2.1
Australia and Indonesia have the world’s 13th and 16th largest economies respectively, by gross domestic product ranking. Despite being close neighbours with strong economies, Australia only ranks 11th on Indonesia’s principal export destinations and 8th as an import source.
2.2
The trade relationship between Australia and Indonesia is clearly under-developed. In 2015-16 Indonesia was Australia’s 13th largest trading partner, trailing behind smaller markets such as New Zealand. The Australia-Indonesia Business Council (AIBC) pointed out the stark contrast in these relationships noting that there are 12 000 Australian companies with
$86 billion invested in New Zealand, population 4 million, and ‘less than 300 on the ground in Indonesia’ and $11 billion invested in a country with a population of 250 million.
2.3
With a projected slowing, in some cases decline, in trade growth with some of our current key trading partners, it is increasingly important for Australian business to be able to develop new markets.
2.4
The trade relationship has been limited due to ‘historically similar export profiles and markets’, as well as policy settings in Indonesia:
Indonesian policies are often geared towards ‘self-sufficiency’, with measures that aim to encourage domestic production. Indonesia maintains tariffs and several non-tariff measures, including variable customs procedures, red tape and import-licensing arrangements, which create complexity for Australian exporters and investors.
2.5
Indonesia’s economy is expanding and its middle class is growing. The economic opportunities in improving our trading relationship with Indonesia are undeniable. Based on current trends:
Indonesia will move from being the 16th largest economy into the top 10 by 2030, and be the fourth largest by 2050. By 2030, around 70 per cent of Indonesians will be of working age, supporting a consuming class of around 135 million people and business opportunities will be worth approximately $US1.8 trillion.
2.6
Despite this growth potential, the current business environment in Indonesia and the region pose challenges to Australian businesses looking to expand trade with Indonesia. DFAT identifies a range of non-tariff barriers and impediments to trade and investment including:
quotas, bans, import licencing and pre-shipment inspection requirements. Product-level non-tariff measures doubled and the number of products covered by these measures expanded by over 30 per cent between 2009 and 2015.
licensing restrictions are applied to many goods and import arrangements are frequently revised, for other goods, permits are seasonal or unpredictable.
the logistics chain is unpredictable and costs are consequently high;
weak law and justice institutions alongside high levels of perceived corruption constrain opportunities and increase costs of doing business.
2.7
At present both Australia and Indonesia have a trade relationship through the ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA) which has a focus on tariff reduction and economic integration into ASEAN, including an aid-for-trade program.
2.8
Negotiations are also currently being undertaken for the Regional Comprehensive Economic Partnership (RCEP), involving the ten ASEAN countries and FTA partners aimed at ‘strengthen[ing] and simplify[ing] the regional trade and investment framework.’
2.9
In addition to these agreements, Australian and Indonesia are currently negotiating an Indonesia-Australia Comprehensive Partnership Agreement (IA-CEPA). IA-CEPA ‘aims to liberalise the current trading environment by eliminating and reducing tariff barriers, building more trade facilitative processes, and improving conditions that impede our services suppliers and investors.’ This agreement is discussed further in Chapter 3.
2.10
Although there are still many impediments to trade, business has recognised the benefits of trade between the two countries. As a result, the trade relationship has grown steadily in the ten years to 2015-16, with an average annual growth rate of 5.1 per cent.
Goods trade
Agriculture
2.11
Agricultural products feature highly in the trade relationship, with Indonesia being the sixth highest value export market in 2015-16. Agricultural commodities account for 58 per cent of total goods exports. Key agricultural exports include:
skim milk powder ($120m).
2.12
Grapes, recovered paper and red meat animal offal exports have also grown strongly in the five years from 2010 contributing to a 24 per cent growth in total agricultural exports over this period.
2.13
Agricultural imports from Indonesia are also strong, having tripled in the five years from 2010 with the largest increases in dressed hardwood, household and sanitary paper products, cocoa, plant extracts and tuna.
2.14
Alongside key commodities, submitters suggested that there are opportunities in emerging markets that should be harnessed. Although a majority Muslim nation, both the Wine Makers Federation of Australia (WFA) and Australian Pork Ltd submitted that there are opportunities to grow the wine and pork market, recognising that non-Muslim minority populations in Indonesia account for over 30 million consumers and with increasing international visitors to Indonesia, there is also a visitor market for this produce.
2.15
The National Farmers’ Federation (NFF) additionally submitted that there is potential to grow these niche agricultural markets to mutual benefit:
Similar to the role that Australia can play through its live cattle industry, the Australian pork industry is well placed to help Indonesia meet its food security goals. The high health status of Australia’s pig herd lends itself to the supply of breeder pigs and genetics into Indonesia.
2.16
The export market is well placed to grow alongside projected population growth. However, submissions to this inquiry noted concerns about Indonesia’s self-sufficiency goals and the changing rules for this sector, which places pressures not only on Australian producers but also Indonesia’s security of supply and price stability. It was submitted:
The introduction of Indonesia’s breeder protocol, which requires one animal imported for breeding purposes for every five animals for feed lotting, is a challenging prospect for [Consolidated Pastoral Company] and its feedlot operations in Sumatra.
The requirement for a 5 to 1 ratio feeder to breeder cattle importation is not economically viable as it is cost prohibitive to feed breeder cows in feedlots that are designed for 120 finishing of Australian feeder cattle, not for feeding cows for many years.
The 5 to 1 rule started in late 2016 and will be audited at the end of 2018 with feedlots who do not comply losing the ability to import cattle in 2019. For feedlots to comply with 5 to 1 they would have 140% of their feedlot full of breeding cattle by the end of 2018. They would also not be producing beef for consumption and this will put significant pressure on Indonesian beef prices.
2.17
Submitters noted that non-tariff measures imposed by the Indonesian Government such as permit limitations and cattle import quotas and restrictions, labelling requirements and duplication in customs processes, provide an ongoing barrier to improving trade. For example, Trade and Investment Queensland submitted:
Import exclusions on citrus products aimed at protecting Indonesian businesses, imposed by the Indonesian Government in the April to September growing season, have severely curtailed Australian exports. Inconsistent and unpredictable determination of quota sizes and opaque implementation systems exacerbate the difficulties faced by exporters. This is of particular concern to Queensland mandarin growers, for whom trade with Indonesia comprises up to 25 [per cent] of exports, with the industry expressing concern over restrictive policies, increasing uncertainty, and rising costs over the past decade.
2.18
Dairy Australia submitted that non-tariff barriers also
hinder the ability of Australian dairy manufacturers to leverage competitive advantages conferred by a:
credible domestic regulatory system, and
reliable cold storage supply chains.
2.19
The Department of Agriculture and Water Resources (DAWR) acknowledged these concerns, stating:
Indonesia’s pursuit of food security through self-sufficiency makes agricultural trade with Indonesia challenging and unpredictable. Indonesia is aiming to achieve self-sufficiency through domestic production of staples – rice, corn and soy beans – an increased production of beef and sugar. Indonesia uses import restrictions, including bans and quotas, to support local producers while negatively impacting Australian exporters. Australia’s agricultural trade relationship with Indonesia is frequently characterised by unexpected changes to import conditions leading to loss or reduction in access and uncertainty for Australian exporters.
More recently, Indonesia’s pursuit of self-sufficiency goals across a number of key commodities has been balanced by sensitivity about high retail food prices and better recognition of the role that imports play in maintaining price stability.
2.20
The uncertainty created by Indonesia’s ad hoc import exclusions not only causes a great deal of difficulty for Australian exporters but may also in the longer-term cause difficulties for Indonesia as Australian exporters look to other markets with more consistent and predictable trade policies.
2.21
Industry submissions acknowledged the efforts being made by the Australian Government to reduce the impact of non-tariff barriers and called on the Government develop strong government-to-government and industry partnerships to reduce the impact of the barriers imposed by Indonesia.
2.22
However, it was also submitted that the multiple trade partnerships and programs in existence in Australian states and territories create unnecessary duplication for Australian agribusiness. The necessary requirement for Halal certification in order to access the Indonesian market was given as an example of the need for comprehensive national partnerships and programs to reduce market disruption. This issue is further discussed in Chapter 3.
Other goods trade
2.23
The remainder of goods exports to Indonesia comprises ‘fuels and elaborately transformed manufactures (ETMs) … such as industrial machinery, paints and other chemicals.’ The value of goods exports grew by 39 per cent in the ten years from 2005-06.
2.24
Similarly, goods imports are dominated by fuels and ETMs, followed by timber imports. Growth in imports has also increased in this time, although at a slower rate with an average annual growth of 3 per cent in the ten years from 2005-06.
2.25
DFAT submitted that IA-CEPA negotiations to date have agreed to develop a ‘cooperative work program’ that will address non-tariff trade barriers and create ‘greater regulatory certainty and coherence.’
2.26
Despite the commonality in export goods shared between the two countries, it was submitted that there are significant opportunities to build on these complementary industries to develop partnerships to mutually enhance each economy. These issues are further discussed in Chapter 3.
Services trade
2.27
Services are the largest part of the Australian economy, representing 60 per cent of GDP. The key trade in services and investment sectors between Australia and Indonesia are:
mining, engineering, technology and services; and
Indonesian investment in Northern Australia, recognising the particular ties in this region.
2.28
Services trade has experienced rapid growth since 2005-06 with an annual growth rate in two-way trade of 12 per cent. Indonesia’s services trade with Australia has grown from a $121 million deficit in 2005-06 to a $1.5 billion surplus in 2015-16.
2.29
Australia’s service exports were worth $1.3 billion in 2015-16, with education and travel being the largest component of this. Australia is the largest destination for Indonesian students with a 287 per cent growth in vocational education and training (VET) enrolments between 2006 and 2016.
2.30
However, there is increased competition in the regional education market and the Department of Education and Training (DET) noted:
Though growth is occurring, the number of Indonesian students in Australia has not returned to the last recorded peak in 2002 (17,617 in January to November). Furthermore, the overall growth in enrolments has been modest in recent years, with strong growth in VET enrolments offsetting flat growth in schools and English language studies (ELICOS), and declines in higher education. While the higher education sector still accounted for more than half (8,023) of all Indonesian students in Australia in 2015 (14,130), higher education enrolments have not returned to their 2002 levels.
2.31
Indonesia has a young population, with over 60 per cent aged below 35 in 2015 so this represents a strong market for Australian education providers. The Department of Education and Training (DET) noted that Indonesia is looking to expand its vocational education and training (VET) sector and this may present additional service opportunities for Australian providers. The Department proposed that Australia can leverage the interest in VET though:
supporting increased government-to-government policy dialogue that promoted greater links between skills development systems, industry and employers (including Australian employers), thereby increasing industry relevance of the training delivered to better meet the needs of the Indonesian labour market;
new models of VET delivery to meet the increased demand for industry-led skills development; and
opening up access and opportunity for Australian registered training organisations to operate in Indonesia.
2.32
Travel is also a strong market. While the rate of Indonesians holidaying in Australia has grown significantly, valued at $247 million in 2015-16, recreational travel to Indonesia is a significant market valued at $2.8 billion – making Indonesia the second most popular travel destination for Australians.
2.33
While services trade is strong and growing, it was submitted that there is potential for significant growth in this area and that this will ‘play an increasingly important part in in both the Indonesian and Australian economies.’
2.34
As well as further growth in education services, submitters noted the potential for growth in:
environmental advisory services.
2.35
The ANZ submitted that there are opportunities to grow service exports with a reduction in barriers to foreign financial services including a need for improved labour mobility to Indonesia and reduced regulation in data processing and foreign equity caps to provide a more liberal and open environment for trade and investment. Reducing these barriers will not only provide benefits to Australian businesses, but also ‘assist in Indonesia’s development’, the ANZ submitted:
The availability of skilled personnel in Indonesia is limited. Reducing barriers to the use of skilled foreign personnel would benefit Indonesia by speeding up the development of the sector and promoting skills transfer.
2.36
This view is supported by the Australian Institute of Marine Science (AIMS), submitting that Indonesia is an important regional partner for science collaboration and maritime cooperation. In addition, AIMS acknowledged that Indonesia’s growing population will put strain on coastal ecosystems and that:
Australia can play a role in supporting the sustainable development of Indonesia’s marine industries, including fisheries, through aid investment and targeted marine science research and development support. As well as improving regional prosperity, sustainable development could potentially reduce illegal fishing in Australian waters, as individuals currently crewing poaching vessels would have access to other employment opportunities.
2.37
DET noted that Australia is Indonesia’s second ranked research collaboration publication partner. Both the Australian Research Council and the Australia-Indonesia Centre, with Australian Government funding, have supported collaborative research projects across a range of fields of study. In addition, the Australian Government supports a ‘Regional Collaborations Programme’ to develop ‘innovative solutions to regional challenges … such as food and energy security and disaster resilience.’
2.38
Indonesia also has significant infrastructure requirements that require investment to meet its development aims. It was submitted that Australian businesses, through public-private partnerships, can offer capital and specialised knowledge to speed development, but this will require a liberalised business environment.
Cultural understanding
2.39
Trade and Investment Queensland noted that while Indonesians hold generally positive view of Australians (87 per cent favourable), Australians hold less positive views of Indonesia (43 per cent favourable). ‘These figures explain some of the relatively low level of engagement and interest in Indonesian business and investment opportunities.’
2.40
The AIBC confirmed these views and submitted that ‘business in each nation poorly understands opportunities in the other nation and how to do business there. Trust and confidence is in general low.’ In their submission to the IA-CEPA, the Australia-Indonesia Business Partnership Group noted that:
There is general cynicism towards FTAs, CEPAs and open economy in Indonesia. Meanwhile in Australia there are negative and out-dated views about Indonesia that inhibit cooperation. This will need to be tackled strategically through stakeholder engagement activities.
2.41
This view is supported by a recent PwC report examining the Australian diaspora noted:
Not only … has Australia not invested sufficient economic resources in Asia, but our cultural understanding of Asia is lacking. In short, we simply don’t know how to do business in Asia.
PwC’s view is that Australia does have the talent to succeed in Asia, but we are not doing enough to foster, prepare and deploy this talent in the region.
2.42
The AIBC submitted that the trade agreement should also include design, arts and culture through which cultural understanding, and therefore business relationships will be improved, noting:
The importance of bilateral cultural projects, particularly in the arts, should not be underestimated, as they oil wheels of mutual understanding. Contemporary art and culture connects well with younger people. Digital technologies enable portability, exchange and collaboration.
…
Sport also offers pathways to build mutual understanding as well as opportunities for collaboration, including through sport science.
2.43
When asked about better utilisation of the diaspora in both countries the AIBC noted:
I think, if we identify projects that are potentially catalysts, it would then become easier to galvanise the alumni in both countries. Otherwise the alumni are talking but not getting much done. We are talking, but we are not achieving much. To put it simply, from an Indonesian business perspective, are they really interested in Australia? Not really. The Indonesian government is interested in Australia, but the business community are looking north. They find us too difficult to deal with, and not without reason. We have a very competitive environment in most industries—the cost of entry is high; the skill sets required are very high—because we are well established.
2.44
DFAT outlined a number of initiatives aimed at building mutual cultural understanding including:
support for the Australia-Indonesia Institute, Senior Editors’ Program and Elizabeth O’Neill Journalism Award (journalist exchange programs), Muslim Exchange Program (leadership program);
education initiatives such as Australia Awards Scholarships, (scholarships and short-term courses), building an Indonesian alumni network, and the Australia-Indonesia BRIDGE School Partnerships (supporting sister-school relationships)
science and research collaboration through the Australia Indonesia Centre (a multi-university centre for collaborative research), the 2016 Australia Indonesia Science Symposium and the Australian National University’s Indonesia Project (research collaboration on issues of economic reform);
support for New Colombo Plan scholars for which Indonesia is a popular destination of choice.
2.45
DFAT further submitted that it is working to support business-to-business links recognising the importance of the business community to the IA-CEPA.
2.46
Despite a myriad of issues, certain industries are actively developing programs aimed at increasing industry cultural understanding. Dairy Australia acknowledged the important role industry plays in improving commercial and cultural linkages to present opportunities to both Australian and Indonesian businesses. The organisation presents workshops to Indonesian hospitality students, hosts an annual scholarship program and conducts missions to build relationships and business opportunities.
Committee comment
2.47
As our nearest neighbour in Asia, improving the business relationship between Indonesia and Australia presents significant trade opportunities for both countries.
2.48
However, the relationship between Australia and Indonesia is complex and needs to be developed at a range of levels. The Committee shares the concerns of submitters that unexpected and mid-season policy restrictions (non-tariff barriers) imposed by Indonesia provides a significant disincentive for trade.
2.49
The Committee also notes that the commonality of goods production can be seen as an obstacle to improving trade. However, despite the complementary nature of our goods production, there are unique market opportunities for Australian producers in Indonesia, particularly harnessing Australia’s reputation for exceptional quality in agricultural products.
2.50
Australia is also highly regarded in the provision of education and tourism services. This excellence is not going unnoticed in both Indonesia and other countries with Australia increasing its exports in both these fields. This is not only a positive economic development, but an important contributor to improving people-to-people links. The more that Australians and Indonesians visit and undertake education and training in each other’s countries, the better the understanding between the two nations.
2.51
The Committee commends those business organisations that are making positive steps towards developing a mutual cultural understanding within their industry and who are building business-to-business linkages.
2.52
In addition to these key services, the Committee is encouraged by the additional service opportunities presented by the growing middle class in Indonesia and Australian business’ awareness, of, and desire to, engage with these opportunities. The regional focus on collaboration in research and innovation is also encouraging.
2.53
The Committee is of the view that the Australia-Indonesia relationship will be of increasing importance as we move through the Asian century. However, both countries must be innovative and bold-thinking in negotiating their relationship – ensuring that the right structures are in place to provide for mutual success into the future.