The ill-advised rush for Australia to strike a trade deal with Indonesia

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Fields ploughed for planting sugarcane in Queensland, Australia (Photo: DeAgostini/Getty Images)

Negotiations for the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) entered extra time this week, as negotiators agreed to add an 11th round (the 7th since leaders reactivated the initiative in March 2016) after negotiations in November failed to produce a final deal.

There are reportedly still differences on goods, services, and investment. Presumably, agreement has been reached on so-called 'economic cooperation', touted as new frameworks for cooperative implementation, technical assistance and future dialogue on bilateral economic relations.

Indonesian Investment Coordinating Board Chairman Tom Lembong, the cabinet member responsible for the bilateral relationship, told a Melbourne audience last weekend that Australia should prioritise a quick deal. As The Weekend Australian reported, Lembong said:

When we sign the trade agreement with Australia, it will be the first trade agreement Indonesia has signed with anybody in almost one decade. We're a bit rusty, we're a bit out of practice in negotiating such agreements so I think that's one limiting factor…I would say it's better to get it done now, get it done quickly, and leave room for us to upgrade it in three to five years.

These comments echo those of Indonesian lead negotiator Deddy Saleh, who urged Australia to lower its sights from a 'high quality' agreement to one that was 'good quality'. As reported by Fairfax Media, Saleh sought to downplay expectations about the agreement's reach and seemingly expressed scepticism about how a 'high quality' agreement would benefit Indonesia:

A 'high quality' agreement suggests opening the markets fully … I'm saying the agreement must be mutually beneficial. So that is where the negotiation lies right now. We are negotiating the 'good' (versus) the 'high' quality agreement.

Such comments should prompt a pause, especially as Australian leaders have insisted throughout 2017 that the deal would be completed this year.

Free trade agreements (FTAs) frequently consume years of negotiation, especially when they don't build off existing frameworks. The Australia-Peru FTA, for example, was in part concluded so rapidly because it extended the existing negotiations through the Trans-Pacific Partnership (TPP) as a basis for further bilateral liberalisation. IA-CEPA, in contrast, envisions a slate of novel elements; it is therefore reasonable that more time would be required.

Another factor – witness Chairman Lembong's observation about 'rustiness' – is Indonesia's lack of FTA negotiations over the past decade. But beyond rustiness, the reality is that free trade does not yet have a strong domestic constituency in Indonesia. Exports are dominated by crude palm oil, coal, liquified natural gas, mineral ores, and rubber; commodities that are freely traded the world over. Indonesia strenuously protects its domestic market, and there are regular World Trade Organisation (WTO) dispute settlement filings against these efforts. Indonesia gives as good as it gets, proving increasingly officious in its filing of WTO complaints against what it perceives as other countries' unfair trading practices. Even during IA-CEPA negotiations, the parties concurrently filed WTO complaints against each other. 

Recent events are also not the first indications that progress might be proving difficult. In February this year, Prime Minister Malcolm Turnbull and President Joko Widodo stood together in Sydney and announced some relatively anodyne concessions: reduced tariffs on Australian raw sugar; administrative changes to the live export trade; and the removal of barrier to Australian imports of Indonesian pesticides. At the time, I wrote the practical importance of the deals hardly matched the fanfare of the leaders' announcement.

In September, trade ministers Steven Ciobo and Enggartiasto Lukita called a press conference in Jakarta to buoyantly inform journalists of new trade deals on sugar, cattle, and pesticides. Somewhat incredibly, these were essentially the same items the leaders announced in February. That it took seven months to draw up the rules makes one wonder if they were hastily thrown together at the end of a visit otherwise devoid of concrete economic progress.

This prompts a last point, which is the ill-advised nature of the government's commitment to deliver a deal by the end of 2017. The leaders and trade ministers have repeatedly affirmed commitment to what is an otherwise arbitrary deadline (including in a joint statement after the February leaders' meeting). Turnbull has framed IA-CEPA as a testament to a relationship that is now (unlike with previous occupants of the office, wink, wink) getting better and better. As he said in February:

But we have got such a strong relationship. It's a very strong friendship and it gets stronger all the time. We're working towards the Comprehensive Economic Partnership and great progress there. We're increasing our trading links and investment, so there's a lot to discuss. At every level the Australia-Indonesian relationship gets stronger and stronger.

Widodo never speaks in such a fashion. Unfortunately, the government has painted itself into a corner here; it will be undeniably awkward if IA-CEPA is too hard and must be rolled into next year.

The comments from Lembong and Saleh must not be separated from this issue; Australia must regard them squarely in the context of what is an ongoing negotiation. In fact, the comments might well be calibrated to exert further pressure on the Australian position.

It is impossible, of course, to evaluate the terms currently on offer. Similarly, we do not know how close (or far) negotiators are from an acceptable deal. Considering reports following the 10th round, there appear to be many items still to be worked out. If so, it would be foolhardy for the government to wager on the vague promise of a future 'upgrade' just to meet what is an essentially political deadline.

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