Responding to US Tariffs

In facing tariffs from the United States (US), Indonesia has not taken the path of retaliation but has chosen the path of diplomacy, both bilateral and multilateral, including with other ASEAN countries, in order to avoid greater adverse impacts on the domestic economy.

Various criticisms previously highlighted the government's response, which was deemed slow in anticipation and mitigation. The vacancy of Indonesia's ambassadorial seat in the U.S. has also weakened Indonesia's economic diplomacy, precisely at a time when it is most needed.

Indonesia is on the list of 57 “worst offenders” countries that have posted large trade surpluses with the US. The US has particularly highlighted Indonesia’s non-tariff barriers, as the reason for imposing a 32 percent reciprocal tariff.

This reciprocal tariff will further impact Indonesia's labor-intensive sectors, which have long depended on the U.S. market and significantly contribute to exports and employment. A wave of layoffs and economic slowdown looms as an imminent threat.

The government has signaled that it is ready to soften regarding non-tariff barriers. The extent of compensation and take-and-give from both parties depends greatly on the strength of our diplomacy. Several observers have urged the government to request a delay in reciprocal tariffs and renegotiate the Generalized System of Preferences (GSP) scheme in order to continue to access the US market.

With the changes in the map and landscape of global trade following the increase in U.S. tariffs, Indonesia must no longer rely too heavily on traditional markets such as the U.S. and the European Union. Diversification into non-traditional markets has become urgent.

Membership in BRICS, accession to the OECD, acceleration and upgrading of a number of bilateral and regional free trade agreements, such as RCEP with ASEAN+, CP-TPP, IEU-CEPA, I-EAEU CEPA, and South-South cooperation, are expected to strengthen Indonesia's position in trade.

All these countries face the same issue, with situations that may be more complex. Here, we must be vigilant about the possibility of Indonesia becoming a target for an influx of products from other countries, especially China, which cannot enter the U.S. due to increased U.S. tariffs. Protecting the domestic market and business actors becomes an equally important agenda.

However, with a collective position, it is hoped that a wider escalation of the trade war can be prevented, the destructive impact on the world economy, and the bargaining position in global negotiations can be strengthened.

The trade war is a momentum to improve competitiveness and transform domestic industry, through economic deregulation. We also need to anticipate potential capital outflows and exchange rate pressures due to the trade war.

Indonesia's position is determined by the extent to which we are able to adapt and take advantage of opportunities from changes in the global trade map, manage uncertainty, and volatility in financial markets. Macroeconomic fundamentals will determine resilience in facing the worst-case scenario, including a global recession or stagflation due to trade wars.