Indonesia and the TPP: A Potential Coup for Rules-Based Free Trade

As the US-China rivalry intensifies, considerable attention has focused on the Association of Southeast Asian Nations as it struggles to maintain a position of neutrality. Of particular economic and geopolitical interest is Indonesia, which accounts for close to half of ASEAN’s total population and gross domestic product. Although a member of the Group of 20, Indonesia has charted its own course, distinct from that of India, for example. In September 2024, it submitted a formal request to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, commonly known as the TPP.

How should we interpret and greet Indonesia’s bid for membership in this high-level free trade arrangement?

Jakarta’s Development Drive

Some may question whether free trade agreements still have a meaningful role to play in this age of rising geopolitical tension. But many governments in the Global South—a category that covers most of the world’s countries—are still keen to liberalize trade and investment so as to leverage the power of globalization and accelerate economic development. Indonesia, for one, is determined to join the ranks of industrially advanced nations by 2045. In February 2024, it entered into negotiations for membership in the Organization for Economic Cooperation and Development, which sets the standards by which the world’s economies are widely classified.

As part of its pursuit of growth and development, Indonesia has been steadily expanding its network of FTAs with countries outside of Southeast Asia. The table below, based on the website of the Japan External Trade Organization, lists the parties with which Indonesia has concluded, or is concluding, such trade pacts, independently from ASEAN.

Indonesia’s Trade (excluding ASEAN agreements)

In just the past several years, Indonesia has negotiated a raft of new or upgraded economic pacts with countries outside of Southeast Asia. For example, it has signed bilateral FTAs with Australia and South Korea, building on existing liberalization commitments between ASEAN and those countries. In August 2024, Jakarta and Tokyo signed a protocol upgrading their bilateral Economic Partnership Agreement, which originally came into effect in 2008. Looking beyond Asia and Oceania, Indonesia has inked partnership agreements with Chile and the European Free Trade Association. Other pacts are under negotiation; talks to conclude FTAs with Canada and the EU are said to be entering their final stages.

Given the example set by Singapore and Vietnam, it was to be expected that Indonesia’s next major target after the EU would be the TPP, a high-level free trade agreement encompassing Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam (and soon to include the United Kingdom). Jakarta’s overarching strategy, it seems, is to develop closer relations with a wide range of economic partners while maintaining ties with both the United States and China. Coordinating Minister for Economic Affairs Airlangga Hartarto has expressed a strong interest in strengthening ties with regions like Latin America, with which Indonesia has done relatively little trade in the past. As part of my work in the Jakarta-based Economic Research Institute for ASEAN and East Asia, an economists team was organized to help his ministry analyze the economic impact of membership in the TPP.

Balancing Ties with China

Indonesia is among the ASEAN countries that have been most active in strengthening ties with China over the past decade. In 2023, China’s share of Indonesia’s exports and imports rose to 25% and 28%, respectively, while Japan, the United States, and Europe together accounted for just 25% of the country’s exports and 20% of its imports (according to figures from the Japan External Trade Organization). The figures for inward foreign direct investment fluctuate considerably from year to year, but in 2023, China’s share was 15%, as compared with a combined share of 22% for Japan, the United States, and Europe (executed basis). Now Jakarta is keen to strengthen its economic ties with the West and other regions to counterbalance China’s growing influence.

Indonesia’s accession to the TPP could also benefit Japan in a number of ways. To begin with, it could be expected to improve the investment environment for Japanese companies. In recent years, Indonesia has begun to emphasize “downstreaming”—that is, adding value to native resources like nickel instead of just exporting the raw materials—and China and South Korea have moved to the fore as key players in this strategy. This trend has begun to overshadow Japan’s development strategy, which has focused on manufacture of automotive and other machinery. For years Japan has been cooperating in the formation of industrial clusters and the improvement of urban amenities in the Jakarta metropolitan area. If Indonesia’s bid for TPP membership is approved, it may be possible to refocus the economic spotlight on Indonesia’s role in the international machinery-production network.

Meeting the TPP’s High Standards

All of that said, it is unclear how soon Indonesia will be in a position to enter into negotiations for TPP accession. To be sure, the country has passed through the process of eliminating tariffs as a member of ASEAN, and it has doubtless learned much through its negotiations with the EU and Canada. But the TPP demands a particularly high level of trade liberalization and compliance with international commitments.

Negotiations for membership in the TPP cannot even begin until all current members agree that the applicant has laid the groundwork required to meet all the conditions as a member of TPP. Although Beijing submitted its application in 2021, negotiations have not even begun because China is not viewed as qualified. Indonesia will have to make an inventory of the reforms required to meet the TPP’s requirements vis-a-vis government procurement, state-owned enterprises, protection of intellectual property, digital commerce, and labor rights, not to mention liberalization of trade, services, and investment. Then the government will have to reach an internal consensus in favor of those reforms.

Reaffirming the International Order

If all the aforementioned conditions are met and Indonesia’s membership is approved, the significance could well transcend the agreement’s direct economic benefits. Amid today’s rising geopolitical tensions, there is a growing tendency to disregard the rules of international trade established by the World Trade Organization and similar frameworks. By joining the TPP, Indonesia would have an opportunity to act as a standard-bearer for free trade and investment in the Global South, reaffirming the importance of the rules-based international trade regime.

Epitomizing the decline of the international trade regime is the dysfunction of the WTO Appellate Body. Established as the equivalent of a second-instance court under the WTO’s dispute-settlement process, the AB is a standing body of seven members, with three members assigned to each case. But Washington has blocked new appointments to the AB since the first administration of US President Donald Trump. By 2020, all the members’ terms had expired.

Under WTO rules, parties who are dissatisfied with a ruling by the panel of first instance have a right to appeal. But with the AB unable to function, all such appeals remain in limbo, making it impossible to enforce the initial decision. There are 24 pending appeals as of the end of 2023. In addition, the number of cases brought before the WTA annually has languished in the single digits since 2020.

Unfortunately, Indonesia is no paragon of free and fair trade. In the Report on Compliance by Major Trading Partners with Trade Agreements published each year by Japan’s Ministry of Economy, Trade, and Industry, Indonesia is routinely cited for import restrictions of various kinds, curbs on the export of local mineral resources, and local content requirements for products like communication equipment and television sets. Some of these issues have been submitted to the WTO but are currently suspended in “appeal into void.”

But Indonesian policymakers are by no means oblivious to the rules. The experts with whom I have spoken demonstrate a clear understanding of the problems—issues that will inevitably come up for discussion if Indonesia is permitted to enter into negotiations for membership in the TPP. My hope is that, through the application process, Indonesia will clean up its trade policies and practices and take the stage as an active supporter of the rules-based international trade regime.

A Bridge to the Global South

Some political forces in the Global South are attempting to rally opposition to the existing international order on the grounds that it was unilaterally imposed by the industrially developed world as a tool of colonialism or neocolonialism. This argument is not entirely without merit. But now is not the time to begin overhauling the existing order. The international rules of trade are a vital bulwark for countries other than dominate players like the United States, particularly the weaker ones, and our top priority now should be upholding them.

As geopolitical tensions intensify, particularly between the United States and China, some areas of economic activity will inevitably be restricted in the name of security. But we must do everything in our power to limit the scope of such regulation and promote free and vibrant trade in all other areas. To this end, Japan and other middle powers need to work with free-trade-oriented countries of the Global South to uphold the rules-based international trade regime. Indonesia and the rest of ASEAN are key potential allies in this campaign.

(Originally published in Japanese. Banner Photo: Indonesian president Joko Widodo (center) poses after the inauguration of a new copper smelter in Gresik, East Java, on September 23, 2024. © AFP/Jiji.)