Maria Monica Wihardja and Siwage Dharma Negara – Indonesia's recent trade agreement with the US has drawn significant scrutiny. While President Prabowo Subianto's administration touts the agreement as a diplomatic success, because it lowers the tariffs for Indonesia's exports to the US from 32 to 19 per cent, the economic returns appear limited and potentially costly.
In exchange for tariff concessions, Jakarta has agreed to large-scale purchases of US goods, liberalise its digital trade and services, remove export restrictions to critical minerals, impose zero tariffs on US goods, and exempt US companies from local content regulations and other non-tariff measures. This raises serious concerns about unequal reciprocity, and fiscal strain on Indonesia.
The US has threatened various Southeast Asian countries, which it accuses of being conduits to Chinese manufacturers, with high tariffs ranging from 25-40 per cent. In response, some countries, including Vietnam and Indonesia, have quickly sent negotiating teams to Washington DC to strike deals. However, different countries have different stakes. Unlike Vietnam, whose goods exports contribute 85.2 per cent to its gross domestic product (GDP), goods exports only account for 18.8 per cent of Indonesia's GDP (Figure 1). Specifically, the US as an export destination accounted for just 9.9 per cent (US$26 billion) of Indonesia's total exports (US$264 billion) in 2024, in contrast with 29.4 per cent (going to the US) of Vietnam's total exports (Figure 2).
Figure 1. Share of Goods Exports to GDP in ASEAN, 2024 (%) – See original document
Figure 2. ASEAN Countries' Exposures to the US Market, 2024 (%) – See original document
Moreover, Indonesia's trade surplus with the US accounts for less than two per cent of its GDP compared to 21.8 per cent for Vietnam. A study by BNP Paribas estimates that the impact of Trump's "Liberation Day" tariffs on Indonesia would be a 0.6 percentage point decline in its GDP growth, in contrast to a 6.8 percentage point decline for Vietnam. Relative to Indonesia, Vietnam seems to face a bigger threat of being slapped with higher tariffs, given its much higher trade surplus with the US. Vietnam has a bigger stake in striking a deal due to its more significant export flows to the US and economic repercussions from tariffs.
Still, Trump's tariff threats have created intra-ASEAN competition in which ASEAN countries are competing to get the lowest relative tariffs in the region.
According to a Centre of Economic and Law Studies (CELIOS) estimate, if tariffs stayed at 32 per cent (that is, if no deal were reached), Indonesia's labour-intensive industries like palm oil, footwear, apparel and electrical machinery, would have been hit the hardest with the potential for significant layoffs (reaching one to 1.2 million). In 2024, those industries were the top exporters to the US. While their share of exports to the US was not larger than 20 per cent, the US is still a significant market: some 18.7 per cent of Indonesia's apparel exports and 14.8 per cent of electrical machinery exports went to the US in 2023 (the latest figures available).
In recent years, Vietnam has increased its market share in the US in the machinery and electrical equipment sector relative to other ASEAN countries, a reflection of its rising regional and global competitiveness and technological capability. About 40 per cent of products exported by Indonesia and Vietnam to the US in 2023 were low-intensity tech products, which included apparel and footwear. However, another 40 per cent of Vietnam's exports to the US were in high-intensity tech products compared to 40 per cent of Indonesia's exports to the US, which were primary products such as palm oil and shrimp.
The Indonesian government has argued that, besides market access to the US, securing a lower tariff rate than that of its neighbours could incentivise investors to relocate their investments to Indonesia. Vietnam has been under the spotlight for being a transshipment hub for Chinese manufacturers. Vietnam's foreign value added for exported goods is high relative to others in ASEAN (that is, Indonesia, Malaysia, Philippines, and Thailand) at 51.7 per cent; most of Vietnam's foreign value added comes from China (42.5 per cent).
Nonetheless, lower tariffs will not automatically make investors want to come to Indonesia, since other factors like productivity and a sound regulatory environment are more critical. Further, using more granular industrial data, it is clear that specific products exported to the US differ across ASEAN countries. This means that tariff differentials might not necessarily bring immediate benefits for Indonesia from export or investment diversions.
For President Prabowo, the 'deal' might earn some short-term political benefits but domestically, the public is divided. Some stakeholders see an opportunity to catalyse reforms in Indonesia's investment and trade regulation, including easing non-tariff measures such as local content requirements. Others see it as weak leadership surrendering to external pressure and jeopardising national interests, including invalidating some of Indonesia's long-held positions on issues like personal data protection and data sovereignty. The business community has mixed views, but is generally optimistic with some caution.
The unequal trade deals that Indonesia and other US trading partners are facing are an object lesson on why the world needs a rules-based international order, including institutions like the World Trade Organization (WTO). To be fair to other trading partners, Indonesia should consider extending similar concessions it has given to the US to them. Offering unilateral concessions to the US opens the door to potential legal challenges against Indonesia under WTO's non-discriminatory treatment.
Indonesia, like other WTO countries, should avoid capitulating to unilateral definitions of 'fair trade' driven by geopolitical and geoeconomic pressures. The US trade deficit – Washington's recurring justification for such measures – stems from deeper structural issues, including the US' savings-investment imbalance. Unilateral tariffs by the Trump administration alone are unlikely to correct these imbalances and may exacerbate global trade tensions.
For Prabowo's administration, the challenge is to craft the details of the framework for a US-Indonesia trade deal to safeguard its national interests. Indonesia needs a strategy leveraging its strengths, such as critical minerals and a sizeable domestic market, instead of surrendering to pressure from the US for a fast deal. Failure to do this will lead to Prabowo's oft-quoted line attributed to Thucydides, where "the strong do what they can, and the weak suffer what they must", becoming reality.
[Maria Monica Wihardja is a Visiting Fellow and co-coordinator of the Media, Technology and Society Programme at ISEAS – Yusof Ishak Institute, and also Adjunct Assistant Professor at the National University of Singapore. Siwage Dharma Negara is Senior Fellow and Co-coordinator of the Indonesia Studies Programme, and the Coordinator of the APEC Study Centre, ISEAS – Yusof Ishak Institute.]
Source: https://fulcrum.sg/what-the-weak-must-suffer-indonesias-high-cost-trade-deal-with-the-us