December 15, 2022
JAKARTA – Indonesia successfully hosted the Indonesia-Pacific Forum for Development in Bali last week. Pacific countries were the focus of the forum, which resulted in the Bali Message for Development Cooperation in the Pacific.
The message sent a strong signal that Indonesia would play an important role – but further details need to be ironed out to know exactly what needs to be done.
Indonesia could leverage its economic prowess to achieve geopolitical goals in the Pacific, mainly through unilateral trade preferences and sovereign wealth funds. The question is how.
First, let’s start to understand how important the Pacific is for Indonesia based on geopolitical reasons. The Pacific countries have been pushing international scrutiny over the human rights situation in West Papua. The latest occasion was during the 41st session of the Universal Periodic Review last month. Vanuatu and the Marshall Islands called for the Office of the High Commissioner for Human Rights and the Organization of African, Caribbean and Pacific States (ACP) to visit and assess the situation in West Papua.
There are also common challenges that both Indonesia and the Pacific face. Common nontraditional security threats include climate change, illegal, unregulated and unreported (IUU) fishing and plastic pollution, to name a few. More strategically, the Pacific region is and should become more prominent as a part of the broader Indo-Pacific outlook.
China has proactively built its regional presence by financing large infrastructure projects. The traditional powers led by the United States have renewed their focus on the region through new initiatives such as the Indo-Pacific Economic Framework and the Partners in the Blue Pacific, which many see as a direct challenge to China.
Indonesia, including ASEAN, is an integral part of balancing the equation, mainly through the ASEAN Outlook on Indo-Pacific.
Second, let’s dig deeper into what Indonesia could do with its economic prowess. The total trade value between Indonesia and the ACP group in 2021 was around US$11.2 billion. This includes countries in the African and Caribbean region, though, so the Pacific shares will be less. This pales in comparison with the total trade with major trading partners such as China, which reached $123 billion in the same year.
More could be done with the Pacific region. Indonesia could start by considering giving unilateral trade preferences with specific requirements tied to Indonesia’s geopolitical goals, such as respect for Indonesia’s territorial integrity. This is an approach by the US and the European Union through its Generalized System of Preferences (GSP). The US even bluntly requires that their GSP beneficiaries are not communist countries, which excludes countries like Vietnam from the list.
Unilateral trade preferences provide more flexibility and leverage than bilateral or multilateral trade arrangements, as such unilateral preferences do not require parliamentary approval and can be revoked at any time by Indonesia. Unilateral trade preferences can also be the first step before trade agreements.
Indonesia should also consider using its newly established sovereign wealth fund, the Indonesia Investment Authority (INA), to achieve geopolitical goals. Sovereign wealth funds have the potential to shape the behavior of other countries and provide more benefits than loans or grants.
Foreign direct investment (FDI) allows investors to exercise management and control over host country firms, and the host countries can also open sensitive sectors protected by high tariffs or non-tariff barriers. Neither loans nor grants can achieve these. For example, the United Arab Emirates sovereign wealth fund, Mubadala, actively invests in aerospace and defense with significant players such as Boeing and Airbus.
Indonesia should consider investing in critical sectors of the Pacific, such as maritime industries, which directly affect their livelihoods. This would undoubtedly entail leverage for Indonesia in the future.
Third, the institutional framework. Internally, the Foreign Ministry is the best institution to formulate the combination of these policies and coordinate the interagency process with the Trade Ministry to grant unilateral trade preferences and the INA for investment decisions in the Pacific. Externally, Indonesia should consider proposing Pacific countries as the dialogue partners for ASEAN.
This move will help integrate them in the ASEAN Outlook on Indo-Pacific. Indonesia could take the lead as the next ASEAN chair next year. The precedent was set when Indonesia, holding the Group of 20 presidency, invited Fiji, the Pacific Island Forum chair, to the group’s summit last month.