ECONOMIC OUTLOOK | HOW BAD IS THE IMPACT OF U.S. TARIFF ON INDONESIA?

Summary

Indonesia has chosen diplomacy over retaliation in response to the 32% import tariffs imposed by President Trump's administration. While many countries opt for retaliatory measures, Indonesia aims to negotiate with the US for a mutually beneficial solution, offering concessions such as relaxing domestic component requirements. The tariffs have caused global economic uncertainty, with concerns over trade wars and global supply chain disruptions. Despite the potential impact on exports, Indonesia’s economic reliance on the US is relatively small, and the country aims to improve its market share by enhancing product efficiency and quality in the US market. The diplomatic approach is viewed as a wise strategy to avoid further escalation.

Takeaways

• 😀 Indonesia has chosen a diplomatic approach to respond to the high import tariffs imposed by the US, instead of retaliating like other countries.
• 😀 Indonesia is sending a high-level delegation to the US to negotiate and find mutually beneficial solutions to the 32% tariff on Indonesian goods.
• 😀 As part of negotiations, Indonesia is willing to offer concessions, including easing local component requirements for tech companies like Apple.
• 😀 Indonesia's exports to the US consist mainly of electronics, apparel, clothing, and footwear, amounting to 26.3 billion USD in 2024.
• 😀 Trump's tariffs have negatively impacted global trade, causing fears of recession and volatility in financial markets worldwide.
• 😀 While many countries are retaliating, including China, Indonesia is focusing on diplomacy and cooperation with ASEAN members to ease the impact of the tariffs.
• 😀 Indonesia's trade surplus with the US in 2024 was 16.8 billion USD, but the tariffs are expected to hurt both exports and the Indonesian currency.
• 😀 The US tariffs are expected to lead to rising inflation, potentially prompting the Federal Reserve to raise interest rates, which could harm emerging markets like Indonesia.
• 😀 Economists worry that the global trade war, especially between the US and China, could fragment supply chains, leading to recessions and global economic instability.
• 😀 Despite concerns, economists believe the tariff impact on Indonesia will be limited because the US is only the third-largest export destination for Indonesia, contributing 2.2% of GDP.

Q & A

What diplomatic strategy is Indonesia pursuing in response to the U.S. tariffs on its goods?

Indonesia is pursuing a diplomatic approach rather than retaliating with its own tariffs. The country is sending a high-level delegation to negotiate with U.S. officials to find mutually beneficial solutions.

What concessions is Indonesia offering to the U.S. in negotiations over tariffs?

Indonesia is offering to adjust its domestic policies, such as easing the domestic component level requirement for technology companies, to meet U.S. trade demands. This includes revising the policy known as the KADEN on ICT goods.

What is the KADEN policy and how does it affect U.S. companies like Apple?

The KADEN policy requires technology companies to have 40% of their components locally sourced in Indonesia. This policy has impacted U.S. tech companies like Apple, affecting their investment and sales, particularly for products like the iPhone 16 series.

How are other ASEAN countries reacting to the U.S. tariffs?

Other ASEAN countries are considering retaliatory measures, with countries like China imposing substantial tariffs on U.S. imports. However, Indonesia is focusing on diplomacy and working with ASEAN to address the impact of the tariffs collectively.

What impact are the tariffs expected to have on Indonesia’s economy?

The tariffs are expected to have a limited impact on Indonesia’s economy as exports to the U.S. constitute a small percentage of the country’s GDP. However, the tariffs could lead to a weaker rupiah and potential inflation, especially if the U.S. raises interest rates.

How do the U.S. tariffs compare across ASEAN countries?

The U.S. tariffs vary across ASEAN countries, with Indonesia facing a 32% tariff, while Cambodia and Laos face even higher tariffs of 49% and 48%, respectively. Vietnam and Myanmar are also impacted by significant tariffs.

What are the potential global effects of the U.S.-China trade war, as discussed in the transcript?

The U.S.-China trade war could fragment global supply chains, leading to higher production costs and economic recessions in both the U.S. and China. This would negatively impact global trade and may affect countries like Indonesia, whose export economy depends on global supply chains.

What role do the Federal Reserve and bond markets play in mitigating the economic effects of the tariffs?

The Federal Reserve plays a crucial role in stabilizing global financial markets by addressing volatility in U.S. Treasury yields. If the Fed does not intervene, rising yields could cause capital outflows from emerging markets like Indonesia, leading to further economic instability.

Why does Indonesia’s economy have a smaller exposure to U.S. tariffs compared to countries like Vietnam?

Indonesia’s exports to the U.S. account for a smaller portion of its GDP (2.2%), whereas countries like Vietnam are more reliant on U.S. exports, making them more vulnerable to the impact of tariffs.

Why is Indonesia’s decision to pursue diplomacy rather than retaliation seen as the right approach?

Indonesia's decision to pursue diplomacy is considered wise because the country is not a major economic superpower, and escalating tensions with the U.S. through retaliatory measures could harm Indonesia’s international relations and economy. Diplomacy provides an opportunity to negotiate better terms and avoid a trade war.