Why is Indonesia considering joining the TPP?

Photo: Gobierno de Chile

The Indonesian Vice-President has expressed his interest in Indonesia joining the TPP. Why the change of heart? Will it benefit Indonesian trade?

Editorial

The possibility of Indonesia joining the 11-nation Trans-Pacific Partnership agreement (TPP) is back under the spotlight. Vice-President Jusuf Kalla revealed that Indonesia is reassessing the agreement. Speaking on the sidelines at the Future of Asia conference, Kalla said Indonesia “is now studying the conditions, the possibility” of joining the agreement.

The words represent a warming of attitudes towards the agreement in government. When Donald Trump pulled the US out of the deal last year, the Vice-President was dubious. He believed the benefits of the agreement were no longer “that big”, stating “we have lost interest”.

What is behind the change of heart?

13 months after the TPP was signed, the global economic climate is much different. The Trump administration’s steel and aluminium tariffs have pushed the globe to the brink of a trade war. Indonesia and other ASEAN nations could get caught in the crossfire.

Negotiations for the Regional Comprehensive Economic Partnership (RCEP), China’s answer to the TPP, have stalled. Talks for the 16-nation agreement, which includes Indonesia, were due to conclude in 2017. However, the 21st round of negotiations began in February.

With the RCEP no closer to completion, and a trade war looming, Indonesia needs trade security. But will the TPP provide the protection Indonesia craves?

The US may re-join the agreement

The TPP offers the allure of tariff-free trade with the other 11-member states. In a world plunged into a trade war over US tariffs, this would protect Indonesian exports.

Donald Trump has also alluded to the US re-joining the TPP agreement. White House economic officials are looking into opening talks aimed at re-joining the agreement. The inclusion of tariff-free trade with the world’s largest economy would make the TPP far more attractive to Indonesia.

If the US joined, China may use the agreement to circumvent US tariffs. China could send materials to TPP members. Factories in these third-party nations would then send the final products on to the US. With Indonesia a part of the TPP, it would be in a strong position to act as a middle-man, converting Chinese raw materials into products ready for the US market.

It could also help Widodo obtain more foreign investment for his infrastructure projects

Indonesia needs foreign direct investment (FDI) to finance Widodo’s large-scale infrastructure projects. The TPP could help drive FDI.

Indonesia’s inclusion in the agreement will grant foreign investors investment protection and preferential tariff rates. The investor-state dispute settlement covered by the TPP will also provide more investor confidence.

However, it is unclear if these benefits will materialise

The US will not automatically receive the green light to re-enter the agreement. President Trump has said he will re-join the deal if he can secure a “better deal” than last time around. But this is unlikely to happen.

The initial TPP negotiations included many concessions to coax the US into signing. Few nation states will be willing to renegotiate these already generous concessions. Trump also has much less leverage. From within the agreement, he could have negotiated a better deal under the threat of walking away from it. From outside the agreement, he has no leverage to secure more favourable terms.

Several countries have made their positions clear. A top Canadian trade official said the US would not receive any special treatment if it decided to reopen talks. A former Australian Treasury official said nobody wanted to reopen negotiations under a Trump administration. Chile’s former president said the US would have to take the deal as it is or not at all.

If he cannot secure better terms, Trump is unlikely to re-join. Without the US, the agreement offers nothing more to Indonesia than it did last year.

Many of the agreement’s original limitations are still present

Should it decide to join the TPP, Indonesia will sacrifice aspects of its national sovereignty. The TPP dictates new laws on licensing regulations, government procurement policy, state-owned enterprises, and intellectual property rights. It also concedes considerable power to international firms.

There is also no guarantee that joining the agreement would boost Indonesian trade. Market access is not the only factor hindering Indonesian exports. High production costs and a lack of competitiveness also limit export growth. The agreement will do nothing to address these obstacles.

It is also too early to say how the US tariffs and Chinese-proposed counter tariffs will affect Indonesia. Before Indonesia joins the TPP, it needs to see how the tit-for-tat spat plays out. If Indonesian exports are left untouched, there is no rush to join the agreement.

Indonesia is unlikely to make any decisions in the immediate future. Studies are currently being carried out on how the existing agreement would impact Indonesian trade. The study will last six to twelve months.

The TPP is not the only option. Indonesia is in the process of negotiating free trade agreements (FTAs) with India, Australia, Chile, Switzerland, Norway, and Iceland. These give preferential tariff rates without the legal concessions of the TPP.

Indonesia has options. It does not need to dive headfirst into a TPP with unfavourable conditions. For now, Widodo and Kalla will be happy to monitor the shifting global economic climate. There is no rush to play Indonesia’s hand just yet. Joining the TPP could become a long-term goal, but is not a part of Indonesia’s immediate future.