Key Takeaways:

- The new U.S.–Indonesia trade agreement establishes a 19% reciprocal tariff and over US$20 billion in U.S. export commitments, reshaping bilateral economic ties.
- While Jakarta touts the deal as a diplomatic win, the benefits remain uneven—Indonesia faces potential export declines, labor disruptions, and regulatory misalignment from U.S. policy alignment.
- To sustain growth, Indonesia must leverage its domestic strengths and diversify trade partnerships, rather than rely solely on tariff concessions to drive investment.

The second Trump administration concluded a trade agreement with Indonesia that establishes a 19% reciprocal tariff on Indonesian exports to the United States, reduced from the previously proposed 32%. In return, Indonesia agreed to make substantial purchases of U.S. goods, with a total accumulation of more than US$20 billion. The principal provisions of the agreement encompass the elimination of tariff barriers, the alignment of policies related to economic security, the removal of obstacles to digital trade, and the enhancement of labor standards.

The agreement threatens to disrupt existing supply chains and trade partnerships because it stipulates the imposition of penalty tariffs on trans-shipment activities involving Chinese goods routed through Indonesia, along with Indonesia’s pledge to procure products manufactured in the U.S.. The additional imposed penalties can reach or even exceed 40%.

President Prabowo Subianto has mandated that the government prioritize diplomatic channels, underscoring the U.S.' position as a key strategic ally. This development has been positively received by several parties. The Indonesian Ministry of Industry attributed this achievement to President Prabowo’s adept negotiation skills, through which Indonesia secured more favorable tariff arrangements compared to competing countries. This outcome is regarded as an important foundation for strengthening the competitiveness of the national industry. Nevertheless, an assessment is necessary to determine the success of this arrangement, as its impacts will likely unfold.

Retail Sector Impact

In Indonesia’s domestic retail sector, the increased availability of U.S. products could expand consumer options, encourage shopping-related tourism, and stimulate higher retail expenditures, thereby benefiting premium retail outlets and regional shopping centers. The tariff adjustment is considered unlikely to negatively impact local small and medium enterprises, as American imports typically cater to distinct market segments. For instance, imported American apparel and footwear would not displace local equivalents, as they belong to separate categories. The Indonesian association of retailers emphasized that Indonesia should be more concerned about competition from Chinese apparel and footwear, as a zero-percent tariff for Chinese apparel and footwear would have a far greater negative impact on domestic producers. The entry of American goods would provide a positive stimulus for the retail industry, noting that some of the most affordable U.S. products could become available in Indonesia’s premium outlets. This development might even attract consumers from wealthier economies to visit Indonesia for shopping purposes. China has indeed become a nightmare for Indonesia’s retail and manufacturing sectors. Nevertheless, Indonesia continues to rely on trade and investment relations with China, particularly given the increasingly asymmetrical situation with the U.S..

However, some analysts maintain a critical perspective, arguing that Indonesia remains at an economic disadvantage in this context.  The 19% tariff on Indonesian imports still diminishes price competitiveness of products such as textiles and palm oil within the U.S. market. A consequent decline in export revenues is likely to ensue, potentially leading to workforce reductions. Manufacturing facilities dependent on U.S. demand may be compelled to implement layoffs or shutdowns. These repercussions extend beyond direct exporters to ancillary industries, including logistics firms, warehouse operations, and supply chain partners.

For comparison, Vietnam's previously established tariff rate of 46% was successfully negotiated down to 20%. Critics contend that even a marginal 1% differential in final tariffs fails to compensate for Vietnam's stronger competitive advantages in the manufacturing sector. These advantages include lower production costs and more efficient logistics infrastructure. Consequently, Vietnam would still be the more attractive destination for industrial relocation. At the same time, Indonesia's weak competitive advantage poses a potential concern for American companies, which may consequently reduce their investments.

Additionally, Washington also exerted considerable pressure. For example, the Indonesian government postponed the implementation of a special label for nutrient grading system for food products high in sugar, salt, and fat until 2027. This policy was originally designed to reduce the country’s obesity rate, which has nearly doubled over the past decade. Washington reportedly expressed concern that such a measure could negatively affect its food and beverage exports to Indonesia, valued at approximately US$54 million.

The alignment of policies has also resulted in detrimental consequences for Indonesia. For example, a significant implication of Indonesia's adoption of U.S. Food and Drug Administration (FDA) certifications for pharmaceuticals and medical devices is the risk of regulatory incongruity. The FDA's regulatory framework is predicated on the healthcare infrastructure of the U.S., which are not necessarily representative of the Indonesian context. This misalignment may subject Indonesia to a more rigorous and potentially unsuitable scrutiny process.

Monetary and Fiscal Sector

The Rupiah experienced significant depreciation, surpassing the levels recorded during the 1998 financial crisis before later stabilizing. Global gold prices also declined due to negative sentiment surrounding Trump’s policy decisions, which subsequently affected domestic gold prices. Furthermore, the Indonesia Stock Exchange implemented adjustments to its trading limits in an effort to mitigate market volatility. Jakarta was scrambling to respond. A comprehensive tax reform initiative was also introduced to ease the burden on businesses. For instance, the import income tax rate was reduced from 2.5% to 0.5%, while import duties on U.S. products were adjusted from 5–10% to a range of 0–5%. At the same time, the Indonesian government has strengthened enforcement measures and addressed regulatory gaps. A significant component of this effort involves a nationwide customs enforcement campaign designed to recover lost fiscal revenue. These fluctuations caused by tariffs can also impact trade competitiveness and foreign exchange flows, with potential Rupiah appreciation possibly making U.S. exports less attractive domestically, thus affecting trade balances. To enhance resilience against potential economic shocks, Indonesian Central Bank decided to lower its policy rate (benchmark interest rate), even as the U.S. Federal Reserve maintained its benchmark rate at 4.5% throughout the year, reflects a more forward-leaning approach aimed at stimulating domestic demand and export-driven production. The rate reduction seeks not only to encourage domestic loan and consumption but also to ease financing constraints for Indonesian exporters seeking to expand production capacity.

Conclusion

From Jakarta's standpoint, the results of its tariff negotiations with the U.S. are more accurately described as a set of carefully calibrated concessions rather than a definitive success. These outcomes have produced asymmetric advantages, constituting a highly qualified achievement rooted not in equitable terms but in a pragmatic adjustment to the demands of Trump trade policy.

Thus, Indonesia cannot rely on tariff reductions alone to generate significant near-term gains in investment or exports. Investor decisions are predominantly influenced by foundational elements such as a productive labor force and a credible regulatory environment, which outweigh the appeal of lower tariffs. This is compounded by the fact that ASEAN members export different products to the U.S.; consequently, the potential for diverting trade or investment flows to Indonesia due to tariff advantages is inherently constrained. A forward-looking strategy for Indonesia should capitalize on its inherent economic strengths, including its reserves of critical minerals and its substantial domestic consumer base, rather than acquiescing to American pressure for a swift agreement. Concurrently, Indonesia must critically assess its significant reliance on the American market for exports and proactively cultivate a more diversified portfolio of investment and trade partnerships. A failure to enact such strategic pivots risks damaging the political credibility of the Prabowo administration.