September 1, 2022
JAKARTA – Indonesia is finally a party to the Regional Comprehensive Economic Partnership (RCEP) after the House of Representatives passed a law on Tuesday that ratified the country’s accession to the world’s largest trade deal.
The country became the 13th out of 15 signatories to ratify the trade pact that brings together ASEAN member states and its Asia-Pacific neighbors: Australia, China, Japan, Republic of Korea, and New Zealand. The Philippines and Myanmar are now the only two ASEAN states that have not ratified the agreement.
ASEAN worked on a set of guidelines for consolidating its free trade agreements, which eventually led to the start of RCEP negotiations in 2012 with Indonesia at the helm. So, without ASEAN and the platform it provides for engaging with its dialogue and trading partners, it would be difficult to imagine bringing together six non-ASEAN countries – and their varied geopolitical dynamics – to sit down and chart the economic partnership.
Better late than never, and the RCEP’s momentum is still there for Indonesia to tap into. The country has maintained steady growth while recovering from the pandemic-induced recession, recording second-quarter GDP of 5.44 percent, beyond expectations.
Fueled by recovery in domestic consumption and commodity exports, Indonesia had maintained a trade surplus for 27 consecutive months as of July. While prices are stagnating or even falling for flagship commodities like palm oil and coal, it has been among the few countries deemed safe from a recession that stems from global inflation and supply chain disruptions.
Things are not always this good for Indonesia, whose economy is not reliant on international trade. According to the World Bank, Indonesia’s trade-to-GDP ratio last year was only 40 percent. Although this is quite common among big countries with large populations, this can also be attributed to the Indonesia’s reliance on raw commodities and its less developed manufacturing sector.
The RCEP offers Indonesia an opportunity to increase its bargaining position in the global value chain. The trade deal is expected to eliminate up to 92 percent of tariffs on goods traded among its 15 members and standardize many customs, investment, intellectual property and e-commerce regulations.
It will also offer better access to cheaper or better-quality inputs and help the country transform into a producer of high-value goods, while opening access to the markets of other RCEP members like China, Japan and South Korea, especially for Indonesia’s fisheries, plantation and automotive products.
Coordinating Economic Minister Airlangga Hartarto estimated that the RCEP could add 0.07 percentage points to Indonesia’s GDP by 2040, largely through a projected US$5 billion in additional exports and an unprecedented trade surplus.
With so much in store under the mega trade pact, Indonesia can also expect more cooperation to support its ambitious goal to become the world’s electric vehicle (EV) production hub, including developing an EV battery industry that will be supported by its large nickel and copper reserves.
The main challenge for the country is to maintain political stability and regional security amid the Ukraine war and the US-China rivalry that have divided the world. The RCEP has given Asia-Pacific countries a greater incentive to maintain peace and foster economic growth.
Without peace, there will be no trade, let alone economic recovery. And as a country in a relatively better position, Indonesia’s broader involvement in international trade and the global value chain could contribute to restoring global peace and prosperity.