EU and Indonesia seal landmark trade deal

The European Union and Indonesia have struck a landmark trade deal to eliminate or nearly zero out tariffs on most goods. This will boost ties between the partners when U.S. President Donald Trump’s protectionist policies reshape global commerce.

EU trade chief Maros Sefcovic confirmed that the agreement, finalized after nearly a decade of negotiations, will save European exporters about €600 million ($700 million) in tariffs annually. It also removes restrictions on transactions involving key raw materials.

“We are really opening a new chapter of huge, huge proportions,” Sefcovic told Bloomberg News, stressing that Indonesia, Southeast Asia’s largest economy, bigger than Vietnam, the Philippines, and Thailand combined, has long been trading below its potential with the EU.

Tariff cuts set to boost cars, machinery, and agriculture

The deal reduces tariffs to zero on 96% of goods within five years, a move expected to increase EU exports to Indonesia by at least 30%, or around €3 billion. Duties on EU cars will drop from 50% to zero over the same period, while levies on machinery and appliances will fall from 30% to zero more quickly. Agricultural and food products will also benefit from liberalized trade.

Licensing and other restrictions will be scrapped for materials such as EU-exported chemicals. Meanwhile, Indonesia’s processed materials will receive preferential tariff treatment in Europe. However, Jakarta’s nickel export ban, a flashpoint in a World Trade Organization dispute with the EU, will remain intact.

With a population of 300 million, Indonesia is a crucial partner for the EU’s supply-chain diversification strategy as it navigates U.S. tariffs of up to 15% on most exports. The deal followed intensified EU talks with major economies, including India, and completed negotiations with Mercosur, which included Brazil and Argentina.

Still, the pact doesn’t resolve frictions over the EU’s deforestation rules, which Jakarta has fiercely opposed due to their impact on palm oil and coffee exports. Instead, Sefcovic said the agreement will provide a platform to help Indonesian companies, especially small exporters, meet EU requirements.

The deal must still be ratified by EU member states, the European Parliament, and Indonesia’s legislature before it can take effect. Calling it a “very clear framework,” Sefcovic said the agreement would strengthen trade and create opportunities for both sides.

Jakarta and Brussels clash over palm oil, deforestation, and biodiesel duties

Meanwhile, frictions over biodiesel remain unresolved. Last month, Indonesia urged the European Union to scrap countervailing duties on biodiesel imports immediately, after the World Trade Organization backed several of Jakarta’s main claims in a complaint to the trade body.

The world’s biggest palm oil exporter had contended in its 2023 complaint that the duties levied by the European Union, the third-largest destination for its palm oil products, broke the trade body’s rules.

“We urge the EU to revoke these countervailing import duties that are not WTO-compliant immediately,” Trade Minister Budi Santoso said in a statement.

The case joins a string of disputes over biodiesel tariffs and palm oil’s link to deforestation. The EU has imposed the duties, ranging from 8% to 18%, since 2019, saying that Southeast Asian nations’ biodiesel producers benefit from grants, tax benefits, and access to raw materials below market prices

Indonesia’s economy has been under intense pressure as violent protests, a falling currency, and political tension hammer confidence in what Wall Street considers Southeast Asia’s most stable market.

Recently, the Jakarta Composite Index reduced as much as 3.6%, while the rupiah sank to 16,500 per U.S. dollar, its weakest point since August 1, according to data from LSEG.

The protests were triggered by frustration over soaring living costs, legislators’ fat paychecks, and recent reports of police violence, creating one of the worst crises the country has faced since President Prabowo Subianto took office last year.

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