Australia / Analyst Insights
Trading Up: The Indonesian FTA Will Change the Australian Economy

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by Nathan Cloutman
Apr 30 2019

After concluding negotiations on 31st August 2018, the Australian and Indonesian governments signed the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) on 4th March 2019. The agreement will come into force once both countries go through their domestic treaty processes. The IA-CEPA will supplement the ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA) that both countries are currently a part of. Under the new trade agreement, a significant majority of Australian exports will enter Indonesia without a tariff, or will have improved preferential arrangements, and imports from Indonesia will enter Australia duty free. Indonesia has a population of over 265 million and is one of the fasting growing economies in the Asia-Pacific region.

The trade agreement is expected to benefit parts of the Australian agricultural and mining sectors. However, the agreement will likely harm the already struggling Australian Manufacturing division. The Beef Cattle Farming industry and the Tailoring and Clothing Accessories Manufacturing industry are likely to be two of the industries most significantly affected by IA-CEPA.

Exports to Indonesia totalled $6.5 billion in 2017-18, having increased from $4.0 billion a decade previous. Agricultural products, such as red meat, and commodities like coal and iron ore are two of the major categories of exports to Indonesia. The FTA is likely to boost trade to Indonesia by simplifying trade and reducing tariffs, significantly supporting certain industries. For example, the Beef Cattle Farming industry, which is expected to total $17.0 billion in 2018-19, is likely to benefit strongly from the deal, with beef and live cattle being some of the most significant exports to Indonesia. The industry’s exports are expected to increase to $1.4 billion over the five years through 2023-24 on the back of increased demand from Indonesia.

Indonesian imports into Australia totalled $4.5 billion in 2017-18. Key import products are primarily manufactured goods, such as furniture, clothing and footwear and tobacco, that are already tariff-free under AANZFTA. However, a rise in manufactured imports from Indonesia will negatively affect the already struggling Australian Manufacturing division. The increased ease of trading between the two countries is likely to increase manufacturing imports into Australia, putting further pressure on a Manufacturing division that is already struggling against imports. For example, the Tailoring and Clothing Accessories Manufacturing industry is expected to decline at an annualised 2.4% over the five years through 2023-24, to $1.3 billion, due to a likely rise in import penetration from Indonesia. Imports into the industry are expected to increase over the five-year period to total $873.0 million in 2023-24.

Operators in the Tailoring and Clothing Accessories Manufacturing industry have attempted to compete with rising low-cost imports from Indonesia and other Asian markets by shifting focus to high-quality, niche goods that compete on quality rather than price. Industry profit margins have declined over the past five years as local operators have been forced to lower margins to remain competitive against low-cost imports.

Related industries:
Beef Cattle Farming in Australia
Tailoring and Clothing Accessories Manufacturing in Australia

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