Trump's Trade Deal With Indonesia, Explained
Last week, after threatening Indonesia with a 32 percent tariff, U.S. President Donald Trump announced that he had spoken directly with Indonesian President Prabowo Subianto and that they agreed on the basic outline of a trade deal. This week the United States and Indonesia released a joint statement providing a bit more detail, although we should keep in mind these terms may very well change.
For now, taken at face value, it appears that Indonesian exports to the United States will be subject to a 19 percent tariff, while most U.S. exports to Indonesia will face no tariff barriers. Indonesia also committed to buying Boeing aircraft, increasing imports of U.S. agriculture and energy products, and reducing non-tariff barriers like cumbersome licensing requirements.
In assessing this deal, it should be noted that the U.S. is not a huge export market for Indonesia, especially compared to other countries in the region like Vietnam. According to the Atlas of Economic Complexity, Indonesian exports totaled $287 billion in 2023 and around $22 billion, or 8 percent, of that went to the U.S. Most of this was from textiles ($8 billion), electronics ($3 billion), and palm oil ($1.5 billion).
At first glance, Indonesian textile exporters look to be getting the worst of this deal. Indonesia's textile industry, especially firms with a lot of international exposure, have already been facing intense pressure thanks to weak global demand. The industry has been grappling with thousands of layoffs and at least one blockbuster bankruptcy. A 19 percent tariff on Indonesian textile exports to the U.S. is unlikely to help matters.
But the long-term outlook is harder to parse. If Nike and other companies feel it makes financial sense to relocate production from Indonesia to another country, they might do so. But relocating manufacturing on that scale is both expensive and time-consuming, so companies will probably wait for a while and see if the tariff scheme changes again, or if they can carve out an exemption. This is why trade policy is usually made in a more measured and consistent way, so that firms have time to adjust and respond to clear market signals rather than ad hoc announcements.
Palm oil is a bit different. Malaysia and Indonesia produce the vast majority of the world's palm oil. The U.S. can certainly tariff Indonesian palm oil if it wants to, but there aren't many other places where importers can get it. For this reason, the joint statement noted that 'certain commodities that are not naturally available or domestically produced in the United States [may be considered] for a further reduction in the reciprocal tariff rate.' This gives the U.S. wiggle room to exempt things like palm oil, for which there are limited domestic substitutes.
On the flip side, Indonesia agreed to buy (or more likely lease) Boeing aircraft and import more American agriculture and energy products. We will have to see what happens, but my reading of this is that it does not represent a huge shift from the status quo and could be a net benefit to the Indonesian economy.
Indonesia has a big commercial aviation market, and domestic carriers are already leasing and operating large fleets of Boeing aircraft. It is likely that Indonesian airlines, including flag carrier Garuda, which is majority owned by the state, would have added more Boeing aircraft to their fleet in the coming years simply through the normal course of business operations. Meanwhile, soybeans and petroleum products are already among the largest American exports to Indonesia, so buying more of them is also something that likely would have happened under normal business conditions.
The other aspect of giving the U.S. more access to the Indonesian market is not just trade, but investment, and that's probably what the Indonesian government is really after. Reuters reported that Indonesia's new state-run investment fund is exploring an $8 billion partnership with U.S. engineering firm KBR to ramp up domestic oil refinery capacity, something that has been a major priority of the government for years.
Much remains to be seen about the impact of this, and how it will play out (including what terms other countries in the region get, and whether any of this will actually last). At the end of the day, for now Indonesian exports to the U.S. will be subject to a 19 percent tariff, which is not great news especially for an already beleaguered domestic textile industry. But Indonesia is not as heavily reliant on exports as Vietnam and Thailand, so there may have been some willingness to give ground there in exchange for the promise of more U.S. investment.
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