3.1
Indonesia is in a phase of rapid economic development and Australia is in a unique position to both support this development and embrace the advantages it offers. Likewise, a strong trade and business relationship with Indonesia offers significant opportunities to Australia as it continues to deepen its connections in the region.
3.2
As outlined in the previous chapter, there are a range of trade agreements that both Australia and Indonesia are party to which are aimed at liberalising trade in the Asia-Pacific region, however, the trade relationship between Australia and Indonesia is not directly codified.
3.3
In order to codify the relationship, the Indonesia-Australia Comprehensive Economic Agreement (IA-CEPA) has been in negotiation since 2010. Negotiations towards this agreement stalled in 2013 before being recommenced in early 2016.
3.4
In February 2017 Prime Minister Hon. Malcolm Turnbull MP and
H.E. Joko Widodo, President of the Republic of Indonesia ‘committed to intensify … efforts to achieve a high quality [IA-CEPA] to transform our economic partnership’ noting that:
As the two largest economies in the region, Australia and Indonesia have shared interests and a common future. Leaders noted trade links are strong, but have not yet reached their full potential. They recognized [sic] that as close neighbours in the world’s most dynamic region opportunities are on our doorstep.
3.5
The current Minister for Trade, Tourism and Investment, The
Hon. Steve Ciobo MP and his then Indonesian counterpart,
H.E. Thomas Trikasih Lembong met in March 2016 to affirm a ‘shared vision’ for IA-CEPA negotiations proceeding on the following core principles:
both sides will strive to ensure the final agreement is high quality and as comprehensive as possible, covering trade in goods and services, investment and economic cooperation, and that it is balanced and delivers mutual benefits;
the final agreement should build upon the existing multilateral and regional agreements as well as negotiations between Indonesia and Australia.
3.6
Trade negotiations have accelerated since the respective trade ministers agreed to their recommencement, with four negotiating rounds and a series for intersessional meetings held since March 2016.
3.7
The IA-CEPA is intended to:
create the framework for a new era of closer economic engagement between Australia and Indonesia and open new markets and opportunities for businesses, primary producers, service providers and investors. IA-CEPA will build on existing multilateral and regional agreements including AANZFTA and be as comprehensive as possible.
3.8
The IA-CEPA process has had considerable input from stakeholders who, like submitters to this inquiry, are keen to see an innovative agreement that promotes strategic models for partnership between the two countries, rather than a standard two-way trade agreement.
3.9
Part of the negotiation process involved the establishment of the Indonesia-Australia Business Partnership Group (IA-BPG) which now comprises the:
Australian Chamber of Commerce and Industry;
Kadin Indonesia (Indonesian Chamber of Commerce);
APINDO (Asosiasi Pengusaha Indonesia, the Employers’ Association of Indonesia);
Indonesia Australia Business Council; and the
Australia Indonesia Business Council.
3.10
These business organisations are strongly in support of the IA-CEPA as is outlined in a comprehensive position paper presented in 2012 and updated in a submission to the IA-CEPA in 2016. The papers outline a vision for a strategic partnership model that recognises the complementary nature of resources and capacity between the two countries. They call for the IA-CEPA to maximise economic partnerships through:
1
Developing cross-border, integrated industries and value chains in both goods and services that utilise the comparative advantages of each country to supply both domestic and third country markets in the AEC, EU, UK, US and China, that neither country could achieve on its own.
2
Building two-way investments, enhancing Australian investments in Indonesia and encouraging Indonesian long-term investments in Australia. This should be achieved by developing competitive markets, lowering barriers, reducing risks and promoting investment opportunities, including joint ventures.
3
Enabling greater sharing of knowledge and technology through harmonising standards and regulations; recognising intellectual property rights; establishing dispute mechanisms; building education, training and professional development cooperation; facilitating joint ventures and business licensing; and encouraging movement of skilled people between the two countries.
4
Facilitating economic cooperation through an enhanced program of development assistance that is focussed on building economic capacity, developing skills, sharing market information, enabling market access, facilitating development of value chains, building local businesses and enhancing cooperation between government development assistance activities and the private sector.
5
Acknowledging the direct link between investment in the services sector and capacity building, through enhanced formal education and training, on-the-job learning and professional development, technology transfer and knowledge ‘spillovers’ that flow from the presence of international services firms.
6
Businesses in both countries have expressed the immense opportunities that exist for enhanced business collaboration and deeper partnerships between Indonesia and Australia in key sectors. Hurdles remain. However, which the IA-CEPA should address so that gains from trade liberalisation will be the greatest and the partnership potentials fully fulfilled. The IA-BPG believes that opportunities can and should be prioritised in sectors where quick and visible outcomes are the most attainable.
7
Preferential treatment. To work well to the benefit of Indonesia and Australia, the IA-CEPA must be overtly preferential. Australia and Indonesia should provide mutual preferential treatment in trade and investment. Where possible, Indonesia and Australia should declare and activate trade and investment preferences that operate above other preferential arrangements.
8
Taking advantage of Indonesia’s Special Economic Zones (SEZ) wherever possible. Existing and future SEZs could provide excellent venues for investment and collaboration, unrestricted by regulations applied elsewhere in Indonesia. Project which successfully utilise Indonesian SEZs could serve as examples to publicise and develop further SEZs elsewhere. The IA-BPG takes a very positive view of such proposals, but notes that many current SEZs are located well away from centres of population and therefore markets. IA-CEPA SEZs could be developed and implemented as a way to create faster delivery of liberalisation in priority sectors or regions.
3.11
Submissions stressed the need for the IA-CEPA to look beyond two-way investment and trade and consider each other partners to develop mutual trade opportunities with third country markets. It was put to the inquiry that instead of a focus on competitive trade, both countries should be focussed on leveraging the comparative advantages and cooperative opportunities and aiming to maximise joint opportunities.
3.12
For example, the AIBC noted that Indonesian agriculture’s ‘poor capacity for reliable, high quality supply to domestic markets’ offers Australia an opportunity in the short-term to share agricultural expertise, and in the long-term, collaborate in accessing third markets.
3.13
The Indonesia-Australia Partnership on Food Security in the Red Meat and Cattle Sector was cited by a number of submissions as ‘an example of a mutually beneficial economic cooperation program which should be used to support momentum in the IA-CEPA negotiations and demonstrate the benefits of a closer economic relationship between Australia and Indonesia.’
3.14
Given the reported reluctance in Indonesia to accept trade deals, both the Australian and Indonesian governments will need to be innovative not only in the IA-CEPA negotiations, but also in the promotion of a final deal to the business sector and the general public. The AIBC noted that simply opening Indonesian markets to Australian products would be problematic politically.
Strengthening cultural ties
3.15
As noted in Chapter 2, many submissions to this inquiry raised concerns about a lack of cultural understanding being an impediment to business in Asia broadly. Given the intended partnership focus of the IA-CEPA understanding and building social and cultural relationships will be essential to its success. As identified by the Australia in the Asian Century White Paper success in Asia requires us to :
strengthen Australia’s deep and broad relationships across the region at every level. These links are social and cultural as much as they are political and economic. Improving people-to-people links can unlock large economic and social gains. While the Australian Government plays a leading role in strengthening and building relationships with partners in the region—with more intensive diplomacy across Asia—others across a broad spectrum spanning business, unions, community groups and educational and cultural institutions also play an important role. Stronger relationships will lead to more Australians having a deeper understanding of what is happening in Asia and being able to access the benefits of growth in our region. In turn, more of our neighbours in the region will know us better than they do today.
3.16
The AIBC also pointed out that building relationships is the key to successful business in Asia:
In the end, the one word that defines business in Asia is 'relationship'. If you do not have a relationship, you have got nothing. You have got a contract that is worth nothing if you do not have a relationship. If you have a relationship, you will have a contract. If you have a contract and no relationship, the contract is worth nothing. We know this. So relationships are vital—we recognise that—and we have some very good relationships at the highest levels in Indonesia. I suggest we are not using them.
3.17
Positive people-to-people links must also be promoted. Harnessing the Indonesian diaspora may also play an important part in a positive promotion of Indonesian culture to Australia as well as promoting an open, liberal economy to Indonesia.
3.18
Indonesia has recognised the value of the diaspora network as an ‘unofficial diplomacy’ effort, supporting and promoting the Indonesian Diaspora Network. This was evident in President Joko Widodo’s February 2017 meeting with the Indonesian community in Sydney where he reportedly emphasised the need for Indonesians in Australia to ‘return their knowledge and expertise back home, and contribute to the development of Indonesia.’
Committee comment
3.19
The Committee supports negotiations for the Indonesia-Australia Comprehensive Economic Agreement being finalised as a matter of priority. A beneficial agreement would open pathways for business partnerships to be developed in new and innovative ways.
3.20
In a hearing for this inquiry it was pointed out to the Committee that there is an acceptance within Australian business that we must be in China – that despite any of the political, governance and cultural barriers to trade, it is of premier business importance. It was noted that the barriers to business are similar in Indonesia, but that Indonesia offers equal, if not greater, opportunity to Australian business and yet it is not seen in the same light.
3.21
A key outcome for the IA-CEPA to be successful is to change this perception – to establish in the minds of Australian business that a presence in Indonesia is essential to being successful in Asia. The Government must ensure that the implementation of the IA-CEPA is accompanied by an active campaign to promote the mutual opportunities presented by a strengthened relationship.
3.22
Australian business also needs to recognise where it needs to upskill in terms of cultural understanding and relationship building. The Government can support this by placing greater value on recognising the knowledge held by our diaspora and the Indonesia diaspora in Australia.
3.23
The Committee recommends that, subject to the finalisation of a satisfactory Indonesia Australia Comprehensive Economic Partnership Agreement (IA-CEPA), the Australian Government develop a campaign to actively promote the business opportunities presented by the agreement.
Infrastructure and service opportunities
3.24
Many submitters raised concerns about a lack of infrastructure in northern Australia as an impediment to trade:
In Northern Australia we are seeing the potential closure of the Port of Karumba and some challenges with the Port of Wyndham for exporting not just cattle but other products from Northern Australia into Indonesia and for importing products from Indonesia. Protein, meal and fertiliser are very expensive for our company, and Indonesia is a producer of some of those products. Currently, that product will go from Indonesia to the Port of Brisbane and then be road freighted up into Northern Australia to be only 300 kilometres south of Darwin at Katherine. To get protein meal products that have come on ship via Brisbane and then on road is a big cost to the Australian supply chain.
3.25
Infrastructure Australia’s Northern Australia Audit identifies a range of factors that preclude the necessary investment in northern ports, including the efficiency of the refrigerated road freight network and competitive air freight rates from southern airports.
3.26
However, the Government has recognised the need for greater investment in northern infrastructure assets. The Northern Australia White Paper identifies the need for investment in the north to capitalise on its proximity to Asia and the 2017-18 Budget provides $100 million for the ‘Beef Roads Programme’ across Queensland, the Northern Territory and Western Australia.
3.27
In addition to the need to improve infrastructure in Australia, there is also the issue of inadequate infrastructure in Indonesia. This can be seen as both a barrier to trade and an opportunity for Australian businesses. Indonesia is focussing on infrastructure development as a key to economic growth and this is widely recognised as presenting significant opportunity for Australian business.
3.28
Similarly, there is opportunity for the services sector to expand to meet the needs of a growing middle class in Indonesia. Education delivery is seen as a key opportunity for Australia, with an under-developed vocational education and training (VET) sector, yet high demand for these skills, in Indonesia.
3.29
Recognising the increasing importance of services to the Australian economy, and the opportunities apparent in the growing Indonesian services sector, it was submitted that ‘services trade and investment liberalisation should be a priority for IA-CEPA so as to greatly enhance the capability and scale of the sector in Indonesia and build strong services linkages with Australia.’
3.30
However, while Australian education providers (as well as other services) are restricted in operation in Indonesia due to the ‘negative list’ accessing these opportunities will be challenging. It was noted that:
Australian education and training providers have specific regulatory obligations regarding their ongoing registration, quality assurance, standards and student protection. Australian education and training providers are not inclined to establish campuses in Indonesia if they can-not ‘control’ the day to day operations of the campus and be able to insist on compliance with regulations as required in Australia.
3.31
There is potential in developing northern Australia as a services delivery hub with the appropriate infrastructure investment. The Northern Territory Government submitted that:
Darwin could increasingly become an education and training hub for Eastern Indonesia, in particular promoting the Northern Territory’s economic growth in synergy with Indonesia’s own and becoming a hub for assistance with bureaucratic and professional development. This would benefit Australia by leveraging Darwin’s location and connections with Indonesia.
3.32
This potential also extends to professional services, information technology and healthcare, but will require adequate infrastructure investment across Australia’s north.
Committee comment
3.33
In the rise of the Asian century, Australia has the advantages of proximity. The tyranny of distance is no longer an obstacle to Australia’s trade development. Australia’s desire to develop northern Australia, alongside the opportunities presented by a developing Indonesia, presents an ideal opportunity to invest in strategic partnerships for greater infrastructure investment in the north to create a regional transport and services hub.
3.34
In the short term, it will be important to maintain our existing infrastructure assets in order to access these markets. In the long term, Australia should aim to keep pace with development to our immediate north and develop infrastructure in northern Australia to meet the growing demand in Asia, specifically our neighbour Indonesia. This investment could encompass transport – road, rail and maritime – as well as services – education, healthcare and professional.
3.35
It was put to the Committee that the President of Indonesia wants to develop ’10 new Balis’. This is not only a significant opportunity for Australia to share its expertise in sustainable tourism development, but will offer an opportunity to develop our northern gateway to Indonesia.
3.36
As services, both tourism and education, will become an increasingly important feature of our export trade into the future, both governments and businesses should ensure that forward-thinking infrastructure investments are made in order to capitalise on these opportunities.
3.37
If planned thoughtfully and innovatively, the development of Indonesia could align with the Australian Government’s ambition to develop the north to mutual benefit.
3.38
The Committee recommends that, subject to the finalisation of a satisfactory Indonesia Australia Comprehensive Economic Partnership Agreement (IA-CEPA), the Australian Government gives priority to the development of infrastructure in Northern Australia that is beneficial to developing maritime, education and tourism services partnerships with Indonesia.
Coordinated trade efforts and goods certification
3.39
The relationship with Indonesia is clearly valuable to the states and territories. The inquiry received submissions from Victoria, Queensland South Australia, Tasmania, and the Northern Territory, all outlining the importance of building the trade relationship with Indonesia and the efforts being undertaken by each jurisdiction to do so.
3.40
A number of submitters suggested that ‘better coordination is required around Australian, state, territory and industry trade delegations to ensure we are delivering the same/right message in Indonesia.’ It was noted:
One thing I see Indonesia do well is brand Indonesia, yet we still have brand Australia and brand Australian states in Indonesia jockeying and vying for their individual states as a good place to invest. We really feel that we get brand Indonesia encouraging us to invest in Indonesia, whereas when you are in Indonesia you see multiple Australian brands coming through federally, and also the state brands, and there should be greater coordination of why Australia is a great place to invest rather than 'Queensland's better than NT' or 'WA's better than South Australia' type approaches.
3.41
It is not only trade delegations, but given the high level of import regulations imposed by Indonesia on food and pharmaceutical goods, it was argued that a national approach to goods certification would be beneficial for exporters.
3.42
Halal certification is a key example of the need for a coordinated, national system to improve business outcomes. Halal certification is a requirement of the Indonesian government for all food goods entering the market. Australian producers submitting to this inquiry raised no concerns with the need to meet this requirement, however, raised a number of concerns about the impact of the procedures currently used for certification, namely:
the jurisdictional fragmentation of the current certification process adding cost and time delays;
costs to producers associated with hosting Indonesian certification delegations; and
lack of clarity about the implementation of the Indonesian Halal Product Assurance (Law No. 33 of 2014) and the impact on Australian exports.
Committee comment
3.43
The Committee generally agrees with the proposition that trade advances to Indonesia should be coordinated on a national basis – that ‘Brand Australia’ should be promoted. Duplication of effort can be costly to states, territories and business, and risks presenting a confusing and fractured image internationally.
3.44
The Committee also agrees that there is a need for a consolidated approach in the certification and labelling requirements for exported goods to reduce these non-tariff barriers to trade.
3.45
It is essential that the Indonesian Government have confidence in Australia’s certification processes to ensure unimpeded access to market for our goods and services. While it is incumbent on the Indonesian Government to reduce regulatory barriers to trade, it is also incumbent on the Australian Government to ensure that Indonesia is able to have confidence in our regulatory processes.
3.46
The Committee welcomes reports that Indonesian President Widodo is cognisant of the need to reduce non-tariff barriers and increase the ease of doing business in Indonesia as this will be essential to improving the trade relationship into the future.
3.47
The Committee recommends that the Australian Government, through the IA-CEPA negotiations, focus on the reduction of non-tariff barriers to trade such as the standardisation of food and pharmaceutical labelling and certification requirements.
The Committee further recommends that the Australian Government establish a national food and pharmaceutical certification process, agreed by the Indonesian Government, to simplify this process for Australian exporters.
IA-CEPA provisions
3.48
As the IA-CEPA is a live negotiation, the Committee was unable to consider the provisions of the agreement that were of concern to some members. However, the following issues were raised in hearings and have been raised in the context of other trade agreements and are noted here for the Government’s consideration prior to the finalisation of the IA-CEPA.
Evaluation processes
3.49
In discussing the IA-CEPA, members of the Committee sought information from DFAT about whether there is independent evaluation of the trade agreements both at the point of treaty-making and a program of regular evaluation throughout the life of the agreement.
3.50
DFAT confirmed that there is no formal evaluation process for trade agreements, but there are ‘regular reviews. … There are processes for us to have dialogue with our trade partners, usually in the architecture of these agreements.’
3.51
Previous Parliamentary inquiries have recommended independent analysis of trade agreements be undertaken.
3.52
In 2015 a Senate Inquiry recommended a number of reforms to Australia’s treaty-making process, including:
The committee recommends that National Interest Analyses (NIAs) be prepared by an independent body such as the Productivity Commission and, wherever possible, presented to the government before an agreement is authorised by cabinet for signature. NIAs should be comprehensive and address specifically the foreseeable environmental, health and human rights effects of a treaty.
3.53
The Joint Standing Committee on Treaties inquiry into the Trans-Pacific Partnership in 2016 recommended such analysis should be conducted by the Productivity Commission or equivalent organisation:
The Committee recommends that the Australian Government consider implementing a process through which independent modelling and analysis of a proposed trade agreement is undertaken by the Productivity Commission, or equivalent organisation, and provided to the Committee alongside the National Interest Assessment (NIA) to improve assessment of the agreement.
3.54
This recommendation was subsequently endorsed by the Senate Standing Committees on Foreign Affairs Defence and Trade Inquiry in 2017 in their inquiry into to the Trans-Pacific Partnership.
3.55
Members of this Committee note these previous recommendations to include independent modelling of newly negotiated trade agreements.
3.56
For this and future trade agreements, some members of the Committee are of the opinion that it would be beneficial if the Australian Government implement a process through which independent economic modelling and analysis of the agreement is undertaken and presented to the Joint Standing Committee on Treaties (JSCOT) to assist in its assessment of the proposed agreement. Whilst a National Interest Analysis, explaining the impact of the proposed treaty action on the national interest, is currently presented to the Parliament for JSCOT’s consideration, this is prepared by DFAT so does not necessarily contain independent analysis.
Labour market testing
3.57
Members of the Committee also sought clarification about labour market testing provisions in the IA-CEPA, particularly given the call by submitters to this inquiry for enhanced two-way arrangements for skilled workers. In response DFAT stated:
You will appreciate that I cannot say too much about a live negotiation. I will say a couple of things. The movement of people, as you know, is probably a normal part of any trade agreement. It is called 'mode 4' in services speak. We expect to have some provisions covering those, but I am not at liberty to talk about those at the moment, because they are under negotiation with the Indonesians. It is important to know that we already have commitments with Indonesia in this area under the ASEAN-Australia-New Zealand FTA, which has removed labour market testing in some areas and maintained it in others. So, in a sense, that is already there as a base for that.
3.58
The Committee notes the Australian Government’s replacement of the 457 visa program, particularly the re-instatement of labour market testing for all new Temporary Skill Shortage visa applicants.
3.59
Some members of the Committee reiterated that the IA-CEPA must not bypass existing Australian labour market testing provisions and should be consistent with the Australian Government’s recent Temporary Skill Shortage visa announcement.
Dispute mechanisms
3.60
A number of submissions called for some form of dispute resolution mechanism to be included in the IA-CEPA given expressed business concerns that ‘trade or commercial disputes in Indonesia are overwhelmingly likely to have an unfavourable outcome for any foreigner’ and Indonesia’s low ranking in the World Bank Group’s business rankings concerning dispute resolution.
3.61
DFAT was asked to confirm whether the IA-CEPA would include an ‘Investor-State Dispute Settlement’ (ISDS) clause. DFAT responded:
It is not yet clear. We have an existing investment protection framework agreement with Indonesia that goes back to 1993 which has ISDS in it. ISDS is also part of the ASEAN-Australia-New Zealand free trade agreement, so there are some questions about coherence and so on. It is too early to say. We have to have those conversations with Indonesia.
3.62
ISDS clauses in trade agreements have been raised as a matter of concern in previous trade agreements, most recently as part of the Trans-Pacific Partnership agreement:
The weight of evidence and expert opinion is clear on two fronts with respect to the introduction of ISDS provisions between countries that are considered low-risk because they have robust governance and judicial systems: (1) the benefits of ISDS are uncertain and minimal with respect to both the flow of investment into Australia, and the protection of Australian investment abroad; and (2) the risks of ISDS in terms of legal costs, compensation, interference with the ability of governments at all levels (local, state, and federal) to regulate in the public interest, and the influence of ‘regulatory chill’.
Even in the case of so-called ‘high-risk’ investment jurisdictions there is a strong argument to be made that the risk of direct or unfairly indirect expropriation can be dealt with by means other than ISDS which are equally effective, but which avoid the capricious nature of the ISDS process/institutions and provide an incentive for developing nations to evolve a mature regulatory and judicial system.
3.63
Some members of the Committee reiterated that these concerns remain, and noted that they do not wish to see ISDS provisions extended within the IA-CEPA.
3.64
The Committee recommends that the text of the IA-CEPA should not include provisions which waive labour market testing, or which include ISDS provisions, and the final text of the agreement should be accompanied by independent analysis conducted by either the Productivity Commission or equivalent organisation.
Concluding comment
3.65
Given the current stage of the IA-CEPA negotiations, the Committee was somewhat curtailed in its capacity to adequately assess the effectiveness of these negotiations and the form that the final IA-CEPA will take.
3.66
Nonetheless, the Committee broadly agrees with the statements made by the respective leaders of Australia and Indonesia and the trade ministers regarding the vision for the IA-CEPA, and the potential it has to promote innovation in the relationship between the two countries.
3.67
The Committee shares the concerns of submitters that the IA-CEPA not be a standard free trade agreement. The IA-BPG sets out a clear, business-friendly vision for this agreement, as outlined above, and the Committee hopes that the means to realise this vision is reflected in the terms of the final agreement.
3.68
The Committee is particularly concerned that the IA-CEPA should set out pathways to reduce non-tariff barriers to trade, not only to maximise two-way trade, but also to maximise the potential for joint opportunities and leveraging our comparative advantages to increase third-market trade.
3.69
The work undertaken over a number of years by the IA-BPG comprehensively sets out the opportunities for the future of the relationship between both countries, including in the fields of:
food security and partnership in a global supply chain;
education and human capital development;
the digital economy and information technology investment; and
infrastructure and resources.
3.70
The Committee agrees with the IA-BPG that Australia is in an ideal position to harness these opportunities – if we can create a trade environment that allows for innovation and strong business partnerships.
3.71
The Committee is also cognisant of the fact that the Parliament’s Joint Standing Committee on Treaties (JSCOT) will be considering the IA-CEPA as part of the standard parliamentary approval process for treaties. The Committee encourages JSCOT, to consider the work of the IA-BPG and submitters to this inquiry as part of its analysis of the IA-CEPA.
3.72
The Committee is greatly encouraged by the openness of Australian business towards greater ties with Indonesia and considers that and enhanced relationships will benefit both countries for many generations to come.
Mr Ken O'Dowd MP
Chair
15 June 2017