A free trade agreement (FTA) between Indonesia and South Korea is set to come into force after the Indonesian parliament recently ratified the deal.
Both countries officially Korea-Indonesia Comprehensive Economic Partnership Agreement (CEPA), in 2019, it had to be ratified by each Congress before it could come into force.
The deal, which was ratified by the Indonesian parliament in August 2022, will boost Indonesia’s fishing and agricultural sectors and strengthen South Korea’s industrial and automotive sectors.
CEPA is poised to add further impetus to the growing economic relationship between Indonesia and South Korea, a partnership at the forefront of South Korea’s pivot to South and Southeast Asia.
South Korea for automobiles and industry, Indonesia for agriculture
CEPA is a trade agreement that reduces trade tariffs and expands market access between two countries. The agreement will eliminate import tariffs on 95.5% of Indonesia’s exports to South Korea and 93% of South Korea’s exports to Indonesia.
Tariff reduction by CEPA ASEAN-Korea Free Trade AgreementAs a result, 90.2% and 80.1% of export tariffs have been removed from Indonesian and South Korean exports, respectively.of ASEAN-Korea Free Trade Agreement is an FTA between South Korea and the entire ASEAN bloc of which Indonesia is a member.
In terms of market access, Indonesia will have more capacity to export fish and agricultural products to South Korea under CEPA. Meanwhile, South Korea will be able to export industrial and automotive products to Indonesia more easily, providing greater access and protection for investment.
For example, many South Korean steel exports, including steel-based auto parts, will be freed from tariffs previously at 5-15% tariffs, while automobiles and auto parts will be freed from 5% tariffs. Indonesia’s exports of various seafood, food and agricultural products, including fish, some agricultural products and beer, will be tariff-free.
However, while Indonesia expands market access for seafood, food and agricultural products, many key agricultural products have been excluded from tariff reductions. This is largely due to resistance from South Korean farmers who claim the trade agreement will negatively affect their livelihoods.
10+ year contract
Indonesia and South Korea have formally adopted a free trade agreement (FTA), CEPA, after more than a decade of negotiations.
CEPA negotiations first started in 2012, collapsed in 2014 due to disagreements and government changes, and were revived in 2019. The revival of CEPA comes out of the steadily expanding relationship between Indonesia and South Korea. Government efforts to deepen economic and political ties with South and Southeast Asia.
Most notably, the South Korean government has made concerted efforts to strengthen ties with ASEAN and India through the New Southern Policy. Then-South Korean President Moon Jae-in made an official visit to Indonesia in 2017, and the two countries upgraded their bilateral relationship to a “special strategic partnership.”
Indonesia and South Korea’s trade ministers finalized negotiations in 2020, but the agreement was ratified by the South Korean parliament in December 2021 and the Indonesian parliament in August 2022. At the same time, it is also a party to –.
During the CEPA negotiations, the South Korean side emphasized its interest in the country’s auto industry, while the Indonesian side sought a commitment to South Korea’s investment in cars and smartphones. It is one of the top investors in electric vehicles (EVs) and batteries in Indonesia.
The importance of this deal for the EV sector has been underscored by a number of symbolic gestures. For example, when Indonesia hosted his G20 summit in November 2022, the government chose South Korea’s Genesis G80 EV and Ionic 5 as official vehicles, expressing hopes for what CEPA will bring.
Expansion of economic and political relations
Relations between Indonesia and South Korea have steadily grown closer since CEPA negotiations first began. Indonesia is now her second largest destination for South Korea’s foreign direct investment (FDI) in ASEAN, after Vietnam. In 2021, trade between Indonesia and South Korea increased her 39% to reach $19.28 billion.
Indonesia’s major exports to South Korea include raw materials such as coal, copper, rubber, plywood and tin. South Korea’s major exports to Indonesia include industrial products such as synthetic rubber, flat steel products, electrical circuits and threads.
If CEPA works as envisioned, the agreement will help boost investment momentum in Indonesia’s automotive and electronics industries, including EVs and batteries. This will increase the manufacturing ecosystem surrounding these industries, which is still underdeveloped compared to the country’s manufacturing potential.
More broadly, the ratification of CEPA bodes well for foreign investors in Indonesia. In recent years, the Indonesian government has increasingly accepted international trade agreements with Australia, Chile, RCEP, etc.
Agreements such as CEPA have slowly improved Indonesia’s trade and investment situation, but this continues to pose many barriers for foreign companies. As a result, Indonesia, Southeast Asia’s largest economy, is transforming into a more attractive partner for international trade and investment.
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