The US-Indonesia Tariff Deal A Harmful Trade-Off

American President Donald Trump has been taking the hatchet to long-standing traditions in international trade. His  choice to use a bilateral rather than multilateral approach is a way to pressure US partner countries to renegotiate trade proposals from a vulnerable position,  and to thus accept the United State’s unilateral rules.  His engagement with Indonesia is no different, and it has been evident from the outset that this negotiation is asymmetrical. Trump’s approach does not involve any discussion on trade-offs with America’s respective economic partners, and countries that seek to retaliate against reciprocal tariffs are threatened[2]. There is only one option: “Take it or leave it”. This stance leaves developing countries such as Indonesia in a compromised position that endangers both their national strategic development agendas and the interests of their people. This article breaks down some of the problems with the new framework agreement between the US and Indonesia, and argues for a different approach that goes beyond the current “Trump” moment, and honours Indonesia’s long term strategic goals. 

It would be misguided to interpret the protectionist practices implemented by Trump through tariff threats merely as anti-trade liberalisation (see The False Dilemma Between Protectionism and Free Trade). In fact, Trump has used bilateral tariff negotiations as a strategy to reset globalisation rules that will restore the US empire (see A Fractured World). Instead, we are witnessing a weaponisation of tariffs as a tool to deepen a specific form of trade liberalisation that is more beneficial to the US, and detrimental to its former allies. According to Trump, the existing globalisation system, particularly through the WTO, has not been in favour of US interests, and China has benefited more from the mechanism. This explains his efforts, however crude, to reform the WTO and push for various plurilateral agreements, such as those relating to e-commerce, investment facilitation and domestic services regulation. Nevertheless, developing countries have vigorously contested plurilateral agreements at the WTO that are incongruent with their development agendas and favour the interests of industrialised nations. Following extensive negotiations, Trump has secured concessions from developing countries regarding their position in the WTO as a condition for getting tariff reductions from the US. 

The deal between Indonesia and America is one such unilateral adjustment, and not a reciprocal agreement. The purported results have not justified the risks and concessions taken by Indonesia. Indonesia’s government asserts that this reciprocal tariff reduction will enhance the competitiveness of Indonesia's primary export products in the US market, following challenges that have previously led to significant job losses, particularly in the textile, footwear, and fisheries sectors. However, it should also be noted that it is unclear whether the agreed upon 19% reduction in reciprocal tariffs with the US also includes the blanket 10% universal tariff and other sectoral tariffs that apply broadly to America’s trade partners. [3]

Therefore, if Indonesia seeks more competitive tariffs for specific products, its government must continue to negotiate reductions in the universal and sectoral tariffs set by Trump[4]. Indonesia will undoubtedly have to make more trade-offs to secure further tariff reductions from the US. The question is whether this reduction will have a significant positive impact on Indonesia, given the dominance of US market access in the country. With the secrecy surrounding the negotiations, it is currently difficult to discern what Indonesia has actually gained from this unbalanced agreement. 

In fact, the Joint Statement on the framework for the Indonesia-US reciprocal tariff agreement released by the US on 22 July[5] only reveals more US demands to Indonesia to serve US trade and investment interests through various trade-offs. To obtain 19% reciprocal tariff reduction, Indonesia has “voluntarily” committed to removing various national regulations to eliminate non-tariff barriers on over 99% of U.S. products exported to Indonesia without exception, such as agricultural, health, seafood, information and communications technology, automotive, and chemicals. The elimination of national regulations on non-tariff barriers will apply universally and cannot be applied discriminatorily with respect to the most favoured countries. Consequently, these non-tariff commitments will narrow Indonesia's policy spaces and may also impact its negotiating position in other trade agreements. Moreover, such non-tariff commitments also potentially go beyond WTO agreements and threaten Indonesia's position at the WTO. 

The consequences of the Indonesia-US negotiations should be seen beyond simply tariffs. The cost-benefit calculation cannot only be measured solely by the increase in export and import figures. Rather, the measurement of this agreement should be in terms of its fundamental impact on people's lives, especially in relation to any changes that may be introduced in national legislation and regulations. For example, Indonesia's commitment to remove restrictions on agricultural imports will result in the loss of protection for small food producers. Additionally , the agreement framework states that Indonesia is committed to move personal data out of its territory to the US, a clause that potentially threatens Indonesia's data sovereignty at a time when data is considered the “new oil”. Indonesia's Personal Data Protection Law is not sufficient to control this liberalisation agenda, especially with regard to the control of big technology companies over Indonesia's strategic resources. 

One of the main issues under the US tariff negotiation with Indonesia is critical minerals. Indonesia sees an opportunity to position itself as an alternative to China as a supplier of critical minerals. Copper and nickel are seen as commodities that can be used as leverage in Indonesia’s tariff negotiations, especially considering the strong role of US mining companies in both commodities, such as Freeport Mc-Moran and Newmont Mining (now Amman Mineral Nusantara). 

Indonesia has used the tariff conversation to reopen negotiations with the US on critical minerals, particularly on the previous agreement reached between Joe Biden and Jokowi in 2023. Indonesia is one of the members of the Indo-Pacific Economic Framework, a Comprehensive Strategic Partnership cooperation[6], where Indonesia is in the supply chain pillar. After President Trump was elected for his second term, the Comprehensive Strategic Cooperation discussion with Indonesia stagnated.  Furthermore, the status of IPEF Cooperation is also unclear, considering that the US is currently prioritising bilateral negotiations. It does appear, however,  that the framework for the Indonesia-US bilateral reciprocal tariff agreement will supersede the two previous agreements.

However, how can critical mineral deals with the US be beneficial for Indonesia? What trade-offs does the country have to make?

To reach this framework agreement, Indonesia has had to dilute or abandon key policy positions that had made it the subject of much praise as an example of how developing countries can benefit from their own resources. First, the framework of the Indonesia-US reciprocal tariff agreement has succeeded in forcing the Indonesian government to abolish its export restriction policy, particularly on critical minerals, and second,  it calls upon Indonesia to join the Global Forum on Steel Excess Capacity and to take action to address overproduction. 

Indonesia's efforts to cooperate with the US on critical minerals will likely be undermined by Trump's 'Made in America' policy. His neo-protectionist policy will prioritize US industrial interests and bring back the industry to the US. The American Iron and Steel Institute supported this agreement, viewing Indonesia's commitment to removing restrictions on the export of critical minerals, particularly nickel, as highly strategic for stainless steel production in the US[7].  Indonesia's nickel export ban has caused global steel overcapacity and production as Chinese companies have direct access to nickel supplies from Indonesia and thus outcompete US steel producers.  Indonesian stainless-steel products are now subject to anti-dumping policies, including those implemented by the European Union. Therefore, the US calls upon Indonesia to join the Global Forum on Steel Excess Capacity and to take action to address overproduction. Among other things, it urges the government not to provide market-distorting subsidies and other types of support, including to fight protectionism as exemplified in, for instance, the export ban policy [8].

China's dominance in the global mineral production and processing industry has engendered significant interdependencies with the US. Critical mineral bottlenecks are a direct threat to US economic and national security[9]. To mitigate this, shortly after his January inauguration, Trump issued many executive orders in a strategy aimed at securing critical mineral supplies as part of The US’s national security agenda to reduce China's influence, especially in the Indo-Pacific region

Trump’s policy aims to access raw minerals that can be processed domestically, to  mitigate the significant vulnerabilities caused by US reliance on foreign sources for, in particular, smelted and processed minerals such as copper and nickel. For example, US copper smelting and processing capacity lags behind from China, which accounts for 50% of global copper smelting supply[10]. In this regard, the call for Indonesia to lift export restrictions to unlock access to critical minerals for the US is a top priority.

Previously, the Indonesian government stated that it would not surrender its policy of banning raw mineral exports in negotiations with the US and would continue to promote exports of high value-added processed minerals, both nickel and copper[11].

However, it is apparent that the US will not simply accept Indonesian stainless steel products entering its market, due to overcapacity issues. Moreover, the US steel industry coalition has consistently urged Trump not to grant an exemption for Indonesia regarding the implementation of a 50% tariff on stainless steel, and copper[12]. For them, nickel supply from Indonesia could address the issue of mineral raw material inputs for the US steel and clean tech industries, including the defense industry, which has long been dominated by China.

Since 2020, the Indonesian government has banned the export of low-grade nickel products with a content of less than 1,7%[13]. However, it should be noted that since 2021, through a Ministry of Trade Regulation, the government has limited the export of nickel pig iron and ferronickel products with certain grades[14].

Indonesia’s decision to impose an export ban on nickel commodities, particularly ferronickel and pig iron, aims at controlling production volumes and prioritising nickel production for the development of the battery industry, in light of declining nickel reserves. Indonesia’s increased production benefits Chinese companies that mine locally, as the output is primarily exported rather than used to strengthen Indonesia's domestic battery industry, which remains dependent on imported semi-finished materials from China. Consequently, various nickel industry associations in Indonesia have been calling for the Indonesian government to impose a moratorium on the development of smelters, including revoking incentives for stainless steel production[15].

The US-Indonesia reciprocal tariff framework, which states Indonesia's commitment to abolishing its nickel export ban policy, will thus certainly have an impact on the revision of the regulations mentioned above. These regulations are fundamental to the development of the battery industry in Indonesia. This policy is an important instrument for limiting the volume of stainless steel production in Indonesia and encouraging the Indonesian nickel industry, including Chinese companies, to accelerate nickel processing for battery raw materials. Indonesia's commitment to eliminate export restrictions in the mineral sector to the US will thus be more detrimental to Indonesia, and will hinder the acceleration of nickel industrialisation for batteries and other clean tech industry such as solar panel. Additionally, Indonesia will be missing out on the opportunity to leverage its nickel wealth, given the depletion of reserves.

It is also overly optimistic of the Indonesian Government to expect the US to support or invest in the development of a battery industry in Indonesia. President Trump issued an Executive Order on 20 March to increase US domestic production of critical minerals including uranium, copper, potash and gold, and accelerating the expansion of mining licences including the development of various mineral processingindustries in the US as a priority[16] . The document also ordered an investigation into the impact of imports of critical minerals on national security due to market distortions, and justified the 50% import tariff increase for copper, steel and aluminium[17]. Therefore, the US aims to access raw minerals that can be processed domestically for clean energy, advanced manufacturing (semiconductors), and defense industries.

Moreover, the framework also succeeds in pushing Indonesia to exempt US companies and US originating goods from local content requirements. Naturally, this has hindered Indonesia's ambition to acquire investment and technology transfer from the US to support the downstreaming of minerals produced domestically. Local content policies are crucial for realising domestic mineral downstreaming, particularly in prioritising domestic actors within the national development agenda. The U.S. explicitly stated its objections to Indonesia’s policy of prioritising domestic materials through local content requirements, as well as to Indonesia's procurement policy requiring the incorporation of domestic production and technology transfer. Unsurprisingly, the US government will not allow this to happen due to the enforcement of intellectual property protection.

Negotiations on this issue are still underway, at least until reciprocal tariffs take effect on 1 August 2025. The Indonesian government must be able to urge the US to accept Indonesia's processed mineral products, which have high added value, and improve its bargaining position to become a country that can take part in a higher global value chain. The efforts that have been fought for over nearly two decades must not be defeated by a compromise position that would actually be a harmful trade-off for Indonesia.

The US unilateral adjustment has put Indonesia back into the raw material export trap and locked it in the bottom of the global value chain. The compromise position Indonesia has adopted has weakened the strategic agenda of Indonesia's downstream mineral industry, which had been aspiring to become a global player in the battery industry and to secure a position in the global semiconductor supply chain. 

Adding value to critical minerals has emerged as a highly strategic battleground for mineral-rich developing countries and emerged as a prominent topic in political discourse, particularly in the escalation of geopolitical tensions between the West and China. Indonesia had so far been a guiding light for other developing countries with its trade policies that, at least nominally, put Indonesians first.   The crisis in the multilateral trading system must not trap developing countries in the Global South — in this instance Indonesia — in a dilemma as they try to protect themselves from Trump's tariffs. Ultimately, this would result in them surrendering their sovereignty to imperialists. 

In fact, quoting Walden Bello, the existence of a multipolar world should be seen as an opportunity for Southern countries to establish a new multilateral order built through equal cooperation, not imposed through unilateral or liberal hegemony[18]. Therefore, the policy of raw materials export ban for added value is key and must be a non-negotiable position, especially for Indonesia, in order to improve its political position and bargaining power amid rapidly changing global geopolitics. It becomes a strategic tool to reposition the Global South at the center of a new international economic order, where they become the arbiter of this new geopolitical and economic map[19].