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Australia-Indonesia Relations are Thriving, but Economic Ties Lag Behind

13 Feb 2020
By Kyle Springer
Australian Prime Minister Scott Morrison speaks with Indonesian President Joko Widodo in Jakarta. Photo credit: DFAT | Timothy Tobing. Source:

While Australia and Indonesia are close neighbours and close friends, they are less close as business partners.  Prioritising connectivity and reframing their economic ties as regional rather than bilateral could help foster that relationship.

The visit of Indonesia’s President Joko “Jokowi” Widodo to Australia this week bodes well for relations with Indonesia. Indeed, relations have improved significantly since a low period in the early part of this decade, which was marked by diplomatic rows over issues ranging from political gaffes to phone tapping.

Australia and Indonesia now enjoy cooperation on a growing number of fronts. Both countries inked a strategic partnership agreement in August 2018. Indonesia now considers Australia its preferred partner in the areas of security cooperation. They co-chair a sub-regional forum on counterterrorism.  Australia has committed significant diplomatic resources to Indonesia. It opened a consulate in Surabaya in 2017, Indonesia’s second-largest city. They have also signed a free trade agreement, the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA). Almost a decade in the making, the deal was approved by Australia’s Parliament last December, but awaits ratification in Indonesia.

The one area that President Jokowi and Prime Minister Scott Morrison must reconcile with an otherwise booming friendship is the state of their economic relations. For two neighbouring G20 countries with seemingly complementary economies, one would expect higher levels of trade and investment. Indonesia and Australia have the lowest trade volumes of any G20 pairing. In 2018, less than one percent of Australia’s foreign investment went to Indonesia. Two-way trade with Indonesia has stagnated at around two percent for the entire decade.

It is hard to find a satisfying explanation for this. Some advocates of increased business ties chalk it up to cultural differences. This is difficult to accept, given Australia’s success doing business with other cultures in Asia, such as Malaysia. Furthermore, Australian universities boast a strong community of academics focused on Indonesia studies. At the grassroots level, people-to-people ties are strong.

Stronger ties between boardrooms are needed. To activate investment and diversity the foundation of bilateral trade, executives need a narrative of Indonesia’s opportunities rather than a litany of its risks. Exchanges of influential businesspeople will pave the way to successful partnerships.  In this context, it’s hard to overstate the importance of IA-CEPA. One of the aims of the treaty is to increase investor confidence on both sides.

Investor State Dispute Settlement (ISDS), which establishes a pathway for investors to enforce the protections guaranteed to them under the agreement, is a step in the right direction. ISDS establishes a system of tariff quotas. For the first time, Australian exporters of key commodities, such as live cattle, will know how much Indonesia will allow in tariff-free.

IA-CEPA is an achievement, but Australia-Indonesia economic ties sit in a wider regional context. This fact has sharpened cooperation in other areas, and with it, a sense that Indonesia is on the rise and that it is at the centre of a dynamic Indo-Pacific region, in which both countries have a huge stake.

A regional economic agenda is forthcoming. Their shared participation in the Regional Comprehensive Economic Partnership (RCEP), understood to be on the path to completion this year, will open up new opportunities.

An ambitious step for Indonesia would be accession to the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP). Indonesia’s membership would add considerable economic heft with the United States and China missing from it. A motivating factor might be that two of Indonesia’s economic competitors, Vietnam and Malaysia, are founding members of the CPTPP.

A widening infrastructure gap constrains economic growth and integration in the region. Indonesia alone needs billions of investment dollars to bridge its own gap. Meanwhile, infrastructure initiatives in the region have emerged as new geopolitical tools to wield influence and ensnare countries in “debt traps.”

The lack of infrastructure is one convincing explanation for why Indonesia and Australia have low trade ties. While they are close neighbours, their major population centres are far apart and there is little connectivity between the two. The areas closest to one another, Eastern Indonesia and Northern Australia, remain relatively underdeveloped.

Northern Australia suffers from its own infrastructure gap as policymakers try to incentivise development there. As such, Northern Australia’s potential role in enhancing connectivity with Indonesia must not be overlooked. While Australia’s foreign policy community has focused on the North as a strategic military asset, few have attempted to frame it as a region critical to Australia’s international connectivity.

The leaders of both countries should elevate the framing of their economic cooperation to take a regional view. By working together shape the region’s trade and investment architecture, they can diminish the smaller issues that derailed cooperation in the past.

Kyle Springer is Senior Analyst at the Perth USAsia Centre based at The University of Western Australia.

A slightly different version of this article appeared in The Diplomat.