On January 9, 2021, Global Affairs Canada released a public consultation for a possible free-trade agreement (FTA) with Indonesia in the form of a comprehensive economic partnership agreement (CEPA). The Canada-Indonesia CEPA is Canada’s third attempt to engage directly in an FTA with the region. The two previous attempts include a bilateral FTA negotiation with Singapore and an ASEAN-Canada FTA feasibility discussion.

Canada has yet to successfully put a bilateral FTA in place with the Association of South-East Asian Nations (ASEAN) as a region or with any of its 10 individual member states[1]. The bilateral FTA negotiations with Singapore had been paused since November 2009, after 8 years of negotiations. Canada had also been in discussion with ASEAN for a regional FTA since August 2016.  As of 3rd March 2021, no formal negotiations have been launched despite the completion of a Joint Feasibility Study in 2019 that recommended the formation of the Canada-ASEAN FTA.

One of the biggest challenges facing Canada in forming an FTA with ASEAN as a region, or bilaterally with individual ASEAN member states, is the gap in FTA priorities and ambitions. Canada, as a developed economy, has pushed for ambitious progressive comprehensive agreements that extend beyond trade and investment. While ASEAN, whose member states are developing and least-developed countries, is focused on increasing goods exports performance and attracting foreign direct investments (FDI).

Source: https://www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/asean-anase/joint_feasibility-faisabilite_conjointe.aspx?lang=eng

Indonesia’s FTAs in general are also mostly focused on trade in goods with relatively low levels of ambition and liberalization in other areas.  Since 2018, Indonesia has concluded or negotiated a Comprehensive Economic Partnership Agreement with Chile (trade-in-goods only), the European Free Trade Association (EFTA), South Korea, the European Union (EU), and Australia. The comprehensiveness of these FTAs is not as high nor as extensive when compared to Canada’s recently concluded comprehensive FTAs, such as the Comprehensive Economic and Trade Agreement (CETA) with the European Union and the Canada-United States-Mexico Agreement (CUSMA).

WHY INDONESIA?

Indonesia is the largest economy in South-East Asia with a gross domestic product (GDP) of USD 1 billion contributing to a third of the region’s GDP. Indonesia is also the 16th largest economy in the world. With half of its current 270.6 million population under 30, Indonesia is expected to reap its demographic dividend between 2030-2050 when more than half of its population will be in the working-age group. Indonesia is forecasted to be the 7th largest economy by 2030 and the 4th by 2050 after China, India, and the United States.

Indonesia presents a massive and growing market for exports as well as investment opportunities in all sectors from agriculture, mineral, steel to high-end technology such as aviation industries – potential opportunities yet to be recognized by many Canadian producers and exporters.

Canada-Indonesia Trade and Investment Flows

Indonesia is already Canada’s largest export destination and the second-largest FDI destination in the region. Canada has enjoyed a trade surplus with Indonesia since 2008, driven by the increase in consumption and production in the Indonesian economy, which has consistently grown at a rate above 5% following its recovery from the 1997 Asian Financial Crisis.

In 2019, Canada exported USD 1.45 billion of goods and imported USD 1.37 billion from Indonesia. However, Canada’s goods exports to Indonesia only accounted for 1.1% of Indonesia’s total imports from the world and 0.3% of Canada’s total goods exports to the world. On the other hand, Canada’s goods import from Indonesia also only represented 0.2% of total Canadian goods import and 0.7% of Indonesia’s goods exports.

Indonesia is the second-largest destination of Canada’s FDI in ASEAN. In 2019, Canadian FDI stock in Indonesia reached CAD 3.8 billion, or about 0.3% of total Canadian FDI stock in the world. Canada is the 20th largest investor in Indonesia with an investment realization of USD 171 million in 2018 as recorded by the Indonesian Investment Agency BKPM.

Untapped Export Potential

In the past decade, Indonesia has been the 2nd largest global importer of wheat and the largest export destination of Canadian wheat. In 2019, Indonesia was also the 5th largest importer of potash fertilizers in the world and the 5th largest export destination of Canadian potash.

The composition of Canadian goods exports to Indonesia is limited compared to Indonesia’s goods export to Canada. Overall, agricultural products such as wheat and other agri-food products account for almost half of Canadian goods export to Indonesia. While fertilizers and wood pulp accounts for another third of Canadian goods export to Indonesia in the past decade.

Despite being top exporters of beef and dairy, Canada owns a very limited share in Indonesia’s beef import market.  In 2019, Canadian beef imports to Indonesia was USD 231,000, or less than 0.04% of Indonesia’s total beef imports that reached USD 700 million. Canada’s dairy import to Indonesia was USD 7 million in 2019, accounting for 0.8% of Indonesia’s USD 1.1 billion dairy imports in the same year. Australia, India, and the United States are the main importers of beef and dairy to Indonesia. The beef and dairy sectors present just a few of yet untapped opportunities for Canadian producers in the Indonesian market.

One of the biggest challenges facing Canada in forming an FTA with ASEAN as a region, or bilaterally with individual ASEAN member states, is the gap in FTA priorities and ambitions.

Ample Investment Opportunities

Currently, 90% of Canadian direct investment in Indonesia was made in the mining sector, particularly nickel mining in Sulawesi. Husky Energy’s operation in Indonesia has been established for more than 30 years. Other Canadian companies that have had a firm footing in the Indonesian market are the insurance and investment giants Manulife and SunLife, having been operating in Indonesia since 1985 and 1995 respectively. In the last decade, Canada’s Circle K has also expanded its minimarts presence in Indonesia.

There are still many untapped opportunities for investment in Indonesia as it ramps up its infrastructure projects under President Joko Widodo and a recent introduction of an omnibus law that is intended to improve the business and investment environment in Indonesia.

Growing Geopolitical Power

Besides vast investment and trade opportunities, Indonesia is also gaining a stronger global geopolitical position. In 2019-2020, Indonesia sat for the 4th time as a non-permanent member of the United Nations (UN) Security Council. As of December 31, 2020, Indonesia is the largest UN peacekeeping troop contributor among the 15 Security Council members, with a total of 2827 personnel.

Indonesia is an important strategic partner economically and politically for Canada. A comprehensive FTA will not only allow Canada to diversify and expand its market but also works as a policy tool that strengthens Canada’s diplomatic relationship with Indonesia.

THIRD TIME’S A CHARM?

An FTA is an appropriate policy instrument that enables both countries to strengthen the limited bilateral trade and investment relationships between Canada and Indonesia. However, the most important question remains whether Canada will be able to actually conclude a deep comprehensive FTA, or any FTA with Indonesia, considering its past performance with ASEAN.

As stated in Canada’s Minister of Trade’s mandate, Canada continues to pursue deep progressive comprehensive FTAs that include chapters beyond trade and investment. Chapters such as gender, intellectual property, labour rights, and environmental protection are important to Canadians but are areas yet to be regulated or have become legislative priorities in many developing countries, including Indonesia.

It is important to take into account Indonesia’s general sensitivity towards threats to sovereignty with its long history of European colonialism. This sensitivity includes any foreign acts that can be perceived as limiting Indonesia’s ability to self-govern.

In order to protect Canadians interests while being mindful of what FTA is politically feasible for Indonesia, Canada should take the role as a facilitator rather than the demander in this FTA initiative. Economic and technical co-operation such as trade facilitation programs is highly sought-after by ASEAN member states including Indonesia.

Overall, a creative yet ambitious approach with great flexibility is required to reflect Canada’s determination in bringing this FTA initiative to successful completion. Australia, which is a close counterpart of Canada, sets a perfect example as it has successfully put in-force both bilateral FTAs with Indonesia[2] and ASEAN[3].

 

Fanny Siauw-Soegiarto is a research economist and a PhD Candidate in International Economics Policy with the Norman Paterson School of International Affairs. Her research focuses on international trade and free-trade agreements and her dissertation examines the expansion of Indonesia’s FTA strategy.

Banner image by Afif Kusuma, courtesy of Unsplash. 

Footnotes 

[1] CPTPP is the only FTA where Canada is also a member with four other ASEAN member-states which include Singapore, Malaysia, Vietnam, and Brunei. CPTPP has yet to be ratified by Malaysia and Brunei despite the signing back in 2018.

[2] Indonesia-Australia Comprehensive Economic Partnership Agreement (CEPA) was signed in March 2019 and put into force in July 2020.

[3]ASEAN-Australia-New Zealand FTA was put in-force in 2010 and amended in 2015 and 2019.

 

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