Indonesia bends to Trump's trade terms to avoid 32% tariff blow

Business Times

4 days ago

[JAKARTA] In a move that underscores the bargaining power of the US under President Donald Trump's trade-first agenda, Indonesia has agreed to eliminate tariffs on American goods and commit to billions in US purchases in exchange for reduced tariffs on its own exports.
The deal, which has helped South-east Asia's largest economy avoid a major trade setback, will see the US reduce tariffs on Indonesian exports from a threatened 32 per cent to 19 per cent. Earlier this month, Vietnam also reached a deal with Washington that lowered tariffs on its exports to 20 per cent; in return, it granted the US tariff-free access to its market.
While the agreement secures Indonesia's continued access to the US market, analysts warn the deal is heavily skewed in favour of the US, requiring significant trade-offs.
David Sumual, chief economist at Bank Central Asia, described the deal as 'a necessary compromise' to preserve Indonesia's competitiveness in the US market.
The 19 per cent tariff is just below Vietnam's 20 per cent and Bangladesh's 35 per cent, two key rivals in major export sectors such as textiles, footwear and apparel.
'What matters most is preserving jobs at home,' Sumual said. 'Indonesia's labour-intensive industries rely heavily on the US market.'
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Under the deal, announced by Trump on Truth Social late Tuesday (July 15), apart from removing tariffs on US goods, Indonesia has also pledged to purchase US$15 billion worth of American energy products and US$4.5 billion in agricultural goods, and increase orders for Boeing aircraft.
The US imposition of a 19 per cent tariff on Indonesian exports, though lower than the previously threatened 32 per cent, still marks an increase from the current baseline of around 10 per cent. Sector-specific tariff details have yet to be disclosed.
The Indonesian government has yet to release an official statement, though a spokesperson from the Coordinating Ministry for Economic Affairs said a joint announcement is forthcoming.
Brian Lee, economist at Maybank, said it's no surprise that the trade deals being struck by Trump are so-called 'unequal' given the US wields significant leverage given its large consumer market.
'Trump is likely in less urgency to strike additional deals given that higher US inflation has been slow to materialise and agreements had been struck to lower tariffs on China and Vietnam, the two key sources of consumer goods imports to the US,' he said.
Throw a lifeline
Indonesia is the second member of Asean, after Vietnam, to seal a trade deal following the White House's tariff notification letters to more than 20 countries.
Trump claimed he spoke directly by phone with President Prabowo Subianto to finalise the agreement.
The deal guarantees key Indonesian exports, including textiles, footwear, electronics and commodities, retaining access to the US – which is Indonesia's second-largest trading partner.
Indonesia ran a US$17 billion trade surplus with the US last year. Meanwhile, the US may seek increased access to Indonesia's strategic natural resources such as copper.
The concessions by Indonesia to secure continued access to the US market are sparking anxiety among local industry players.
On pins and needles
Redma Gita Wirawasta, chairman of the Indonesian Fiber and Filament Yarn Producers Association, expressed mixed feelings about the deal. 'A 19 per cent tariff is still a burden, but manageable. It helps us stay competitive, which is a relief, especially for downstream industries.'
However, he warned that Indonesia's competitive edge could disappear quickly, depending on how the US finalises trade deals with other major exporters – especially China, the world's largest textile producer and exporter.
'If China secures a lower tariff than us, we'll be at a disadvantage. If their tariff is higher, we could capture some of their market share but that also brings risks, like transshipment problems or dumped Chinese goods flooding our own market.'
While the trade deal provides Indonesia some relief through lower tariffs, analysts caution that the gains come with serious risks.
Harry Su, managing director and research and digital production at Samuel Sekuritas, said the agreement heavily tilts in favour of the US, leaving vulnerable sectors – particularly poultry and corn – exposed to a flood of cheaper American imports. Without protective measures, he said millions of Indonesian jobs could be at stake.
Indonesia is a major corn importer, with annual imports averaging around US$250 million, primarily for animal feed. These imports have placed pressure on small-scale and vulnerable local farmers, who struggle to compete with cheaper foreign corn.
'If American corn can freely enter Indonesia, our local farmers will also perish as our production costs are much higher than in the US,' he said.
The Indonesian negotiation team, led by Coordinating Minister for Economic Affairs Airlangga Hartarto, has visited the US twice to meet with the US Trade Representative.
Indonesia has pledged to address the trade imbalance by increasing purchases of American energy, cotton and wheat, as well as streamlining import licensing processes. The US highlighted Indonesia's non-tariff barriers, among other issues, as major sticking points during the negotiations.
Lee from Maybank said easing barriers to US investments could be a positive for Indonesia if it improves the business environment and attracts more foreign direct investment to Indonesia over time, possibly in the strategic minerals space such as copper and nickel smelting.
The timing of the deal also reflects Indonesia's attempt to secure certainty ahead of the Aug 1 deadline, while other countries, such as India and China, remain in negotiations.
Lee said it may be too early to gauge the relative competitiveness of Indonesia's 19 per cent tariff compared to the US' other trading partners.
Su from Samuel Sekuritas highlighted that Indonesia's new agreement with the US raises important questions about how China, its closest and largest trading partner, will perceive this shift.
'It's the elephant in the room', he added.