The Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) is the latest bilateral trade agreement to be ratified by the Indonesian government. Even though a feasibility study was conducted in 2007, the negotiations between the two countries, which started in 2010, took around nine years before they finally concluded in March 2019. Australia ratified the agreement in November 2019 and Indonesia in February 2020. The agreement will be effective from July 5.
As one of the most comprehensive trade agreements signed by the government, the IA-CEPA is crucial for Indonesia, both in terms of trade and investment, for a number of reasons. First, the agreement offers zero-tariff market access for Indonesian products to the Australian market, particularly for automotive, wood including furniture, textile, electronic and other products. This is expected to enhance Indonesia’s competitiveness and trade performance against its ASEAN counterparts in accessing the Australian market.
Second, in regard to non-tariff measures, the agreement provides an opportunity for Indonesian producers to receive assistance to meet the Australian technical and health standards, which otherwise could be regarded as technical barriers to trade. Third, the agreement will extend the opportunity for Indonesia to attract more foreign direct investment from Australia. Fourth, the agreement will provide opportunities for Indonesian workers to gain internship experience in several sectors particularly education, tourism, telecommunications, health care, etc. Fifth, the IA-CEPA provides an opportunity for Indonesia and Australia to become an economic powerhouse in the region. Meaning, both countries will collaborate to exploit their competitive advantage and economic complementarity to boost their exports to other countries.
However, since the agreement is reciprocal in nature it means the IA-CEPA, like many other free trade pacts, will also pose significant challenges for a developing country like Indonesia. The Indonesian domestic market will be flooded by Australian products. In this regard, the Indonesian government needs to prepare its producers to be more competitive. Since the official date for the implementation of the agreement is approaching, it is essential to assess how ready the Indonesian government and the business community are in bracing for the impact of the IA-CEPA.
To assess the readiness of the government and its business community, there are some issues worth discussing. First, it is important for the government to ensure the availability of comprehensive information on the benefits and challenges of the agreement. For example, both countries have set up an Indonesia-Australia Standardization Information database on technical and health standards. This database is a central step for making necessary information on the Australian standards accessible to Indonesian producers. Having sufficient information about the standards is one thing but being able to adequately meet those standards is another issue. In this context, it is the government’s responsibility to ensure producers will be able to comply with those standards. In addition, the government also needs to provide more information regarding skill exchange programs under the agreement, including vocational training for Indonesian workers in Australia. The COVID-19 pandemic certainly will delay all the activities related to the movement of persons across borders. It is important therefore for the two countries to find the best way to attain the benefits of this plan amid the pandemic.
Second, in the investment sector, it is important for the government to focus the investment under the IA-CEPA on infrastructure and healthcare facilities, as well as renewable energy. The pandemic, undoubtedly, has halted most infrastructure projects in Indonesia. However, the need for investment in healthcare facilities is even more urgent than ever. Under these circumstances, it is necessary for the government to have a clear policy to exert a pull on Australian investors to invest in those endeavors.
Third, the idea of an economic powerhouse offers a great prospect for the Indonesian business community to improve its competitiveness in the global value chain. However, it can also be a double-edged sword. On the one hand, this collaboration will provide guaranteed access for Indonesian producers to the raw materials they need from Australia, mostly for the manufacturing and food and beverage industries. This will secure production processes, which in turn, will be able to enhance Indonesia’s exports to other countries. On the other hand, it will also present formidable challenges for domestic suppliers of similar products. To mitigate this impact, it is necessary for the government to have sound policies on raw materials that are unavailable or which cannot be satisfactorily supplied by local producers.
Additionally, it is imperative for the government to ensure the agreement will also benefit small and medium enterprises. In this context, making sure the SMEs are integrated into the global value chain is imperative. In the short term, the government has to be clear on how to enhance the capacity of SMEs to be linked with the global value chain. In the long run, the government also needs to facilitate the upgrading process of the SMEs to become global players.