Indonesia’s trade agreements

As Australia’s closest neighbour, Indonesia presents unlimited potential as an emerging economic powerhouse with a burgeoning middle class.

In its current Master Plan for the Acceleration and Expansion
of Indonesia’s Economic Development (MP3EI), the government vowed to streamline the investment and regulatory environment for sectors such as agribusiness, mining and resources, health, education, training and information and communications technology.

A range of opportunities for Australian businesses continue
to open up as the larger and wealthier consumer base creates potential for prospective markets. On the most recent figures available, Australia’s annual two-way-trade with Indonesia is $14.8 billion. This means that only 2.2% of our total trade across the world is with Indonesia, further highlighting the huge growth potential given our more significant trade receipts with far less populous nations such as Malaysia, Singapore and New Zealand.

There are various reasons for why this should be so –
the principal one being that Indonesia is in an earlier stage of development than some of its Asian counterparts. Indonesian manufacturing is less evolved, its financial system is less sophisticated and its infrastructure, particularly transport, will require many billions more in investment before it can rival some of the more advanced Asian economies.

In 2016-17, Indonesia is the second-largest recipient of Australian development aid, receiving just under $300 million. Australia has also pursued closer defence links with Indonesia since 2005 through the Lombok Treaty, and
has worked more closely with Indonesia on anti-terrorism measures since the Bali bombings of 2002, in which 88 Australians died, and on tackling people smuggling. Australia is also linked to Indonesia through a number of regional forums and agreements. Both nations are members of the G20, ASEAN Regional Forum and the Australia-New Zealand-ASEAN Free Trade Agreement, which was signed in 2009.

An Indonesia-Australia Closer Economic Partnership Agreement, intended to build upon existing agreements, is currently being negotiated. Indonesia applies most favoured nation status to Australian imports, while Australia applies equivalent concessions through its developing country tariff rate.

With all this work over many years by both Australia
and Indonesia to create a lush environment for bilateral trade and investment, and given the proximity of our land masses, it cannot be too long before Indonesia climbs further up the rankings of places where Australians conduct business.

The ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA) applies for numerous goods imported into the country. Indonesia’s customs agency uses a tariff schedule based on the Harmonised Commodity Description and Coding System for classifying goods. In addition to tariffs, Value Added Tax (VAT) is levied on most imports at the rate of 10 per cent of CIF + Import duties (tariff). Certain goods are exempted from VAT. An additional Luxury Goods Sales Tax (LST) is imposed on certain goods that are defined as luxury goods. A Prepaid Income Tax Article 22 is also applied at 2.5 per cent or 7.5 per cent of CIF (cost, insurance and freight) + Import duties.

AANZFTA enforcement will result in tariffs on 92 per cent of affected items being reduced to zero by 2015. This will increase to 94 per cent by 2025. In order to qualify for the AANZFTA tariff rates, a product has to meet strict Rules of Origin requirements and have a Certificate of Origin.

Want to learn more? Explore our other Indonesia information categories or download the Indonesia Country Starter Pack.