The Impact of United States International Trade Policy on the World Economy and Indonesia

The high international trade deficit has become one of the driving factors behind the policy to increase export import tariffs to the United States. This policy has resulted in higher export costs to the U.S., potentially leading to a decline in the economies of several countries. Indonesia is one of the countries facing significant risks from this policy.

On Wednesday (2/4/2025), US President Donald Trump issued an executive order (Executive Order) —Regulating Imports with Reciprocal Tariff to Rectify Trade Practices that contribute to large and persistent annual US goods trade deficit — imposing an additional 10 percent import duty on all countries, effective April 5, 2025.

A total of 57 countries considered the “worst offenders” will face higher tariffs starting April 9. Most of these countries are from the European Union and Asia, including Indonesia and eight other ASEAN countries (Kompas.id/3/4/2025).

The U.S. tariff policy aims to regulate imports with reciprocal tariffs to improve trade practices that contribute to the ongoing U.S. trade balance deficit.

The policy immediately triggered widespread global controversy. This is because it has the potential to disrupt the supply chain that has been established so far, particularly those related to the US.

Several commodities exported to the US have experienced a significant increase in costs, making them less competitive in the US domestic market. This will burden importers as well as consumers in the US, as the prices of imported commodities become more expensive, potentially leading to a decline in demand.

As a result, exporting countries must reduce the shipment of their products to the U.S. or optimize production efficiency to lower prices, thereby lessening the burden on U.S. consumers. Additionally, this forces exporting countries to seek alternative export destinations outside the U.S. This, of course, will create turmoil for exporting countries as it has the potential to cause economic slowdown due to decreased demand for goods from the U.S. Furthermore, it may increase the risk of layoffs in several industries that have a market share directed toward the U.S.

For the United States itself, the tariff policy is expected to reduce the trade balance deficit and open negotiation opportunities with any country in the world by showcasing the advantages of the United States' geopolitical and geoeconomic "soft power."

However, behind these policy measures lies a significant risk to the U.S. economy. In addition to driving up the prices of imported goods, the tariff policy also has the potential to disrupt industrialization. This is because several manufacturing industries in the U.S. still rely on the supply of raw materials or resources that must be sourced from abroad.

This will certainly increase the production costs of goods within the United States. Ultimately, the prices of goods produced by domestic industries in the U.S. will also become increasingly expensive in the local market. The potential negative effects will eventually be evident in the U.S., namely a decline in sales or demand, layoffs, and an economic slowdown in the "Uncle Sam" nation.

Based on data from the World Bank, the world's gross domestic product (GDP) in 2023 will reach 106.17 trillion US dollars. The US is the country with the largest economic power globally. In 2023, the GDP in the US will reach 27.72 trillion US dollars. This nominal is quite far apart, around 10 trillion US dollars, from China's GDP which is ranked second in the world with a value of 17.79 trillion US dollars.

With such a large economic value, the level of welfare of the US population is relatively very high with a per capita income of around 82,000 US dollars per year.

Despite having a very large economic power, in the context of international trade, the US actually has a high level of dependence on other countries in the world. This can be seen from the US international trade balance which has a deficit value that is also very large.

Based on data from oec.world, in 2023, the value of US exports to the world will reach 1.86 trillion US dollars. On the import side, the value of foreign products entering the US will reach around 3 trillion US dollars or the highest in the world. The high demand for imported goods will cause the US trade deficit in 2023 to be around 1.1 trillion US dollars.

The deficit has been going on for a long time. In 2015, for example, the US trade balance recorded a deficit of around 800 billion US dollars. At that time, the value of US exports to the world was around 1.41 trillion US dollars, while the value of imports was almost 2.21 trillion US dollars. Going back to 2010, the US trade balance was in deficit of around 720 billion US dollars, with export revenues of around 1.2 trillion US dollars and payments for imports of goods worth 1.92 trillion US dollars.

Going back to 2000, the US also recorded a deficit of $383 billion. Imports of goods had reached $1.2 trillion, while exports were only around $808 billion.

Although the US has always had a deficit in its trade balance since the past, the US's role in the world economy is very vital. The indication was seen in the period 2020-2021, when Covid-19 hit and pushed the global economic downturn, the US economy remained a reference for advancing the economies of countries in the world. The value of US exports at that time was recorded at 1.65 trillion US dollars and the value of imports reached more than 2.7 trillion US dollars. The deficit of 1.12 trillion US dollars indicated that the US contributed to efforts to stimulate the advancement of the sluggish world economy.

However, the US currently seems to want to narrow the gap in the trade deficit while trying to grow the domestic industry again to compete with a number of imported commodities. Of course, this will have an impact on global conditions because there is a change in the "regularity" that has occurred so far.

As the largest importing country in the world, the US has very broad cooperation partners globally. The US has a trade network with almost all countries in the world. Of the hundreds of countries, there are at least 20 countries that are the strongest cooperation partners with the US.

In terms of exports, the US has cooperation with a number of developed countries including Canada, Germany, Japan, England, the Netherlands, South Korea, Singapore, France, Switzerland, Spain, Australia, Italy, and Belgium. With emerging market countries, the US sends its exports to China, Mexico, Brazil, and India.

In terms of imports, the US has a high dependence on a number of countries, including Mexico, China, Canada, Germany, Japan, South Korea, and Vietnam. In 2023, the value of exports of goods to the US averaged more than 100 billion US dollars. In fact, for Mexico, China, and Canada, the value of imports of goods to the US averaged more than 400 billion US dollars.

In the context of international trade between the US and Indonesia, Indonesia's position is in 20th place with export value to the US reaching 27 billion US dollars. This means that Indonesia's position in the supply of commodity goods to the US is very important.

Of the number of strategic partner countries, most of them do show deficit notation for US international trade. If sorted from the largest deficit, there are at least four countries that contribute to the negative notation. These countries are China with a balance deficit of around 282 billion US dollars; Mexico 213 billion US dollars; Canada 140 billion US dollars; and Vietnam 108 billion US dollars. For other countries, the average deficit pressure is below 60 billion US dollars.

The smallest balance deficit with the US is at least three countries, namely France around 8.30 billion US dollars; Switzerland around 12 billion US dollars; Malaysia almost 26 billion US dollars; and Indonesia around 17 billion US dollars.

Of the 20 countries, some also posted a positive trade balance for the US. These countries are Brazil with a surplus of 2.92 billion US dollars; Singapore 10.26 billion US dollars; and the Netherlands around 30 billion US dollars.

With the US policy of implementing universal tariffs of 10 percent to all countries starting April 5 and reciprocal tariffs varying from 10 percent to above 40 percent starting April 9, it will have an impact on the flow of exports and imports of goods or services globally. Of course, countries that have a large deficit contribution to the US will receive large tariffs to offset their deficits.

Indonesia will also feel the impact of President Trump's policy. Moreover, the additional tariff imposed on products from Indonesia is set at 32 percent. This tariff is very large when compared to the previous US import duty on Indonesian imports of 4.2 percent.

With the US policy, of course it will cause unrest in the business world or industry in Indonesia that has a market share to the US. There are at least nine types of businesses that have a very large export value to the US. These businesses include machinery, electricity, and electronics; textile products; footwear; rubber products; spare parts and equipment; animal and vegetable oils; and a number of fishery products. Each sector of these commodities has an average export value of more than 1 billion US dollars.

With the tariff policy, of course it has an impact on a number of these sectors. The reduction in production resulting in reduced demand will make businesses sluggish and potentially lead to layoffs. Therefore, the government needs to immediately take mitigation steps to respond to Trump's policy.

In addition to seeking new market space outside the US, the government and related stakeholders need to immediately establish diplomatic steps to negotiate with the US. The government must be able to utilize the US diplomacy's "soft power" space well and optimally. (KOMPAS RESEARCH AND DEVELOPMENT)