Australia and Indonesia Seek Closer Relations Through Trade

Australian Prime Minister Scott Morrison made a quick trip to Indonesia on October 20 in order to attend the inauguration of President Joko Widodo’s second five-year term. The visit comes as both countries are in the final stages of ratifying a new free trade agreement, known as the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA). The agreement was signed in March this year, and is expected to be ratified by both countries’ legislatures by the end of the year. Morrison’s presence at the Indonesian president’s inauguration was not just an act of good neighborliness, but to maintain momentum in the ratification process.

Despite the two countries’ geographic closeness, the trading relationship between Australia and Indonesia remains underdeveloped. Neither country is in the other’s top 10 trading partners. For Australia, trade with Indonesia is currently eclipsed by countries with much smaller populations like New Zealand and Singapore. Yet Indonesia is on track to become the world’s fourth largest economy by 2050, presenting ample opportunity for Australia, should it be able to take advantage of the two countries’ proximity.

Australia is hoping that this new free trade agreement will create the impetus for Australian companies to be a considerable part of Indonesia’s growth. In order to facilitate this potential, when implemented, the negotiated IA-CEPA will make 99 percent of Australian merchandise exports to Indonesia either tariff-free or given preferential treatment from next year. Indonesia will guarantee import permits to a range of Australian agricultural products, and also agree to make it easier for Australia’s services sector to do business in Indonesia. Virtually all Indonesian exports to Australia will face zero tariffs.

The FTA is designed not simply to facilitate trade between the two countries, but to considerably alter the nature of the relationship. While the recent relationship between the two countries has been friendly, is it not close. For Australia, this is a problem. Although Jakarta currently remains focused on its internal complexity and seems uninterested in, or uninclined to use its increasing strength, this is bound to change as it becomes more accustomed to its emerging weight. Canberra will need to find ways to work with its neighbor’s growing power, and whatever ambitions it may develop.

Yet this prospect faces some considerable hurdles. It would be reasonable to say that no two neighbors are more culturally distinct than Australia and Indonesia. This presents a significant challenge to improved relations as it inhibits the understanding of each other’s norms and customs, and restricts the ability to find and develop a common set of values. At present the two countries simply do not know each other, and this places considerable restrictions on their ability to meaningfully cooperate.

One major impediment to this cooperation is Australia’s expensive and cumbersome visa process for Indonesians. While the IA-CEPA will make it easier for Indonesians to obtain business visas to Australia, the process for tourist visas will remain unchanged. Australia’s suspicion toward the intentions of Indonesians, and its inclination to use its visa regime as a revenue-raising measure, doesn’t endear itself to its neighbors. In fact, it creates a serious barrier to greater cross-cultural exchange.

This lack of cultural exchange may also inhibit the success of the IA-CEPA. While Indonesia’s markets will become more open to Australian businesses, finding areas of mutually beneficial exchange could still prove difficult. The “China model” of trade relations – where Australia digs up resources and exports them to rapidly developing countries – is less compatible with Indonesia, which is a market competitor in many of the minerals Australia has in abundance. This indicates that Australian businesses will require a far more intimate understanding of Indonesian society in order to find market opportunities.

In August 2018 Canberra and Jakarta signed a new strategic partnership agreement. The agreement outlined five pillars on which the relationship between the two countries could be enhanced, iterated as: enhancing economic and development partnership, connecting people, securing our and the region’s shared interests, maritime cooperation, and contributing to Indo-Pacific stability and prosperity.

All these pillars are inter-related to varying degrees, but Canberra’s current hope is that the enhanced economic relations desired in the first pillar will be facilitated by the IA-CEPA, and that the strengthening of the other pillars will flow on from this. Yet for the IA-CEPA to be truly successful, and for the two countries to be able to form a more robust strategic partnership, the second pillar of connecting the two countries’ citizens in order to build greater cultural understanding will require far greater attention.