Exploring Indonesia’s free trade agreements

For businesses in Indonesia looking to expand their horizons and tap into global markets, free trade agreements (FTAs) offer a valuable pathway to success.

But what exactly is an FTA?

Essentially, it's an agreement between two or more countries to reduce or remove trade barriers, such as tariffs and quotas. For Indonesian businesses, FTAs offer numerous advantages, including reduced tariffs, leading to lower costs and increased competitiveness. FTAs also provide improved market access, making it easier to sell products to more countries.

With these benefits in mind, let's explore the different types of FTAs that Indonesia participates in.

Types of FTAs

Indonesia actively participates in free trade agreements to bolster its international trade and economic growth, and these FTAs can be categorized into two main types:

• Bilateral FTAs: Bilateral FTAs are agreements between Indonesia and one other country. With the goal to strengthen economic ties and facilitate trade between the two nations, these agreements often involve tariff reductions, improved market access, and cooperation in specific sectors.
• Multilateral FTAs: Multilateral FTAs involve Indonesia and a group of countries, often within a regional bloc like the Association of Southeast Asian Nations (ASEAN). These agreements promote regional economic integration and foster trade liberalization among member countries.

Key bilateral free trade agreements

Indonesia-Japan Economic Partnership Agreement (IJEPA)

The Indonesia-Japan Economic Partnership Agreement (IJEPA), signed in 2007 and implemented in 2008, is a comprehensive bilateral free trade agreement that has strengthened economic ties between the two countries. 

IJEPA's key benefits include tariff reductions on 90% of goods traded between Indonesia and Japan, fostering greater market access for businesses in both countries. Also, the agreement promotes technology transfers, workforce training, and collaboration in the services sector, facilitating knowledge exchange and economic development.

For example, under IJEPA, an Indonesian company exporting natural resources like wood to a furniture producer in Japan can benefit from reduced tariffs. Consequently, their products become more competitive in the Japanese market, potentially leading to increased exports and business growth.

Indonesia-Korea Comprehensive Economic Partnership (IK-CEPA)

The Indonesia-Korea Comprehensive Economic Partnership (IK-CEPA) is a bilateral free trade agreement that has been in the works for over a decade. Negotiations initially began in 2012, were paused in 2014, resumed in 2019, and finally came to fruition with the agreement's implementation on 1 January 2023.

IK-CEPA aims to substantially reduce trade barriers by eliminating 95% of Indonesia's tariffs on exports to South Korea and 92% of South Korean tariffs on exports to Indonesia. At the same time, it's anticipated to strengthen the fisheries and agriculture industries in Indonesia. On the other hand, for South Korea, the IK-CEPA supports the automotive and industrial sectors.

One notable outcome of IK-CEPA is the increased investment from South Korea into Indonesia. South Korea was already the seventh-largest investor in Indonesia in 2022¹, with bilateral trade reaching US$20 billion. With the implementation of IK-CEPA, this investment is expected to grow. 

For example, Hyundai has invested US$1.5 billion in building an automotive plant in Indonesia, producing both electric and internal combustion engine vehicles. Furthermore, the company has partnered with LG in a consortium to build Southeast Asia's largest EV battery cell plant in Indonesia.

Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA)

Ratified in 2020, the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) is a unique free trade agreement that goes beyond traditional trade liberalization. It focuses on fostering a broader economic partnership, cultural exchange, and maritime cooperation between the two countries.

IA-CEPA opens up market opportunities in various sectors, including agricultural products, services, and livestock. Also, one distinctive feature of this agreement is the provision for a work and holiday visa arrangement, allowing for work experience exchange between Indonesian and Australian citizens². This enables young professionals to gain valuable experience in each other's countries, fostering cultural understanding and strengthening bilateral ties.

Indonesia-European Free Trade Association Comprehensive Economic Partnership (IECEPA)

Active since 2021, the Indonesia-European Free Trade Association Comprehensive Economic Partnership (IECEPA) facilitates trade between Indonesia and the EFTA member states (Iceland, Liechtenstein, Norway, and Switzerland). This agreement covers a wide range of areas, including trade in goods, services, intellectual property rights, and sustainable development.

IECEPA provides Indonesian businesses with improved access to European markets, particularly for sectors like sustainable and ethical production. For instance, an Indonesian company that manufactures sustainable clothing can benefit from reduced tariffs and streamlined customs procedures when exporting to EFTA countries.

Indonesia-Chile Comprehensive Economic Partnership Agreement (ICCEPA)

The Indonesia-Chile Comprehensive Economic Partnership Agreement (ICCEPA), in effect since 2019, also aims to strengthen trade relations between the two countries. 

A key benefit of ICCEPA is the gradual reduction of tariffs on thousands of products. For example, under this FTA, Indonesian coffee beans will gradually become more affordable for Chilean importers, potentially leading to increased demand and expanded market share for Indonesian coffee in Chile.

Indonesia-Pakistan Preferential Trade Agreement (IPPTA)

Signed in 2012, the Indonesia-Pakistan Preferential Trade Agreement (IPPTA) focuses on enhancing trade preferences for specific products between the two nations.

This free trade agreement opens up opportunities for Indonesian companies to import high-quality kinnow oranges from Pakistan. Additionally, it allows Indonesian palm oil exporters to tap into the significant Pakistani market for vegetable oils, potentially boosting export volumes and revenue.

Indonesia–Mozambique Preferential Trade Agreement (IM-PTA)

The Indonesia–Mozambique Preferential Trade Agreement (IM-PTA), effective since 2022, represents a strategic step towards diversifying trade partnerships and expanding market access. This agreement offers opportunities for Indonesian businesses to access new markets in Africa, with Mozambique serving as a potential gateway.

One key feature of this FTA is the diversification of fiber sources for Indonesian industries. For example, textile businesses in Indonesia can now source cotton from Mozambique at competitive prices, reducing their reliance on traditional suppliers and potentially lowering production costs.

Indonesia’s multilateral free trade agreements

Regional Comprehensive Economic Partnership (RCEP)

The Regional Comprehensive Economic Partnership (RCEP), which Indonesia joined in 2022, is currently the world's largest free trade agreement. It encompasses 15 Asia-Pacific countries, including all ten ASEAN members, Australia, China, Japan, South Korea, and New Zealand. Additionally, RCEP is expected to boost Indonesia's GDP and trade surplus through tariff elimination and enhanced market access.

For Indonesian businesses, RCEP provides significant opportunities to expand their exports within the Asia-Pacific region. For example, Indonesian electronics manufacturers can now sell their products to major markets like Australia, Japan, and China with reduced trade barriers, leading to increased competitiveness and potential growth in export volumes.

ASEAN Trade in Goods Agreement (ATIGA)

The ASEAN Trade in Goods Agreement (ATIGA) is another multilateral free trade agreement that aims to promote the free flow of goods within the ASEAN region. Also, it focuses on tariff liberalization and the removal of non-tariff barriers, making it easier for businesses in ASEAN countries to trade with each other.

For Indonesian businesses, ATIGA provides a significant advantage in accessing the large and growing ASEAN market. For example, an Indonesian food company can export its snacks to Thailand without facing high import taxes, making its products more competitive and appealing to Thai consumers.

How to check if your product meets FTA requirements

If you want to take advantage of Indonesia's free trade agreements, there are certain factors you need to review:

• Identify the Product's HS Code: Every product traded internationally is assigned a unique Harmonized System (HS) Code, which helps classify goods for customs and trade purposes. To find your product's HS Code, you can check the Indonesian Customs website or utilize tools like DHL MyGTS.
• Check the FTA Rules of Origin: Each FTA has specific rules of origin that determine whether a product qualifies for preferential tariff rates, and these rules can vary significantly between FTAs. You'll need to research the specific FTA you're interested in and understand its rules of origin. Additionally, these rules consider factors like where the product was made, the materials used, and the extent of processing within the FTA countries.
• Determine if Your Product Qualifies: Once you understand the rules of origin, you can assess whether your product meets the list of criteria. This may involve analyzing your production process, sourcing of materials, and manufacturing location. And if your product satisfies the rules of origin, it's likely eligible for preferential treatment under the FTA.
• Obtain a Certificate of Origin: To claim FTA benefits, you'll need a Certificate of Origin (COO). This is a type of import or export document that officially certifies that your product meets the FTA's rules of origin, and you can typically obtain it from your local chamber of commerce or trade authority.
• Consult with Experts: If you encounter any challenges or have questions about FTA requirements, don't hesitate to consult with experts. After all, trade advisors or customs brokers can provide valuable guidance and help you navigate the complexities of FTA compliance.

Unlock global opportunities with DHL Express

Indonesia's free trade agreements offer tremendous potential for businesses to expand their reach, reduce costs, and boost competitiveness. For example, for an Indonesian textile company exporting to Switzerland, the IECEPA allows them to enjoy reduced tariffs, making their products more competitive. Or if you’re importing high-quality kinnow oranges from Pakistan, under the IPPTA, you can ship your products at a lower cost.

And if you’re exploring new markets or optimizing existing trade routes, DHL Express can help you navigate international trade.

With DHL Express’s shipping expertise, tools, and logistics solutions, you can streamline customs processes, leverage preferential tariff rates, and ensure smooth cross-border transactions. Plus, our global network and in-depth knowledge of international trade regulations make us the ideal partner for businesses looking to succeed in the global marketplace.

Create a business account with DHL Express today, and let us help you maximize the benefits of these agreements and achieve your international trade goals.