Indonesia and the US are exploring the possibility of entering into a Free Trade Agreement (FTA).
Earlier this month, at a conference held in Washington DC entitled "Making the Case for a US-Indonesia FTA" David Katz, director of the Southeast Asia and Pacific Affairs at the US Trade Representative (USTR) office, said that an investment accord with Indonesia is among Washington's top priorities in Southeast Asia in 2007. He also said that a bilateral investment treaty, which is effectively the investment chapter of a FTA, is something they are currently exploring.
Indonesia has had a trade and investment agreement (TIFA) with the US since 1996, yet deepening the economic partnership was put on hold following the 1997 East Asian financial crisis, which hit Indonesia especially hard. Since then, Indonesia has been recovering, while bilateral negotiations have picked up new momentum. Over the past two years, the two countries have held five official TIFA meetings. Katz said that forums for services and agricultural trade as well as intellectual property rights were being devised within that framework.
Katz added that the initiatives undertaken by the two countries are directly related to provisions of the FTA and part of the building-blocks approach to support and build capacity for the agreement.
A study by Washington based Peterson Institute for International Economics, which was presented at the conference, has estimated that an FTA between the two countries could boost trade by about 40%. The study said, "an FTA between Indonesia and the US is fundamentally about large political gains for the US and potentially large economic gains for Indonesia."
The study added that Indonesia has relatively low average tariffs and a fairly open investment regime by regional standards, but important barriers remain in place, with peak tariffs and import licenses protecting sensitive commodities. It added that regulatory impediments and weak intellectual property rights (IPR) limit foreign investment and hamper service providers.
The study also pointed out that Indonesia would insist on market access for processed agricultural products such as cocoa, fish and tobacco, and for labour-intensive clothing and footwear which are "sensitive issues" for the US.
Investment is a key strategy for Indonesia's economic growth. President Susilo Bambang Yudhoyono said on the occasion of the Independence Anniversary in 2006 that he expected growth in 2007 to be 6.7%. To reach this target, foreign investment will be essential. The relatively high inflation rate of the past year has led to high interest rate and limited domestic investment.
The US already has free trade pacts with some of Indonesia's neighbours including Australia and Singapore. Also negotiations are well under way for an FTA with Malaysia. The US hopes to conclude them by early 2007, according to a US official at the third round of negotiations in November 2006.
Latest statistics put the US as Indonesia's second export destination with 13.9% of the total. The number one position goes to Japan with 22.3% of Indonesian exports and the US is followed by China with 9.1% of total.