Introduction
3.1
This chapter examines the benefits that are expected to flow from the implementation of the Comprehensive Economic Partnership Agreement between the Government of Australia and the Government of Indonesia (IA-CEPA).
3.2
It looks first at the support for the Agreement before considering access to the Indonesian market including the benefits for individual sectors. It also examines the important role IA-CEPA is expected to play in developing the broader Australian-Indonesian relationship. The chapter reviews some of the specific provisions that are expected to promote trade facilitation and concludes by looking at the timing of ratification and implementation.
Support for treaty action
3.3
There is overwhelming support for the ratification and implementation of the IA-CEPA. In particular it enjoys strong support among agricultural producers and the education sector.
Access to the Indonesian market
3.4
The Indonesian market is seen as providing exceptional potential for Australian businesses. Indonesia is currently the world’s 10th largest economy and is expected to become the world’s fourth largest by 2050. A large population, rapid urbanisation, and emerging middle class are feeding this economic growth. Indonesia currently has a population of 260 million people, half of whom are aged between 18 and 34 years of age. These conditions have encouraged ongoing economic growth:
Trade liberalisation and macroeconomic reforms have been underlying factors for Indonesia being one of the fastest-growing economies in the Indo-Pacific since the turn of the century. Indonesia has maintained a stable economic growth, which consistently remained within a narrow range of 4.9 to 5.3 per cent for the last 14 quarters. Moreover, trade and international investment has been a strong contributor to Indonesia’s economic growth since the Asian Financial Crisis in the late 1990s. Its GDP [Gross Domestic Product] per capita has risen from US$807 in 2000 to US$3,877 in 2018 – and has more than halved the percentage of the population living in poverty in 1999, to 9.8 per cent in 2019.
3.5
The Department of Foreign Affairs and Trade (DFAT) explained that IA-CEPA would provide improved access for Australian businesses to the Indonesian market including:
… the opening of new markets through tariff reductions or eliminations; the institution of tariff rate quotas with automatic licencing without seasonality; non-discriminatory access for service providers and investors to opportunities within the domestic economy as regulated.
Underutilised potential
3.6
Submitters stressed Indonesia’s proximity to Australia and its potential, noting the current low volumes of trade and investment. Indonesia is Australia’s 14th largest trading partner, worth $17.6 billion in 2018, and accounts for only two percent of Australia’s exports. This underperformance contradicts the norms of international trade which assumes that close geographic neighbours with similar economies will develop close trading relationships:
One of the closest things to an economic law is the theory of gravity in international trade. This theory says that, the bigger the two economies are and the closer they are, the greater their trade will be. But Australia and Indonesia defy gravity. Despite being G20 countries on each other’s doorsteps, the countries barely make it into each other’s top 10 either for destinations of goods and services exports or for the sources of their imports. A lot of things are required to address this missed opportunity, and a free trade agreement is one of them.
Sector benefits
3.7
In light of the unrealised potential in the Indonesian market for Australian businesses, the IA-CEPA has been welcomed. Individual sectors provided examples of the improved access they expect to receive from the Agreement.
Mining
3.8
The Minerals Council of Australia (MCA) advised that as Indonesia continues to industrialise, its demand for Australian processed minerals and metals will continue to grow. Overall in 2018 these were worth around $1.9 billion. Crude petroleum was Australia’s largest export to Indonesia, worth over $827 million, followed by coal at $747 million. Other significant exports included iron ore at $190 million, aluminium at $156 million and zinc at $128 million.
3.9
Tariffs on mineral and energy exports, where they still exist, will be further reduced under IA-CEPA, including steel which is mentioned below. However, the MCA indicate that the most significant benefits from the Agreement will flow to the Mining Equipment and Technology Services (METS) sector. The sector is currently estimated to contribute some $90 billion in revenue to the Australian economy annually and plays a significant role in trade with Indonesia:
It is estimated that at least 140 Australian-based METS companies export equipment, product or technology to the Indonesian market, including at least 40 ASX-listed companies. For many firms, through a number of industry surveys, Indonesia consistently rates as the top or second top priority market.
3.10
The METS sector is expected to benefit substantially from Indonesia’s commitments on mining services, particularly as Australian companies will now be able to own up to 67 per cent of mining service companies based in Indonesia, up from 49 per cent.
Steel
3.11
BlueScope Steel is currently one of the largest Australian direct investors in Indonesia and the largest manufacturer of coated steel products in the country. Despite its position, the company faces difficulties sourcing feedstock, the semi-finished steel raw material feedstock, Cold Rolled Coil (CRC), from its Australian mills for the operation in Indonesia. As well as the current 15 per cent tariff imposed by Indonesia, the Indonesian permit system is difficult to navigate.
3.12
The existing tariff will be reduced to zero from the date of entry into force of IA-CEPA and Indonesia will immediately guarantee import permits for 250,000 tonnes of steel per year, increasing by 5 per cent per annum thereafter.
3.13
BlueScope Steel sees this as a win-win situation with steel exports increasing from the Australian steelworks and their operations in Indonesia acquiring competitive supplies of feedstock.
Grain
3.14
The grain industry is strongly supportive of IA-CEPA. Indonesia is currently Australia’s largest wheat export market with approximately one-fifth market share. From 2013 to 2018 wheat exports to Indonesia averaged 4.2 million tonnes per year, accounting for around 17 per cent of total Australian wheat production. Currently, the majority of this product is exported from Western Australian and is destined for the Indonesian noodle market.
3.15
A new quota of half a million tonnes of Australian feed grain has been agreed under IA-CEPA. The Indonesian government has not been issuing import permits for the Indonesian feedstock market since 2015 and the commitment in IA-CEPA means Australia will be the only supplier with access to the Indonesian market. This will open up Indonesia’s extensive feed grain market to Australian producers and the grain industry expects grain growers to benefit significantly:
IA-CEPA secured new access for Australian feed grains and represents dollars in farmers’ pockets. Under IA-CEPA, Australian farmers are set to gain 500,000 tonnes of new feed grain market access to Indonesia, making Australia the only country in the world with such market access. This new market, equivalent to 12,000 trucks worth of barley, sorghum and wheat, is worth $125 million in farmgate value to the Australian grain industry.
Meat and livestock
3.16
Indonesia is seen as ‘critical and vital’ to the success of the northern Australian cattle industry:
It’s one of our largest meat markets in Asia, with over 200 million people who cannot eat one of the world’s major proteins due to religious beliefs, which is surely making them more dependent on beef and on us as a beef-producing nation and neighbour than most other neighbours.
3.17
Trade in red meat in 2018 amounted to around $1 billion, made up of 65 per cent live and 35 per cent boxed. Beef consumption in Indonesia is expected to grow 9 per cent by 2020, with some estimates up to 1,300 per cent by 2050.
3.18
The meat and livestock sector representatives strongly endorsed IA-CEPA.
Dairy
3.19
Indonesia is Australia’s third largest dairy export market and in 2018-19 Australia exported over 56,000 tonnes of dairy product to that market valued at over $192 million.
3.20
IA-CEPA will eliminate existing tariffs on dairy products that have not already been eliminated under the ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA). The Australian Dairy Industry Council (ADIC) estimates that the annual value chain savings through dairy tariff elimination will be in excess of $6 million per annum, which the dairy industry translated into 15–20 direct jobs.
3.21
A dairy farmer from New South Wales (NSW) described Indonesia as ‘a massive market for Australia in the future. It’s so close to us and it’s growing’.
Citrus
3.22
Citrus growers currently export approximately 12,000 tonnes of fruit, mostly oranges and mandarins, to Indonesia annually. However, this dropped off to only 6,000 tonnes in 2018 due to uncertainty in the market. The difficulties lie with the current Indonesian quota system as the quotas are not issued in line with Australian growers’ seasons.
3.23
Citrus Australia are confident that the provisions in IA-CEPA will provide certainty and increased opportunities:
[The Indonesians] were issuing quotas on a six-monthly basis and so we never had any forward notification of what those quotas were, so there couldn’t be any possible forward planning. If on face value we can accept the agreement as it is, we’ve actually got some regulatory transparency, because we at least know we can get 10,000 tonnes of oranges and 7,500 thousand tonnes of mandarins in and so people can actually put some planning in place to service that market.
3.24
Citrus Australia noted it was conceivable that in the next decade the Indonesian market would reach 20,000 tonnes of fruit, worth approximately $40 million. The citrus industry expressed the hope that the agreement would enter into force by early 2020, to coincide with harvesting times.
Education
3.25
The Australian Technical and Vocational Education Training (TVET) sector is particularly enthusiastic about the opportunities opened up by IA-CEPA. Currently the courses being delivered in Indonesia do not meet the needs of the workforce. The Australian TVET sector has already established strong relationships with its Indonesian counterparts and sees IA-CEPA as a means to build on those existing relationships.
3.26
TAFE Directors Australia noted the favourable conditions in the Indonesian market and the benefits expected to flow from the Agreement:
The inclusion of skills development as one of the five high-level outcomes of the agreement is particularly welcome and provides much-needed profile and potential for growth to the Australia-Indonesia skills relationship. The focus also complements the significant TVET reform that the Indonesian government is now implementing. The greater certainty provided to TAFEs to offer qualifications in country and to bring training into Indonesia is appreciated.
3.27
Sustainable Skills provided one example of the significant potential that the Indonesian policy shift could deliver for the Australian TVET sector:
If you look at the energy sector, we met with PLN, the state owned enterprise that runs electricity there. They stated that they need a million people skilled to be able to help build the power plants and the transmission lines and operate them, and they don’t have the training capacity to be able to have Indonesians work in that space.
3.28
The tertiary education sector also advised that IA-CEPA would open up opportunities in the Indonesian market:
… given Indonesia’s scale and its dramatic growth projections, we’ve tracked that very closely and see a lot of opportunity. Our hope is that the agreements that are being structured will allow us not only to pursue those in greater fashion but to explore new service offerings into the country and work more closely with our colleagues there.
Competitive advantage
3.29
The improved access to the Indonesian market provided by IA-CEPA is expected to provide a competitive advantage for Australian businesses. Witnesses explained that the size, scope and future potential of the Indonesian market is attracting interest from across the world, making it imperative for Australia to take advantage of its international trade reputation and its proximity to Indonesia. Mr Phil Turtle, National President of the Australia Indonesia Business Council (AIBC), provided the example of his own experience:
If you look at our respective economies, we’re both around the trillion-dollar economy side and pretty close in global GDP rankings. There are projections of Indonesia tracking towards maybe the top four or five economies over time. Last year when I was in Jakarta with the Prime Minister, when he was announcing the conclusion of this agreement, in the hotel I was staying there were delegations from Russia, Europe, Japan and Korea, all having the same sorts of conversations with our Indonesian friends … There’s a real opportunity for Australia to put its foot on this very important relationship, and there’s an opportunity now which we would not want to miss.
3.30
Various sectors warned that they are already facing significant competition. The National Farmers’ Federation (NFF) emphasised the ongoing risks to Australia’s market share and warned that markets producing similar goods continue to compete with Australia in the Indonesian market, pointing to the effect of recent events:
With the US-China trade war we know that product that is being diverted into our markets from the US in particular is seriously challenging our market share. We simply can’t rest on our laurels when it comes to accessing markets. So this preferential access is incredibly important.
3.31
The meat and livestock industry identified low cost beef from India and Brazil as major concerns. Indian beef is approximately a third of the price of Australian beef and Brazilian beef about half the price of Australian beef. The Grain Industry Association of Western Australia (GIWA) noted that Australia’s drought condition had combined with increased international competition to cause a significant loss of market share:
Recently the combined forces of additional global wheat supply, competitively priced logistics, and high domestic grain prices due to the east coast drought mean Western Australian origin wheat is facing stiff competition (up to $40 a tonne difference) from Black Sea (Ukrainian and Russian) and Argentinian wheat delivered into Southeast Asian mills. This year our industry expects food wheat imports into Indonesia from Australia to be one quarter to one fifth of our most recent 5 year average of 4.2m tonnes, a sobering statistic.
3.32
Although the Australian Export Grains Innovation Centre (AEGIC) expects this situation to continue in 2020 ‘due to the continuing drought conditions on the east coast’, they stress the need to be in a position to recover market share in Indonesia quickly when Australia’s stocks improve. IA-CEPA is crucial in this regard in AEGIC’s opinion:
It has never been more important for Australia to reach a trade agreement that includes grain and grain products with Indonesia.
Relationships
3.33
The importance of strengthening Australia’s relationship with Indonesia was repeatedly stressed to the Committee. IA-CEPA is seen as providing a significant platform for increased business-to-business and person-to-person relationships. The Indonesia Institute explained that at a certain level the overall relationship between the two countries is very good:
… if you look at the current relationship between Australia and Indonesia, whether it be political, government, policing, terrorism, defence, NGOs [Non-Governmental Organisations], community or education, it’s actually in a very good place. It’s a very solid relationship, and over the years, as our two nations have gone through the various bumps, we have seen on every single occasion that business-to-business links just shrug it off, and business carries on.
3.34
However, the Institute notes that, at a more general level, the relationship is not as strong, quoting a recent report from the Lowy Institute which found that 46 per cent of all Australians ‘including future business leaders’ perceive Indonesian people very poorly or ‘with a great deal of suspicion’. The Institute considers that the ‘real value’ of IA-CEPA is as a ‘catalyst for really addressing these closer links that we need between our countries’.
3.35
IA-CEPA is expected to both strengthen existing relationships and develop new ones. Drawing on the current relationship with Indonesia, the grain industry is developing the Australian-Indonesian Grains Partnership under the auspices of IA-CEPA:
This partnership will provide the required technical, economic and social programs to allow the grains and related industries in both countries to thrive. This partnership will bring together decision-makers from both countries, foster relationships and maximise the opportunities for development and collaboration among the food, grains and livestock sectors. The partnership will ensure that Indonesian stockfeed and livestock sectors have the right technical support when using Australian feed grains, such as barley. That will mean that Indonesian livestock sectors maximise their productivity when using our grains, ensuring that the relationship is no longer transactional but one of genuine partnership.
3.36
Likewise, ADIC has developed strong relationships with Indonesia which IA-CEPA is expected to strengthen and support:
Dairy Australia runs both inbound and in market programs to strengthen relationships with key trading partners including Indonesia. Since 2015, dairy leaders from Indonesia have participated in the annual Dairy Australia South East Asia Scholarship program which educates participants on dairy food safety systems and associated regulatory frameworks. This strengthens personal links and helps spread knowledge and understanding of Australia’s incredible value proposition. The alumni from this program provide invaluable contacts within the Indonesian market.
3.37
The opportunities provided in skills development are particularly relevant to relationship building. The Export Council of Australia (ECA) said that the connection between skills development and strengthening people-to-people ties is ‘essential for longer term economic partnership’. TAFE Directors Australia provided examples of their extensive existing relationships and described the types of partnerships that the sector engage in:
There are typically three types of partners for TAFE in Indonesia. It would be institutes; … government partners, particularly regional governments who are seeking to improve the capabilities of their local TVET systems; and industry. We work with all of those three in quite different ways and often assess their needs and provide a type of program based on the needs of that individual client or client group.
3.38
Sustainable Skills explained that IA-CEPA will enhance those existing opportunities and allow a deepening of the engagement:
There need to be ways of taking it beyond those things and helping to create a real difference. With the President there now, who’s really focused on reform … and clearly wants a strong relationship with Australia, there is an opportunity for Australia to make a difference, particularly in vocational education, where our strengths are, and to build those closer ties. We’ve got the expertise to be able to do that systematically.
3.39
Curtin University highlighted the importance of education links, telling the Committee that they have close to 10,000 alumni in Indonesia, many of them holding important positions in the Indonesian university system. The University has an important economic relationship with Indonesia but considers that IA-CEPA is critical to expanding relationships outside the economic area:
We also have significant ongoing relationships in research, in teaching and also in executive development, and these are growing at all times. So it’s very important for Curtin University that IA-CEPA works. It affords the opportunity for us to further develop our relationships there. There are also some areas around the relationship between our two countries that I believe could be further enhanced …
Trade facilitation
3.40
The inclusion of mechanisms designed to break down non-tariff barriers and provide opportunities for continuing improvement in the trade environment, was identified as a major benefit of IA-CEPA. Historically, Indonesia has been adverse to market liberalisation and tending towards protectionist. Many of the ongoing issues facing Australians doing business in Indonesia involve administrative and technical barriers, as will be discussed in the next chapter of this report. Therefore, the emphasis in IA-CEPA on building Indonesia’s capability and capacity to open up to trade and investment by enabling it to undertake reforms was welcomed.
3.41
The Australian Industry Group (Ai Group) pointed out that these provisions benefit both Australian and Indonesian businesses:
… it doesn’t just benefit Australian companies; it also benefits Indonesian companies and makes them more competitive and also supports Australian investors who are in Indonesia and want to export from Indonesia and use Indonesia’s FTA [Free Trade Agreement]. The challenge with trade facilitation is that it’s a hidden cost and it adds no value. You can argue a tariff does provide income to your government— it is a tax and so reducing it reduces income to the government and the cost of products at the border—but no-one benefits from higher trade facilitation costs. No-one benefits from 150 hours being spent on producing documents, or government employees inspecting those documents, so any improvement we can make will benefit the economies on both sides.
3.42
The provisions include specific chapters on economic cooperation and trade facilitation as well as on non-tariff barriers and technical barriers to trade. Additionally, the nine committees that will be established under Chapter 18 (Institutional Provisions) will facilitate an ongoing process to ensure that IA‑CEPA continues to meet Australia and Indonesia’s changing trade environment:
The Joint Committee [established under Chapter 18] and others provide the Australian Government a method to table new ideas and update IA-CEPA’s provisions. As liberalisation increases the volume of bilateral economic ties, the sectoral composition of trade and investment flows will necessarily evolve. This will create new priorities for regulatory cooperation, and thus requires a ‘future-proofing’ of the standards and processes in IA-CEPA. The use of these committees will ensure that regulatory cooperation can adjust to meet the changing character of Australia-Indonesia economic relations.
3.43
The committees will be established after the Agreement enters into force. The committee on economic cooperation is considered vital to the successful future development of IA-CEPA:
I encourage all Australian officials and elected representatives to utilise their relationships and bilateral exchanges to work vigorously towards the institutionalisation of the agreement’s envisioned—and novel—committee on economic cooperation. If this can be turned into a credible and vibrant forum for problem solving and the cooperative identification of areas of future liberalisation, this will help strengthen the agreement and the ties between the two countries. Although most existing non-tariff barriers and technical barriers to trade are left untouched under the agreement, the use in coming years of constructive diplomacy to institute a productive working partnership on resolving such issues will be decisive for IA-CEPA’s eventual legacy with respect to the future of the bilateral economic relationship.
3.44
Witnesses advised the Committee that the Australian Government had set up the Non-Tariff Barrier (NTB) Action Plan in December 2018, providing a single point of contact for businesses to report NTB concerns. The Department of Foreign Affairs and Trade (DFAT) advised that the information being collected is being used to progress NTB concerns reported by Industry and provided a successful example regarding the China-Australia Free Trade Agreement (ChAFTA):
… despite expanding export market access opportunities provided by the China-Australia Free Trade Agreement, a Tasmanian-based seafood processing and packing business was unable to export one of its products—Gould’s Squid—as it was not on China’s list of approved exports from Australia.
The company lodged this query through the NTB Gateway in December 2018. In January 2019, following long-term efforts by the Department of Agriculture, the company was advised that new seafood species, including Gould’s Squid, had been added to the list of approved exports.
Entry into force and implementation
3.45
There were repeated calls for a speedy entry into force and implementation of IA-CEPA. Agricultural producers, in particularly, were eager to see the Agreement ratified, noting that it was a year since it had been signed:
… NFF (National Farmers’ Federation) would like to emphasise that we would love to see rapid action here. We’re really looking to our parliamentarians to ensure the benefits that we have secured under these agreements are accessed or are able to be accessed by Australian farmers as soon as possible.
3.46
Several sectors are ready to take immediate advantage of the opportunities presented by IA-CEPA. For example, Citrus Australia has growers prepared who could gain the benefits of IA-CEPA for their next season so would like to see it come into effect by early 2020. Likewise the grains industry encourages immediate ratification to allow their growers’ access to the Indonesian market for their next crop, due in November-December 2019.
3.47
The TVET sector is well prepared to take immediate advantage of the opportunities presented by IA-CEPA:
We have known for decades what we need to do in Indonesia. We have the resources. The curriculum is ready. It has been trialled and tested. The geographical location of Indonesia, especially to somewhere like WA, is well advanced. We might not have a very strong relationship, which people believe we have, with Indonesia, but at an educational level we are in and out of Indonesia multiple times a year. We have strong partnerships; we have discussed what is in the agreement several times over decades and I think we’re just ready to go in gung-ho and build those relationships, create that infrastructure and deliver the programs, which have already been delivered in multiple ways but without such a formalised agreement around it.