Australia must act now to secure economic ties with a rising Indonesia

Deputy Prime Minister Barnaby Joyce’s remarks during the recently concluded federal election campaign that suggested a link between asylum seekers and live exports was an unfortunate reminder of the diplomatic and political sensitivities that have long vexed Australia-Indonesia relations.

In defusing the issue, Australia’s two major party leaders, Malcolm Turnbull and Bill Shorten, both praised Indonesian President Joko Widodo and emphasised the need for greater Australia-Indonesia co-operation.

Much of this increased co-operation must begin by strengthening supply and value chains and investment ties between the two countries.

State of play

Negotiations for the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) were revived recently after a three-year hiatus.

Together with government-to-government negotiations, the proposed agreement’s main mechanism for business engagement, the Indonesia-Australia Business Partnership Group (IA-BPG), has also restarted consultations, including a recent session in Perth. This is a unique bilateral business forum to provide both governments with proposals for the agreement to drive a fundamental change in the economic relationship between the countries.

The resumption of negotiations presents the opportunity to bring the countries’ economies closer together to enhance trade and improve access to each other’s markets.

But the truly significant economic outcome the agreement could achieve would be to enhance Australian investment in Indonesia and, most importantly, encourage long-term Indonesian investment flows into Australia. This investment will ultimately be crucial to Australia’s ongoing economic prosperity.

To achieve that, Australia and Indonesia must start now to make mutual investment the hallmark of their economic relationship.

Beyond free-trade agreements

To achieve such investment we cannot simply adopt provisions of free-trade agreements that have gone before, however high quality they may be. As talks on the IA-CEPA resume, negotiators should not simply pick up where they left off three years ago.

The strategic and economic ground has shifted over that time. There are new, fast-developing trade and investment links centred on the Indo-Pacific.

In Asia, trade in services is growing faster than trade in goods. Goods and services are being traded within single, complex products. Global supply and value chains, where value is added to goods and services at multiple locations before being delivered to customers, make up the newest, fastest-growing mode of trade and investment.

The trade landscape in the Indo-Pacific is a complex web of old and new trade agreements and economic groupings: the Regional Comprehensive Economic Partnership (RCEP), the Trans-Pacific Partnership (TPP), the ASEAN Economic Community (AEC), Australia’s free-trade agreements with Japan, South Korea and China, and APEC.

Some, like the TPP and AEC, are known for their broad scope and for tackling difficult issues in agriculture and human movement.

Other agreements have focused principally on the old trade agenda – lowering or abolishing tariffs and tackling non-tariff barriers to trade in goods and services. And others have such broad membership that it is uncertain what real outcomes will be achieved.

By the mid-point of this century, Indonesia will be the fourth-largest economy in the world after the US, China and India. Australia’s North Asian partners are already active in Indonesia, laying the groundwork for future Indonesian investment flow to North Asia.

Australia must start the job of ensuring Indonesian investment also flows south. A modest investment by Indonesia now, from Australia’s perspective, opens up the opportunity for collaboration in a whole range of areas – not just for one-off projects but for decades to come.

IA-CEPA therefore needs to address the building of transborder industries, supply and value chains to other markets, co-operation in energy, natural resources and infrastructure, working together on skills formation and capability-building, transferring knowledge and technology, and enabling movement of students, professionals and tourists between our countries.

This is a major task for Australia. The agreement’s scope and depth should focus on how we can turn the Indonesia relationship into a substantial investment opportunity for prosperity into the future.