EU races to strengthen ties with Indonesia

Indonesia is only the European Union's fifth-largest trading partner out of the 10 Association of Southeast Asian Nations (ASEAN) states.

Bilateral trade in goods was worth $24.8 billion (€25.29 billion) last year, according to EU figures. That might have been up nearly 20% from 2020 but it was still only more than half the value of the EU's trade with Vietnam last year.

Things are changing. "Our engagement with Indonesia has probably never been so intensive," a European Commission spokesperson told DW.

A surge of diplomatic visits kicked off in June 2021 when Josep Borrell, the EU's foreign policy chief, made Jakarta the first port of call in his maiden Southeast Asian visit. He returned for a second visit, to Bali, in July this year.

Because of its role as G20 president for 2022, Indonesia has also received an unprecedented number of high-profile EU visits, including from Valdis Dombrovskis, the EU trade commissioner, who last month said from Jakarta that he expects both sides to agree terms on a free-trade deal by 2024.

Talks over a Comprehensive Economic Partnership Agreement (CEPA) began in 2016 but have progressed at a glacial pace, not least because of a series of trade disputes between Indonesia and the EU.

"We continue to fill our bilateral relationship with more substance," said the EU spokesperson. "In our view, one of the best ways to do this would be to conclude our CEPA trade talks with an ambitious deal."

Changing times

In many ways, improving ties are to be expected. Jakarta is the diplomatic home of ASEAN, with the bloc's executive based in the Indonesian capital. Because Brussels is desperate to boost ties with the region, that means it often has to work via Jakarta. 

Added to this, Indonesia takes over as the annually-rotating chair of ASEAN next year, giving EU officials even more of an impetus to cooperate with their Indonesian counterparts.

Economically, Indonesia is also becoming more attractive. By 2030, it will be Southeast Asia's largest digital economy, its government predicted.

Indonesia's manufacturing sector is growing. And it has been a "prime beneficiary" of a diversification of manufacturing facilities away from China, said Kevin O'Rourke, a Jakarta-based analyst and principal at consultancy Reformasi Information Services.

The European Investment Bank (EIB), the EU's lending body, opened its regional office for Southeast Asia and the Pacific in Jakarta last month. Kris Peeters, the EIB's vice-president, said that it is looking to invest up to €1 billion each year in projects in Indonesia.

"We want to establish ourselves as a reliable partner of Indonesia and Southeast Asia and help ensure that the country and the region grow and develop in a way that is green, sustainable and empowering, limiting the effects of climate change, and strengthening the national independence of EU partner countries," Peeters said in a statement.

Tech opportunities

The interest in investment is twofold. Under Joko Widodo, the Indonesian president, the government has prioritized green energy, although much of this will have to be funded from foreign investors. Brussels reckons it can steal a march on China, a major investor in Indonesia. 

"Broad scope exists for collaboration with EU entities on a clean energy transition that Indonesia may finally be starting; I think that virtually all of the larger EU countries are engaged in renewable energy projects or plans in Indonesia in some way," said O'Rourke. 

Indonesia is also moving up the tech assembly supply chain. This year, the electric car giant Tesla agreed a $5 billion deal to source EV batteries from an Indonesian subsidiary of a Chinese company, Huayou.

"Indonesia has become the key producer of lithium batteries in the global supply chain," said Widodo in a policy speech in August.

Many tech manufacturing companies are investing in Indonesia because it is also a major producer of the raw materials, such as nickel, bauxite, copper and lead, that are needed for computer chips and batteries.

A "long-awaited surge" in the growth of manufactured exports is now underway, having increased by nearly a third year-on-year in the first seven months of 2022, O'Rourke noted. "Conditions for such investment are generally improving in Indonesia, creating an additional 'pull factor,'" he added. 

End of bad blood

EU-Indonesia relations have soured over a handful of trade disputes, most of which have gone to the World Trade Organization (WTO) for review. Yet tensions are expected to ease once the WTO makes its recommendations by the end of the year.

Widodo said in early September that he expects his country to lose in its trade dispute against the EU over Indonesia's 2020 ban on exports of nickel ore. The WTO formed a panel overseeing this dispute in April last year. A final report is expected in the last quarter of 2022.

The WTO is also expected to announce its decision by the end of the year over Indonesia's case against the EU's decision to phase out imports of palm oil imports by 2030. Indonesia is the world's largest exporter of palm oil, which Brussels has designated as a non-renewable fuel.

Once these disputes are settled, analysts reckon that discussions between EU and Indonesian officials can turn to issues where both sides see eye to eye, such as on the long-awaited free-trade deal. With Indonesia taking over as ASEAN chair next year, there is even more impetus on Brussels to cooperate if it wants to continue building good ties in the region.

Edited by: Keith Walker