Indonesia's Export Economy: A Disaster?

Summary

In 2019, Indonesia’s President Joko Widodo implemented an export ban on raw nickel ores to boost domestic processing, significantly increasing the country’s trade value and foreign investment. While the strategy has benefited Indonesia’s economy, especially within the electric vehicle (EV) market, it has sparked environmental, social, and governance (ESG) concerns, including pollution, labor rights violations, and conflicts with indigenous communities. The success of this protectionist agenda is uncertain for other raw materials like bauxite, and ongoing trade tensions with the EU and WTO rulings add complexity to Indonesia’s long-term economic prospects.

Takeaways

• 😀 President Joko Widodo's 2019 nickel export ban led to a dramatic rise in Indonesia’s nickel trade value, from $1.08 billion to $28.8 billion.
• 😀 The export ban has attracted significant foreign direct investment (FDI) in Indonesia's metals industry, with $16.1 billion invested in 2022.
• 😀 Widodo is seeking to extend export bans to other raw materials like bauxite, palm oil, thermal coal, and tin, to increase domestic processing and value-added products.
• 😀 While China has invested heavily in Indonesia’s nickel industry, Western investors remain hesitant due to concerns over Indonesia's ESG (Environmental, Social, and Governance) record.
• 😀 Major ESG issues include outdated technology, environmental damage from low-grade nickel processing, poor labor standards, and weak regulatory frameworks.
• 😀 The Indonesian government’s decision to allow deep-sea tailings disposal has caused significant environmental harm, including biodiversity loss and local health issues.
• 😀 Although Indonesian companies are shifting from aquatic to land-based disposal methods, this solution is costly and still fails to resolve long-term environmental concerns.
• 😀 Poor working conditions in Indonesian nickel plants, including unsafe environments and labor abuses, have prompted complaints from workers and international human rights groups.
• 😀 Indonesia's revised laws, such as the Omnibus Law, lower ESG standards, which has led to local communities and indigenous people being marginalized in decision-making processes.
• 😀 The success of Indonesia's nickel industry relies on specific conditions, including its vast nickel reserves and the growing global demand for electric vehicle batteries, which may not be applicable to other raw materials like bauxite.
• 😀 Trade relations with the European Union (EU) have become tense due to the WTO ruling against Indonesia’s export ban, with the EU pushing for compliance with international trade rules.
• 😀 President Widodo has shown resistance to the WTO ruling, potentially risking trade sanctions from the EU and other global trade partners if the export bans are not reversed.

Q & A

What prompted Indonesia's decision to ban raw nickel ore exports in 2019?

President Joko Widodo of Indonesia announced the ban on raw nickel ore exports to encourage foreign investment in the downstream processing of nickel, boosting the country's economy and its position in the electric vehicle market.

What has been the economic impact of Indonesia's export ban on raw nickel ore?

The export ban led to a dramatic increase in the value of Indonesian nickel trade, rising from 1.08 billion USD to 28.8 billion USD. Foreign direct investment in the metals industry surged to 16.1 billion USD in 2022, positioning Indonesia as a major player in the electric vehicle market.

How has Indonesia's export ban influenced its relationships with Western investors?

The ban has caused reluctance among Western investors, with significant investments from China but minimal involvement from Australia, Canada, South Korea, and the US. This is mainly due to concerns over Indonesia's environmental, social, and governance (ESG) practices.

What are the main environmental issues related to Indonesia's nickel processing?

Key environmental issues include the reliance on coal for energy, the production of acidic waste from low-grade laterite nickel ore processing, and the controversial practice of dumping waste into the ocean, leading to environmental degradation and loss of biodiversity.

What challenges does Indonesia face in improving its ESG standards in nickel processing?

The challenges include the high costs of switching from ocean dumping to land disposal, the reluctance of investors to bear these costs, and the Indonesian government's insufficient policies to address these issues comprehensively.

How does Indonesia's approach to ESG differ from Western investors' expectations?

Western investors are concerned with Indonesia's low ESG standards, including poor labor conditions, environmental damage, and limited public participation in decision-making. These concerns have led to some investors, like Paris-based Hedonova, divesting from Indonesian nickel projects.

Why might President Widodo's strategy of banning exports not work for all raw materials in Indonesia?

The strategy is successful for nickel because Indonesia has the largest reserves and favorable market conditions. However, other materials like bauxite don't have similar market conditions or natural advantages, and imposing export bans may not lead to the same appreciation in value.

What is the potential impact of further export bans on other raw materials, such as bauxite?

Export bans on materials like bauxite could fail to generate significant economic benefits, as Indonesia's bauxite reserves are smaller compared to other countries like Australia. Additionally, rising processing costs could lead to international buyers seeking cheaper alternatives.

What are the risks of Indonesia continuing its protectionist export policies despite WTO opposition?

If Indonesia continues its export bans despite the WTO ruling against them, it risks facing trade sanctions from other countries. These sanctions could harm Indonesia's broader trade relationships, especially with the EU and other major trading partners.

How could retaliatory tariffs affect Indonesia's economy and labor market?

Retaliatory tariffs could lead to increased costs for Indonesian imports, particularly iron and steel, and disrupt trade channels. This may further strain Indonesia's economy, potentially worsening existing labor issues, especially if sanctions are imposed on key sectors like manufacturing.