How US, Indonesia can both win from strengthening ties

The penultimate stop on US Vice President Mike Pence’s tour to Asia was to Indonesia, a strategic move that should send positive signs about the Trump administration’s engagement to trade in the region.

The largest country in Southeast Asia, Indonesia is important to the US as it is a vibrant democracy with a young and productive population and strong growth potential. It also has the world’s largest Muslim population and is known to practice religious tolerance.

The US is obviously important to Indonesia because it is still a major power and the largest destination for its exports, as well as an important source of investment and technology.

At the end of the visit, Pence and Indonesian President Joko Widodo announced that both sides intend to increase trade and investment, though more work is need to ensure “win-win” solutions.

This is consistent of course with the US administration’s priority on win-win bilateral deals.

We got a hint of what the US means by win-win from Pence’s speech at a business forum in Indonesia.

Amid the signing of business deals amounting to $10 billion, Pence reiterated that the US remains committed to Asia and that President Donald Trump’s “America First” policy will benefit the world just like the “rising tide will lift all boats”.

He also said the US would do more to increase fair and open trade in a win-win way by removing barriers to trade. However, he also emphasized that US companies face many barriers and difficulties in the Indonesian market, including intellectual property, the lack of transparency and requirements in manufacturing to include local content to be able to sell products in the Indonesian market.

Furthermore, he said while he appreciated the reforms Indonesia has done to date, more needs to be done.

None of these points are surprising.

At the end of March, on a list of 16 countries with trade deficits with the US, India ranked 13, with $13.2 billion or 1.8% of the total deficit (compared with China which contributes 47%).

The National Trade Estimate Report on foreign trade barriers released around the same time specifically mentioned restrictions on agriculture imports and licensing and local content in mobile technology.

Indonesia also remains on the priority watch list of the United States Trade Representative Special 301 report, which monitors the global state of intellectual property rights (IPR) protection and enforcement.

What is important to Indonesia is that a win-win strategic partnership is one which not only focuses on the issues and problems, but can build on the high complementarity between the US and Indonesia to realize opportunities to grow trade, investment, business to business and people-to-people links.

The elements of such a strategy would include the following:

First, the analysis of the trade deficit should go beyond the short-term ups and downs due to effect of business cycles and look at the opportunities to grow trade between the two countries, as both countries are on track for robust recovery.

Indonesia’s recovery as commodity prices improve and the prioritization of infrastructure will mean increased investments and import demand for capital goods, as well as Boeing jets, to meet transportation needs.

The US has a growing trade surplus with Indonesia on services, especially financial services, telecommunications and computer and information services. This is a growth area as Indonesia is just starting the process of entering into the digital economy and robust creative industries. These are the areas the US has strong comparative advantage.

Second, in resolving disputes and policies deemed as unfair and leveling the playing field, it is best to optimize existing rules for dispute resolution, such as dispute settlement procedures under the World Trade Organization (WTO). This can be supplemented by strengthening bilateral mechanisms of dialogue, increasing understanding of issues and finding win-win resolutions.

Third, we should be strategic partners in common platforms where there is a convergence on issues of concern, such as ensuring fair, open and rules-based trade and investment flows between countries globally and regionally. Having an external market based on openness has been and will continue to be key to Indonesia’s development and lifting millions out of poverty.

Finally, we should recognize that the current US focus is not on the multilateral trade or mega-regional trade agreements, but on bilateral trade agreements.

Indonesia must approach this in a strategic way, given that in studying the case for joining the Trans-Pacific Partnership (TPP) it was found that, on many new issues, Indonesia would have to change many laws and institutions. Presumably a bilateral trade agreement with the US would involve similar elements.

The areas of difficulties that Indonesia will face could actually lead to areas for win-win cooperation.

More study is needed as Indonesia works toward strengthening its bilateral relations and overcoming issues.

Whether or not it leads to a bilateral agreement with the US, it would do a lot to enhance understanding, identify the gaps between the actual situation in Indonesia and what is desired by the US, and in turn identify areas for further cooperation and capacity building.

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