Hopes and Fears: Indonesia's prospects in an ASEAN-EU Free Trade Agreement

By Alexander C. Chandra, Anna Alfaro Manurung, Daniel Pambudi, Beginda Pakpahan on May 13, 2010

It is nearly four decades since the Association of Southeast Asian Nations (ASEAN) and the European Union (EU) first formalized their relations in 1972. The European Economic Community (or European Community), as the EU was then called, was the first official dialogue partner for ASEAN. Over the last thirty years or so, relations between the two regional groupings have been coloured by both achievements and setbacks. To ASEAN, the EU has been a model of inspiration for regional integration, while the EU, keen to spread the ideology of regionalism worldwide, has been active in providing support to regional integration in Southeast Asia. In order to strengthen the economic relations between the two regions, the EU and ASEAN have agreed to draw up an ASEAN-EU Free Trade Agreement (AEUFTA) sometime in the near future.

This study is a thorough examination of ASEAN and the EU's plan to establish an FTA. More specifically, using both qualitative and quantitative methods, it attempts to assess the economic impacts of this proposed free trade arrangement on one of ASEAN's developing member countries, Indonesia. Both Indonesia and the EU improved their bilateral economic relationship through the 2009 signing of a Partnership and Cooperation Agreement (PCA), which covers diverse areas of cooperation, such as trade, investment, human rights and climate change. The PCA with Indonesia is the first such agreement to be signed by the EU with an Asian country; it thus reinforces Indonesia's diplomatic standing in the eyes of European policy-makers. Although numerous studies have been conducted to analyze the feasibility of an AEUFTA, little critical research on the subject has been carried out. This study, then, is an initiative to fill that gap.

Key findings:

  • There can be little doubt that the proposed FTA between ASEAN and the EU is likely to bring about significant challenges to the countries of Southeast Asia. More specifically, the proposed FTA can be expected to deepen the existing asymmetry of economic relations between the two blocs. The developing and least developed countries of ASEAN, in particular, are likely to face economic difficulties as a result of the adjustment costs generated by this trade agreement.

  • The EU today has become an economic entity capable of exercising influence beyond that of other global economic superpowers, while ASEAN, on the other hand, has yet to evolve into a supranational economic entity capable of competing with the EU on the world stage. Despite the recent ratification of the ASEAN Charter, regional integration among ASEAN member countries remains weak, and this could potentially undermine ASEAN's ability to advance its regional economic interests vis-à-vis the EU.

  • Although most stakeholders in Indonesia agree that economics and trade relations with the EU are important, there is also widespread concern that the proposed AEUFTA could bring about significant negative effects to the welfare performance of the country in the short term.

Key recommendations:

Based on the above findings, this study argues that an agreement that benefits all parties will take into account the following considerations:

  • The prioritization of ASEAN's developmental objectives, which include, among others, the incorporation of Special Products (SP) and the Special Safeguard Mechanism (SSM), establishing a flexible time frame that would allow Indonesian economic actors to manage better the adjustment costs derived from this FTA, and further assistance and support given to the enhancement of ASEAN integration;

  • The improvement of market access for Indonesian exports to enter the EU market;

  • Concrete commitments from the EU to pursue long-term capital investment in Indonesia;

  • The use of flexible time frames for the implementation of the FTA;

  • Ensuring the participation of civil society groups in the policy-making processes leading to the full implementation of Indonesia's (ASEAN) free trade agreement.

Publication details

IISD, 2010