The importance of trade relations between Australia and Indonesia

The importance of trade relations between Australia and Indonesia

If you have been following the news lately, there have been growing tensions between Australia and Indonesia as two Australian citizens, Andrew Chan and Myuran Sukumaran are facing execution for smuggling drugs. A diplomatic visit to Indonesia by our trade minister, Andrew Robb, has already been cancelled and there have been suggestions by Indonesians and Australians alike to sever trade relations between the countries, while some Australians plan to boycott travel to Bali. With regard to trade, how important is Australia to Indonesia, and vice versa? Do the two nations significantly trade with each other? Let’s find out.

To put it into perspective, Indonesia is not even in the top ten of Australia’s biggest trading partners. Using the latest data from DFAT, in 2013, Australia’s two way trade with Indonesia was valued at $14.9b, where $11.2b was in goods. Major exports to Indonesia include wheat ($1b) and live animals —not including seafood ($300m)—while the biggest import is crude petroleum (around $2b). Australia invested about $10.9b in Indonesia in 2013, which constitutes only 0.7% of Australia’s total foreign investment. Similarly, Indonesia’s investment in Australia is only $1b. In light of these numbers, some Australians might say that trade with Indonesia is nowhere near as important as trade with other heavyweights such as China and Japan. In so many cases, however, numbers do not reflect the whole story; Indonesia’s importance to Australia and vice versa is not fully explored in these figures.

In terms of the Australian economy, the agriculture sector has the most to lose should bilateral relationships go sour. Presently, Indonesia is Australia’s largest wheat export market, as Indonesia is gradually becoming more westernised in terms of its diet. Additionally, Indonesia’s burgeoning middle class is expected to drive Australia’s wheat exports significantly in the years to come. As Indonesia’s growing middle class gets richer, this has a big impact on Australia’s animal exports. It is no surprise that Indonesia is also Australia’s largest live cattle export market, which was valued at $461m in 2013–2014, representing 55% of Australia’s total live cattle exports.

Indonesia’s importance to the live cattle industry was highlighted when the Australian government announced the live cattle ban on the country in 2011. While this was a big win for ethics and morals, many Australian cattle farmers were badly hit by the ban. The impact was so serious that a lawsuit for compensation was launched against the federal government. If the two countries stop trading, other parts of the Australian economy will also suffer, not just the agriculture sector.

Another oft-forgotten topic is the two way trade in services, which reached $3.7b in 2013. Half of Australia’s service exports to Indonesia (44.8%) come from the higher education sector, as many Indonesian students come to study at universities like Monash or Melbourne. In light of the complex issue of university deregulation, Australian universities may have to depend more on fees from international students to balance their books. Australian retaliation against Indonesia’s decision to execute Chan and Sukumaran will lead to a reduction in the number of Indonesian students attending Australian universities. In simple terms, it would represent lost revenue to the higher education sector, currently Australia’s third largest export at $15b.

On the flipside, Indonesia’s main export to Australia is personal holidays, mostly in the island of Bali. Australian efforts to boycott travel to Indonesia, in order to oppose the executions, are likely to prove futile. They serve only to incite further rage and hatred from Indonesians, as exemplified by the Coin for Australia movement. Moreover, what happens in Bali affects only the Balinese economy, and not the whole economy. As an Australian permanent resident from Indonesia, I live in Java when I come back home and if Australians boycott Bali, nothing really happens to my way of life.

If the relationship deteriorates even further, this may lead to a breakdown in the Indonesia-Australia Comprehensive Economic Partnership (IA-CEPA) negotiations, which plan to establish a free trade agreement between the two nations. Indonesia and Australia have accepted that there is greater scope to increase bilateral trade, and should this FTA plan go bust, future trades that may be worth billions to both countries will go up in smoke. Outside of trade, Indonesia is of significance to Australia due to the proximity of both countries. The two nations collaborate in a range of other activities, including scientific research, defence and think tanks. If Australia or Indonesia severs economic ties with the other, these other activities will invariably suffer the same fate. The result will be a lose-lose situation.

Everyone is entitled to their own opinion regarding Indonesia’s stance towards the imminent execution of the Bali drug smugglers. However, it is clear that both Indonesia and Australia are better off by having excellent trade relations with each other. With the executions looming for the two men, relations will be quite frosty between the countries. However, it’s almost a certainty that in the long term Australia and Indonesia will continue their trade relations. Let’s hope that this extremely sensitive and complex issue won’t damage the relationship between the two countries beyond repair.