Understanding the Impact of Trump's Tariff Policy on the Indonesian Economy

The implementation of a 32 percent reciprocal tariff by the United States government under Donald Trump's leadership has put great pressure on the Indonesian economy. This policy has reduced the competitiveness of Indonesian exports in the US market because the price of goods has become more expensive.

As a result, demand for Indonesian products, especially from labor-intensive sectors such as textiles, footwear, and furniture, is expected to weaken. This has the potential to disrupt the national trade balance.

Indonesia's labor-intensive sectors are the ones most affected by Trump's tariffs. The textile industry is estimated to employ up to 3.98 million people by 2025. The furniture industry employs more than 962,000 workers, both in small, medium and large industries by 2023. With declining demand from the US market, the threat of layoffs is real.

The impact of this policy extends to the exchange rate and financial markets. The rupiah exchange rate was depressed to Rp17,217 per US dollar on Monday (7/4/2025) at around 09.15 WIB, exceeding the 1998 crisis level. However, at 14.30, the rupiah exchange rate strengthened to Rp16,799.5 per US dollar.

This reflects market panic over declining export revenues and the potential for a global trade crisis. This uncertainty is adding to the private sector's external debt burden.

Global gold prices also fell due to negative sentiment from Trump's policies, which also affected domestic gold prices. On the other hand, the stock market was also hit. In fact, the Indonesia Stock Exchange had to make adjustments to trading limits to dampen the turmoil.

The 32 percent tariff also hit Indonesia's main export products that have been heavily dependent on the US market. Products such as knitted and non-knitted clothing (with HS codes 61 and HS 62) and furniture (HS 94) were among the hardest hit because the US has absorbed more than 50 percent of Indonesia's total exports in this sector.

Indonesian knitwear, for example, has been absorbed by the US by 60.5 percent in the last five years. Meanwhile, non-knitwear and furniture have US absorption of 50.5 percent and 58.2 percent respectively. Rising tariffs have made these products lose their competitiveness as they become much more expensive in the US market.

Other commodities such as machinery and electrical equipment (HS 85) and processed fish and crustacean products were also affected. Although the percentage of exports to the US for machinery and electrical is only around 22.6 percent of the global total, the annual export value is still significant, at more than 4 billion US dollars.

Of the provinces in Indonesia, West Java as the center of national industry will be greatly affected by Trump's tariff policy. With 10 main export commodities to the US such as textiles, footwear, automotive, and furniture, this tariff makes products from the province more expensive, reducing competitiveness.

Head of the West Java Industry and Trade Agency Nining Yuliastiani stated that although the tariffs imposed on Indonesia are still lower than neighboring countries, it still burdens competitiveness. The regional government is also encouraging the simplification of regulations and diversification of export markets.

The West Java Indonesian Employers Association (Apindo) requested stimulus and protection for labor-intensive industries because the aftereffects of this policy are very deep. Industries in Bandung, Cimahi, and Bekasi will be the most vulnerable because they are very dependent on the US market.

In East Kalimantan, the commodities affected are wood and refined, bleached, deodorized (RBD) palm oil. Although the US is not a major market, the export value of the two commodities to the US remains significant.

The imposition of these tariffs also forces business actors in East Kalimantan to seek alternative markets and accelerate the economic transformation from oil and gas and coal to other sectors such as fisheries, agriculture and manufacturing.

Business actors in East Kalimantan have also begun to prepare market diversification. Banana exports from East Kutai, for example, are threatened with disruption so that business actors have begun to explore non-US markets such as European countries and BRICS or Brazil, Russia, India, China, South Africa.

Indonesia's labor-intensive sector is the most affected by Trump's tariffs

Meanwhile, business actors in Lampung are relatively more optimistic. Exports from Lampung are dominated by food products such as coffee, pineapple, coconut, and spices, which are still needed globally. Business actors in the province also see this momentum as an opportunity to expand the market to Asia and Africa and accelerate the downstreaming of the food industry.

With export value reaching more than 500 million US dollars in February 2025, with the US as the main partner, Lampung continues to rely on the agricultural and processing sectors to maintain export performance despite rising tariffs.

Apindo Lampung is pushing for incentives such as reducing import duties on raw materials and equipment so that local industries can produce goods more efficiently and compete in the global market despite tariff pressures.

The government responded to Trump's policies with various strategies, one of which was to increase imports from the US as a "reward" for tariff reduction. Imported products such as wheat, soybeans, and LPG and LNG (liquefied natural gas) will be purchased from the US.

The increase in imports was carried out through a reallocation mechanism, not by increasing the total import volume, so as not to burden the State Budget (APBN).

Tax reforms were also launched on a large scale to ease the burden on business actors. For example, the reduction of the import Income Tax (PPh) rate from 2.5 percent to 0.5 percent and the adjustment of import duties on products from the US from 5-10 percent to 0-5 percent.

President Prabowo Subianto also stated that he would remove import quotas to ensure the smooth flow of goods and provide flexibility for business actors. This step is expected to stabilize domestic prices and supplies of goods amid the global crisis.

President Prabowo did not elaborate in detail on the plan to eliminate import quotas for which commodities and from which countries. However, in an official statement from the Press Media and Information Bureau (BPMI) of the Presidential Secretariat, the elimination of import quotas is primarily intended for goods that concern the livelihoods of many people.

In addition, diplomatic negotiations were also conducted. President Prabowo assigned Coordinating Minister for Economic Affairs Airlangga Hartarto, Finance Minister Sri Mulyani Indrawati, and Foreign Minister Sugiono to negotiate with the US.

Professor of the Faculty of Economics and Business, University of Indonesia, Ari Kuncoro, suggested the government use the strength of domestic consumption as the main shield from export contraction due to the imposition of Trump tariffs. With a large population base, Indonesia has strong capital to maintain growth through household spending.

According to him, changes in post-pandemic consumption patterns make incentives key. The government can encourage spending by offering seasonal discounts, electricity discounts, and holiday stimulus. This is important so that the average propensity to consume (APC) remains high and the economy moves.

Of course, in addition to strengthening domestic consumption, negotiation efforts and seeking alternative markets must be carried out optimally. This is important to reduce the impact of Trump's tariff policy on the Indonesian economy.

Note: This summary article is compiled from a number of articles that have been published in Kompas.id. The article was compiled with the support of generative artificial intelligence (AI) technology. However, before being published, the article went through a verification and editing process by the Kompas editor. Here are a number of articles that are sources: