Trump Tariffs: Test and Momentum for Reform for Indonesia

"Liberation Day"—this is how United States President Donald Trump referred to April 2, 2025, when he announced the new tariff policy that was part of his campaign promises during the last presidential election. However, for the world, this is not merely a declaration but a strong signal that the era of free trade has come to an end.

This policy marks a turning point in global trade with the implementation of a "reciprocal" tariff of 10 percent on all imports, as well as additional tariffs of up to 49 percent for countries with significant trade deficits with the U.S.—which it claims amount to 600 billion U.S. dollars per year. These tariffs will take effect at the beginning of April.

The imposition of reciprocal tariffs is being utilized by the U.S. government as an effort to strengthen domestic industries, reduce dependence on foreign products, and restore jobs for American workers.

The amount of the reciprocal tariff increase, as explained by President Trump, originates from 50 percent of the equivalent tariff imposed by trading partner countries on the U.S., calculated based on the trade deficit compared to the total U.S. imports from those countries.

No country is immune from these reciprocal tariffs. Even countries with free trade agreements (FTAs), such as Australia and South Korea, are not immune from the new tariffs.

As one of the countries with a significant trade surplus with the US, amounting to 17.9 billion US dollars in 2024, Indonesia is subject to a reciprocal tariff of 32 percent.

This rate is higher than several other BRICS countries, such as South Africa (30 percent), India (26 percent), and Brazil (10 percent). However, it is lower compared to some neighboring countries in ASEAN, such as Cambodia (49 percent), Laos (48 percent), and Vietnam (46 percent).

Tariffs have several types of impacts. The first is the substitution effect, where higher prices due to tariffs encourage the consumption of relatively cheaper substitute goods. For example, tariffs on textiles from Indonesia cause U.S. consumers to purchase domestically produced textiles or switch to imports from countries not subject to tariffs or with lower tariffs.

Subsequently, the income effect, stemming from the erosion of consumers' purchasing power, can reduce total consumption. Producers from the United States' trading partner countries, such as Indonesia, are at risk of experiencing a decline in sales and business profits, which in turn could affect workers' wages and employment levels.

From a macroeconomic perspective, the increase in import tariffs is a price that domestic consumers in the US will pay. They will pay higher prices for those goods.

One worst-case scenario estimate is that U.S. prices could rise by 3.3 percent if there is no domestic substitute and the full burden of tariffs is passed on to consumers. For example, German automaker Volkswagen is preparing to add an “import tax” to the price of its cars, due to the 25 percent tariff imposed on imported vehicles.

Therefore, this tariff policy will cause inflationary pressures, resulting in the high Fed interest rate tending to persist. As a result, the US dollar appreciation trend will continue.

Based on 2024 trade data, Indonesia is among the 15 countries with the largest trade deficit with the US. The impact of these reciprocal tariffs is significant and worrying, especially for labor-intensive products, such as clothing, textiles, and footwear, which account for almost 30 percent of Indonesia's total exports in 2024.

Given the challenges the industry is currently facing, including layoffs and minimum wage issues, this tariff policy will be a serious problem for Indonesia. In addition, Indonesia's economic policies have also been called "unfair" to the US several times.

Several regulations such as the Domestic Component Level (TKDN), import licensing (import licensing), or prohibition and restriction policies (lartas) as well as Natural Resource Export Proceeds Funds (DHE SDA) have also not escaped the attention of the US Government.

Could Indonesia benefit from investment relocation? This will depend on Indonesia's readiness and commitment to economic reform.

According to the World Bank's latest Business Ready report, the process for registering a foreign company in Indonesia takes 65 days, far longer than the most efficient countries, which only take three days.

In addition, trade barriers are also a major obstacle, with import compliance costs at 66 percent of the value of goods and exports at 35 percent, much higher than the most efficient countries, which are only around 2 percent.

The Japan External Trade Organization (JETRO) report, which conducted a survey of Japanese affiliated companies in several countries, including ASEAN countries in 2024, also showed several major obstacles for investors in Indonesia.

These obstacles include unclear policies from local governments, rising labor costs, and time-consuming tax procedures. In the last five years (2019-2024), almost 16 percent of total companies have moved their production functions from other countries, with Vietnam being the main destination, followed by Thailand, while Indonesia is still lagging behind.

The performance of the services sector also plays a crucial role in encouraging foreign investment, especially because of its close linkage to the performance of trade and the manufacturing industry.

The OECD Services Trade Restrictiveness Index (STRI) 2024 shows that regulation of the services sector in Indonesia is still stricter compared to the average OECD country and relatively high compared to other countries in the STRI sample.

Despite some liberalization measures taken by the government in recent years, significant restrictions remain in the legal services, accounting, telecommunications and insurance sectors, which discourage foreign investment.

Therefore, improving the investment climate is a homework that must be done by the government to be able to turn this challenge into an opportunity. With the high connectivity between investment and trade, it is hoped that mutually beneficial economic relations between Indonesia and the US will be more open.

According to the latest CSIS Report on Indonesia's Strategic Dependence, the US still plays an important role in the Indonesian economy, especially the food and energy sectors as priority sectors for the current government.

For example, Indonesia imports significant amounts of wheat and soybeans and the US is recorded as accounting for 60 percent of Indonesia's shrimp export market. In terms of foreign investment, the US is also still a major investor in the mining sector.

To date, there has been no policy response from the Indonesian government since the Trump administration took office. Malaysia, for example, has just launched the National Geoeconomic Command Center (NGCC) to respond to geoeconomic dynamics, including assessing the impact of Trump's tariffs.

One of the government's initiatives is the labor-intensive sector deregulation program, to provide a breath of fresh air for companies and investors. Massive deregulation and debureaucratization in this sector aims to facilitate the entry of investors into labor-intensive industries.

This policy could be complemented by the completion of negotiations on new trade agreements, such as the Indonesia-European Union Comprehensive Economic Partnership Agreement, which has the potential to increase Indonesian exports, particularly in labor-intensive sectors such as textiles and garments.

Diversification of products and trading partners is an absolute must. Based on ITC's export potential simulation, products with the largest export potential from the US to Indonesia, such as soybean oil, cotton, corn, and wheat, have the potential for additional exports to the US of up to 2 billion US dollars per year.

The US services sector, especially digital, needs attention from the Indonesian government. Last year, the US recorded a services trade surplus of almost $300 billion, consisting of financial services to cloud computing. In addition, Indonesia can also be more active in efforts to access the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CP-TPP), to explore new export markets, especially in South America.

Finally, Indonesia needs to consider a more concrete regional response within ASEAN, given that all member countries are facing significant tariff increases. For example, encouraging the use of the Regional Comprehensive Economic Partnership (RCEP) to accelerate trade between member countries and help mitigate the adverse impacts of US tariffs.

Nothing is instant, but without concrete action, Indonesia could lose opportunities that will not come twice.

Dandy Rafitrandi,Researcher, Department of Economics, Center for Strategic and International Studies (CSIS)