In February, U.S. President Donald Trump and Indonesian President Prabowo Subianto signed an Agreement on Reciprocal Trade, the outline of which was agreed to during a phone call between the two leaders last year. Basically, after the United States threatened to levy a 32 percent tariff on Indonesia, negotiators brought it down to 19 percent by agreeing to buy more American products, particularly energy and agricultural commodities.
In a case of exceptionally poor timing, right after the deal was inked, the United States Supreme Court ruled that Trump’s use of tariffs in this manner was unconstitutional. This means the threatened 32 percent tariff used as leverage to negotiate the deal is no longer valid. Does that mean the 19 percent tariff agreed to under the deal still applies? Hard to say.
What we can say is that the deal, whether it is ultimately enforceable or not, appears to be quite one-sided, with Indonesia making numerous concessions and little evidence of reciprocity from the United States. The phrase “Indonesia shall” appears more than 200 times in the 45-page document. The phrase “United States shall” appears 9 times.
Among the many things Indonesia shall do under the terms of the deal are facilitate $10 billion of direct investment in the United States and import up to $33 billion worth of U.S. goods and services, mostly energy, aviation and agricultural products. Indonesia shall remove tariff barriers for most U.S. goods, exempt them from local content requirements and accept U.S. certification and standards.
The U.S. also expects Indonesia to join it in some kind of global trading bloc. Indonesia shall help “combat transshipment and other practices to evade or circumvent duties and other measures applied by the United States.” If Indonesia enters into a bilateral free trade agreement with another country that “jeopardizes essential U.S. interests,” the U.S. can reimpose the 32 percent tariff rate, which, you will remember, has now been ruled unconstitutional.
A remarkable clause states that if the United States takes trade-related action against a third country, “Indonesia shall adopt or maintain a measure with equivalent restrictive effect as the measure adopted by the United States.” Indonesia shall also set up a screening mechanism for foreign investment and “cooperate with the United States on matters related to investment security.” I wonder whose security they have in mind here. The text doesn’t say.
In return, the United States shall exempt certain Indonesian goods, particularly textiles, from tariffs. But much of this is vaguely worded. The U.S. merely agrees that “a to-be-specified volume of apparel and textile imports from Indonesia can enter the United States” at a zero tariff rate. There are similarly vague references to developing critical mineral supply chains. Few specifics about how this will work are provided.
What are we to make of all this? As I explained several months ago, the U.S. is not a huge trade partner of Indonesia. According to the Atlas of Economic Complexity, Indonesia exported $24 billion in goods and services to the U.S. in 2024, around 8 percent of its total exports. A quarter of that was textiles, so we can see why pushing for a zero tariff rate there was a priority.
Indonesia also agreed to open up its domestic market and purchase U.S. energy and agricultural commodities. Many of these are things Indonesia purchases anyway, and the new targets are not strictly binding. For instance, under the terms of the agreement, Indonesia shall import 3.5 million metric tons of U.S. soybeans. This may seem like a lot, but in 2024, Indonesia imported 2.4 million metric tons from the U.S. If we just look at the trade component of the agreement, it may not be the best deal in the world for Indonesia, but there is a certain logic at work.
Other provisions, especially those requiring Indonesia to take action against third parties that jeopardize U.S. interests, are harder to parse. It was reported back in December that the deal was stuck because Indonesian negotiators were pushing back on these asks. At some point between then and now, I guess they changed their mind. Whatever the text says, it is hard to imagine provisions such as those actually being enforced.
One way to view this deal is that, because Indonesia is not a massive trading partner of the U.S., instead of playing hardball, it sought to minimize the damage while staying in Trump’s good graces. This is why they were willing to make so many concessions, even ones that would be hard to implement. This strategy, of course, rests on a larger assumption that the United States is acting in good faith and that Indonesia shall at some point receive the promised reciprocity, for instance, investment in critical mineral supply chains.
Constitutionality of the tariffs aside, the idea that the United States is acting in good faith needs to be very seriously questioned. Within days of signing this new trade deal in which Indonesia agreed to do a number of things to keep the United States happy, the United States returned that goodwill by hitting Indonesian solar panels with tariffs of more than 100 percent.
Source:
thediplomat.com
