Indonesia should ‘play smart’ as it zeroes in on ratifying trade deals with Iran

House of Representatives (DPR) Commission VI, which oversees trade and investment, on Monday gave the green light for the government to ratify the trade deal soon so it can take effect in January next year.

Aditya Hadi

Aditya Hadi

The Jakarta Post


President Joko “Jokowi” Widodo (right) receives late Iranian President Ebrahim Raisi at the Bogor Presidential Palace in West Java on May 23, 2023. During their meeting, the two leaders signed cooperation agreements in various fields, including trade. PHOTO: X-JOKOWI/THE JAKARTA POST

July 11, 2024

JAKARTA – Indonesia has set its sights on ratifying a preferential trade agreement (PTA) with Iran, with many expecting it to open doors for local products to markets in Central Asia, South Asia and the Middle East, but experts have urged caution over its geopolitical situation and sanctions from Western countries.

House of Representatives (DPR) Commission VI, which oversees trade and investment, on Monday gave the green light for the government to ratify the trade deal with Iran soon so it could take effect in January next year.

The agreement would become the second trade deal between Indonesia and a Middle Eastern country, following the Comprehensive Economic Partnership Agreement (CEPA) between Indonesia and the United Arab Emirates in July last year. Jakarta has also started negotiations with Saudi Arabia on a similar agreement.

Iran is not a major trade partner for Indonesia, ranking only 62nd in export value last year with exports to Tehran. Exports only amounted to US$198.1 million, less than 1 percent compared with shipments to China, the archipelago’s main trading partner, with goods valued at $64.9 billion in the same period.

Iran also does not ship many exports to Indonesia.

However, Trade Minister Zulkifli Hasan explained that Iran was a strategic location and could serve as a trading hub between Indonesia and other countries in the region.

“At the same time, a relatively high tariff structure in Iran has become the main obstacle for Indonesian products to be competitive in that country. Thus, we hope the PTA could increase our exports to Iran and its surrounding countries,” Zulkifli explained to the lawmakers on Monday.

Mohammad Faisal, executive director of the Center of Reform on Economics (CORE), agreed that Iran had the potential to be a primary gateway for Indonesia to enter other Asian countries, although it was not the only one.

“It is an opportunity for Indonesia to market manufactured products, such as clothing, automotives, food, beverages, as well as halal products due to our similar [Islamic] values,” Faisal told The Jakarta Post on Wednesday.

M. Abiyan Habib Dzakwan, researcher at the Centre for Strategic and International Studies (CSIS) said the PTA would not guarantee Indonesian products would be accepted in other countries around Iran.

According to him, the result would depend on the significance of the trade deals Iran had made with those countries.

“Indonesia itself is in the process of negotiating trade deals with other countries in the region,” Habib said to the Post on Tuesday.

Countries under the Eurasian Economic Union (EAEU) are among those that have adjacent borders with Iran and the Indonesian government has aimed to seal a free trade agreement (FTA) with the bloc this year.

The EAEU is an economic union comprising Armenia, Belarus, Kazakhstan, Kyrgyzstan and the Russian Federation, with some of the members landlocked countries.

Jakarta went on with the negotiations amid Western sanctions against Russia for its war in Ukraine and Belarus for its involvement in the conflict.

Play smart

Habib also reminded the government to reassess which entities or products from Iran were currently under sanction so it could mitigate the reputational, market access and competitiveness risks to Indonesian products in Western countries.

“We should avoid using raw materials from Iran for strategic export commodities to G7 [Group of Seven] countries. On top of that, any sensitive technology products from Iran should not be used by strategic government institutions,” Habib suggested.

Iran has been facing severe Western sanctions and international isolation for many years, especially from the United States.

In April, Washington imposed new sanctions on Iran after it launched missile and drone attacks on Israel amid tensions in the Middle East, a move that was followed by the European Union the same month.

Trade Minister Zulkifli acknowledged the potential geopolitical risks that came with the PTA with Iran, but assured that the government had calculated the risks.

He reasoned that choosing the PTA would mean Jakarta could select products, allowing it to exempt certain high-risk products from Tehran, whereas a CEPA would apply to all goods and services flowing between the two countries.

“In the middle of [trade war between West and East], we have an opportunity [to explore various markets]. If we continue to depend on traditional markets and stop being creative, we will not grow,” Zulkifli stated.

The CSIS’ Habib added that amid a more protectionist geopolitical climate, the government should focus on fighting for more functional global trade aside from trying to open alternative markets.

He suggested efforts were still needed to find a middle ground to resolve controversial trade-related issues with existing trade partners.

“Alternatively, the government could establish agreements with countries geographically close to Europe, such as Turkey, Jordan, Morocco, Egypt and Tunisia,” he explained.

Krisna Gupta, a senior fellow at the Center for Indonesian Policy Studies (CIPS), opined that safeguarding existing markets could be done in parallel with establishing new markets, as both had their own benefits.

However, he suggested that it would be challenging to champion global trade without the desire from big countries, especially the US.

“Those issues need to be resolved, I agree. But it is all about political will, so it would be hard,” he told the Post on Wednesday.

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