Trade agreement with Indonesia couldn’t come at a better time for WA

The Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) is a major strategic effort to build better economic relations. Australia and Indonesia signed the free trade agreement in March 2019 after eleven years of negotiations. It will enter into force on 5 July, and couldn’t come at a better time for Western Australia.

The events of this year have put unprecedented pressure on Western Australian exporters. The conventional tools of international business development have been curbed by the COVID-19 pandemic: global travel, face-to-face meetings, and large events. Value chains are collapsing. Shipping networks are disrupted by quarantines and the difficulty finding crews for vessels.

A trade dispute with China has also entered the mix. On 19 May, China hit Australian barley exports with tariffs totalling 80 percent. This is major blow to WA farmers, who account for the majority of the Australia-China barley trade China’s actions have also threatened beef. Four abattoirs in Queensland have been banned from exporting to China under the pretext of food safety, termed “sanitary and phytosanitary” regulations in trade parlance.

This makes IA-CEPA more important than ever. Both barley and beef have expanded access to the Indonesian market under the agreement. For the first time, Indonesia is using the tariff rate quota (TRQ) trade instrument. Under a TRQ, Indonesia agrees to tariff-free entry for a specific volume (a quota) of a product. Any additional exports beyond the quota are subject to a tariff. 

Under the feed grain TRQ, 500,000 tonnes of barley will be allowed into Indonesia duty free. The live cattle TRQ allows imports of 575,000 cattle at a 0 percent tariff in the first year after entry into force on 5 July. The quota increases four percent every year for the next six years. 

Using the TRQs come with their own challenges, such as equitable allocation to exporters and space for new market entrants. The feed grain TRQ not only covers barley but also sorghum and wheat. How much of the quota would be allocated to each grain is not yet clear. However, the Commonwealth Department of Agriculture is in charge of TRQ administration, and WA can advocate for due allocation based on its position as the top exporter.

Moreover, IA-CEPA provides that Indonesia will issue import permits automatically for TRQ commodities. While this might seem inconsequential, Indonesia’s labyrinthine import licensing process is a major non-tariff barrier to trade. A simplified process for automatic permits makes it vastly easier for WA exporters to get these products behind the border. 

There are other provisions for beef under IA-CEPA. Tariff reductions that are not tethered to a quota include a 0 percent tariff on chilled beef. Frozen beef with bone-in has a low tariff of 2.5 percent. This is good news for the industry as Indonesia’s beef consumption in Indonesia is expected to grow 1300 percent to 2050.

IA-CEPA can also serve as a platform for further development of trade and investment ties through its established new cooperation mechanisms. The combined effects of COVID-19 and trade tensions with China create a greater impetus to activate the committees IA-CEPA sets up in the institutional provisions chapter.

The most relevant committees would be the ministerial-level Joint Committee and the Committee on Trade in Goods. The former is obliged to meet within a year of entry-into-force, the latter within two years. WA business can encourage the Commonwealth government to convene these committees as soon as possible to discuss options for the feed grain TRQ.

Through these same mechanisms, WA can start a broader conversation with Indonesian policymakers and businesses to examine how WA can contribute to its neighbour’s food security. Food prices in Indonesia remain some of the highest in the region. For example, the average price of beef is approximately $8.05 per kilo, compared to the World Bank’s reference price of $4.00 per kilo.

To meet rising demand and to stabilise food prices, Indonesia will have to improve its agricultural productivity. It will also need to secure future supply by maintaining trade partnerships with reliable – and proximate – agriculture exporters like WA.

If the state can activate IA-CEPA and make enterprising use of its provisions, WA could establish itself as a preferred agricultural partner for one of the largest and fastest-growing economies in the Indo-Pacific region.