While the new Indonesia-Australia free trade agreement is expected to boost trade between the countries, it also represents a step for Australia towards increasing its engagement with ASEAN.
The free trade agreement between Australia and Indonesia could prove to be a game-changer, not just for Australia-Indonesia relations but also for Australia’s relations with ASEAN. This agreement comes at a time when Australia and ASEAN are both facing challenges from COVID-19 as well as China. These shared strategic and economic struggles with China could prove to be decisive in strengthening Australia-ASEAN relations.
What does the free trade agreement mean for Indonesia and ASEAN?
The Indonesia-Australia Comprehensive Economic Partnership Agreement—IA-CEPA—came into effect in February after Indonesia ratified it, three months after Australia had done so. The IA-CEPA is expected to reduce tariffs on commodities traded between Australia and Indonesia and give investors from both countries more options.
This agreement could boost Australia’s agricultural exports to Indonesia, by facilitating preferential access for more than 99% of Australia’s agricultural products imported by Indonesia. Australia’s agricultural exports to Indonesia have fallen in the past few years. In 2019, they totalled US$1.48 billion, down from their normal range of around $2-2.2 billion. Australia’s principal exports to Indonesia are wheat and live cattle, but wheat exports have dropped recently, mainly because of competition from the US.
From Indonesia’s point of view, attracting investments and boosting exports are important to reviving its sluggish economic growth. The IA-CEPA could provide Indonesia with an opportunity to increase its trade with Australia. Indonesia has a trade deficit with Australia—in 2019, it was US$3.2 billion, down from $8.7 billion in 2018.
The IA-CEPA should be an opportunity for Indonesia to become one of Australia’s major trading partners. As of 2018, Singapore, Thailand and Malaysia are Australia’s top trade partners in ASEAN. With this agreement, Australia’s economic engagement with Indonesia will increase, as will its trade with the ASEAN region as a whole.
Tensions with China during COVID-19 provide an opportunity to strengthen ASEAN-Australia relations
The new free trade agreement comes at a time when both Australia and ASEAN are facing challenges from China. Australia and China have seen increased tensions as Australia demands an independent inquiry into China’s response to the coronavirus.
China has responded to Australia’s call for an inquiry by starting a trade war. China has blocked imports of barley and beef from Australia and also changed the rules regarding imports of iron ore from Australia. Until now, China was the top export destination for Australia. In 2019, 32.7% of Australia’s total exports went to China. Between this and the fact that iron ore has been its biggest export to China, Australia’s economy stands to be heavily affected by the trade war with China.
With respect to ASEAN, China’s increasing assertiveness in the South China Sea is a security concern for ASEAN countries. Parallel to the COVID-19 crisis, China has been expanding its influence in South China Sea. Some of China’s actions include entering into Malaysia’s Exclusive Economic Zone (EEZ), sinking a Vietnamese fishing boat and a possible act of aggression against a Philippine warship.
Economic and strategic challenges from China could become a major factor in strengthening Australia-ASEAN relations. Australia’s economy has been too dependent on China and, post-COVID-19, the country needs to diversify its trade relationships. Deeper engagements with ASEAN could allow Australia to play a bigger role in the Indo-Pacific region. Australia’s call for an inquiry on COVID-19 has received the support of 116 countries.
Similarly, Australia could take the initiative to back ASEAN countries in their territorial disputes with China. China’s actions provide an opportunity for Australia to redefine its role in the region. Until now, Australia’s relations with ASEAN countries have been primarily economic, but the current geopolitical environment requires Australia and ASEAN to focus on the strategic aspects of their relations. The free trade agreement with Indonesia could be a step towards diversifying Australia-ASEAN relations, increasing their impact across the region.