Preferential Trade Agreement: Indonesia Extends Olive Branch

Preferential Trade Agreement: In a quest to boost cooperation in the international arena, New Delhi is leaving no stone unturned. In that attempt, the government of India is giving importance to countries that are considered to be ‘Third World’, just as it gives preference to countries in the First World. It is not an exaggeration to say that Indian foreign policy is shifting from its immediate neighbors to the larger and expanding circles of Asia and the rest of the world.

To that extent, if we focus specifically on the outer circle concerning Asia and strategic partners, it becomes significant to consider the relations with Indonesia that stretch from the historical-cultural to the economic domain. The best part is that Indonesia too has shown optimism in the relations since always.

Indonesia offers Preferential Trade Agreement

Indonesian Trade Minister Zulkifli Hasan was on a state visit to India from March 13–14. During a meeting with Indian Trade and Commerce Minister, Piyush Goyal, in New Delhi, he said, “The Preferential Trade Agreement can optimize the economic potentials of the two countries. Indonesia is open to negotiating a trade agreement that focuses on the interests of both countries.”

The statement is an invitation from the Indonesian side to expedite negotiations on the Preferential Trade Agreement (PTA), which will prove to be a crucial feature for increasing bilateral trade. As we know, Indonesia is a member of ASEAN, and India has already signed a free trade agreement with ASEAN.

Also read: The inside story of India-Indonesia Brahmos deal

FTA with ASEAN

Under the 2010 ASEAN-India Trade in Goods Agreement, India and ASEAN members have agreed to open their respective markets by progressively reducing and eliminating duties on 76.4 percent of goods and liberalizing tariffs on over 90 percent of goods. Since it came into effect, the merchandise trade between the two countries has increased significantly, with an increase in exports of 23 percent and imports of 55 percent over the past decade.

In line with that, the individual countries are negotiating their bilateral agreements with India. Indonesia, being one among others, has been negotiating the Comprehensive Economic Cooperation Agreement (CECA) for a decade. In 2011, both countries started the negotiations, so this offer by the Indonesian Trade Minister has aroused new hope for a resurgence of those negotiations.

India-Indonesia trade relations

Indonesia is the world’s largest producer of palm oil. But India’s prime source of palm oil is Malaysia, which is the second-largest producer of palm oil in the world. This is because of the positive effect of the CECA signed between the two countries. However, after the anti-India stance on CAA taken by Malaysian President Mahathir Mohamad, the Indonesian imports are also on the rise.

Given that India is the largest consumer of palm oil, Indonesia is being enticed to increase trade with India. Indonesia now accounts for 47 percent of Indian palm oil imports, up from 30 percent previously. This is further expected to get a boost after Indonesia lifted an export ban on palm oil. So, breaking a deal on Preferential Trade Agreement will obviously include palm oil that will benefit both countries. But it is not only palm oil that both countries should consider for Preferential Trade Agreement.

Also read: Indonesia’s ban on the export of palm oil can become a blessing in disguise for India

In a geographical context, both countries are at the crossroads of the Indo-Pacific. India’s last territory is just 90 nautical miles away from Indonesia. The significant junction in question is also the location of essential Sea Lines of Communication (SLOC) and narrow passages on water that act as the financial arteries of the area. In a sense, it can be loosely said that India and Indonesia act as de facto gatekeepers of the region, which comprises a trade route for almost 60 percent of the world’s maritime trade.

Considering this, it is of crucial importance that India and Indonesia enter into a strategic partnership that is advantageous for the bilateral relations between both countries. As per the current trade trends, Indonesia is India’s sixth-biggest trading partner with $18.8 billion. It is India’s second-biggest trading partner in the ASEAN region.

This must be noted: the projected target for bilateral trade is $50 billion until 2025. During the meeting, Hasan also elucidated that India is Indonesia’s fourth-largest trade partner and the 21st-largest source of foreign investment. Apart from the Preferential Trade Agreement, Indonesian Trade Minister Hasan also urged his Indian counterpart to reconsider its plan on anti-dumping import duties on viscose staple fiber (VSF).

Also read: Indonesia shows the door to Rohingya Muslims

Issue of Viscose Staple Fibre

VSF is the supporting raw material for the Indian textile industry. It is a cotton-like fiber that is man-made and sustainable in characteristics and is heavily used in apparel, clothing, and handloom manufacturing. After the FTA with ASEAN, VSF was imported to India at zero duty. This increased the competitiveness of the Indian market, as the imported VSF was cheaper than the domestic one. So, the Directorate General of Trade Remedies (DGTR) recommended the imposition of duties.

Previously, the anti-dumping duty (ADD) was incurred on VSF, which ended in 2021. Indonesia was at $4.150 million (2.146 million kg) in Q3 2021, when ADD was withdrawn. The imports jumped to $10.207 million (5.135 million kg) in Q4 2021.

Now, the Directorate General of Trade Remedies (DGTR) has again recommended the imposition of ADD on VSF, which has been supported in turn by the Association of Man-Made Fiber in India. And the government of India is now considering putting it up again. This is making Indonesia more uncomfortable, and hence Hasan made another offer to his Indian counterpart.

He pitched for investment in India. According to him, one of Indonesia’s biggest VSF producers is interested in investing in India to develop eco-friendly lyocell fiber products of better quality. He stated that the investment is expected to help Indonesia contribute to the manufacturing of high-quality textiles in India.

Also read: Indonesia’s tallest leader Sukarno’s daughter is all set to do a Ghar Wapsi

Three-minister meeting formula

Indian Trade and Commerce Minister Piyush Goyal invited Hasan to hold a bilateral meeting between Indonesia and India, where three ministers from each country will participate. The Indonesian trade minister accepted the invitation and named three ministers regarding the meeting.

The trade relations between India and Indonesia need to be strengthened as the two countries share a long history of mutual cultural heritage. Sukarno, the most significant Indonesian leader in history, strived for better relations with India. His importance to contemporary and newly independent India can be understood by the fact that he was the first chief guest of the first Republic Day celebration of India on January 26, 1950. Apart from that, Indonesia’s proximity to the Indo-Pacific and South China Sea gives it diplomatic importance, and India needs its cooperation with it for an open and free Indo-Pacific and rules-based order.