A new pact against Chinese dominance? Why the EU trade agreement with Indonesia is so strategically important

### EU deal secures nickel for electric cars ### A deal with two faces: How the EU overlooks environmental concerns regarding raw materials ### Billions in savings for the economy: These sectors benefit from the new Indonesia agreement ###

What is the historical background of the trade negotiations between the EU and Indonesia?

Negotiations between the European Union and Indonesia on a comprehensive economic partnership agreement have a long history. As early as 2007, the European Commission initiated negotiations with the Association of Southeast Asian Nations (ASEAN), of which Indonesia is the largest economy, on a regional trade and investment agreement. However, these negotiations were suspended by mutual agreement in 2009 to make way for a bilateral negotiating format.

The breakthrough came years later. In July 2025, EU Commission President Ursula von der Leyen and Indonesian President Prabowo Subianto reached an agreement in principle. This formed the basis for the Comprehensive Economic Partnership Agreement (CEPA), which was finally signed on September 23, 2025, on the island of Bali by EU Trade Commissioner Maroš Šefčovič and Indonesian Minister of Economy Airlangga Hartarto.

The nine-year negotiation period reflected the complexity of the talks, particularly on contentious issues such as Indonesia's ban on raw materials exports and environmental concerns regarding palm oil production. However, the trade conflict initiated by US President Donald Trump intensified the pressure on both sides to reach a swift agreement.

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What specific tariff reductions and trade advantages will result from the agreement?

The trade agreement creates a comprehensive free trade area with over 700 million consumers and brings significant tariff reductions. The EU will eliminate import duties on 98.5 percent of EU goods exported to Indonesia. This extensive tariff exemption will result in annual savings of around €600 million for EU exporters.

Of particular importance is the gradual abolition of Indonesian car tariffs, which previously stood at 50 percent and are scheduled to be phased out over the next five years. This opens up new opportunities for European car manufacturers to export and invest in electric vehicles. Tariffs on machine parts, chemicals, and pharmaceuticals will also be eliminated.

In the agricultural sector, EU farmers and food producers will benefit from the elimination of tariffs on a wide range of products. Indonesia has agreed to abolish tariffs on dairy products, meat, cheese, chocolate, and baked goods. At the same time, the EU is removing most tariffs on agricultural products from Indonesia, which will particularly benefit Indonesian export industries such as palm oil, textiles, and footwear.

Approximately 80 percent of Indonesian exports could be exempt from import duties in the European market. Furthermore, procedures for EU companies exporting goods to Indonesia will be significantly simplified, and the provision of services in key sectors such as IT and telecommunications will be facilitated.

Why are critical raw materials so important for the EU and what role does Indonesia play in this?

Securing access to critical raw materials has become a key strategic objective of the EU. In March 2024, the EU adopted the Critical Raw Materials Act (CRMA), which sets ambitious benchmarks for raw material supply. By 2030, at least 10 percent of the demand for strategic raw materials should be met by EU extraction, at least 40 percent by EU processing, and at least 25 percent by the European circular economy. Furthermore, the EU should not be more than 65 percent dependent on any third country for its raw materials.

Indonesia plays a key role in this strategy, as the country possesses the world's largest nickel reserves. Nickel is a critical raw material for the production of batteries for electric vehicles and is therefore central to Europe's clean technologies and energy transition. Around one-third of global nickel reserves are currently located in Indonesia, particularly on the island of Sulawesi. The country is even further ahead in nickel production, with an estimated global market share of around 60 percent, which could rise to as much as 75 percent.

EU Commission President Ursula von der Leyen emphasized that the agreement provides the EU with "a stable and predictable supply of critical raw materials, which are essential for Europe's clean technology and steel industry." This is particularly important given geopolitical developments and the EU's efforts to diversify its raw material dependencies.

What challenges arise from Indonesia's raw material export policy?

Indonesia pursues a strategic policy of domestic raw material processing, which has led to significant tensions with trading partners. In 2020, the government in Jakarta imposed a strict export ban on unprocessed nickel ore to force the development of a processing industry within the country. The aim was to prevent the country's raw materials from simply being exported and instead process them within Indonesia itself, thereby promoting industrialization and retaining a larger share of the value creation within the country.

From Indonesia's perspective, this policy was a great success. A mid-double-digit billion-dollar sum in US dollars flowed into the nickel value chain. Chinese investors, in particular, built numerous nickel smelters and steel plants near the mining areas in Sulawesi. As a result, Indonesia rose from obscurity to become one of the world's largest exporters of stainless steel.

The EU, however, responded to the export ban with legal action. In 2022, the EU won a case at the World Trade Organization (WTO), which declared the export ban unlawful. Indonesia appealed, however, and the proceedings could take years. As part of the new trade agreement, German industry is demanding that Indonesia completely lift its export ban on nickel.

Another problem arises from the dominance of Chinese companies in Indonesian nickel processing. While many of the hundreds of mines are Indonesian-owned, Chinese companies control the further processing. Western automakers often only gain access to Indonesian nickel through cooperation with Chinese partners.

How does the geopolitical situation affect the EU's trade strategy?

The deteriorating geopolitical situation has forced the EU to fundamentally rethink its trade strategy. The trade conflict with the US, dependence on Russia for raw materials, and vulnerable supply chains are intensifying the pressure to diversify. The EU aims to further diversify its trade relationships and develop new partnerships.

In this context, the Indonesia agreement is part of a broader strategy. After 25 years of negotiations, Brussels reached an agreement with the Mercosur countries (Argentina, Brazil, Paraguay, and Uruguay) on a large free trade area. The agreement was signed on December 6, 2024, and could boost annual EU exports to South America by up to 12 percent, equivalent to approximately €49 billion.

The EU also modernized its free trade agreement with Mexico and is exploring new avenues in its trade relations with the UK. In Southeast Asia, the EU already has trade agreements with Singapore and Vietnam. The Vietnam agreement, which entered into force in August 2020, led to a 36 percent increase in bilateral trade.

Trade Commissioner Šefčovič emphasized that in today's unpredictable global economy, trade relations are not merely economic instruments, but strategic assets that signal trust, coordination, and resilience. Diversification is therefore not a technical detail, but a key instrument of European resilience policy.

What is the economic significance of Indonesia as a trading partner?

With over 281 million inhabitants, Indonesia is the world's third-largest democracy and the most populous Muslim-majority country. As a G20 member and with a gross domestic product of approximately US$1.4 trillion, it ranks 16th among the world's largest economies. GDP per capita was around US$4,958 in 2024 and is projected to rise to US$7,519 by 2029.

Bilateral trade between the EU and Indonesia reached €27.3 billion in 2024. The EU imported goods worth €17.5 billion from Indonesia, while exports from the EU amounted to €9.7 billion. This made Indonesia the EU's fifth-largest trading partner among the ASEAN bloc in 2024.

Indonesia's economic dynamism is impressive. The country has consistently achieved high growth rates of around five to six percent in recent years. In 2024, real economic growth reached 5.0 percent. Forecasts predict that Indonesia could become the world's fourth-largest economy by 2045.

In 2024 alone, Germany's trade volume with Indonesia amounted to €7.3 billion. Imports of goods from Indonesia to Germany in 2023 totaled approximately US$2.5 billion, while exports to Germany reached US$4.6 billion. This demonstrates the considerable potential for expanding trade relations.

How is Indonesia strategically positioning itself in ASEAN and the Indo-Pacific?

Indonesia occupies a central position in the Southeast Asian region. Since 1976, the Association of Southeast Asian Nations (ASEAN) has had its permanent headquarters in the capital, Jakarta. Jakarta functions as the unofficial "capital of ASEAN" and houses the ASEAN Secretariat, which has recently been renamed the ASEAN Headquarters.

Indonesia's strategic importance extends far beyond Southeast Asia. The archipelago is considered the most powerful player in all of Southeast Asia and one of the most important countries in the entire Indo-Pacific. This position is reinforced by its geographical location as an archipelago state with more than 17,000 islands, controlling vital sea lanes.

In the context of increasing strategic competition between China and the US, Indonesia's position gains further significance. Several non-ASEAN countries, such as the US, China, and Australia, maintain two ambassadors in Indonesia: one for Indonesia and one for ASEAN. This underscores the country's dual importance as the largest ASEAN economy and a regional strategic player.

Jakarta also plans to strengthen its international significance even after losing its capital status with the relocation of the government to Nusantara. Law No. 2 of 2024 on the Jakarta Special Region envisions Jakarta becoming a "global city," serving as a center for trade, service activities, financial services, and national, regional, and global business operations.

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What are the environmental impacts of palm oil production in Indonesia?

Palm oil production in Indonesia is at the center of significant environmental debates. Indonesia, along with Malaysia, accounts for 85 percent of global palm oil production. Indonesian companies clear vast areas of rainforest every year specifically for palm oil plantations. According to the Indonesian Ministry of the Environment, 24 million hectares of rainforest were destroyed between 1990 and 2015 – an area almost the size of Great Britain.

The environmental problems are numerous and severe. Oil palm cultivation often comes at the expense of the environment and people. Pesticides on palm oil plantations pollute the soil and endanger the people exposed to them. Deforestation and burning of tropical rainforests releases CO2 and destroys habitats for people, animals, and plants.

The draining of peatlands is particularly problematic. A large portion of Indonesia's forest area stands on peatlands, which must be drained for oil palm cultivation, releasing large quantities of CO2 into the atmosphere. Although peatland draining has been banned in Indonesia since 2019, monitoring and prosecuting such violations is very difficult.

In 2022, 208,000 hectares of forest were destroyed, a 19 percent increase compared to 2021. This means Indonesia lost a forest area larger than Greater London. Palm oil plantations already cover approximately 16 million hectares, and these areas are expected to expand further.

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How does the trade agreement address sustainability issues?

The new trade agreement between the EU and Indonesia includes specific provisions to address sustainability issues, particularly in the area of ​​palm oil production. Brussels insisted that the agreement include references to a number of international climate and environmental protection agreements. According to the EU, there is a special provision for more sustainable palm oil production, but this does not impose any specific restrictions on Indonesia.

In May 2023, the EU adopted an important regulation to ensure that, from the end of 2024, no products produced at the expense of forests will be sold in the EU. This regulation applies to products that are particularly frequently associated with deforestation, such as palm oil, soy, and beef.

At the same time, there are positive developments in sustainable palm oil projects. The Forum for Sustainable Palm Oil (FONAP) has successfully collaborated with local producers and organizations in Indonesia. With the support of the Indonesian association FORTASBI, around 1,000 smallholder farmers were trained to establish sustainable farming methods. Through targeted training, the participating smallholder farmers were able to increase their yields, while simultaneously reducing pesticide use and protecting adjacent forest areas.

In the German food industry, over 90 percent of the palm oil used already comes from sustainably certified cultivation. This shows that transformation is possible through transparent standards, functioning certifications, and targeted investments in local production conditions.

Which industries will benefit most from the new trade agreement?

The trade agreement opens up significant opportunities for various sectors on both sides. On the EU side, the automotive, mechanical engineering, chemical, and pharmaceutical industries will particularly benefit from improved market access. The gradual elimination of Indonesia's 50 percent import tariff on motor vehicles creates new opportunities for automobile exports and investment in electric vehicles.

The European agricultural and food sector will benefit significantly from the elimination of high tariffs. Traditional EU products and key industries will be protected by the agreement and gain better market access. Dairy products, meat, wine, chocolate, and other foodstuffs, in particular, stand to benefit from the tariff reductions.

On the Indonesian side, the export industries for palm oil, textiles, and footwear stand to benefit most. The raw materials sectors, particularly nickel and other minerals, are the focus of attention. Indonesia not only possesses the world's largest nickel reserves but also cobalt, a byproduct of nickel production. Other raw materials such as tin, copper, and bauxite could also benefit from trade facilitation in the future.

The service sector is gaining new opportunities through the provision of services in key sectors such as IT and telecommunications. New opportunities for EU investment in Indonesia are being developed, particularly in strategic sectors such as electric vehicles, electronics, and pharmaceuticals.

How does the ratification process work and when does the agreement come into force?

The signed trade agreement still needs to undergo a complex ratification process before it can enter into force. On the EU side, both the Council of Member States and the European Parliament must approve the agreement. On the Indonesian side, ratification by the Indonesian Parliament is required.

Indonesia aims to have the agreement implemented in 2027. The timeframe between signing and entry into force is typical for such comprehensive trade agreements. By comparison, the EU-Vietnam Free Trade Agreement was signed in June 2019, approved by the European Parliament in February 2020, and entered into force in August 2020.

The ratification process can be influenced by various factors. Some EU member states might have concerns regarding the environmental impact or other aspects of the agreement. Experience with the Mercosur agreement shows that some member states, such as France, Austria, and Poland, view trade agreements critically and might attempt to organize a blocking minority.

The European Commission submitted the Mercosur agreement to the Council for ratification on September 3, 2025, and hopes for a decision in 2025. Similar timeframes could apply to the Indonesia agreement, with ratification by all parties by 2026 or 2027 appearing realistic.

What role does China play in Indonesia's resource economy?

China plays a dominant role in Indonesia's raw materials economy, particularly in the nickel sector. In response to Indonesia's 2020 export ban on unprocessed nickel, Chinese companies began investing heavily in the country. They established their own nickel processing facilities and manufactured anodes for electric vehicle batteries locally.

Meanwhile, Chinese electric car manufacturers are establishing operations in Indonesia. BYD plans to complete a factory on Java by the end of the year, capable of producing 150,000 vehicles annually. Xpeng's first Indonesian-assembled vehicle recently rolled off the production line at a new plant. This development demonstrates how China is driving Indonesia's industrialization.

Nickel mining and processing are largely controlled by Chinese companies. While many of the hundreds of mines are Indonesian-owned, Chinese companies control the further processing. European companies are often dependent on Chinese partners for imports from Indonesia.

According to the Indonesian Ministry of Investment, there are currently 20 investment projects for nickel smelters and another 19 for ferro-nickel processing, as well as 21 for iron sulfate processing in Sulawesi and the North Moluccas. Tens of billions of US dollars have flowed into the nickel value chain, primarily from Chinese investors.

This Chinese dominance poses a challenge for Western companies seeking more direct access to Indonesian raw materials. According to Volker Treier, head of foreign trade at the Association of German Chambers of Industry and Commerce (DIHK), German companies are prepared to create alternative access routes through investment and job creation in Indonesia.

How does the Indonesia agreement compare with other EU trade agreements in the region?

The Indonesia agreement is the EU's third free trade agreement with ASEAN partners, following those with Singapore and Vietnam. The Vietnam agreement, which entered into force in August 2020, can be considered a success story. Bilateral trade between the EU and Vietnam has increased by 36 percent since its ratification. Vietnam has become the EU's most important trading partner in Southeast Asia.

Trade between the EU and Vietnam amounted to €64.2 billion in 2023, placing Vietnam 17th in EU merchandise trade. The Vietnam agreement included the immediate elimination of 65 percent of tariffs on EU exports to Vietnam and 71 percent of tariffs on imports from Vietnam.

The Indonesia agreement, however, is significantly more comprehensive. With the elimination of 98.5 percent of tariffs, it goes further than the Vietnam agreement. Moreover, its economic significance is greater: with 281 million inhabitants, Indonesia is the leading economy in Southeast Asia, while Vietnam has approximately 97 million inhabitants.

The EU continues to strive for a comprehensive agreement with the entire ASEAN region. The bilateral agreements are intended to serve as helpful building blocks for a future regional agreement. With a share of approximately 10.2 percent of ASEAN trade, the EU is ASEAN's third-largest trading partner after the US and China.

The EU-ASEAN work programme for trade and investment for 2024-2025 provides a framework for economic policy cooperation to address issues such as supply chain resilience, digital trade and green technologies.

What are the long-term strategic implications of the agreement for both sides?

The trade agreement between the EU and Indonesia has far-reaching strategic implications that extend beyond mere trade. For the EU, it is an important building block in its diversification strategy and its efforts to reduce dependence on individual trading partners. Securing access to critical raw materials from Indonesia strengthens Europe's strategic autonomy in the green and digital transformation.

The agreement positions the EU as an alternative partner to China in the region. While China has already invested heavily in Indonesia's raw materials sector, the EU agreement offers Indonesian companies new markets and technologies. This could lead to a more balanced economic partnership and strengthen Indonesia's negotiating position vis-à-vis China.

For Indonesia, the agreement represents a confirmation of its strategy of domestic raw material processing. The EU is effectively accepting Indonesia's approach of no longer being merely a raw material supplier, but rather becoming an industrialized nation. This could encourage other developing countries to pursue similar strategies.

The agreement also strengthens Indonesia's position as a regional leader in Southeast Asia. As the largest ASEAN economy with a direct trade agreement with the EU, Indonesia can further expand its role as a bridge between Europe and Asia. Jakarta plans to leverage its position as the "capital of ASEAN" to position itself as a center for regional integration.

In the long term, the agreement could contribute to a reorganization of trade flows in the Indo-Pacific. The EU is establishing itself as a third pole alongside the US and China, which could strengthen the strategic autonomy of all participants. For global trade policy, the agreement sends a signal for rules-based multilateralism at a time of increasing protectionist tendencies.

The experience gained from this agreement will also shape future EU trade policy. Its success could serve as a model for further agreements with other ASEAN states and other developing countries that wish to change their role in global value chains.

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