A New Era in US-Indonesia Relations
Commentary by Wayne Forrest
The announcement of a new highly protectionist regime of US tariffs on April 2 has ushered in a new era in US-Indonesia relations. America is clearly not the friend it once was. For decades the US treated Indonesia as an key emerging economy, especially after it violently ended the possibility of a Communist regime in the mid 1960’s. Playing the role of an enlightened “hegemon” the US showered Indonesia with billions in economic and military aid through institutions such as the IMF, World Bank, Ford Foundation, Harvard Institute for International Development, USAID, OPIC, USTDP, and Asian Development Bank. Although its economy never lost strong elements of state intervention based on its quasi-socialist Constitution, Indonesia’s leaders allowed substantial foreign capital and assistance to partner with its local private and state enterprises. As Indonesia developed a non-oil/gas, manufacturing sector, it bumped against US protections (primarily garments, intellectual property and labor rights)) but these were not fundamental and were usually negotiable. Indonesia was approachable on almost every issue.The 32% blanket tariffs now facing Indonesia, along with USAID shuttering and withdraw from climate change compacts such as JETP, is a direct, unilateral slap in the face. Indonesia will publicly minimize them, and project calm, but these tariffs will cut very hard. The US, although not Indonesia’s largest trading partner, is its largest market for manufacturing products. Incomprehensibly, the tariff also hits agricultural and fishery commodities not grown in the US such as coffee, tea, palm oil, spices, herbal and botanical products, and shrimp. Typically, US tariffs are more targeted; but these hit every category of Indonesian worker. Rubber is exempted, presumably because of its strategic value to the military.
Wisely, Indonesia has chosen, along with its ASEAN neighbors, to negotiate rather than retaliate, but its not all that clear to me that the Trump administration is any kind of mood to do this. Already Trump advisor Peter Navarro has rebuffed Vietnam’s offer to move to 0% tariff. Indonesia’s Coordinating Minister for Economic Affairs, Airlangga Hartarto, announced he will lead a high-level delegation to visit the DC in the coming weeks, and he has led efforts within ASEAN to do the same. I hope they haven’t embarked on a fool’s errand. Furthermore, he announced that Indonesia is prepared to buy more US cotton, oil/LNG, and soybeans.
It is not yet clear which is the more important part of Trump’s trade strategy: opening foreign markets, eliminating trade deficits and leveling tariff rates or re-shoring manufacturing. If the imperative is to recreate the America of the past (think late 19th and early to mid 20th century) when manufacturing employment was at its highest, a few things will be necessary. First, those high tariffs would have to remain in place for at least a few years. The new factories would have to pay wages in the $3 to $10 an hour range as they are in Vietnam, China, and Indonesia. Currently the average manufacturing wage in the US is $28-35 per hour. Second, the US would probably have to go back to the gold standard, pegging gold at $35 an ounce. We had this system until 1971 when President Nixon floated the exchange rate to bring more purchasing power to developing countries so they could have sufficient dollars to buy US goods. Neither path appears realistic. Americans won’t buy all kinds of US-made household gadgets and toys (assuming production can be transferred) if prices go up 50-100% or higher. The US dollar is still the world’s reserve currency, but it is not as dominant as it once was.
However, if lowering tariffs, non-tariff barriers, and getting countries to buy more US goods is the strategy, there is little incentive for relocating manufacturing. Countries won’t lower their barriers unless the US lowers its own. If both do, we’re back to where we started perhaps with more open markets for US goods and investment as well as better respect for intellectual property rights. That would be a good thing, but countries could still export their manufactured products to the US like they do now.
The high tariffs will cause Indonesia to seek new markets but also make them vulnerable to the redirected exports of countries like Vietnam and China, a dilemma Indonesia’s government is currently preparing for. The Indonesian government has struggled to help an economy that has been shedding jobs in key industries like garments ever since the pandemic. A series of laws and policies have attempted to woo investment in labor intensive manufacturing, but these efforts are constrained by automation/robotics and counterproductive policies that try to be simultaneously open and protective. It actively courts foreign investment while demanding local content, often when no good local alternatives exist. The tariffs are a body blow to this effort.
President Prabowo recently called for the elimination of many of the barriers mentioned in the USTR report. I sincerely hope he can prevail over the vested interests that erected them and that it helps reduce the tariffs or at least limits the considerable downside.
(These comments are the author’s and do not necessarily reflect the views of the American Indonesian Chamber of Commerce or its members).
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US-Indonesia Market Statistics/Issues
- The US is Indonesia’s largest export destination after China and accounted for slightly more than half of Indonesia’s total US$31 billion trade surplus in 2024.
- Indonesia exported $26.3 billion worth of goods to the US while importing only $9.5 billion, with key exports including electrical equipment ($4.6 billion), clothing ($4.34 billion) and footwear ($2.23 billion), CPO ($3.6 billion) and rubber ($2 billion)
- Shrimp exporters have already announced they are facing order cancellations from the US, its top market, worth $1.9 billion
- In the 2025 National Trade Estimate Report, the USTR cites Indonesia’s local content requirements (TKDN), complex import licensing and inspection procedures (especially for agricultural and dairy products), onerous tax compliance procedures, high excise tax rates on consumer items, customs duties assessed using reference rather than transaction pricing, and a rule requiring natural resource firms to onshore export revenues above $250,000, among other policies it deemed problematic for foreign businesses.
(These views are the author’s and may not reflect those of AICC or its members.)