Indonesia and Trump Tariffs

US President Donald Trump called April 2 “liberation day” or a declaration of economic independence. His main instrument was tariffs, which were announced more widely and had a greater impact than many had expected.

This marks the largest protectionist measure since the 1930s, during the trade war leading up to the Great Depression. Under the pretext of "reciprocal tariffs," this policy is not only misguided but also contradicts basic economic principles.

High tariffs will raise the prices of imported goods, fuel inflation, and burden US consumers.

Trade data for 2024 shows that the US experienced a goods trade deficit of 1.2 trillion US dollars with 92 countries, but also recorded a surplus with 111 countries. This deficit is not solely due to the trade policies of partner countries but is a result of comparative advantages and the US's own budgetary imbalances.

With tax cuts and an increase in budget deficits, U.S. domestic savings are reduced, which will widen the U.S. savings-investment (S-I) gap, thereby exacerbating the trade deficit.

Instead of solving the problem, Trump's tariff policy has actually worsened the situation by suppressing exports, disrupting supply chains, and harming the competitiveness of U.S. manufacturing itself.

With the Executive Order—Regulating Imports with Reciprocal Tariff to Rectify Trade Practices that contribute to large and persistent annual US goods trade deficit—all countries are subject to an additional 10 percent import duty, effective April 5.

The 57 countries deemed “the worst offenders” will face higher tariffs starting April 9. Most of them are from the European Union and Asia, including Indonesia and eight other ASEAN countries.

First, let us examine the U.S. reciprocity tariffs, which stem from the assumption that many countries impose higher "tariffs" on U.S. exports compared to the "tariffs" the U.S. imposes on them.

Trump and his advisors argue that this has caused the U.S. trade deficit, shut down domestic manufacturing industries, and disrupted strategic supply chains, thereby being considered a threat to U.S. national resilience.

Article XXI of the World Trade Organization (WTO) does indeed allow for the imposition of unilateral tariffs on the grounds of national security, but this article was previously rarely used. Since 2018, its application has become more widespread without clear justification. The U.S. has abandoned the rule-based multilateral trading system and the role of trade in development, which has advanced many developing countries and reduced poverty, including in Indonesia.

I use quotation marks because the reciprocity “tariff” in question includes more than just import duties.

Trade barriers deemed unfair to U.S. exports and investments are also calculated as part of tariffs. The "National Trade Estimate Report 2025" from the U.S. Trade Representative (USTR) states that Indonesia has various barriers, including the import licensing system, Domestic Component Level (TKDN) regulations, policies on Foreign Exchange from Natural Resource Exports (DHE SDA), investment licensing, taxes, barriers in the services sector, and intellectual property rights issues. Among these barriers, import licensing, TKDN, and DHE SDA are the top priorities for the U.S.

The US calculates the tariff rate not based on tariff reciprocity alone, but by focusing on the trade deficit. The average difference in US and Indonesian import duties is only 4.2 percent. Indonesia's import duty on US imports is 8.6 percent, while the US import duty on Indonesian imports is 4.2 percent. The US also does not calculate barriers outside of import duties using the "tariff equivalent" calculation, which is usually estimated by comparing import prices after tariffs with international prices.

They calculated based on Indonesia's trade deficit with the US divided by US imports from Indonesia (or Indonesia's exports to the US). With this method, the US determined that their exports to Indonesia faced a 64 percent "tariff". President Trump then "kindly" gave a 50 percent discount so that Indonesia was subject to a 32 percent tariff.

According to the White House, the calculation is a concept from the Council of Economic Advisers that considers the trade deficit, as a measure of the overall impact of a country's trade policies, to be hampering U.S. exports. It doesn't make economic sense, and U.S. policy is full of ambiguity, but the reality is that these tariffs will be implemented.

It is true that much of what the US has done has no clear economic logic and violates many multilateral trade regulations, but the reality is that unilateral policies have now been announced with all their consequences.

The US has also stated in the Executive Order that countries that retaliate will be subject to additional import duties. For countries that take steps to address issues that are considered to contribute to unfair “reciprocity tariffs,” their import duties will be lowered. Investments to the US can also be considered as a form of avoiding higher import duties.

In general, Indonesia does not need to retaliate, but needs to approach and use existing mechanisms to build dialogue, cooperation, and partnership with the US. In addition, Indonesia needs to expand partners outside the US and build a collective position with various groups, in facing the uncertainty of the global situation.

Indonesia will face import duties of 10 percent starting April 5 like all other countries, and 32 percent starting April 9. The imposition of these tariffs will have a significant impact on Indonesia's exports to the US, with major exports being electronics, textiles and textile products, footwear, shrimp and also wood products (furniture and crafts).

There is a sectoral import duty of 25 percent that has been and will be applied to automotive, steel and aluminum, semiconductors, copper products, wood and derivative products, and precious metals. These products are subject to sectoral import duties and not bilateral import duties related to the country.

The impact on Indonesia will be very pronounced because these sectors are very important for employment, shrimp farmers, and export growth, and the Indonesian economy. Some of our export products, such as apparel, shoes, and wood products, are highly dependent on the US market.

As conveyed by the government, the government is indeed calculating the impact of these tariffs on the affected sectors and the national economy as a whole. The National Economic Council (DEN) and cross-ministerial teams have been preparing since the beginning of the year with various strategies, including dialogue with the US Government.

Some of the steps being prepared are to clarify and answer the issues raised by the US Government, especially those conveyed through the NTE 2025 report. For example, the explanation regarding DHE DSA that foreign exchange retention is only after the related companies have used and set aside the foreign exchange they need.

Indonesia can use the existing bilateral mechanism with the US, namely the Trade and Investment Facilitation Agreement (TIFA) to conduct dialogue, explore mutually beneficial cooperation and partnerships in various fields such as critical minerals and semiconductors.

Finally, Indonesia needs to expand its market and diversify its trade and investment partners, and not stand alone in the face of US tariff policies.

To expand markets and partnerships, we need to complete negotiations and upgrade various free trade agreements (FTAs).

One of the important FTA negotiations is the conclusion of the European Union-Indonesia Comprehensive Economic Partnership Agreement (EU-Indonesia CEPA), given the importance of the European Union (EU) market and that Vietnam—our competitor for some export products, especially those in the field of footwear and apparel—already has an agreement with the EU.

In addition, deepening the ASEAN agreement and the Regional Comprehensive Economic Partnership (RCEP)—ASEAN plus China, Japan, Korea, Australia, and New Zealand—so that a diversified supply chain can be built and the US can also be involved. Indonesia can also utilize the Trade and Investment Framework Agreements (TIFA) to explore cooperation in the fields of critical minerals and semiconductors.

Indonesia should not face US tariffs alone. As the President emphasized during his visit to Malaysia, ASEAN is stronger when united.

Given that nine ASEAN countries are subject to additional US tariffs, a collective ASEAN position is crucial. The ASEAN Geoeconomic Task Force proposed at the ASEAN Economic Ministers’ Retreat in February is a good idea and could be used to respond to US policies in a more coordinated manner.

Not for retaliation because a trade war will not benefit anyone, but a collective position to conduct dialogue and engagement with the US, to find solutions and partnerships that are beneficial and build a more diversified chain with a role from the US.

Mari Pangestu, Professor of International Economics, FEB UI and Deputy Chair of the National Economic Council