Nationalism as a Hindrance to Indonesia-Australia Economic

Cooperation

I. Gede Wahyu Wicaksana

Department of International Relations, Faculty of Social and Political Sciences, Universitas Airlangga

Keyword: Indonesia, Australia, economic relations, nationalism, interests, sovereignty.

Abstract: Recent advances in economic relations between Indonesia and Australia have not been impressive. Despite

the fact that the Indonesian and Australian governments promote multilateral and bilateral free trade

agreements to facilitate information exchange, coordination of developmental policies, and to further regional

market integration, structural impediments in the form of nationalistic trade and investment regimes remain

in place to limit Australian businesses operating in Indonesia. This article examines how the nationalist roots

of Indonesia’s international relations, and recent developments in domestic and bilateral contexts, have

hindered the essential components of ongoing economic collaboration with Australia. The argument is that

since economic nationalism has been an inseparable element of Indonesia’s foreign policy, it has conditioned

the Indonesian government to take inward-looking position on external economic relations. Nationalist

sentiment has gained traction because local elite political economic interests dominate the state’s rulemaking.

Protectionism leads to contradictions and disruptions within Indonesia-Australia economic cooperation,

particularly with the FTA implementation.

1 INTRODUCTION

Recent advances in economic relations between

Indonesia and Australia have not been impressive.

Statistics of bilateral trade and investment illustrate

that Australia is not ranked as one of Indonesia’s

major partners. Total trade volume between 2012 and

2016 indicates an annual decrease of 4.63 per cent

(Indonesian Ministry of Trade 2017), whilst

Indonesia is not among Australia’s 10

largest trading

partners, and its position is even below that of New

Zealand and Malaysia (Australian Department of

Foreign Affairs and Trade 2017). Australia’s

investments in Indonesia lag behind those of China,

the United States, Japan, and Singapore, with the

number of Australian companies operating in

Indonesia decreasing from 250 in 2012 to less than

200 in 2016 (Coordinating Agency for Investment

2017). This is despite the fact of Indonesia and

Australia’s proximity to each other, which could

potentially reduce transportation costs, and the

relative complementarity of both countries’ natural

resources, as well as Indonesia’s dynamic population

and the potential of its growing middle-class markets

for export of Australian products.

The Indonesian and Australian governments are

trying to expand various initiatives in a free trade

agreement (FTA) in order to eliminate barriers and

strengthen economic cooperation. The ASEAN-

Australia-New Zealand Free Trade Agreement

(AANZFTA) was established in 2009, aimed to

facilitate information exchange, coordination of

developmental policies, and further regional market

integration among Australia, New Zealand, and the

ten ASEAN member states. It was followed by the

commencement of negotiation rounds for Indonesia-

Australia Comprehensive Economic Partnership

Agreement (IA-CEPA) in 2012, in which the two

sides expected to accelerate bilateral achievements in

line with the multilateral arrangements established by

AANZFTA. However, the outcome of the

liberalization processes has not been balanced.

Australia shows more significant progress in opening

its economy to Indonesian exporters and investors.

On the other hand, structural impediments in the form

of nationalistic trade and investment regimes remain

in place to limit Australian businesses operating in

Indonesia (Gleason and Springer 2014, 113-116).

124

Wicaksana, I.

Nationalism as a Hindrance to Indonesia-Australia Economic Cooperation.

DOI: 10.5220/0010274100002309

In Proceedings of Airlangga Conference on International Relations (ACIR 2018) - Politics, Economy, and Security in Changing Indo-Paciﬁc Region, pages 124-129

ISBN: 978-989-758-493-0

2 HAMPERED BILATERAL

ECONOMIC COOPERATION

Indonesia and Australia are trying to improve their

economic cooperation through the multilateral

framework of AANZFTA and the bilateral level

approach of IA-CEPA. In many respects, however,

Indonesia is sending contradictory messages to the

spirit of liberalisation conceived in these free trade

arrangements. In spite of realising tariff reduction

programs, nontariff measures are retained to confine

the flow of exports and imports. Regulation on

investment is unwillingly adjusted to the global

market demands. It is evident in the proliferation of

conflicting national rules and procedures and the

intergovernmental regulations governing foreign

direct investments in the country. By and large,

economic partnership between Indonesia and

Australia is hampered by the former’s continuing

desire to protect itself.

3 CONTRADICTIONS WITHIN

THE FTAs

AANZFTA is not Indonesia’s first economic

regionalism scheme, although it may be one which is

most comprehensive regarding the scope of sectors

being covered. The application of AANZFTA in

Indonesia started in January 2012, meanwhile

Australia had applied it two years before (Kontan

2012). In general, the ASEAN participants agreed to

eliminate tariffs on 85 per cent to 100 per cent of

products imported from Australia by 2025.

Indonesia’s commitment is 93 per cent by 2020.

Australia has reciprocated with a more optimistic

outcome that is it was able to reduce tariffs on 96 per

cent to 100 per cent on ASEAN imported products

after 2015 (ASEAN Secretariat 2009a). The standard

agreements of the World Trade Organization (WTO)

on deletion of tariff measures are referred to by

AANZFTA (Australian Department of Foreign

Affairs and Trade 2009). It is perhaps intended to

avert potential increases in reciprocal tariffs beyond

the negotiated terms.

In attempts to smooth regional circulation of

goods, AANZFTA has approved the implementation

of flexible rules of origin. Essentially, there is no

prohibition on member countries trading products

listed in AANZFTA for which the material

ingredients are supplied by non-member producers

(ASEAN Secretariat 2009b). Nevertheless, Indonesia

is not enthusiastic about this system. It employs the

more domestic oriented policies to bolster local

industrial linkages. The government encourages and

facilitates a particular domestic sector to use input

from another domestic sector, or output from a

domestic sector is used to add more value to another

domestic sector. When linkages are formed and

further enhanced, domestic economic sectors can reap

benefits from the increased value of the product

(Patunru and Rahardja 2015, 6). This policy vision

and action are clearly stated in the document of

Masterplan Percepatan dan Perluasan Pemangunan

Ekonomi Indonesia (Master Plan for Acceleration and

Expansion of Indonesian Economic

Development/MP3EI) promulgated by the

Yudhoyono government. MP3EI projects which were

begun in 2011 preceding Indonesia’s AANZFTA

commencement are quite nationalistic in nature.

Jokowi sustains the nationalism of MP3EI. He

indeed directs domestic industrialisation in ways

which conform to greater intent to foster internal

connections. It can be found in Jokowi’s middle range

national development planning for 2015-19. Jokowi’s

economic trajectory is certainly in contrast to the core

thinking of liberal economics, to which trade

interdependence among states should be advanced to

create common prosperity. The nationalist leadership

expects that intensified local linkages can bring about

efficiency, stable prices, and even economic growth

throughout the Indonesian archipelago. This has been

translated into the national maritime connectivity

development called tol laut. The essence of the tol

laut development is building robust and modern water

transportation as well as logistic systems serving

major port cities and the surrounding islands to speed

up goods and services inflows from industrial sites in

Java to isolated areas throughout the country. It looks

like a complex web of local interisland connections

which is centralised in several points. As a

consequence, international trade cannot past through

any sea routes within the tol laut. It is gradually

concentrated to go through gates in five major port

cities. For example, imports from Australia and the

Pacific region can only enter Indonesia from one

point that is harbour built in Sorong Papua. Clearly,

the tol laut development is being undertaken without

considering the wider regional economic integration

agendas, including AANZFTA.

Decentralised governance poses another

challenge to AANZFTA’s preferences. The problems

are derived from conflicting legal products and

interests between Jakarta and the local governments.

The central government is authorized to make laws

on international trade agreements, and apply them

across the country. However, under the

Nationalism as a Hindrance to Indonesia-Australia Economic Cooperation

125

decentralization regime the local governments can

make and implement their own regulations to control

trade of goods within local jurisdictions. There are

provinces, for instance Central Java, East Java, and

Bali, which impose more permit requirements, taxes,

and cross-bureaucracy procedures to export and

import activities. The treatment is stricter to

foreigners owned business.

Beside this, significant issues also challenge

AANZFTA’s dialogue process on trade in services.

Three central areas are being discussed without

satisfactory conclusions. The first issue is related to

the level of market openness for essential service

sectors, such as education, finance, infrastructure,

mining logistics, and telecommunications. Indeed,

among ASEAN members, Indonesia is the most

recalcitrant trade partner due to its largest non-tariff

measures. Up to 2015, there have been 199 nontariff

measures issued by 14 different government agencies

regulating 6,466 products (Munadi 2016, 67), which

potentially affect all its trading partners within

AANZFTA. The other two areas are associated with

investment services and protection of foreign

ownership. Likewise in RCEP disagreements revolve

around ISDS rights of foreign companies to bring

lawsuits against the host countries. Indonesia has

consistently opposed the legalization of such rights,

arguing that the state’s territorial rights, especially

domestic law establishment, must be enforced on

foreign business entities. It portrays Jokowi’s

inconsistent investment policies, at international

forum inviting investments but at home trying to

restrict them. In his presidential campaign Jokowi had

emphasised the need to impose the state’s laws on

foreign economic activities (Kompas.com 2014). The

trend so far has indicated that foreign investors prefer

to file lawsuits through the international adjudication

mechanisms. In the international arbitration tribunals,

it has been noted that there are no fewer than 50 cases

involving ASEAN states and their Asia Pacific

partners, and which amount to US$ 31 billion (Das

2017, 4).

In bilateral forums, the Indonesian delegates to

trade negotiations with Australia have committed to

work together in parallel to AANZFTA to gradually

remove tariffs on Australian imported goods from 78

per cent to 92 per cent in 2015, to 94 per cent in 2025.

These deregulation packages would allow Australia’s

main agricultural commodities, except for wine,

sugar, and live cattle, to gain wider markets in

Indonesia. For Australia’s pharmaceuticals,

manufacturing, and minerals tariffs will be organised

so that they do not exceed limits permitted by the

WTO (Australian Department of Foreign Affairs and

Trade 2012). Alongside the tendency within

AANZFTA, service sectors are not yet open widely.

For example, permits for foreign institutions to invest

in the education sector have been very limited.

Proposals for revision to this regulation were objected

to by the Yudhoyono government on account of

protection against commercialisation (Kontan 2013).

Equity limitation is applied to foreign construction

firms which undertake government and private

projects (Okezone.com 2014). There are strict rules on

foreign lawyers who can work in Indonesia

(Hukumonline.com 2014). Others are entailed in the

lists of negative investments issued between 2013 and

2014.

In dealing with these problems, IC-CEPA was

initiated with the primary objective of discovering

alternatives to speed up changes in policies and

governmental structures considered to be impeding

progress. Indonesia and Australia have arrived at the

assumption that bilateral talks can be more efficient

in achieving common goals. Nevertheless, there is a

different view between Jakarta and Canberra about

IA-CEPA. The former believes IA-CEPA should be

consulted with reference to the conduct of other

ASEAN-driven economic cooperation. This position

is also visible in Indonesia’s free trade scheme with

Japan, South Korea, and Pakistan. ASEAN’s

economic institutionalisation is used to ground the

extended bilateral free trade dialogue. Of course, it is

more comfortable for Jakarta to rely on ASEAN’s

framework of interstate interactions which guarantee

no political intervention in its internal affairs. Against

the Indonesian stance, Australia wishes that IA-

CEPA could be promoted like the model of

Australia’s free trade agreements with Singapore and

Thailand in which there have been existing equal

state-to-state commitments made to proceed with

trade liberalisation on both sides, directed at the same

pace. Such a difference in the ways Indonesia and

Australia project their respective interests made IA-

CEPA discussions less productive and they were

suspended in 2013. The Jokowi government resumed

IA-CEPA meetings in 2016, yet the erstwhile

contending positions have remained to hinder their

progress.

4 THE POLITICS OF FREE

TRADE INITIATIVES

Economic nationalism plays an influential role in

conditioning the Indonesian government to take

protective actions within AANZFTA and IA-CEPA,

ACIR 2018 - Airlangga Conference on International Relations

126

thus affecting the ongoing Indonesia-Australia

economic cooperation. Firstly, the fact that Australia

is not Indonesia’s favourite trading and investment

partner means that Australia cannot leverage

economic diplomacy to set imperatives for Indonesia

to follow in the free trade regulatory bodies wholly

and completely. He (2008) argued that Indonesia’s

external actions during the Reform era have been

constructed by the mixture of political legitimacy and

international pressure. Yudhoyono and Jokowi had no

problems with their respective political legitimacy

because they were directly elected by the majority

voters in democratic presidential elections. Hence,

the consecutive leaderships which are established are

able to anticipate possible political costs which may

be caused by policies denoting rejections of full scale

liberalisation. In addition, the public in general have

usually supported the government’s protectionist

decisions. Subsequently, AANZFTA and IA-CEPA

only create various processes of mutual

understandings about the need for liberal trade

mechanisms, yet offer little real achievement in

respect to common interests.

Secondly, high tariffs on Australia’s agricultural

exports and non-tariff regulations issued to restrict

Australia’s services can be linked to the politics of

domestic actors, especially the oligarchs, whose

interests have been disadvantaged by the free trade

arrangements in question. In the post-Suharto

unconsolidated democracy, the messages of

protection of people’s interests and the safeguarding

of national sovereignty are easily hijacked by the

oligarchic elites to serve their rent-seeking objectives.

The extension of this political culture to foreign

relations is observable in the state’s behaviour within

regional and bilateral institutions which are

developed with unbalanced contributions in

economic affairs. Drawing on Keohane’s variance of

intergovernmental cooperation and state power

relations (1989), the free trade agreement between

Indonesia and Australia exemplifies the case of low

degree of compliance and high transactional costs.

The reason behind the negotiation is determined by

the dominant political economic players.

Thirdly, the nationalistic features of Jakarta’s

international affairs connect functional and technical

matters with those which are actually the domain of

high politics. Likewise other multilateral

commitments made by Indonesia, which also

encompass Australia, such as ASEAN Regional

Forum (ARF), ASEAN RCEP, and Asia Pacific

Economic Cooperation (APEC), the viability and

feasibility of AANZFTA will be much dependent on

Jakarta’s perception about noneconomic issues, such

as defence and security, in state-to-state interactions.

Laksmana (2017) notices that the 1999 East Timor

crisis and the 2006 Lombok Treaty prove the

importance of Jakarta’s and Canberra’s strategic

assessment on the dynamic developments of wide-

ranging Indonesia-Australia relations. In this context,

the nationalists in Jakarta, both executive and

legislative, still view Australia as an untrusted

partner. Consequently, although not every single

economic initiative from Australia is rebuffed for

historical politico-security reasons, Jakarta always

carefully calculates the impact on national security.

Jakarta prudently witnessed Canberra’s changing

foreign policy approach from favouring Paul

Keating’s multilateralism to adhering to a new type

of bilateralism of preferential trade agreements under

John Howard. This change was not entirely related to

the Howard government’s self-endorsed preference

for relations with Australia’s Asian neighbours, but

the contagious effects of the Asian financial crisis

which was unresolved by the two major regional

institutions of the East Asia, APEC and ASEAN,

which pushed Australia to find a different way to

conduct its immediate external relations.

Washington’s success, which was acquiesced by

Canberra, to promote IMF as opposed to APEC as the

crisis funding helper body for Indonesia, South

Korea, and Thailand at a time American-Australian

links were strengthening alerted Southeast Asians

about the cross-regional powers’ interests outside the

existing economic multilateral institutions. Indonesia

and others crisis affected states fully understood

about Australian regional ambition following the ill

consequences of the IMF’s controlled liberalisation

programs. Howard’s confidence of bilateralism

heightened in the Australian-led INTERFET mission

in East Timor (Lee 2015, 152-53). Jakarta was upset,

and ties with Canberra touched the lowest ebb since

Australia stood by the establishment of Malaysia in

early the 1960s.

Holding distrustful views about Australian

intentions towards its neighbouring Asians, Indonesia

and Malaysia rejected the initiative proposed by the

Howard government to relate ASEAN free trade

(AFTA) and Australia-New Zealand Closer

Economic and Trade Agreement (CER), although

Canberra had contributed to providing economic

rehabilitation assistance in the IMF’s reform

packages. Yet, Australia moved forward with

bilateral free trade talks with other ASEAN countries,

and made good impressions on Singapore and

Thailand, which had initially been appealed to (Lee

2015, 153-54). These evolving events can explain

why Indonesia did not warmly welcome the later

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127

proposal for AANZFTA. Jakarta’s lack of interests in

Australia’s regional proposal persisted when Kevin

Rudd’s idea for an Asia Pacific Community was

launched in 2008 (Morini 2010). Diplomatic clashes

caused by Australian navy intrusions into Indonesia’s

territorial waters for turning back illegal migrants

again disrupted dialogue for economic cooperation.

The IA-CEPA rounds were put on hold.

Jokowi is trying to repair fractures in the

relationship with Australia. On his visit to Australia

in February 2017, the president emphasised the

importance of economic cooperation between the two

countries. IA-CEPA discussions should be completed

by end of the year. However, two issues remain to act

as obstacles to free trade advancement. The first issue

is related to Indonesia’s resource exploitation by

Australian companies still threatens the prospects for

a more open investment atmosphere. The second

issue is the unfinished perception gap between elites

that Indonesia and Australia have divergent economic

and security priorities, for example development in

the South China Sea. Australia’s main concern is its

shipping, and therefore a bilateral solution with China

must be made. Whilst, Indonesia focuses more on its

economic sovereignty over Natuna, and regards the

multilateral framework of the South China Sea code

of conduct as the best option to stabilize the seas

(Suryadinata and Izzuddin 2017). The influence of

such mismatched expectations on how Jakarta and

Canberra deal with bilateral economic cooperation

cannot be underestimated.

5 CONCLUSION

This study concludes that economic nationalism is an

important factor in the current Indonesia-Australia

cooperation in trade and investment. The impact on

economic cooperation with Australia is explainable

through this nationalist feature. Agreements on tariff

elimination are successfully achieved. However,

nontariff measures are mushrooming, and

consequently impede the inflow of trade and

investment with Australia. The nationalist

inconsistency characterises Indonesia’s engagement

in AANZFTA and IA-CEPA, allowing them to

proceed, but with little real effect. In addition, the

evolving politics of free trade, which is affected by

Indonesia’s negative perception about Australia’s

regional roles, remains to act as a hindrance to the

advancement of Indonesia-Australia economic

cooperation.

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