The Case for a More Ambitious Indonesia-US Partnership

In a global system characterized by geopolitical turbulence, Indonesia stands as a rising economy and key player in international affairs. Over the past two decades, Indonesia has experienced strong economic growth. By 2030, the thriving republic is projected to become one of the world’s seven largest economies and to enter the top five by 2050. Indonesia is geographically located at the fulcrum of the Pacific Ocean, Malacca Strait, and the Indian Ocean.

Another reason for this Southeast Asian nation’s growing influence is its use of robust diplomacy. Many Indonesian leaders have sought to brand Indonesia as the country with “a million friends and zero enemies.” The tenet of strategic independence in Indonesian foreign policy also extends to the China-U.S. competition. Jakarta has made it clear that it will not simply “choose a side.”

Indonesia’s distinctive circumstances present the United States with an opportunity for a partnership that could advance the domestic interests of both nations. Presently, the U.S. centers its bilateral relationship with Indonesia on security, such as collaborative maritime exercises in the South China Sea. For example, in 2021, the U.S. initiated the construction of a maritime training center for the Indonesian Maritime Security Agency on the strategically positioned island of Batam.

On November 16, the U.S. and Indonesia signed a Defense Cooperation Arrangement and a Comprehensive Strategic Partnership Framework, allowing them to cooperate on issues affecting Indonesia and the broader Asia-Pacific. The two countries have previously collaborated on countering violent extremism and organized crime networks threatening local and international security.

China, on the other hand, has opted to court Indonesia mostly through economic investment, the most notable sign of which was the recently-completed $7.3 billion high-speed railway connecting the nation’s capital Jakarta to Bandung. This railway is the first of its kind in Southeast Asia. China intends to continue boosting its economic and trade ties with Indonesia. Even during the COVID-19 pandemic, 90 percent of Indonesia’s vaccine supply was provided by China.

The United States has failed to give Indonesia the same level of commercial attention. To this end, the U.S. ought to enhance its engagement with Indonesia in the areas of diplomacy, trade, and investment. A more robust partnership is smart for many reasons, including Indonesia’s strategic position for international trade. Indonesia is geographically located at the intersection of the Indian and Pacific Oceans and between the Asian and Australian continents.

The increasing significance of the Indonesia-U.S. relationship is accentuated by the global energy transition. Indonesia holds some of the world’s largest reserves of critical minerals, including those used in battery manufacturing. Notably, Indonesia has the world’s largest nickel reserves, and is quickly scaling up its mining capacity. By 2030, the country is poised to become the fourth-largest producer of green commodities in the world.

Moreover, Indonesia’s new cutting-edge solar power plants demonstrate its “understanding of the need to innovate to meet its ambitious sustainability and net-zero targets,” as the Wall Street Journal wrote in a recent article sponsored by the Indonesian Ministry of Investment. Indonesian President Joko Widodo (better known as Jokowi) has also vowed to close down all coal plants by 2050. 

However, as suggested by journalists, activists, and academics, the transition away from coal and oil will present fiscal, legal, and social challenges. Indonesia is still reliant on fossil fuels for about 67 percent of its energy needs, according to a 2017 study by the OECD. This dependency is in part due to regressive fossil fuel subsidies, which stifle Indonesia’s ability to become a renewable energy powerhouse.

The U.S. can help Indonesia not only by facilitating investments in energy projects, but also by sharing technical and policy know-how, including how to phase out fossil fuel dependency. After all, the U.S. has led energy extraction and related technologies for the last two centuries. The U.S. is also on schedule to close half of its coal-producing capacity by 2026, while simultaneously boosting its electricity grid capacity through renewable energy. Indonesia’s expanding geothermal sector is another sector where the U.S. can provide valuable guidance. The U.S. has the world's largest installation capacity of geothermal energy.

Only recently has the Biden administration finally begun to recognize the importance of U.S. policy toward Indonesia on energy. The main vehicle for this collaboration in the short term is the Just Energy Transition Partnership (JETP). The JETP was signed in November 2022 at the G-20 Leaders’ Summit in Bali. This financing mechanism provides international support to help Indonesia cap CO2 emissions at 290 million tons, achieve a net-zero energy sector by 2050, and secure at least one-third of Indonesian energy from renewables.

At the center of the JETP is the decarbonization of Indonesia’s electricity grid, which still relies on coal for 43 percent of its electricity. This presents a real challenge for Indonesia, which has expressed concern over being unable to fully phase out coal and has excluded private coal power plants from its JETP program as a result.

A significant challenge facing the JETP is funding, which is only a fraction of what Indonesia needs to achieve its energy transition goals for 2030. In light of this concern, advocates for the deal argue that JETP funds will act as a catalyst, attracting more substantial investment and backing for Indonesia's future energy transition. Encouragingly, the business landscape in Indonesia has become increasingly reliable for U.S. companies. This is partly attributed to the nation’s political stability and minimal levels of polarization.

The primary hurdle for U.S. investment in energy development within Indonesia stems from its domestic policy, specifically the Inflation Reduction Act (IRA). On one hand, the IRA encourages the U.S. to further its environmental goals by engaging in renewable energy agreements. On the other hand, the IRA’s provisions on international partnerships apply exclusively to countries with which the U.S. has a free trade agreement.

Currently, there is no free trade deal between the U.S. and Indonesia. Indonesia has proposed the idea of a “limited free trade deal,” similar to the one established by the U.S. and Japan last year, that would allow it to get around this restriction.

Giving the U.S. access to Indonesia’s large nickel reserves, as well as its energy development projects and opportunities, would be a win-win for both nations – provided that relevant projects are conducted in a responsible and environmentally sensitive way. The Indonesian government has been actively trying to better regulate the nickel industry, in order to protect the local flora, fauna, and communities near mining sites. It is in the United States’ own interests to support this endeavor.

The U.S. should not only advance Indonesia’s proposal for a short-term, “limited” deal but actively propose a comprehensive, long-term arrangement. A bona fide free trade agreement between Indonesia and the U.S. has the potential to significantly contribute to the economic development and prosperity of both nations.