April 7, 2025
JAKARTA – The United States has levied a flat tariff rate of 32 percent on all imports from Indonesia as of April 3, 2025. Around 60 countries are subjected to tariff rates ranging from 10 to 49 percent, affecting practically all US imports, and this has been assessed to negatively impact world trade.
Tariffs are taxes levied to businesses and end consumers for goods imported from another country. These taxes are paid by the importing businesses and do not necessarily impact the exporting country. In the literature on economic statecraft, one of the main purposes of tariffs is to generate uncertainty on both ends of the trade for continued access to the large US consumer market, which could spiral into a global trade crisis.
The uncertainty is worsened by the size of the US consumer market and how much it imports compared to the rest of the world. According to 2023 data, the United States’ nominal gross domestic product (GDP) is approximately US$27 trillion, accounting for about a quarter of the global GDP of $105 trillion. US consumer spending typically constitutes around 68 percent of GDP, suggesting a nominal value of $18.3 trillion.
In 2023, the US imported approximately $3 trillion worth of goods, which accounted for approximately 13 percent of global merchandise trade.
Exports to the US form around 9 percent of Indonesia’s total export volume, but the effects of US tariffs may vary across different industries. Commodities already struggling to remain competitive, such as textiles, or those politically volatile, such as palm oil, will be the most negatively impacted, as they could potentially lose the second-largest export market for Indonesian goods.
The government will have two major problems in the immediate future. First, it remains an open question whether Indonesian goods are still competitive enough so that other countries are willing to purchase them. In an ideal world, we should be able to replace the current export volume to the US, but what will likely happen is that other countries will shift to domestic production, even when it makes more sense to import the same goods.
They will then enact tariffs to discourage companies from relying on global supply chains to be able to safeguard against shocks, despite overwhelming evidence that globalization leads to lower prices for consumers and greater potential for economic growth. This spillover effect can potentially lead to a shrinking global market for exports.
Second, tariffs and the effects thereof are hard to explain to businesses and individuals. Technically, US tariffs do not apply to Indonesian trade with other countries: The 46 percent rate applied to US imports from Vietnam does not mean that Vietnamese goods imported by Indonesian businesses will lead to an increase in their prices here.
It will not impact those that do not sell to American businesses, but the psychology of markets does not necessarily align with real economics, especially because tariffs cannot be defined easily and its effects are hard to measure properly.
As such, with current conditions dominated by fear and uncertainty, it is not unreasonable to expect Indonesian businesses to increase their prices even if US tariffs do not affect them, exacerbating the already weakening domestic consumer spending and slowing down economic growth. As it stands, Asian markets tumbled in the hours following President Trump’s announcement.
Recent developments in geopolitics show a worldwide trend in countries seeking to increase imports of raw resources and stockpiling them to withstand short-term disruptions, in a bid to increase their competitiveness in the much more valuable value-added sector.
It may be enticing, maybe economically necessary, for the government to forego its downstreaming and value-added initiatives and prioritize exporting raw resources to maintain Indonesia’s trade balance.
But this is neither politically nor economically advantageous.
In moving away from resource extraction to value-added manufacturing, the government has promised higher paying jobs to an anxious electorate, and this would backfire if it decided to reverse its position. The narrowing window to progress beyond the feared “middle income trap” will completely pass by if the administration of President Prabowo Subianto decides to pursue populist policies and reengage with extractive economics.
Mutually beneficial trade relationships must be prioritized above mere nationalist fervor. Prabowo’s machismo approach to foreign policy must consider the risks of an impending global trade war, not just between the US and the world but also among countries vying to recapture lost trade with the US.
To do well, the government must engage in non-incendiary trade diplomacy and pursue strategic measures, such as stockpiling.
The world will respond to these tariffs in two ways. In the long term, countries will try to contest them through the World Trade Organization and establish bilateral and multilateral trade deals to offset the opportunity cost of the heavily taxed US market.
However, it is the short-term response that should worry policymakers, because countries will aggressively try to replace or capture lost business.
The uncertainties surrounding Indonesia’s economic, legal and political landscape may prove detrimental to our efforts.
In this new uncertain reality, political economy is the name of the game. The US will also be the least of our concerns in the long term. The Prabowo administration must tread carefully, as all impacted countries will see Indonesia not as a friendly partner, but one of their many competitors and potential trade adversaries.