New Trade Agreement Signed Between the US and Indonesia: Coexistence of Tariffs and Market Access
Following the US's threats of tariffs on several countries, President Trump and Indonesia reached the first significant trade agreement under his "new tariff policy." On July 15th, local time, Trump announced on social media that after meeting with Indonesian President Prabowo, the two countries signed a "landmark" agreement.
Under this new agreement, all Indonesian exports to the US will incur a 19% tariff. In return, US exports to Indonesia will enjoy full exemption from tariffs and non-tariff barriers. Trump described this as a "win-win" deal, stating this is the first time the US has obtained "full access" to the Indonesian market. He specifically noted that US goods, including its strong copper industry, can enter the Indonesian market "unhindered."
It's noteworthy that the agreed 19% tariff rate is lower than the previously threatened 32% import rate laid out in Trump's letter on July 7th. This adjustment suggests that after issuing tariff threats, the US is also willing to negotiate to lower rates to achieve an agreement aligning with its trade interests.
Agreement Core: Indonesia's Massive Procurement and Market Access Commitment
The critical aspect of this agreement lies not only in tariff adjustments but also in Indonesia's commitment to opening its market to the US and its large-scale procurement plan. As part of the agreement, Indonesia promises to make substantial purchases of US goods, including $15 billion worth of energy products, $4.5 billion in agricultural products, and 50 Boeing aircraft. Trump emphasized that this marks the first time US ranchers, farmers, and fishermen will "fully enter the Indonesian market."
Additionally, the agreement includes a "transshipment clause," stipulating that if any goods from countries with higher tariffs are transshipped through Indonesia to the US, they will incur additional fees on top of the 19% tariff outlined in this agreement. This move aims to prevent other countries from using Indonesia as a middle ground to bypass US tariffs, reflecting the US's firm stance in executing its trade policy.
Although the total trade between Indonesia and the US is relatively small, slightly under $40 billion in 2024, and not among the US's top 15 trading partners, the US faces a trade deficit with Indonesia nearing $18 billion. Indonesia exports a wide range of products to the US, including palm oil, electronic equipment, footwear, automotive tires, natural rubber, and frozen shrimp. Through this agreement, the US aims to reverse the trade deficit with Indonesia while creating new market opportunities for American companies.
Effective "Tariff Strategy": Potential Reshaping of the Global Trade Landscape
The trade agreement between Indonesia and the US is the first successful case since the Trump administration issued tariff letters to multiple countries on July 7th. This appears to confirm Trump's strategy of using tariffs to reshape the global trade landscape is working. He had previously issued similar tariff threats to over 20 trade partners, including Canada, Japan, and Brazil, with rates ranging from 20% to 50%, while also expressing willingness to negotiate after issuing the letters.
The conclusion of this agreement will undoubtedly pressure other countries facing tariff threats to negotiate with the US. Trump also mentioned that similar trade agreements are "in progress." It’s foreseeable that more countries will seek new trade arrangements under US tariff pressure in the near future. This trend could profoundly impact the global trade system and might indicate the emergence of a new trade era characterized by bilateral agreements and protectionism.
