House of Representatives

Explanatory Memorandum

(Circulated by authority of the Assistant Minister for Customs, Community Safety and Multicultural Affairs, the Honourable Jason Wood MP)

Attachment C - INDONESIA-AUSTRALIA COMPREHENSIVE ECONOMIC PARTNERSHIP AGREEMENT

ANALYSIS OF REGULATORY IMPACT ON AUSTRALIA

5 December 2018

PART 1: INTRODUCTION

1. This Analysis of Regulatory Impact on Australia (ARIA) relates to the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA). Australian Prime Minister Julia Gillard and Indonesian President Susilo Bambang Yudhoyono launched negotiations on IA-CEPA in November 2010.

2. A Regulatory Impact Statement was prepared by the Department of Foreign Affairs and Trade (DFAT) in consultation with the Office of Best Practice Regulation (OBPR) in 2009 to inform the decision to commence negotiations (See Attachment 1 - 2009 Regulatory Impact Statement ).

3. After a pause in negotiations, these were relaunched by Indonesian Minister of Trade Republic of Indonesia, H.E Thomas Trikasih Lembong and Australian Minister of Trade and Investment, the Hon Steven Ciobo MP when they met in Canberra on 16 March 2016.

4. An interim Regulatory Impact Statement was completed by DFAT in consultation with OBPR in 2016 in order to inform cabinet's decision on a negotiating mandate after negotiations were restarted.

5. The substantial conclusion of negotiations was jointly announced by the Australian Prime Minister Scott Morrison and Indonesian President Joko Widowdo on 31 August 2018.

6. On the basis of these RIS, among other supporting documentation, Cabinet decided that, of the available policy options, pursuing a high quality bilateral agreement with Indonesia was the likely to produce the most benefit to Australia. Cabinet set the acceptable parameters of a beneficial agreement in the form of a negotiating mandate. An agreement within these parameters has now been achieved and is ready to be tabled in parliament. This ARIA will support the deliberations of Parliament's Joint Standing Committee on Treaties.

PART 2: PROBLEM IDENTIFICATION

7. The Joint Standing Committee on Trade and Investment Growth enquiry Leveraging our advantages - The trade relationship between Australia and Indonesia noted 'The trade relationship between Australia and Indonesia is clearly underdeveloped. In 2015-16 Indonesia was Australia's 13th largest trading partner, trailing behind smaller markets such as New Zealand'. Indonesia is a natural market for Australia, with high potential for growth into the future (geographical proximity, large and growing population, economic growth).

8. Indonesia is also an important strategic partner for Australia, with a significant and growing leadership role in the Indo-Pacific via its role in ASEAN and its position as one of the world's largest democracies and most populous Muslim country.

9. It is in Australia national interest to deepen and broaden economic cooperation with Indonesia, as well as other facets of the relationship, and encouraging ongoing reforms that will help Indonesia grow and develop. This was recognised by the government's recent announcement of a Comprehensive Strategic Partnership with Indonesia, of which economic partnership was one of the key pillars.

10. Australia's trading and strategic relationship with Indonesia has been emphasised with the recent global trade environment - and rules-based international order more generally- facing challenges, including through growing protectionist sentiment.

11. Australia is a nation dependent on trading for our success. Australian businesses rely on export markets to sell their products and to access low cost inputs from overseas. The 2017 report Australian Trade Liberalisation: Analysis of the Economic Impacts by the Centre for International Economics found that Australian households have benefited from a higher standard of living thanks to cheaper consumer goods and one in five jobs in the Australian economy is dependent on trade.

12. With the World Trade Organization (WTO) Doha Development Agenda Round stalled, major trading economies are increasingly working to decrease barriers to trade via bilateral and plurilateral agreements, within which countries agree to lower existing trade barriers on a reciprocal basis.

13. With Australia's trading partners being proactive in negotiating reciprocal reductions in trading barriers, Australia's businesses will increasingly be at a disadvantage compared to their competitors in other countries unless the government ensures that Australian businesses enjoy the same levels of access. Expanding and deepening Australia's trade and investment relationships is critical to Australia's future economic growth and prosperity.

Barriers impeding Australia-Indonesia Trade and Investment

14. Indonesia will move from being the 16th largest economy into the top 10 by 2030, and be the fourth largest by 2050. By 2030, around 70 per cent of Indonesians will be of working age, supporting a consuming class of around 135 million people and business opportunities will be worth approximately $US1.8 trillion.

15. In Indonesia, high tariffs and non-tariff measures, including variable customs procedures, red tape and import-licensing arrangements are significant obstacles for Australian business. Indonesian policies are often geared towards 'self-sufficiency', notably in the food and agriculture sectors, with measures that aim to encourage domestic production and discourage imports.

16. In a promising development, Indonesian President Widodo has announced the aim of improving Indonesia's position on the World Bank Ease of Doing Business report, targeting a rank of 40. From a ranking of 109 in 2015, Indonesia achieved a ranking of 91 by 2016, a jump of 15 places. By 2017, Indonesia's ranking remains at 72, due to improvements in similar countries while Indonesia made no progress.

17. Despite much progress, Indonesia's regulatory environment remains uneven.

Tariff Barriers

18. Like most countries, Indonesia has progressively lowered its import tariffs. The ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA) continues to reduce these in certain sectors for Australian exporters to Indonesia. However, a range of key agricultural exports such as sugar, frozen beef, some horticulture and sheep meat, and some manufactured exports, such as copper cathodes, some iron and steel products and some machinery parts continue to face high tariffs.

Non-Tariff Measures

19. Indonesia maintains non-tariff measures including quotas, bans, import licensing requirements and pre-shipment inspection for a range of products. Between 2009 and 2015, the number of product-level non-tariff measures on Indonesian imports doubled, expanding the number of products covered by non-tariff measures by over 38 per cent ^[1] . This dilutes some of the benefits created by reductions in both the MFN tariff and tariff reductions under AANZFTA.

20. Indonesia's import licensing restrictions apply to many goods, including alcoholic beverages ^[2] . Indonesia frequently revises import arrangements for a range of other products, such as sugar, live cattle and horticulture.

21. A number of Australian companies have expressed concern about anti-dumping actions affecting their trade with Indonesia. Concern about the transparency of regulations and administration in Indonesia also has an impact on trade and investment prospects.

22. Indonesia's regulations vary for different Australian imports with, for example, seasonal permits applied to Australia citrus ^[3] , unpredictable permits for grapes, and no permits issued for apples, mangoes, melons, bananas or pineapples.

Barriers to Services Trade

23. Australia's exports in education, health, mining, telecommunications, business and professional, financial, tourism and other services into Indonesia are significant but impeded by Indonesia's regulatory regime. Lengthy and costly business licensing, permitting and operating procedures, visa restrictions around expatriate employment and difficulties with governance hamper further growth.

24. Indonesia maintains barriers to services trade in many sectors. Relatively restrictive rules governing legal, accountancy and architecture services, as well as education, telecommunications and construction exist. Australian professionals face challenges in obtaining recognition of qualifications. Indonesia maintains restrictions on services, including limits on foreign equity and nationality requirements. Australian and other foreign educational institutions cannot, for example, establish branches or local campuses in Indonesia.

Investment

25. The Indonesian Government is keen to secure large-scale international investment, yet despite some reforms, investment attractiveness remains low due to factors including:

a.

Limitations on foreign investment, including foreign investment in a number of sectors being either closed or restricted. Many sectors have investment caps that limit foreign investment to a non-controlling shareholding. Investment caps are also subject to change and changes may apply retrospectively.

b.

Limitations on expatriate work visas for service, trading and consulting companies.

c.

Additional permits and costs associated with visiting directors, consultants, auditors and lecturers.

d.

Shortages of skilled local staff and low levels of labour productivity. While Indonesia has one of the lowest wage costs for manufacturing in US dollar terms in Asia (lower than China, Philippines, Thailand, Malaysia and Vietnam) the advantage is lost when adjusted for labour productivity. Firms also incur large indirect costs due to poor logistics, infrastructure gaps, labour skills shortages and complex business licensing requirements.

Logistics Costs

26. Logistics costs in Indonesia are estimated at 25 per cent of the cost of manufacturing sales, higher than that of neighbouring countries including Thailand (15 per cent) and Malaysia (13 per cent) ^[4] . A large proportion of this cost is associated with the need to carry higher inventory levels to accommodate an unreliable logistics chain. Moving freight from Java to Indonesia's outer provinces is hampered by long supply chains, uncertainties in delivery times, and high costs that cover the cost of mostly empty return voyages.

Impact of Other Preferential Trade Agreements

27. Australian businesses are currently at a disadvantage to some key competitors given Indonesia's existing trade agreements. Under the ASEAN Trade in Goods Agreement (ATIGA), Indonesia provides preferential access to ASEAN nations. China also has preferential access to Indonesia compared to Australia on a range of goods under the ASEAN-China FTA.

28. Indonesia has been negotiating an FTA with the EU since July 2016. If finalised, this has the potential to further impact the competitiveness of Australian businesses.

29. The ASEAN Framework Agreement of Services (AFAS) allows Indonesia to offer greater market access to service suppliers from ASEAN countries - including through recognition of qualifications in a range of professions, such as accounting. In practice, Indonesian regulations give advantages to ASEAN service suppliers in 20 sectors, including transport, healthcare and tourism.

30. Some of Australia's existing trade agreements also currently provide preferential access to Indonesia's competitors in the Australian market. For example, tariffs on all China's textiles, clothing and footwear exports to Australia are being eliminated under the China Australia Free Trade Agreement. For Indonesia, these tariffs are not eliminated under AANZFTA until 2020.

Global Mid-Term Outlook

31. The future trajectory of the Australia-Indonesia trade and economic relationship will be affected in part by prevailing global and regional conditions. Global economic growth has been held at around 3 per cent per year since 2010, around 0.5 of a percentage point weaker than the average for the two decades before the global financial crisis (GFC). Weak trade and investment growth, low productivity growth and low inflation remain major vulnerabilities for the global economy.

32. The United Nations Conference on Trade and Development (UNCTAD) estimates global foreign direct investment (FDI) flows fell 23 per cent in 2017, reaching an estimated US$1.43 trillion, as global economic growth remained weak and world trade volumes posted anaemic gains. FDI flows to developing economies remained stable in 2017 after falling 20 per cent in 2016 (to an estimated US$671 billion), largely on the back of slowing economic growth and falling commodity prices.

33. However, despite heightened uncertainty, there are also some encouraging signs. Australia's 2018-19 Budget Economic and Fiscal Outlook forecasts global growth at 3.8 per cent in 2017 moving to 3.75 per cent in 2018 and 2019. This is in part due to higher forecast growth in the United States and East-Asian economies in 2017 and 2018.

34. The July 2018 IMF World Economic Outlook forecasts US economic growth of 2.9 per cent for 2018 and 2.7 per cent for 2019 (Budget 2018-19 - 2.3 per cent). Economic activity in the ASEAN 5 (Philippines, Indonesia, Malaysia, Thailand and Vietnam) has remained relatively resilient despite subdued global demand, with economic growth of 5.3 per cent in 2018 and 5.4 per cent in 2019.

35. The Indonesian economy has continued to expand, driven by private consumption and public investment, and economic growth in the Philippines and Vietnam has remained strong

36. Key uncertainties for the global outlook include the pace of growth in China, the impact of Brexit, and tighter global financial conditions. On the upside, the support to economic activity from policy stimulus in the United States and/or China could turn out to be larger than expected, which could translate to a stronger pickup of activity in their trading partners (including Australia and Indonesia). Upside risks also include higher investment if confidence in the recovery of global demand strengthens.

Indonesia's Economic Outlook

37. Despite the challenges outlined above, there are significant opportunities for greater trade, commercial and cultural links between Australia and Indonesia. Indonesia's economy has expanded strongly over recent decades. The poverty rate more than halved from 23 per cent during the Asian Financial Crisis to 10 per cent in 2018. Indonesia's Central Statistics Agency (BPS) reported growth of 5.06 per cent for the year to Q3 2017, with growth of 5.2 per cent in Q3 2017. Indonesia remains the third fastest growing economy in the G20 (behind India and China).

38. Indonesia accounts for more than a third of total ASEAN GDP. Positive growth during the global financial crisis (GFC), compared to the turbulence caused by the Asian financial crisis, illustrates a new resilience to external shocks. While there are important caveats, Indonesia's future economic outlook remains relatively upbeat out to 2030. Based on current trends, Indonesia will move from the 16th largest economy in the world to the ninth largest by 2030, and fourth largest in 2050. A PWC report (February 2017) expects average annual growth of over 6 cent per annum out to 2050, Global Insights estimate annual growth ranging from 5.1 to 6.1 per cent per annum and the US Department of Agriculture expect annual growth between 4.4 and 5 per cent. ^[5]

39. To fully realise its potential, Indonesia will need to continue structural reform and improve its governance and business climate. The tendency to look inward for growth, change laws unexpectedly and restrict trade to protect local industry are all areas where continued reform would bring significant long-term gains.

Growing Opportunities with a Growing Economic Power

40. Asia is predicted to be home to around two thirds of the world's middle-class by 2030, fuelling demand for resources and commodity exports from both Indonesia and Australia. Under conservative assumptions, Indonesia itself will have a consumer class of 135 million people by 2030 ^[6] . This would support domestic consumption and represent the largest growth in consumers aside from China and India.

41. Indonesia's urban population could reach 63 per cent in 2030, up from 51 per cent in 2012, with much of the movement anticipated to occur outside of Jakarta. Cities with populations between 150,000 and 10 million people (such as Surabaya, Medan, Makassar and Yogyakarta) will grow faster than Jakarta and contribute more to the economy.

42. These cities are predicted to contribute around 63 per cent of GDP in 2030, compared to Jakarta's 19 per cent. Indonesia has one of the youngest demographic profiles in the world, with 53 per cent of its 257.6 million people below the age of 30. With continued population growth, around 70 per cent of the population are expected to be of working age by 2030.

43. As Indonesia's economic weight grows, and more of its people enter the consumer class, business opportunities in Indonesia will continue to grow. McKinsey (2012) estimates that Indonesia could offer private-sector business opportunities worth approximately $1.8 trillion by 2030. As wealth grows, Indonesian investors are likely to look to countries offering stable economic returns, particularly in industries with links to their domestic economy, including, for example, food and agriculture.

Opportunities in Goods

Agriculture

44. Indonesia is an important market for Australian agriculture. This importance should increase as Indonesia's economy and middle class grow. In an analysis of Indonesia's food demand to 2050, the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES 2015) anticipates that economic, population and urbanisation growth will result in a quadrupling of the value of agricultural food consumption from 2009 levels. (Figure 1)

Figure 1 Agrifood consumption in Indonesia 2009 versus 2050 forecasts

45. While there is potential for Indonesia to increase its food production and productivity, Indonesia's domestic agricultural sector will face challenges to satisfy the country's growing food demands (Figure 2). There are opportunities for Australian agricultural goods to supplement Indonesia's demands for quality agricultural products, and to be used as inputs for Indonesian manufactured food products.

Figure 2 Agrifood exports and imports for Indonesia: 2009 versus 2050 forecasts

46. There are distinct opportunities for collaboration between Australian and Indonesian agrifood business to access third markets. Australian wheat is already used as a crucial input for Indonesia's noodle production, which is then exported to the region. As the region continues to grow, these types of opportunities should expand.

Consumer goods

47. Indonesia's rapidly expanding middle class represents opportunities for Australian exporters of consumer goods. For example, the rising demand for premium goods has boosted the growth of imported cosmetics and skin care products. Sales of imported cosmetics in 2015 reached US$441 million and accounted for more than 60 per cent of cosmetics market share in Indonesia.

Manufacturing and specialised equipment

48. There is scope for Australian manufactured and industrial goods to be used as inputs or intermediate products in Indonesian manufacturing, which is increasingly targeting Asian markets.

49. The medical devices technology market in Indonesia is forecast to pass US$1 billion in 2018. Around 85 per cent of the medical equipment and services market is comprised of imports. Business opportunities primarily exist in surgical equipment, high-intensity focused ultrasound, radio immunotherapy and clinical laboratory equipment used for diagnostic tests, particularly for molecular diagnostics, microbiology, and immunochemistry and genetics testing.

50. There is also scope for Australian innovations, including in the resources sector where Australian companies already supply specialised underground mining equipment.

Opportunities in Services

51. Increased services trade represents the biggest potential for growth partnerships between Indonesian and Australian businesses. There are significant synergies between the services sectors that Indonesia is prioritising for future growth and the sectors in which Australia has expertise.

52. Australia's strengths match Indonesia's priorities in agriculture, education, healthcare, mining, professional, financial and tourism services. In many of these areas Australian exports are showing signs of growth, but there is huge potential for further growth that would help lift productivity across sectors in Indonesia.

ICT, E-Commerce and Fintech

53. Indonesia's digital innovation sector is rapidly evolving, with increasing technical literacy especially among younger age groups. The rate of internet access is rapidly growing. Smartphones are the key platform, with more than 280 million SIM cards in use across the archipelago.

54. E-commerce is growing rapidly in Indonesia. Current government forecasts estimate a surge in e-commerce spending from US$6.9 billion this in 2017 to US$14 billion by 2020. Ecommerce is growing between 40-50 per cent annually, making Indonesia one of Asia's more attractive destinations for digital investment. There are opportunities for firms ready to bring in capital, technology and security solutions to partner with local companies to launch their own e-commerce arm.

55. Financial technology services (FinTech) continues to develop rapidly in Indonesia. Total FinTech transactions in Indonesia are estimated to reach US$37.15 billion by 2021. The Indonesian Government has identified close to 100 local FinTech companies with the potential to help Indonesia's banks, small medium enterprises and non-banking financial institutions. The Financial Services Authority of Indonesia (OJK) has developed new guidelines to encourage greater FinTech investment in Indonesia, based on Australian templates.

Energy and Resources

56. Indonesian energy demand is predicted to grow strongly over the medium term. Population growth will put extreme pressure on Indonesia's energy infrastructure and make identifying new and unconventional energy sources increasingly important for sustaining growth.

57. The Indonesian government has already signalled it wants to see a substantial expansion of renewables and oil and gas exploration. Australian companies providing renewable and exploration services will need to continue monitoring developments in Indonesia.

58. As a major producer of thermal coal, tin, nickel and copper, Indonesia offers opportunities for Australian engineering, technology and mining services companies. Despite 2013-2015 marking a low point in the commodities cycle, Indonesia continued to attract investment and the resources and the energy sector remains a strong contributor to overall GDP.

59. Opportunities exist for providers of mining technology services who can clearly demonstrate productivity gains to Indonesian miners. Demand remains strong for mining (and to a lesser degree exploration) software, specialised and innovative equipment, education and training services and specialised mining consulting.

60. The Indonesian mining industry has suffered from considerable skills shortages, creating opportunities for training providers. Mine safety - an area of outstanding Australian capability - also looms large as a growth opportunity for Australian service providers.

Education

61. Australia remains the number one destination for Indonesian university students studying abroad and is forecast to grow at 7 per cent through to 2024. Austrade estimates that there are over 500,000 Indonesian alumni of Australian education institutions, many of whom are now in senior positions in the private and public sectors. Australia is the number one destination for Indonesians studying abroad, with an approximate 25 per cent share of internationally mobile Indonesian higher education students (UNESCO, 2014; Illuminate, 2015).

62. There are also significant opportunities for Australian institutions to partner with Indonesian industry and the education sector to build capacity, develop programs and deliver training in Indonesia. This is especially the case in the VET sector, which Indonesia has identified as a major driver of economic growth and for which it is establishing new policies and partnerships to align skills with industry needs.

63. Australia can become a key partner by supporting greater links between skills development systems, industry and employers (including Australian employers); engaging with industry to help tailor training to business needs; and developing new industry-led skills development delivery models to meet increased demand.

64. Australian institutions can also tap into opportunities in maritime (port management and safety), engineering-related training (electrical, manufacturing, automotive and mechanical), hospitality (food safety, kitchen operations), tourism (hotel management), health services (allied health and patient care) and training needs in a range of other sectors by providing training in Indonesia and Australia.

Tourism

65. Increased tourism is central to Indonesia's economic growth strategy, which is targeting 20 million visitors by 2020. In response to limited tourism development outside of Bali, the Indonesian government has nominated ten new destinations for development to increase visitation, capitalising on key strengths of price competitiveness, rich natural resources and heritage sites.

66. As a world leader in providing consulting services to grow tourism destinations and innovative attractions and experiences, there are significant opportunities for Australian companies to help develop Indonesia's new tourist areas. Australia's research, marketing, training systems and tourism planning are highly regarded internationally and can readily contribute to growth in Indonesia. There are also opportunities for Australian hotel management businesses, which have a large global footprint and access to well-developed value chains of businesses that provide high-quality products, services and skills to deliver premium visitor experiences.

67. There are significant prospects for growth in visitor numbers and spend by inbound Indonesian tourists to Australia. When choosing a holiday destination, Indonesians value safety and security, value for money, sport and cuisine, world-class nature and welcoming people. Australia performs strongly in all these categories.

Healthcare services

68. Rising affluence is increasing the demand for high-quality health care. However, as an emerging market with infrastructure constraints and a challenging geography, an increasing number of Indonesians are travelling overseas for medical treatment, spending up to US1.2 billion a year. There are opportunities for Australia's world-class healthcare providers and businesses to build capacity across the Indonesian healthcare sector- from the vocational training of doctors, nurses and hospital workers to hospital administration, patient management, after-care and aged care.

69. Over the medium to long term the healthcare IT market is likely to be a major contributor to the sector's growth. Examples of key growth areas are telehealth, telemedicine, electronic medical records, and the use of healthcare mobile applications for point-of-care diagnostics, particularly in remote and rural areas.

Aviation

70. Indonesian domestic air travel is growing at over 5 per cent annually and in 15 years will be the fifth largest domestic air travel market globally. In preparation, the Indonesian government has allocated $5.4b over the next 5 years to upgrade or build 15 airports annually. In mid-2016, Indonesian airlines had 800 new planes on order and a deficit of 2,500 pilots.

71. Indonesia's demand for international maintenance, repair and overhaul (MRO) services and training, aviation flight training and aviation engineering presents a significant opportunity for Australian business to engage in the aviation industry. Australian companies are in discussions around air traffic control management systems and airport scheduling technology.

Maritime

72. As an archipelagic nation there are significant infrastructure needs in the port sector. Planning from large port developers and operators takes in tourism needs as well as interisland and international connectivity. There are also opportunities for Australian port management capabilities and technology to be overlaid on the port infrastructure.

Global Value Chains

73. The foreign content share of Indonesia's exports is one of the lowest among major economies, partly reflecting relatively high export dependencies on agricultural, food and mining products (OECD-TiVA, December 2016). Australia's supply of products and services (particularly in manufacturing and ICT inputs) that underpin the latter suggests potential for further complementarity to access third markets.

PART 3: OBJECTIVES OF GOVERNMENT ACTION

74. The current trade and investment relationship between Australia and Indonesia could be much stronger given the growing complementarities between our economies, Indonesia's growth trajectory and the opportunities a closer partnership and economic integration would provide in accessing the dynamic Asian markets to our north. Deeper economic integration would strongly complement already close strategic, security and political engagement, and help build stronger people-to-people links.

75. Recognising the gains to be made from closer economic ties, Australia and Indonesia have been working to progressively address barriers and capitalise on opportunities through liberalising trade agreements.

76. The most significant barriers to trade with Indonesia are at the level of government regulation. Australia companies are not able to influence these barriers, so Australian Government action is required. This has been requested by a broad range of Australian businesses (see consultation section).

77. If the Australian government does not act to ensure a level playing field for Australian exporters, those businesses risk being out-competed by others whose home governments have reciprocally negotiated the lowering of trade barriers for their companies.

78. Previous government actions in this space have been successful. The Productivity Commission's 2017 report Rising Protectionism: Challenges, threats and opportunities for Australia notes that reductions in Australian government regulation on trade have overwhelmingly improved the quality of life enjoyed by Australians. Australia's deregulated trading environment was an important cause of our resilience in the global financial crisis. Other FTAs have been successful at convincing our trading partners to reciprocally reduce their own barriers, increasing trade and investment.

79. The objectives of government action are to secure tariff reductions on commercially significant Australian exports to Indonesia, secure increased market access in Indonesia for Australian services providers, and to build a strong foundation/framework for economic and other cooperation between Australia and Indonesia.

80. This reduction of barriers to trade will level the playing field for Australian businesses, enabling Australian exporters to compete on an equal level with exporters from other countries.

81. Constraints on government action include domestic sensitivities within Australia and Indonesia. Vested interests in Australia and Indonesia and non-competitive industries currently shielded by government regulation will resist the removal of regulations that prevent competition from imports.

82. In Australia, negative media reporting about trade has tended to focus on community fears that trade could increase migration, decrease available employment in manufacturing and prevent the government from regulating in the public interest. Concerns frequently raised in the media in Australia are addressed in the consultation section.

PART 4: ALTERNATIVE MEANS BY WHICH TO ACHIEVE THESE OBJECTIVES

No Government Action

83. No government action would mean leaving all regulations in place that currently restrict imports and inbound investment to Australia from Indonesia. This would not improve Australian companies' access to Indonesian markets, however it would not prevent them from attempting to export goods and services to Indonesia under existing WTO and AANZFTA conditions.

Unilateral Deregulation

84. The productivity commission ^[7] notes 'that there is no reason why Australia could not proceed unilaterally to lower these barriers. Lowering barriers to all countries on a most favoured nation (MFN) basis would confer larger benefits than lowering them preferentially to a relative few. This is because preferential agreements can result in trade diversion, where it is the preferential treatment that makes the agreement partner country the cheaper supplier, giving them an advantage over the lower cost suppliers.

85. Past work of the Commission has highlighted how bilateral agreements have not always delivered the expected benefits or earned the broad support of the community (PC 2010). In part, this is due to long phase-in periods for tariff reductions in the most sensitive areas and the costs of navigating multiple agreements with complex rules of origin and regulations, which limit their use by businesses. Recent analysis concluded that rules of origin 'have become a pernicious barrier to trade for Australian businesses' (Crook and Gordon 2017, p. 3).'

86. While from a purely economic perspective, unilateral reductions are the easiest to achieve and require the least amount of effort, analysis by the Productivity Commission understates the benefits of FTAs and overstates the complexities in making use of them.

87. This arises due in part to Australia's trade policy not operating in a vacuum, or under conditions found in the ideal economic model, and due to Trade Agreements being written to address every product that is being exported/imported along with Services, Investment and an increasing range of contemporary issues.

88. Should Australia act unilaterally, other countries would continue to pursue bilateral or plurilateral agreements to the exclusion of Australia and Australian industries. That is, inaction itself can lead to a worsening of Australia's position over time, and short of multilateral agreement to not negotiate further trade agreements, Australia would experience a short term gain, for longer term pain.

89. The international trading environment is already distorted by existing regulations, which include:

a.

Sanitary and phytosanitary measures;

b.

Standards, technical regulations and conformity assessment procedures;

c.

Tariff and non-tariff measures;

d.

Customs procedures; and

e.

Existing FTAs.

90. As Australia has already reduced or eliminated tariffs from its major trading partners under existing FTAs, as well as providing duty-free and quota free access to Least Developed Countries under the Generalised System of Preferences (GSP), it is likely that an additional FTA would have a negative effect on trade diversion for Australian importers. This is due to IA-CEPA allowing imports from Indonesia to compete on equal grounds to imports from many of Australia's major trading partners and Least Developed Countries.

91. An example of the benefit of is Australian sugar exporters to Indonesia who received no preferential outcome under the AANZFTA Agreement. In 2015, it was brought to the Australian Government's attention that Thai exporters would be facing an effective tariff of five per cent under the ASEAN Trade in Good Agreement while Australian exporters to Indonesia would continue to face the MFN tariff, effectively 8 per cent.

92. The Australian Sugar Industry Alliance noted that 'We[Australia] went from supplying around a third of Indonesia's sugar imports to almost nothing.'

93. As an early deliverable of the IA-CEPA negotiations and a demonstration of goodwill, Australia and Indonesia were able to make use of provisions of the AANZFTA to bring the tariffs faced by Australian exporters of sugar in to line with that of Thai exporters, with Australia eliminating the tariff on certain pesticides and herbicides. ^[8]

94. Had Australia not had an existing trade agreement in place, Australian sugar producers would continue to be locked out of the Indonesian market. While transactional, the specific impact on Australian sugar producers could have had major consequences for both producers and the regions they are located in.

95. When it comes to the complexities of using FTAs, IA-CEPA will build off the existing rules for AANZFTA including the Rules of Origin and document certification procedures, including improving on aspects where AANZFTA resulted in a negotiated outcome that Australia sought to improve.

96. Where a business already makes use of AANZFTA, they will already understand many of the rules of IA-CEPA.

97. Businesses are free to decide which Agreement to export their goods under, or not to make use of a FTA at all, and as such, rather than creating a noodle bowl of overlapping FTAs, an additional agreement will strengthen Australian industries ability to trade with Indonesia while minimising the tariffs and barriers they face.

98. It is important to understand that the 'noodle bowl' concept is an issue raised, not typically by individual businesses but, by those who are involved in looking at an FTA holistically such as industry associations, policy makers and academics.

99. Most small or medium enterprises export a fixed and limited number of products across a small selection of tariff lines, meaning that even in the case where they may have a choice between four or five FTAs, they will only need to learn the rules for the FTA which they wish to make use of the available tariff preferences.

100. Where larger businesses need to make use many agreements across a larger range of products these businesses tend to access the services of specialist logistics firms or in-house logistics experts that are experienced in managing the complexities involved in the international movement of goods, which involves matters beyond the trade agreements such as shipping, quarantine and standards.

Multilateral Agreement

101. There are currently no negotiations for a comprehensive multilateral trade agreement advancing in the World Trade Organization. As a result, it is not currently feasible to seek improved market access for Australian exporters through multilateral negotiations.

Plurilateral Agreement

102. The ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA) has been in force between Australia and Indonesia since 2012, following Indonesian ratification.

103. Australia committed under AANZFTA to eliminate all tariffs on Indonesians goods by 2020.

104. Under AANZFTA, Indonesia has bound 92 per cent of tariff lines at tariff-free treatment in 2017, which will rise to 94 per cent by 2025, with another four per cent having the tariff bound at 5 per cent or less. However, some products will still face high tariffs.

105. AANZFTA also provides outcomes on services and a regime of investment protections.

106. In addition, AANZFTA provides a platform for economic integration with ASEAN, including through the AANZFTA Economic Cooperation Support Program, an aid-for-trade program funded by Australia and New Zealand. Parties to AANZFTA are currently conducting a General Review to ensure AANZFTA remains relevant to business. However, this review focuses on issues beyond the Australian-Indonesian bilateral relationship, and it is not certain that it would address all the issues identified.

107. In addition to negotiating the bilateral IA-CEPA, Australia and Indonesia are building on the outcomes of AANZFTA through negotiations of the plurilateral Regional Comprehensive Economic Partnership (RCEP).

108. However, plurilateral negotiations have the disadvantage that they bring the economic sensitivities of a larger range of countries, and in the case of RCEP, the Australian government cannot expedite the timing of such agreements' conclusions due to being dependent on a larger number of Parties needing to agree.

109. In addition, plurilateral agreements can sometimes end up being less ambitious than bilateral negotiations because of the need to address sensitivities between the parties, for example, in the case of RCEP, the inclusion of China, India, Japan and Korea means that for some of those countries, this will be the first trade agreement they have negotiated with each other. This also means that sometimes areas of particular interest to Australia may not be covered unless all negotiating parties are willing to discuss them.

110. While RCEP does offer prospects for reducing barriers to trade with Indonesia, the timing of this is uncertain and the number of barriers reduced will be limited by the nature of plurilateral negotiations and may not be able to target some areas of specific commercial interest for Australian companies.

Bilateral Agreement

111. A bilateral FTA with Indonesia would allow Australia to address a broad range of trade barriers that Australian businesses face when dealing with Indonesia.

112. The Australian Prime Minister and the Indonesian President have publically agreed that this option will be beneficial for both Australia and Indonesia and will support the bilateral relationship going forward.

113. Part of the negotiation process involved the establishment of the Indonesia Australia Business Partnership Group (IA-BPG) which now comprises the:

a.

Australian Chamber of Commerce and Industry;

b.

Kadin Indonesia (Indonesian Chamber of Commerce);

c.

APINDO (Asosiasi Pengusaha Indonesia, the Employers' Association of Indonesia);

d.

AiGroup;

e.

Indonesia Australia Business Council; and the

f.

Australia Indonesia Business Council.

114. These business organisations are strongly in support of the IA-CEPA as is outlined in a comprehensive position paper presented in 2012 ^[9] and updated in a submission to the IA-CEPA in 2016. ^[10] The papers outline a vision for a strategic partnership model that recognises the complementary nature of resources and capacity between the two countries.

115. As well as securing reduced barriers to trade for Australian exporters, IA-CEPA sets up a comprehensive plan of economic cooperation between Australia and Indonesia that will lead to an improved business environment in the future.

116. IA-CEPA also provides a foundation for working together on future regulatory alignment that will lower the cost of doing business further.

Best option

117. The best option to achieve these goals is for the IA-CEPA to enter into force between Australia and Indonesia. The FTA offers the prospect of delivering outcomes across goods, services and investment that respond to contemporary challenges facing Australian business.

118. An agreement with Indonesia, which delivers commercially meaningful outcomes and uses the AANZFTA as its foundation would deliver benefits for Australian exporters and investors, and demonstrate the importance of the bilateral relationship to the broader Indo-Pacific region.

119. Consistent with Australia's other free trade agreements, remaining Australian tariffs on imports from Indonesia will be eliminated, with consumers and businesses across Australia set to benefit from lower prices.

120. The agreement is unlikely to impose major adjustment costs on any region or sector.

121. Savings related to improvements to administrative processes using the Agreement's Rules of Origin, including Certificate of Origin Procedures, are set out in Attachment 2 - Regulatory Burden Estimate.

122. The Obligations under IA-CEPA are set out in Attachment 3 - Obligations in Detail

PART 5: IMPACT ANALYSIS

Goods

123. Under AANZFTA, 98 per cent of Indonesian exports to Australia are duty free and only two per cent face tariffs; however around 30 per cent of Australian exports to Indonesia are still affected by tariffs. These tariffs are a burden on our businesses and discourage trade.

124. Under IA-CEPA, 99.9 per cent of Australian goods exports to Indonesia will enter Indonesia duty free or under significantly improved and preferential arrangements.

125. Indonesia will offer improved and more certain access for Australia on live cattle, feed grains and horticultural products such as citrus fruits and vegetables (carrots and potatoes). As the centre of Australia's live cattle trade with Indonesia, northern Australia will be a particular beneficiary.

126. IA-CEPA will also offer better access for rolled steel coil, produced in Australia by Bluescope as a feedstock for its Indonesian manufacturing facilities.

127. Through IA-CEPA, Indonesia will lock in the lower sugar tariff that has already been implemented as a result of the 2017 agreement between then Prime Minister Turnbull and President Widodo. Indonesia will also progressively eliminate tariffs on most other products, including frozen beef and sheep meat, dairy, and a range of manufactured steel, copper, plastic, automotive parts and machinery products.

Services

128. Indonesia made limited services commitments under AANZFTA. IA-CEPA is an important opportunity to secure and improve the basis for trade in services between Indonesia and Australia.

129. IA-CEPA will improve certainty for Australian service providers in Indonesia in a range of sectors of commercial interest. Indonesia's commitments represent a significant improvement on its services commitments in AANZFTA. For example, for the first time in any FTA, Indonesia has offered commitments on a wide range of technical and vocational education, ensuring Australian providers can establish certain majority Australian-owned joint ventures in Indonesia and limiting the onerous conditions that have previously applied to the education sector. This is a significant win for Australian VET providers.

130. Indonesia has offered its best ever commitments overall on services in any FTA. These commitments would guarantee that Australian suppliers can establish majority-owned businesses with no geographic limitations, in sectors including private hospitals, tourism, telecommunications, architecture, engineering, construction, infrastructure and a range of mining and energy-related services.

131. Indonesia has offered to lock in future liberalisation for higher education, legal, postal, courier and international maritime services, guaranteeing that Australian providers would benefit from future reforms.

Investment

132. Market access outcomes for Australian investors exceed those in Indonesia's most ambitious agreements to date, with Indonesia for the first time binding meaningful levels of access for investment in key sectors, such as energy.

133. IA-CEPA will deliver important protections for Australian investors, both general protections and investor-state dispute settlement (ISDS), equivalent to and, in some instances, beyond Indonesia's most liberal agreements.

134. Investor protections, including ISDS, are necessary in the challenging Indonesian investment environment. Indonesia presents risks for foreign investors, with an uncertain regulatory climate and increasing economic nationalism. Strong disciplines in the IA-CEPA Investment Chapter, including ISDS, are important to promote and protect Australian investors and investments in Indonesia. The Indonesia-Australia Business Partnership Group called for the inclusion of ISDS in IA-CEPA in its submissions to government.

135. ISDS between Australia and Indonesia is already available under the ASEAN Australia New Zealand Free Trade Agreement (AANZFTA), but that agreement lacks the important safeguards contained in Australia's more recent FTAs.

136. The ISDS chapter in IA-CEPA includes safeguards equivalent to the best Australia has agreed to date (equivalent to our most recent concluded agreement, the Peru-Australia Free Trade Agreement), providing a better balance between the protection of investors and maintaining the government's right to regulate in the public interest.

137. In IA-CEPA, an investor's basis for challenging legitimate Australian regulatory measures is limited by carve-outs, exceptions and other protections for government policy setting. Modern procedural safeguards, such as provision for expedited preliminary objections and costs orders, are included to contain costs and deter frivolous claims. Moreover, the agreement precludes ISDS disputes from being pursued in relation to any public health measure.

Improving the Business Environment

138. In addition to traditional barriers, non-tariff issues, variable customs procedures, red tape and WTO-inconsistent import licensing arrangements are major obstacles for many Australian businesses in the Indonesian market.

139. IA-CEPA will include an innovative new program of economic cooperation. We will use the IA-CEPA economic cooperation program in key areas of mutual interest for Australia and Indonesia, such as strengthening links between Australian exporters and Indonesian processors. It will also help maximise the benefits of IA-CEPA's outcomes in key services sectors such as education, health and tourism.

140. Cooperation under IA-CEPA will strengthen prospects for IA-CEPA's implementation and support reform efforts in Indonesia, which will benefit both Indonesia and Australia. IA-CEPA includes a built-in agenda to include appropriate economic cooperation to facilitate trade and investment and secure support in the Indonesian system.

141. IA-CEPA will improve conditions for Australian exporters in a number of ways. It will guarantee import licences for a number of key products.In addition, for the first time in an Australian FTA, IA-CEPA includes a chapter on non-tariff measures. This will set up a cooperative mechanism to help deal with non-tariff barriers in the Indonesian market. IA-CEPA will also support improvements to customs procedures and provide assistance linked to Indonesia's implementation of the WTO Trade Facilitation Agreement.

142. Australia and Indonesia have agreed to a comprehensive set of domestic regulation disciplines for trade in services to help address behind-the-border barriers such as delays in processing licences and permits. These build on the rules contained in AANZFTA. Australia and Indonesia have agreed to establish a mechanism to promote professional mutual recognition arrangements between relevant bodies and to improve licencing and certification processes for professionals.

143. The Electronic Commerce Chapter reflects the increasing importance of the internet for business, including commitments to ensure service suppliers and investors can transfer information into and out of Indonesia. It will lock in Indonesia's planned liberalisation of its current data localisation requirements - an important outcome for Australian businesses in Indonesia. The Chapter builds on AANZFTA in several other ways. It also prohibits governments from requiring companies to release their software source code as a condition of importation, sale or distribution, and it contains enhanced commitments on paperless trading and electronic signatures.

144. The Competition Policy Chapter seeks to ensure that the trade and investment liberalisation achieved across IA-CEPA is not undermined by anti-competitive practices. The Chapter includes an obligation on Parties to adopt or maintain consumer protection laws to proscribe the use in trade of misleading practices, or false or misleading descriptions.

145. The Transparency Chapter promotes greater transparency in the making and implementation of laws, regulations and government decisions to facilitate predictability and ease of doing business. It requires Parties to establish or maintain impartial and independent tribunals or procedures for the review of final administrative actions. Australia already complies with the Chapter's requirements.

146. The agreement includes a skills exchange component. The Indonesia-Australia Business Partnership Group (IA-BPG) - a grouping of Australian and Indonesian business interests developed to support the negotiation of IA-CEPA - sought a reciprocal skills exchange as an early outcome of the negotiations. Over five years, the exchange will provide a total of 1500 eligible Australians and 1500 eligible Indonesians the opportunity to work in the other country for a maximum period of six months. The maximum number of participants from each country would start at 100 per year in the first year and step up by 100 per year to a maximum of 500 in the fifth year. Each rise in annual intake would be subject to the Participants' mutual approval following a review each year. The sectors available for the exchange would be limited to: financial and insurance services; mining, engineering and related technical services; and information, media and telecommunications services.

147. The skills exchange will operate under existing visa criteria and processing arrangements. It has been designed to adapt to changes in Migration Law and will be subject to regular review. It is limited to a modest number of eligible participants whose visits will be short in duration.

148. The exchanges will help build the capacity of Indonesian workers for skilled work in Indonesia. This is a key area of need in the Indonesian economy and an important component of improving the prospects of increased Australian investment in Indonesia, where a shortage of skilled labour is a significant impediment. The skills package will also help build people-to-people links and increase the Indonesia literacy of Australian businesses - leading to more export opportunities. Significantly, the inclusion of the skill exchange had been instrumental in securing major benefits for Australia under IA-CEPA. These includes significant improvements in market access for Australian exporters - particularly on agriculture and steel - as well as greater access and certainty for Australian service providers and investors, including in areas such as vocational education and training, health, tourism, telecommunications, and mining and energy services.

Supporting the Strategic Partnership

149. Indonesia is one of Australia's most important bilateral relationships. Cooperation spans political, economic, security, development, education and people to people ties. Australia and Indonesia share joint interests in supporting economic growth, safeguarding our open sea-lanes, cooperating to fight terrorism and deter transnational crime, working together to bolster a rules-based international order and celebrating both countries' diversity by building deeper community understanding of each other's societies, languages and cultures. Australia's relationship with Indonesia is central to achieving the goals set out in the 2017 Foreign Policy White Paper. The White Paper notes that Indonesia is likely to be one of the five biggest economies in the world in purchasing power parity terms by 2030, and it is already a leader in our region, including in ASEAN.

150. In recognition of this, on 31 August 2018, Australia and Indonesia signed the Comprehensive Strategic Partnership. The Comprehensive Strategic Partnership has five pillars: Enhancing Economic and Development Partnership; Connecting People; Securing Our and the Region's Shared Interests; Maritime Cooperation; and Contributing to Indo-Pacific Stability and Prosperity. IA-CEPA will play a direct role in supporting Pillar One: Enhancing Economic and Development Partnership, but will also make important contributions to the other four pillars of the Comprehensive Strategic Partnership.

151. For example, economic cooperation under IA-CEPA will support important reforms and developments in Indonesia to drive growth and prosperity. This work will facilitate trade and provide markets for Australian goods and services, but it will also support sustainable and inclusive economic growth in Indonesia that benefits Australia and contributes to regional growth and stability. IA-CEPA has been designed to contribute to the three objectives of Australia's Aid Investment Plan: Effective Economic Institutions and Infrastructure; Human Development for a Productive Society; An Inclusive Society through Effective Governance.

152. Further, several important telecommunications cables connecting Australia to the rest of the world pass through Indonesian waters. The IA-CEPA Telecommunications Chapter includes specific obligations designed to improve the transparency and predictability of Indonesia's regulation of the installation, maintenance and repair of submarine telecommunications cables in its waters.

PART 6: TRADE IMPACT ASSESSMENT

153. The IA-CEPA will open up market opportunities for Australian exporters and investors in the region.

154. Indonesia has one of the fast growing populations in the region, already ten times the size of Australia's, and Gross Domestic Product (GDP) two-thirds the size of Australia.

Key Economic Statistics

Table 1 - Australia's and Indonesia GDP and Population

Source: IMF WEO October 2018, CIA World Fact book

^a IMF WEO October 2018 Estimate

Australia's exports, import and two-way trade with Indonesia

155. Indonesia is Australia's 13 ^th largest two-way trading partner, with Australia's goods exports to Indonesia being a significant component of the relationship.

156. Indonesia is Australia's 14 ^th largest merchandise trading partner, with Indonesia being Australia's 9 ^th largest goods export destination.

157. Indonesia is Australia's 9 ^th largest Services trading partner, with Australia importing twice as much as it exports, driven predominately by personal travel.

Table 2 - Australia's trade with Indonesia (A$ billion)

Source: ABS catalogues 5368.0 and 5368.0.55.004 (July 2018 data)

Impact on Goods Exports

158. Australia's merchandise exports to Indonesia were worth A$7.03 billion in 2017, with agricultural and resources being key products.

Table 3- Australia's Top 20 Exports to Indonesia

159. The elimination of barriers to trade is expected to increase the volume and value of trade with Indonesia. Attachment 4 - specific market access outcomes in detail lists the benefits for some of the goods outcomes for goods that Indonesia already imports from Australia.

160. It is estimated that, for goods where tariffs are reduced or eliminated beyond existing Indonesia's AANZFTA commitments, some A$923.4 million of 2015-17 average imports into Indonesia from Australia would face an average $A23.7 million less tariffs per annum than if IA-CEPA were not to enter into force.

161. This is on top of A$1.67 billion worth of 2015-17 imports not facing tariffs due to the existing tariff elimination under the AANZFTA agreement in 2018, which otherwise would be A$220.0 million in duty per annum.

Table 4 - Products where more than A$100,000 of duty is saved per annum due to IA-CEPA when compared to AANZFTA

Tariff rate quotas

162. For several tariff rate quotas (TRQs), the benefit provided by IA-CEPA is that exporters will have a known quantity allowed to be imported into Indonesia for the first time. For example, under current arrangements, Australia grains exporters are not able to export animal-feed quality wheat, sorghum and barley. IA-CEPA provides that up 500,000 tonnes of these animal-feed grains maybe imported in year one.

163. By year ten after entry into force, this will have increased to 775,664 tonnes. This is a new market opportunity that does not currently exist and provides benefits to Australian grains exporters, as well as Indonesian feed-lotters that require the certainty provided by having access to these grains in order to affordably feed the animals on their lots.

164. With a more affluent and growing population, demand for high-quality protein from poultry and beef is expected to continue to increase (see Figure 1 Agrifood consumption in Indonesia 2009 versus 2050 forecasts), making this a potentially lucrative market for Australian grain producers looking to diversify their export market opportunities.

165. Australia exported on average A$1.2 billion or 4.3 million tonnes of these grains to Indonesia over the 2015-2017 period, taking 16.6 per cent of Australia's exports of these goods over the period. However, these grains were predominantly for human consumption.

166. From day one of the Agreement, new quota arrangements will provide certainty to exporters of the most sensitive products to Indonesia. In total, IA-CEPA contains eight TRQs. These are for:

a.

Live Cattle

b.

Potatoes

c.

Carrots

d.

Oranges

e.

Mandarins, Clementines, Wilkings and similar citrus hybrids

f.

Lemons and Limes

g.

Feed Grains

h.

Hot/cold rolled steel coil

167. For example, based on recent market prices, should the TRQs be fully utilised:

a.

Live Cattle - Over the first six years, tariff savings in the order of A$200 million on Australian exports to Indonesia worth A$4.0 billion.

b.

Potatoes - Over the first six years, tariff savings of A$5.2 million dollars would be avoided on A$48.2 million of exports.

c.

Carrots - Over fifteen years, tariffs of A$15.0 million dollars would be avoided in comparison to AANZFTA, and A$21.2 million in comparison to the MFN rate, on A$131.7 million of exports.

d.

Mandarins - Over the first six years, tariff savings of A$5.2 million dollars would be avoided on A$48.2 million of exports.

168. Under the IA-CEPA, an exporter or importer who already trades under AANZFTA will understand much of the Agreement's rules of origin, and the inclusion of arrangements for authorised exporters to self-certify documentation when exporting will assist Australian exporters. This will reduce the administrative arrangements an Australian trader needs to be aware of and comply with to access IA-CEPA preferences. Attachment 2 - Regulatory burden and cost offset estimate sets these out in detail.

Elimination schedule for Indonesia's tariffs on imports from Australia under IA-CEPA

169. Imports from Australia into Indonesia typically face higher MFN tariffs than imports from Indonesia into Australia. The following table sets out historic data of the trade weighted tariffs faced by imports from Australia into Indonesia.

Source: World Integrated Trade System

170. Under IA-CEPA, Indonesia will eliminate tariffs on 94.5 per cent of tariff lines, covering some 78.87 per cent of recent imports from Australia.

171. Importantly, tariffs on sugar will be bound at 5 per cent, comparable with sugar tariffs faced by Indonesia's closest trading partners under the ASEAN Trade in Goods Agreement. This is particularly notable given the two sugar tariff lines are responsible for 6.66 per cent of imports.

172. Likewise, many of the gains from IA-CEPA for Australian merchandise exporters are under TRQs, with live cattle subject to a TRQ accounting for 9.27 per cent imports from Australia.

Source: Analysis based on DFAT STARS database

Impact on Goods Imports

173. Australia's merchandise imports from Indonesia were worth A$4.212 billion in 2017, with resources and manufactures being key products.

Table 5 - Australia's Top 20 Imports from Indonesia

174. Under IA-CEPA, Australia has committed to eliminating tariffs on all IA-CEPA originating products from entry into force of the Agreement.

175. This is consistent with Australia's other Free Trade Agreements, and should IA-CEPA enter into force in 2019, would also be faster than under AANZFTA.

176. IA-CEPA will benefit consumers by increasing the choice of goods available at lower prices. This includes tariffs of mostly 5 per cent on plastics and rubber, textiles, clothing and footwear, iron and steel, motor vehicle components and some machinery and furniture tariffs.

177. Though Australia had already eliminated tariffs for a majority of tariff lines under the AANZFTA, some increased imports and price reductions can be expected as a result of the removal of remaining tariffs, allowing Indonesian produced goods to compete with those goods that already have preferential access, either under Australia's existing FTAs or under the GSP.

178. While Australia will eliminate tariffs on a higher proportion of tariff lines, the trade weighted average as highlighted by the low trade weighted tariffs below shows that for imports from Indonesia into Australia, tariffs are not a major barrier to trade.

Source: World Integrated Trade System

Impact on Services

179. The IA-CEPA will contribute to the growth and diversification of Australian exports of services by liberalising barriers and providing more transparent and predictable operating conditions in Indonesia. Australian services exports to Indonesia have grown from A$1.2 billion in 2012 to A$1.6 billion in 2017. Australians involved in education, finance, ICT, health, transport and logistics, tourism, mining and professional services sectors all stand to benefit from this deal.

180. Australia and Indonesia have a growing relationship in services trade, with Australia exporting and importing twice the amount of services as Indonesia to the world in 2016.

181. Australian service suppliers are well positioned to take advantage of knowledge and expertise in order to expand into the growing Indonesian market.

Source: World Integrated Trade System

182. Australia imports more services from Indonesia than it exports, driven by personal travel services, i.e. the tourism sector. In 2017-18, tourism to Indonesia was worth A$3.392 billion, or almost 86.2 per cent of Australia's service imports.

183. Australia's main services export to Indonesia is education related personal travel services, worth A$861 million out of A$1.292 billion in travel services. Total services exports to Indonesia in 2017-18 were worth A$1.609 billion.

184. Australia's current education services exports to Indonesia will assist with the future development of the nation and build long term relationships. In terms of tourism, Australia is an important destination for Indonesians with non-education personal travel growing 5.5 per cent per annum since 2012-13. Indonesia provides Australia with a young, growing market, with growing consumer demand allowing for a diversification in offerings.

185. The recognition of Australia as an important destination for study is reflected in the growing use of Student Visas, with Student Visas up from 8,224 in 2007-08 financial year to 9,104 in 2017-18.

186. While not comparable to Department of Home Affairs visa data, data from the Department of Education highlights that students coming from Indonesia have moved away from higher education towards VET based courses, making up nearly half of the commencements in 2017-18.

Visas Granted (Department of Home Affairs)

^a 8 Year trend growth

Source: Department of Home Affairs
https://data.gov.au/organization/immi

Enrolment and Commencement data for international students 2002 - 2017

2018 YTD to September 2018.

Source: Department of Education and Training -
https://internationaleducation.gov.au/research/International-Student-Data/Pages/InternationalStudentData2018.aspx#Explanatory

Investment

187. An area of importance raised by investors was that the agreement addressed various aspects of law, including Investor-State Dispute Settlement, to provide certainty that would enable businesses to make long-term investments in Indonesia.

188. Many of these investors are Australian minerals and resource companies, which already have investments in various projects in the region. The outcomes provided under an FTA, such as this, enable investors to make better-informed investment decisions by helping to minimise the sovereign risks.

Australia's Investment position with Indonesia

Source: ABS Catalogue 5352.0 - International Investment Position, Australia: Supplementary Statistics, 2017

PART 7: CONSULTATION

189. The public consultation and stakeholder engagement process on the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) commenced with a joint feasibility study between Australia and Indonesia in August 2007.

190. Negotiations were launched in 2010 and reactivated in March 2016. Throughout the negotiations DFAT, in conjunction with other government agencies, has consulted widely with industry and other stakeholders in formulating our positions.

191. A list of businesses and organisations that have been consulted - through consultation events, stakeholder meetings, and phone calls - is set out in Attachment 5 - Stakeholder Consultations.

192. DFAT also consulted with State and Territory Governments.

193. Negotiators also benefitted from the participation of the Indonesia-Australia Business Partnership Group (IABPG), a joint business advisory body established by the parties.

194. The IA-BPG produced two reports for consideration by both Australia and Indonesia. The Australian members of the IA-BPG and the Australian stakeholders they consulted in preparing their recommendations are set out in Attachment 6 - Indonesia-Australia Business Partnership Group (IABPG).

195. Stakeholders in the public consultation process appreciated the benefits of negotiating IA-CEPA and building on the foundation provided by AANZFTA. The innovative "early outcome" process that delivered a sugar tariff cut and important cooperative projects - including a detailed standards mapping project - succeeded in building momentum and business support.

196. Most stakeholders supported the government's efforts to pursue a comprehensive trade agreement. Particular interest has been shown in reducing barriers for agriculture and steel, as well as enhancing opportunities for Australian service providers and investors in areas such as professional services, education, energy, tourism, health and transport.

197. Many were especially keen that market access gains achieved under AANZFTA could be expanded, with agricultural stakeholders particularly forceful advocates for improved market access outcomes. Representatives from a range of peak agricultural bodies, including Meat & Livestock Australia, Dairy Australia, and the National Farmers' Federation, have been consulted throughout IA-CEPA negotiating rounds. The steel industry was strongly engaged on securing meaningful commercial outcomes.

198. Following announcement of conclusion of the IA-CEPA, the following industry comments in support of the IA-CEPA were published by DFAT:

National Farmers' Federation (Fiona Simson, President)

199. The National Farmers' Federation congratulates the Government on concluding the Indonesia-Australia Comprehensive Economic Partnership Agreement. Trade is critical to the growth of Australian agriculture and Indonesia is a vital trade partner for Australian farmers.

200. IA-CEPA locks in important new trade opportunities for our meat, grains, sugar, dairy and horticulture producers. It ensures Australian farm exports can contribute to Indonesia's economic growth by providing high quality food and fibre to Indonesian consumers. IA-CEPA creates new opportunities for Australian farmers and Indonesian processors to partner in exporting to the world.

201. The NFF applauds the Government's ongoing commitment to negotiating valuable FTAs including ChAFTA, JAEPA, KAFTA and now IA-CEPA. Opening international markets is critical to agriculture's aim to reach a production value target of $100 billion by 2030. IA-CEPA and Australia's other FTAs lock in those trade opportunities and provide the market certainty needed to help us reach that target.

The Australian Industry Group (Innes Willox, Chief Executive)

202. Members often nominate at the border and behind the border barriers as the biggest obstacles to expanding in to the Indonesian market. The ground breaking agreement to dedicate an entire FTA Chapter to non-tariff measures, as well as streamlining the export documentation requirements, will give Australian exporters the confidence to have another look at this growing market.

Australian Chamber of Commerce and Industry

203. The Australian Chamber of Commerce and Industry has had a strong, long term interest in the completion of the Indonesia - Australia Comprehensive Economic Partnership Agreement (IA-CEPA), and in particular our involvement with the Business Partnership Group. We are pleased that it seems that a number of the recommendations from this Group have been included in the negotiated outcomes. For example, "economic cooperation" will be a feature to support both countries to develop stronger links between supply chains and related investments that will assist to realise the opportunities embedded in the dedicated chapter areas.

Australia Indonesia Business Council (AIBC) (Phil Turtle, National President)

204. The Australia Indonesia Business Council, as the peak organisation involved with the promotion and facilitation of trade and investment between Australia and Indonesia, is delighted to see the finalisation of IA-CEPA and congratulates all involved in its formulation. The Australia-Indonesia relationship is an important yet historically underdone one, and this Agreement promises to kick-start a new era of Trade and Investment between our countries. With important outcomes delivered across a broad range of sectors, the AIBC looks forward to playing an important role in socialising IA-CEPA within the business community, ensuring the opportunities created are widely known and pursued.

Australian Services Roundtable (Jane Drake-Brockman, Chairman of the Board):

205. The Australian Services Roundtable, the peak business body for the Australian services industries, said the Australia-Indonesia Comprehensive Economic Partnership Agreement (IA-CEPA) is a stand-out success on multiple fronts and will contribute to improved services sector competitiveness in both economies. It further demonstrates the Australian government's determination to champion better deals for services, including for SMEs.

206. The FTA breaks new ground on services trade, investment, business visits and e-commerce outcomes with Australia's geographically closest fast-growing South-East Asian trading partner. Over time the deal will enable enhanced business partnerships, greater technical inter-operability and a more seamless regulatory environment for services and data flows as the transformation to the digital economy evolves. SME exporters in both countries will benefit.

207. The deal involves market opening not only in Tourism and Education but also in Mining services, Health, Hospital and Aged Care services, in Architecture and Engineering and a range of other knowledge-intensive Business Services."

Minerals Council of Australia (Tania Constable, CEO)

208. This is a good outcome for the Australian and Indonesian resources sectors.

209. The agreement's provisions will create more scope for Australia's world-leading mining services firms to partner with Indonesian businesses in developing that country's extensive minerals and energy resources.

210. This will not only provide new export opportunities for Australia - it will also support economic growth and development in one of Australia's nearest and most important neighbours.

211. The agreement's tariff reductions for copper cathodes and steel products will improve market access for these resources-based commodities. Cheaper input costs will also boost the competitiveness of a number of Indonesia's manufacturing industries.

Specific goods-related groups

Australian Livestock Export Council (ALEC) (Simon Crean, Chairman)

212. The Australian Livestock Exporters Council (ALEC) commends and welcomes the Australian Government for the common ground and substantive outcomes achieved through the completed IA-CEPA. This is an agreement of great significance which our organisation and peer red-meat bodies have long argued for and supported.

213. The structure of the agreement to support sustainable expansion of Australian live cattle feeder and breeder export volumes out of northern Australia port gateways into the largest market of Indonesia, has many important elements under the completed free trade agreement.

214. Critically it complements Indonesia's policy goal of achieving greater security and access to protein through expanding free trade, whilst playing to Australia's strength with its large northern Australian cattle industry and established supply chain so ably equipped to support this market.

215. The collective efforts of Australian DFAT and DAWR officials during the IA-CEPA discussions and negotiations is recognised by industry, along with the former Australian Trade Minister and Prime Minister who embraced the need for closer economic ties between both nations.

Meat & Livestock Australia (Andrew McCallum, Global Manager - Trade and Market Access)

216. IA-CEPA is a most welcome addition to the suite of FTAs the Government has concluded with key trading partners. Indonesia is a customer for significant quantities of Australian live cattle, beef and offal and has a steady requirement for sheepmeat (albeit smaller volumes). IA-CEPA will not only deliver additional trade liberalisation (by building on the ASEAN-Australia-New Zealand FTA outcomes) it will also provide a framework for a more market orientated import regime. This in turn will deliver benefits for both our sector as well as the Indonesian supply chain - including importers, retailers and foodservice operators. On behalf of the red meat and livestock industry I extend our thanks to Australia's negotiating team for their tireless effort.

Bluescope (Mark Vassella, Managing Director and CEO)

217. BlueScope is very pleased that the Australian Government has secured a high quality, comprehensive agreement with Indonesia.

218. The outcome on hot rolled coil (HRC) and cold rolled coil (CRC) steel opens up the potential to more competitively export steel products from our Port Kembla Steelworks to BlueScope's operations in Indonesia. This is a win-win for Australia and Indonesia: it will boost Australian steel exports; while also ensuring that BlueScope's operations in Indonesia, which employ over 500 Indonesians, have access to a wider range of high quality, competitively priced feedstock.

219. We congratulate the government, including the former Trade Minister The Hon Steven Ciobo, for their hard work and close liaison with industry in achieving this important outcome.

GrainGrowers (John Eastburn, Chairman)

220. GrainGrowers, representing Australian grain farmers, commends the Australian and Indonesian Governments for the progression and finalisation of IA-CEPA. IA-CEPA will cement the existing relationship between Australian and Indonesian milling wheat industries whilst allowing new trade, investment and relationships to flourish between Australia's grain industry and Indonesia's food manufacturing, stockfeed and livestock sectors.

AUSVEG (James Whiteside, Chief Executive Officer)

221. AUSVEG, representing Australia's vegetable and potato growers, welcomes the finalisation of the IA-CEPA. The efforts of the Minister for Trade, Tourism and Investment and DFAT, working together with their Indonesian counterparts to finalise negotiations, are greatly appreciated by the Australian vegetable industry. In particular, the agreement made for carrot and potato exports - two of the Australian vegetable industry's key export crops - provides a strong basis for developing sustainable trade in fresh vegetables between Australia and Indonesia.

Citrus Australia (David Daniels, Market Access Manager)

222. With the conclusion of IA-CEPA, Citrus Australia is optimistic about the outcomes from the agreement.

223. While the tariff reductions under the proposed agreement are certainly welcome, the increased certainty provided for Australian citrus in Indonesia will be even greater news.

224. This outcome will allow the Australia citrus industry to build stronger long-term business relationships with Indonesian customers, and provide better business certainty along the value-chain.

225. As a close neighbour of Australia, the Indonesian market has strong growth potential and if the current offer by Indonesia is realised, we can expect to see export volumes increasing.

226. Australian citrus complements the product grown in Indonesia, filling different market segments. We look forward to working with our customers in Indonesia to grow demand for citrus in Indonesia across the board.

Australian Dairy Industry Council (Terry Richardson: President)

227. Indonesia is a major destination for our Australian dairy exports and ranks as Australia's third largest dairy export market on value terms. Indonesia's demand for dairy is set to continue to build on the back of its increasingly affluent 260 million strong population. As Australia's nearest neighbour with strong existing ties with our dairy industry, the conclusion of IA-CEPA will enhance the naturally emerging opportunities that are presenting themselves in that key market. From this perspective the conclusion of IA-CEPA is a very welcome outcome for the Australian dairy industry. The Australian dairy industry will continue to work with Indonesian food processors to grow demand for dairy products across the Indonesian market.

Canegrowers (Paul Schembri, Chairman)

228. Improving the conditions for trade with our nearest neighbour is a great outcome for the Australian sugar industry. The change in tariff from an effective 8% to 5% puts us on a par with our competitors in that market and provides the opportunity to increase our exports to Indonesia from their present level of 350,000 tonnes to more than 1 million tonnes. Indonesia is a growing market and one which we are perfectly situated to supply with quality sugar well into the future. We look forward to a long and mutually beneficial relationship.

Specific services and investment-related groups

Austmine (Robert Trzebski, Chief Operating Officer)

229. Austmine welcomes news of the conclusion of IA-CEPA. For over 10 years now, Indonesia has consistently ranked among the top 5 export destinations for Australian exporters of Mining Equipment, Technology and Services (METS) and remains a region of future growth in the resources sector. IA-CEPA should encourage more Australian METS exports to Indonesia, to the mutual benefit of our countries.

TAFE Directors Australia (TDA) (Craig Robertson, Chief Executive Officer)

230. TAFEs in Australia look forward to working with the Indonesian Government, technical education institutes and industry to assist in developing skills programs for Indonesians. The Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) supports and encourages this collaboration to help Indonesian firms lift their capability through skilled workers to enable trade with Australia and across the globe.

Sustainable Skills Ltd (Nigel Carpenter, CEO)

231. The IA-CEPA has enabled a much improved understanding of how Indonesia's workforce skills opportunity is central to Indonesia's social and economic development. Australian experience in delivering industry-based training can help Indonesia to deliver job-ready trained workers. Sustainable Skills Ltd. welcomes the significant opportunity IA-CEPA opens for world-class Australian training providers to contribute to skilling the Indonesian workforce into the future.

Engineers Australia (Angela Frawley, General Counsel)

232. Engineers Australia welcomes the opportunity to work cooperatively with Indonesia to foster mutual recognition arrangements for professional engineering qualifications and services. The IA-CEPA will be significant in supporting and building upon an existing global dialogue about trade in professional engineering services and we look forward to exploring the benefits that the agreement will provide.

Other Stakeholder Views

233. Civil society and industry groups have not been vocal in articulating any significant concerns in relation to IA-CEPA. The Australian Forest Product Association expressed concern that IA-CEPA might impact the anti-dumping regime or lower Australian standards - it will not.

234. The Australian Fair Trade and Investment Network (AFTINET) provided a submission outlining its concerns, including over transparency, ISDS, temporary movement of workers; pharmaceuticals; and government procurement (the latter two areas are not covered by IA-CEPA).

235. The Department takes all concerns raised by stakeholders seriously and works with other Departments and State Governments to ensure that, while there may be differences from the positions raised by stakeholders, these are considered as part of Australia's overall negotiating position.

236. In addition to ongoing individual stakeholder consultations with directly interested stakeholders, the Department hosts stakeholder updates biannually to provide interested organisations an opportunity to find out about the state of play of current negotiations and provide input into those negotiations. Time is made at these meetings for side discussions on particular matters that arise, as well as individual meetings with key negotiators to discuss specific matters of concern.

237. Along with consultations, there have been enquiries and reports into Australia's trading relationship with Indonesia which are set out in Attachment 7 - Additional Reports.

238. Engagement with stakeholders will continue after the conclusion of IA-CEPA to raise awareness of the FTA and ensure businesses and consumers take full advantage of the agreement. DFAT and Austrade run an Australia-wide outreach programme to provide practical information on how to maximise benefits from Australia's FTAs. DFAT will publish all FTA outcomes and summary factsheets on its website.

239. The Department welcomes submissions at all stages of the negotiation from individuals and organisations on the potential opportunities and impacts of a free trade agreement (FTA) with the Indonesia. Written submissions may take several forms, from a short email through to a more comprehensive analytical paper. Information on making submissions can be found at:

PART 8: CONCLUSION

240. It is in Australia's interests to enter into a bilateral FTA with Indonesia, given the IA-CEPA is expected to:

a.

deliver commercially meaningful market access gains that will benefit Australian agriculture, resources, energy and manufacturing exporters, service providers, consumers and investors;

b.

secure Australian exporters' competitive position in one of the fastest growing countries in the Asia-Pacific;

c.

deliver faster and deeper market access gains than are possible through multilateral WTO negotiations;

d.

be consistent with WTO requirements for free trade agreements; and

e.

complement Australia's efforts to seek additional trade liberalisation from Indonesia through the WTO and regional mechanisms.

241. It should be noted that:

a.

the removal of tariffs on merchandise imports from Indonesia will lead to a small reduction in tariff revenue, should the Agreement enter into force in 2019 and will marginally affect the government's fiscal position. This reduction has been accounted for under AANZFTA for 2020 and subsequent years. The tariff reduction will also result in lower costs to Australian consumers; and

b.

Australia will eliminate tariffs on all originating products from entry into force of the Agreement.

PART 9: IMPLEMENTATION AND REVIEW

242. In line with Australia's treaty-making processes, once agreed, the text of the FTA will be tabled in Parliament. The Joint Standing Committee on Treaties (JSCOT) will then conduct an inquiry into the FTA and report back to Parliament.

243. Following consideration by the JSCOT, Parliament will consider any legislation or amendments to existing legislation that may be necessary to implement an agreement prior to treaty action being taken.

244. Australia will need to make the following legislative changes in order to implement the obligations in IA-CEPA.

a.

The Customs Act 1901 and the Customs Tariff Act 1995 and relevant customs regulations will need to be amended to incorporate the preferential tariff rates that will apply to goods imported from Indonesia under IA-CEPA.

b.

Changes will be required to the Export Control Act 1982 to provide authority to administer a tariff rate quota on steel.

c.

A Ministerial determination will need to be made under section 140GBA of the Migration Act 1958 to implement the IA-CEPA exemptions from labour market testing for Indonesian intra-corporate transferees and independent executives.

245. DFAT and other government agencies will use existing resources to implement the IA-CEPA.

246. There are no costs or losses of tariff revenue for Australia associated with the entry into force of IA-CEPA because Australia will have already eliminated all tariffs under AANZFTA by the time IA-CEPA enters into force.

247. Australia will provide Indonesia with economic cooperation to support its implementation of IA-CEPA and to support further liberalisation efforts in Indonesia.

248. IA-CEPA is expected to enable Australian exporters to increase the value of their sales to Indonesia and contribute to economic growth in both countries.

249. The operation and effectiveness of the FTA will be addressed through working groups, Senior Officials Meetings, Ministerial Meetings and future reviews of the FTA. In advance of these meetings and any formal review, DFAT will invite submissions from the public and consult with stakeholders to identify concerns regarding the implementation of the FTA.

250. The government is committed to helping businesses, particularly SMEs, make the most of opportunities FTAs may provide for those businesses, including through:

a.

the government's FTA seminar series;

b.

Austrade and DFAT support for the outreach of third parties, for instance by speaking at third party events, and providing materials to support third parties running their own activities;

c.

detailed online information about FTAs, including factsheets summarising outcomes and guides for businesses;

d.

FTA 'helpdesks' (email inboxes and a dedicated hotline) where SMEs and members of the public can contact FTA experts with specific questions or issues;

e.

the FTA Portal, a website assisting businesses that contains easy-to-access information about the specific benefits of Australia's FTAs in both goods and services as well as trade data

the Portal has attracted over 210 000 unique users since its launch in 2015 and is attracting 2,600 users each week;

f.

the Austrade "FTA Toolkit" designed for use by third party providers including industry associations and state and territory governments. The FTA Toolkit brings together government FTA related collateral in one online asset library, including: case study videos, guides, factsheets, and industry specific information; and

g.

an Austrade FTA grant for member-based business organisations to deliver knowledge-based seminars and workshops.

251. The FTA seminars are delivered jointly by Austrade and DFAT, drawing on the networks of Commonwealth, State and Territory Governments, and regularly include representatives from Austrade's TradeStart network, AusIndustry, and Efic.

252. DFAT and Austrade have delivered 105 seminars since March 2015 engaging with more than 4200 business and other representatives, with 73 held in regional and 32 in metropolitan areas

253. Participants are surveyed after each seminar with responses to date indicating a high-level of satisfaction.

254. In 2017-18, 79 per cent stated all or most of their objectives were being met with a further 21 per cent agreeing some of their objectives were being met. Eighty three per cent would recommend the seminar to a peer or colleague and 88 per cent reported an increased understanding of how to use and benefit from an FTA as a result of attending a seminar.

255. The Department also has an ongoing work program with existing FTA partners to monitor the use of trade agreements. This includes through methods such as exchanging data on the use of tariff preferences in order to better understand whether the preferences granted under an agreement are being used by exporters and importers.

256. In particular, the Free Trade Agreement Utilisation Study - PricewaterhouseCoopers (PwC) Report identifies areas where FTA preferences are underutilised. This information helps identify industries or sectors where greater outreach may be required.

https://dfat.gov.au/about-us/publications/trade-investment/Pages/free-trade-agreement-utilisation-study-pwc-report.aspx