Last month, Indonesia further increased trade protection measures by raising export taxes on copper, laterite, zinc and lead concentrates from 0-5 to 5-15 percent in 2024, depending on the product and its smelter development progress.

Indonesia’s success with its nickel export ban in 2014 has caught the attention of its neighbor, the Philippines, which is now considering imposing a 10 percent export duty on its own nickel ores.

While the policy lead to the sudden decline in Indonesia's critical mineral exports, which the government conceded, it has spurred investment in the smelter development and hence increased the value-added production of critical minerals. This is particularly evident in the case of nickel, where the export ban of 2014 increased the number of smelters from two to 13, with an annual input capacity of nearly 27 million tons. With the recent nickel export ban in 2022, the government plans to have 30 nickel smelters with a total capacity of 70 million tons this year.

Although the effect comes late, Indonesia’s export downstream of nickel, among them stainless steel and ferronickel, increases sharply two and five years after the export ban entered into force, respectively. According to the United Nations COMTRADE data, Indonesia’s export of stainless steel was near zero back in 2014 but exceeded US$10 billion in 2021. For ferronickel and other nickel products, the export increases six times from around $3 billion in 2014 to almost $20 billion in 2022.

However, this success has come at a cost. The world export of ferronickel goes down from around $850 billion in 2014 to around $450 billion in 2022, indicating that global production of ferronickel is slowing down since Indonesia restricts its nickel ores supply.

It prompted many countries, especially the European Union as a major importer of raw minerals, to bring this case to the World Trade Organization (WTO).

As Indonesia’s industrial policy on critical minerals is sending shockwaves around the world, it is worth seizing the momentum to seek technological transfer and upgrade in the mining sector as they will help Indonesia reduce its reliance on foreign sources and eventually develop its own smelters and conduct its own research and development.

Past industrial policies in Southeast Asia, including Indonesia, as Paul Krugman suggested, did not promote technological upgrading or innovation but only imitated and produced goods that, in the end, were one step behind those of the developed countries. There has been little evidence of learning-by-doing or spillover effects from technology transfer that occurred from their industrial policies.

So how to make Indonesia’s industrial policy on raw minerals a success?

To achieve the objective of promoting technological transfer and upgrading, the government could focus on incorporating technology transfer into its foreign direct investment (FDI) strategy in the mining sector. This could be achieved through the imposition of local processing, local labor and local content requirements (LCRs).

The requirement for smelter development in order to obtain an export permit, as well as the restriction on the export of raw minerals, could be considered a form of local processing requirement. By limiting the export of raw minerals, miners are left with no choice but to process and add value to mineral ores within the country.

These local processing requirements will push foreign investors to operate in the downstream processes, which will facilitate the transfer of technology as they want their companies in Indonesia to operate efficiently using the most advanced technology available back in their country.

The Energy and Mineral Resources Ministerial Regulation No. 25/2018 captures the spirit of local labor requirements in the mining sector. Under this regulation, the use of foreign workers in the mining sector is allowed for the purpose of transfer of knowledge. The regulation also requires the FDI to prioritize hiring and training local employees prioritize the hiring and training of local employees.

However, the regulation lacks clear guidance on the type of training that should be provided or the level of competence that should be achieved. Regardless, the objective of the local labor should build a local workforce and the technical capacity of local institutions to make them adapt to and embrace efficient mining technologies.

Despite these efforts to build a local workforce and increase the technical capacity of local institutions, research has shown that many foreign firms located in export-processing zones and receiving incentives from the government have not generated sufficient linkages with the local economy. Instead, they have mostly engaged in process trade based on cheap unskilled or semi-skilled labor available in the country. This must change.

African countries have seen the importance of local content requirements in the mining sector. For example, in Ghana, the Minerals and Mining (Local Content and Local Participation) Regulations, 2020 (LI 2431) provide guidance on employing expatriates, training Ghanaians and procuring local goods and services in the mining sector. Similarly, in Namibia and Sierra Leone, local content provisions are part of the terms and conditions for obtaining and holding mineral and mining licenses.

The LCRs will urge the vertical technology spillovers taking place between foreign companies operating in the mining sector in the country with local suppliers and customers within the value chain through forward and backward linkages. By implementing LCRs, Indonesia could encourage foreign companies to set standards for products supplied to them, pushing local firms to innovate. This could also lead to the production of better-quality outputs that can be used in more downstream products.

For example, if foreign companies were allowed to process nickel into stainless steel within Indonesia, they may produce higher quality stainless steel that would improve the quality of inputs for the production of pipes and valves.

The success of imposing localization requirements on FDI in the mining sector depends on Indonesia’s power and influence in that sector. For example, Indonesia is the world’s largest producer of nickel, accounting for around 22 percent of global production. This gives the country significant leverage to implement resource nationalism policies on nickel, giving other countries little choice but to comply with Indonesia’s downstreaming policy.

However, this is not the case for other minerals in which the country does not reign supreme. This was evident when the government imposed a smelter development requirement for bauxite export approval in 2017. Chinese buyers immediately switched to suppliers in Guinea and Australia, causing Indonesia’s share of bauxite supply to China to drop from 60 to 15 percent. As a result, Indonesia paused the export ban.

It is important for the government to strategically impose localization requirements on FDI by considering the country’s influence in the sector and aiming for transfer technology and technological upgrading in order to maximize the benefits of current resource nationalism policies.

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The writer is a consultant on trade and digital trade policies for development and PhD candidate in international development at University of Oxford, the United Kingdom.