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W&P Newsletter – DEVELOPMENT OF INTERNATIONAL TRADE IN INDONESIA: ENTERING A NEW ERA OF FREE TRADE AGREEMENTS

July 13, 2020 News
  1. Free Trade Agreements (FTAs) and Indonesia

From 1990 to 2015, there were only 10 FTAs concluded by the Indonesian government. Among those are the prominent FTAs, namely the ASEAN Free Trade Agreement (AFTA), ASEAN-China Free Trade Agreement (ACFTA), and Indonesia-Japan Economic Partnership Agreement (IJEPA).

However, the more integrated economy after 2015 has inevitably changed the Indonesian government’s approach, where for less than 5 years the Indonesian government has been intensively and aggressively negotiating and concluding 13 additional more of FTAs. In 2019 to 2020 alone, 19 trade agreements are in talks. The brief summary is as follows:

  1. 2019

On February 19th, 2019, Indonesia completed the ratification of the Comprehensive Economic Partnership Agreement Between the Government of the Republic of Indonesia and the Government of the Republic of Chile (IC-CEPA) through the Presidential Regulation No. 11 of 2019. IC-CEPA, which came into effect on August 10th, 2019, marks the first bilateral trade agreement between Indonesia and a Southern American country.

Within the ASEAN framework, Indonesia has ratified and implemented a trade pact with Hong Kong, China (AHKFTA) through Presidential Regulation Number 34 of 2020. AHKFTA that effectively entered into force as of June 11th, 2019, significantly reduces tariffs up to 85% between ASEAN members with Hong Kong.

  1. 2020

Despite the COVID-19 pandemic, the Indonesian government continues its effort to increase the trade flows. This is shown by the ratification of the Indonesia-Australia Comprehensive Economic Partnership (IA-CEPA) in March 2020 through Law No. 1 of 2020. Indeed, Indonesia and other countries agree that a more integrated trade is much needed to recover from the hard-hit COVID-19.

There are also at least two prominent FTAs scheduled to be concluded and ratified by the end of this year. The first one is the Indonesia-Korea Comprehensive Economic Partnership Agreement (IK-CEPA), which negotiation was completed in late 2019 and is scheduled to be signed later this year.

The most anticipated FTAs among all is the Regional Comprehensive Economic Partnership (RCEP) that is aimed to be signed by the end of 2020. The RCEP, currently reaching its final stage, is projected to be the world’s largest trade agreement.

  1. What is RCEP?

The mega-deal was initially proposed by the 10-member of ASEAN in 2012 that would bring together ASEAN’s major trading partners, namely Australia, China, Japan, South Korea, New Zealand, and India.[1] The RCEP is projected to be the world’s largest FTA accounting for half of the world’s population and a third of Global Domestic Product (GDP), which is about US$27 trillion. This is even larger than other regional trading blocs such as the European Union and the United States-Mexico-Canada Agreement (USMCA).

The RCEP consists of 20 chapters. It comprehensively covers an array of subjects in trade in goods, trade in services, investments, competition, rules of origin, economic and technical cooperation, e-commerce, intellectual property rights, small and medium enterprises, telecommunications, and dispute settlements, amongst others.

The RCEP is different with the World Trade Organization (WTO) rules. The RCEP balances a mix of ‘WTO-plus’ commitments to lower at-the-border trade barriers and ‘WTO-extra’ provisions to address behind-the-border regulatory issues.

  1. How the RCEP could affect the businesses?

Currently, ASEAN has multiple ‘plus-one’ trade agreements with each of its FTA partners. Therefore, by simplifying and consolidating the separate rules and procedures from each FTA into a set of common rules, the RCEP is aimed to provide comprehensive investment commitments and market access as well as to overcome the trade inefficiencies.

As the largest economy in ASEAN, Indonesia is expected to benefit from an increase in market access, investment, and chances to participate in regional supply chains. The most important highlights on how the RCEP will affect the businesses are discussed below.

  1. Tariffs & Non-Tariff

With the significantly lower tariffs and non-tariff barriers, the RCEP will improve market access for both goods and services, drawing foreign companies that are keen on entering a more integrated ASEAN. The notable change in the rules of origin will boost efficiency even further. The RCEP will create a common set of rules of origin for the entire bloc allowing companies to easily ship products between the RCEP members without the need to worry about specific rules of origin criteria in each country of each manufacturing step. This will significantly reduce the costs for companies with supply chains that spread throughout Asia. This will also prompt multinationals that export to the RCEP countries to establish supply chains across the bloc. This altogether will ultimately improve transparency in trade and investment and facilitate the greater inclusion of ASEAN’s Small and Medium-Sized Enterprises (SMEs) to global and regional supply chains.

  1. Investment

The RCEP will encourage both foreign and Indonesian investors to invest in all RCEP members as a result of a better investment climate within the region. The RCEP will specifically provide legal certainty for investors within the RCEP region. The RCEP will cover core investment protection, including regulation that requires a compensation payment when an investment is taken over, fair and equal treatment, and compensation for losses due to private litigations. The RCEP has not yet included a specific clause on Investor-State Dispute Settlement, which will be negotiated once the RCEP comes into effect.

  1. Government Procurement

The RCEP will facilitate improvement regulatory environment and business opportunities on all lines. The procurement chapter in the RCEP will increase transparency and cooperation in the area concerning the procurement of goods and services by the government. The RCEP will be Indonesia’s first agreement that includes the government procurement clause in a trade pact.

  1. Antitrust

The RCEP will have a specific chapter on business competition. The RCEP will oblige countries to maintain their antitrust laws, including the prohibition of any activities that encourage anti-competition. The RCEP aims to support and protect a healthy competition between businesses requiring countries to ensure independent enforcement of such regulations.

  1. E-Commerce

The RCEP will also have regulations regarding e-commerce that will drive businesses, including Indonesia, to take advantage of digital commerce in the RCEP region. The RCEP will promote digital commerce across borders by supporting the businesses to transfer data across borders as part of their business activities. However, restrictions will be put into place for data related to public interests, including requirements for localization data storage. A regulation that supports the digitalization of trade documents, the use of electronic signature, and the electronic authentication will help to facilitate trade across borders. The RCEP will protect the personal information of the consumers and online users.

As a broader projection, the RCEP has the potential to deliver meaningful opportunities for the members as the RCEP accounts for almost half of the world’s population (about 3.4 billion), a third of global domestic product (about US$27 trillion), total trade of US$10 trillion, and 26% of Foreign Direct Investment (FDI) flows.

  1. When is the RCEP’s Conclusion?

The ASEAN’s official website explains that the negotiation process was concluded in November 2019,[2] and by 2020, the legal scrubbing of the texts has been undergoing with all RCEP countries agree to commence the signing in 2020 in Vietnam.[3] On 20, 22, and 24 April 2020, all RCEP participating countries reaffirmed their commitment to sign the RCEP agreement in 2020 emphasizing the continuous discussion with India and the conclusion of RCEP is needed to provide a more stable and predictable economic environment to support the much-needed recover of trade and investment in the region that has been adversely affected by the COVID-19 pandemic.[4]

  1. What are the Challenges for Indonesia?

With the fast-approaching RCEP’s signing schedule, the Indonesian government also must anticipate challenges following the implementation of RCEP, especially concerning the necessary adjustment between the existing and the implementing regulations to provide a one synchronized and harmonized set of regulations. This specifically becomes a challenge to the Indonesian government that still struggles to adjust some of the current overlapping and contradicting regulations, whether those apply nationally or regionally. This inconsistency could raise a concern because legal certainty is critical for an investor in deciding where and how they are going to invest. Thus, a conclusion of RCEP, but without comprehensive and consistent regulations with the spirit of RCEP would reduce the full potential outcome of RCEP that Indonesia could receive.

If you have further inquiries about this newsletter, please reach out to us at info@wplaws.com or any of our lawyers.

 

[1] Although India has expressed its intention to pull out from RCEP, other negotiating countries, including Indonesia, are optimistic that India would rejoin the negotiation later.

[2] https://asean.org/rcep-leaders-agree-sign-trade-pact-2020/

[3] https://www.channelnewsasia.com/news/asia/rcep-negotiations-signing-expected-2020-12062560

[4] https://asean.org/joint-statement-29th-regional-comprehensive-economic-partnership-trade-negotiating-committee-rcep-tnc-meeting/