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

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

What is the historical background to 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 began negotiations on a regional trade and investment agreement with the Southeast Asian Nations Association (ASEAN), of which Indonesia is the largest economy. However, these negotiations were suspended by mutual agreement in 2009 to make way for a bilateral negotiation 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 Economic Affairs Airlangga Hartarto.

The nine-year negotiation period reflected the complexity of the negotiations, particularly on contentious issues such as Indonesia's commodity export ban and environmental concerns regarding palm oil production. However, the trade conflict triggered by US President Donald Trump increased the pressure on both sides to reach a speedy agreement.

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What specific tariff reductions and trade benefits 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 far-reaching tariff exemption will result in annual savings of around €600 million for EU exporters.

Particularly significant is the gradual abolition of Indonesian auto tariffs, which were previously at 50 percent and are scheduled to be phased out over the next five years. This opens up new opportunities for European automakers to export and invest in electric vehicles. Tariffs on machine parts, chemicals, and medicines will also be eliminated.

In the agricultural sector, EU farmers and food producers will benefit from the abolition of tariffs on a wide range of products. Indonesia has agreed to eliminate tariffs on dairy products, meat, cheese, chocolate, and baked goods. At the same time, the EU is lifting most tariffs on agricultural products from Indonesia, which will particularly benefit Indonesia's export industries for palm oil, textiles, and footwear.

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

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

Ensuring access to critical raw materials has become a central 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 mined in the EU, at least 40 percent should be processed in the EU, and at least 25 percent should come from the European circular economy. Furthermore, the EU should not be more than 65 percent dependent on any third country.

Indonesia plays a key role in this strategy, as it has the world's largest nickel reserves. Nickel is a critical raw material for the production of electric car batteries 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 leads the world 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 essential for Europe's clean technology and steel industries." This is particularly important in light of 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 refining raw materials domestically, which has led to considerable tensions with trading partners. In 2020, the government in Jakarta imposed a strict export ban on unprocessed nickel ore in order to force the development of a processing industry in the country. The goal was to no longer simply transport the country's raw materials away, but to process them in Indonesia itself in order to promote industrialization and retain a larger share of the added value in the country.

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

However, the EU 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. However, Indonesia filed an appeal, which could take years to hear. German industry is demanding that Indonesia completely lift its nickel export ban as part of the new trade agreement.

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 processing. Western automakers often only access Indonesian nickel in 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, raw material dependence on Russia, and fragile supply chains are increasing the pressure for diversification. The EU aims to further diversify its trade relations 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 states (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 for trade relations with the United Kingdom. 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 just economic instruments, but strategic assets that signal trust, coordination, and resilience. Diversification is therefore not a technical detail, but a central instrument of European resilience policy.

What is Indonesia’s economic importance as a trading partner?

With more than 281 million inhabitants, Indonesia is the world's third-largest democracy and the most populous Islamic country. As a G20 member state and with a gross domestic product of approximately $1.4 trillion, the country ranks 16th among the world's largest economies. Per capita GDP was approximately $4,958 in 2024 and is forecast to rise to $7,519 by 2029.

Bilateral trade between the EU and Indonesia already 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 within 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.

Germany alone had a trade volume with Indonesia of €7.3 billion in 2024. Imports of goods from Indonesia to Germany amounted to approximately $2.5 billion in 2023, while exports to Germany reached $4.6 billion. This demonstrates the significant potential for expanding trade relations.

How does Indonesia position itself strategically 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 its capital, Jakarta. Jakarta serves as the unofficial "capital of ASEAN" and is home to 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 region. This position is reinforced by its geographical location as an archipelagic state with more than 17,000 islands, controlling important sea routes.

In the context of increasing strategic competition between China and the United States, Indonesia's position becomes even more important. Several non-ASEAN countries, such as the United States, 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 standing even after losing its capital status due to the government's relocation to Nusantara. Law No. 2 of 2024 on the Jakarta Special Region stipulates that Jakarta will become a "global city" serving as a center for trade, service activities, financial services, and national, regional, and global business activities.

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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 large areas of rainforest every year specifically for palm oil plantations. According to the Indonesian Ministry of Environment, 24 million hectares of rainforest were destroyed between 1990 and 2015—an area almost the size of Great Britain.

The environmental problems are diverse and serious. Oil palm cultivation often comes at the expense of both the environment and people. Pesticides on palm oil plantations pollute the soil and endanger people exposed to them. Deforestation and slash-and-burn agriculture in tropical rainforests release CO2 and destroy habitats for people, animals, and plants.

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

In 2022, 208,000 hectares of forest were destroyed, an increase of 19 percent compared to 2021. Indonesia lost an area of ​​forest larger than Greater London. Palm oil plantations already cover around 16 million hectares, and this area is 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 contains specific provisions to address sustainability issues, particularly in the area of ​​palm oil production. Brussels pushed for the agreement to include references to several international agreements on climate and environmental protection. According to the EU, there is a special agreement for more sustainable palm oil production, but it does not impose any specific restrictions on Indonesia.

The EU already adopted an important regulation in May 2023 that aims to ensure that, by 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 cultivation methods. The participating smallholder farmers were able to increase their yields through targeted training, 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 demonstrates that transformation is possible through transparent standards, effective certifications, and targeted investments in local production conditions.

Which sectors 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 abolition of the 50 percent Indonesian import tariff on motor vehicles will create new opportunities for automotive exports and investments in electric vehicles.

The European agricultural and food industry will benefit significantly from the elimination of high tariffs. Traditional EU products and important industrial sectors will be protected by the agreement and will receive improved market access. Dairy products, meat, wine, chocolate, and other food products stand to benefit particularly from the tariff reductions.

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

The services sector will gain new opportunities by enabling the provision of services in key sectors such as IT and telecommunications. New opportunities for EU investment in Indonesia will be opened up, 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 has to go through 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 launch the agreement in 2027. The time 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 may have concerns about 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 with skepticism and may attempt to organize a blocking minority.

The EU Commission submitted the Mercosur agreement to the Council for ratification on September 3, 2025, and hopes for a decision before the end of 2025. Similar timeframes could apply to the Indonesia agreement, although ratification by all parties by 2026 or 2027 seems realistic.

What role does China play in Indonesia's raw materials economy?

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

Meanwhile, Chinese electric car manufacturers are setting up shop in Indonesia. BYD plans to complete a factory on Java by the end of the year that will be able to produce 150,000 vehicles a year. Xpeng's first vehicle assembled in Indonesia recently rolled off the production line at a new factory. This development demonstrates how China is driving Indonesia's industrialization.

Nickel mining and processing are largely in the hands of Chinese companies. While many of the hundreds of mines are Indonesian-owned, Chinese companies control 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 smelting, another 19 for ferro-nickel processing, and 21 for ferrous sulfate processing in Sulawesi and the North Moluccas. Tens of billions of US dollars have flowed into the nickel value chain, primarily through 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 German Chamber of Industry and Commerce (DIHK), German companies are willing to create alternative access routes through investments 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.

EU-Vietnam trade volume reached €64.2 billion in 2023, placing Vietnam 17th in the EU's trade in goods. 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.

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

The EU continues to strive for the conclusion of 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 USA and China.

The EU-ASEAN Trade and Investment Work Programme for 2024-2025 provides a framework for economic 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 go beyond trade alone. 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 European 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 validation of its domestic raw material processing strategy. The EU effectively accepts Indonesia's approach of becoming an industrialized country, rather than merely a raw material supplier. 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 use its position as the "capital of ASEAN" to position itself as a center of 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 parties involved. For global trade policy, the agreement sends a signal for rules-based multilateralism in a time of increasing protectionist tendencies.

The experience with this agreement will also shape future EU trade policy. Its success could serve as a model for future agreements with other ASEAN countries and other developing countries seeking to transform their role in global value chains.

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