An FTA with Indonesia would remove roadblocks to trade flow

This opinion piece appeared in The Australian on Monday 5 june 2017.


Christopher Koch’s 1978 novel, The Year of Living Dangerously, set in Indonesia in the tumultuous Sukarno era, sparked the imagination of many Australians about our nearest neighbour, so proximate geographically, yet so distant politically and culturally.

Four decades later, Indonesia is much more familiar territory for Australians. There are strong government, business, educational and personal links, and more than 1.2 million Australians visit Indonesia every year. Yet the economic relationship remains relatively remote.

One of the most accurate predictors of trade is the gravity model, which holds that trade between two countries is a factor of their economic heft, or GDP, and their distance from one another.

On this logic, as two sizeable economies on one another’s doorsteps, Australia and Indonesia should be major trading partners.

Yet trade and investment flows between Australia and Indonesia are markedly underdeveloped, defying the gravity model.

Indonesia is the biggest economy in Southeast Asia, yet only Australia’s 12th largest trading partner, ranking behind smaller regional economies like Singapore, Thailand and Malaysia.

Australia’s trade with Indonesia in 2015-16 was worth $60 for every Indonesian man, woman and child.

By contrast, Australia’s trade with Thailand was worth around $300 for every Thai resident; with Malaysia it was nearly $600; and with Singapore it was more than $4000 per head of population.

Those numbers illustrate the potential to increase trade across the Arafura Sea. So does a recent PwC report, which observed that Australia has been investing more in New Zealand, a country of less than 4.5 million people with modest growth prospects, than in Indonesia, a country of 255 million which is growing twice as fast as our trans-Tasman neighbour.

Australian mining companies have made significant investments in Indonesia’s resources sector, but these mutually beneficial investment flows could be increased by liberalising local regulatory settings. There is also considerable scope for Australia’s mining equipment, technology and services firms to work with Indonesian partners on resources developments.

The importance of boosting economic ties with Indonesia should not be underestimated.

Indonesia is projected to be one of the world’s top 10 middle-class consumer markets by 2020 and the world’s fourth-biggest economy by mid-century. Just as trade with China has been a ­potent force for Australian prosperity over the last decade, so trade with Indonesia can add a new dimension to the sources of Australia’s growth in coming ­decades.

To realise this opportunity, however, Australia and Indonesia cannot rely on gravity alone.

Roadblocks to trade — like tariffs and non-tariff barriers to goods, discriminatory restrictions on services and unwarranted ­barriers to cross-border investment — need to be dismantled by finalising the proposed Indo­nesia-Australia Comprehensive Economic Partnership Agreement.

Julia Gillard and Susilo Bambang Yudhoyono launched negotiations for this free-trade agreement in 2012. Malcolm Turnbull and President Joko Widodo now want to conclude a deal by the end of this year. Officials recently conducted the latest round of negotiations in Jakarta.

An FTA with Indonesia won’t be a cure-all, but it can play a valuable role in stimulating trade and developing the economic relationship. Moreover, the push to get the deal over the line comes at a time when free trade is under ­attack.

Australia has a long track record of bipartisan support for trade liberalisation, reflecting the importance of access to international markets for our export-oriented economy. Yet when trade deals are concluded, scare campaigns ramp up and parliamentarians have to decide whether to act in the national interest or pander to populism.

Too many players in the trade debate say they support openness yet work assiduously to disparage specific agreements — letting the perfect be the enemy of the good, and effectively making common cause with anti-trade activists.

Advanced economies are now reaping the protectionist backlash that comes from a failure to advocate strenuously in favour of free trade agreements.

An Indonesia-Australia FTA should be backed by political leaders and those in business, academia and the community who support free trade and economic reform.

For such an agreement will not only improve living standards in both countries.

It also comes as the world faces a tumultuous turning point over the future of trade and globalisation — a year of living dangerously for those committed to open markets and a rules-based international trading system.

Brendan Pearson is the chief executive of the Minerals Council of Australia.