics and Finance (Indef).
