President Joko “Jokowi” Widodo (left) meets with United States President Joe Biden on the sidelines of the United Nations Climate Change Conference (COP26) at the Scottish Event Campus (SEC) in Glasgow, Scotland, the United Kingdom, on Monday, Nov. 1, 2021.(Presidential Bureau for the Media/Laily Rachev)
It is a busy season for international engagement in Indonesia. With the country assuming the presidency of the Group of 20 for the first time and hopefully escaping nearly two years of a dreary COVID-19 funk, 2022 should see the country shine.
The Biden administration’s stepped-up engagement with Indonesia and Southeast Asia overall reflects this. From visits to the region by the Vice President, the US Secretaries of Commerce and Defense, to President Joe Biden’s participation in the virtual US-ASEAN Summit in November, there is a new sense of diplomatic momentum across the region. Such welcome vibrancy regarding Southeast Asia has not been seen for a long time in Washington.
The spotlight is now on Jakarta. This month, Indonesia will host visits by US Secretary of State Antony Blinken and United States Trade Representative Katherine Tai. Other senior officials are poised to visit early next year, and Biden has invited President Joko “Jokowi” Widodo and other ASEAN leaders for an in-person summit in Washington in January.
Against this encouraging backdrop, Indonesian and American business leaders will gather both in person and online in Jakarta for the 9th annual US-Indonesia Investment Summit Dec. 13-15. Led by our two organizations, the US Chamber of Commerce and AmCham Indonesia, the summit comes amid growing economic optimism due to Indonesia’s extraordinary drop in COVID-19 cases. But neither continued good fortune on COVID-19 nor a frothy economic recovery are foreordained – uncertainties remain.
In order to maintain momentum, both sides need a robust agenda of economic engagement and candid conversations about trade and investment policy. For that reason, this year’s summit is the most important yet. In a dramatically altered international environment, the summit will be key to setting Indonesia-US economic relations on a stronger footing.
Indonesia previously held the unpleasant distinction of having the largest number of COVID-19 cases in Southeast Asia by a vast margin. No more; case numbers have plummeted from a height of nearly 50,000 new cases per day in July, to only a few hundred per day, well below many of its smaller neighbors.
Indonesia’s manufacturing sector is also looking perky; the IHS Markit Indonesia Manufacturing Purchasing Managers Index (PMI) stood at 53.9 in November, the third straight month of growth in factory activity, with strong demand and output growth as COVID-induced disruptions subsided. Consequently, buying activity rose sharply again, while firms reported tentative increases in both employment and inventories.
Perhaps most significantly, US-Indonesia bilateral trade is thriving after years of largely mediocre performance. Over the previous decade, 2011-2020, US purchases from Indonesia grew at a paltry average of 2.2 percent annually, only a quarter of the figure for ASEAN as a whole. In stark contrast, through the first nine months of this year, US purchases were up 30 percent over the same period last year. Indonesia’s record high exports to the US in 2021 will surpass the previous high by a big, big margin.
This is due partly to the relocation of investment and sourcing activity out of China. Vietnam was a particular beneficiary of this adjustment, but more recently it has bumped up against its own capacity limits. For that reason, the US Chamber and the Indonesian Employer’s Association (Apindo) are working closely to assess Indonesia’s capabilities and potential as a sourcing destination for major American retailers seeking alternatives to China, Vietnam, and other countries. This represents a huge opportunity.
Unfortunately, global supply chain problems cloud the outlook. Lead times continue to worsen, amid reports of shipping and traffic congestion. Foreign demand contracted for the fifth month in a row, while input costs accelerated to an eight-year high, driven by higher raw material and transportation costs alongside supplier shortages. As a result, manufacturers passed on the increased costs to consumers.
Further, there could well be another COVID-19 wave in Indonesia (or the US, with its many willfully unvaccinated people). Although Indonesia’s vaccination rate has increased impressively, it still lags behind most of its neighbors. The upcoming year-end holidays could drive a rebound in COVID-19 cases and it is anyone’s guess how severe the Omicron variant will prove to be.
In addition, the impressive improvement in attitudes toward foreign investment driven by the Omnibus Job Creation Law is being thrown into doubt by the recent Constitutional Court ruling temporarily putting the brakes on the law.
Further, climate change is no longer a future worry, but a present reality. Quick energy transitions – which by nature are not so quick – are vital in coal-dependent Indonesia, where powerful coal industry players are also major political actors. Beyond this, US-China relations and China’s unclear goals in the region add unwanted complexity and uncertainty.
Nevertheless, Indonesia can draw in more foreign investment by leveraging its many strengths – abundant natural resources, the largest consumer market in Southeast Asia and a young workforce. Indonesia can complement its formidable natural attributes with further policy reforms in areas like bureaucratic complexity, education and ease of investment in healthcare.
Fortunately, numerous trade irritants with Washington were addressed in the successful review of Indonesia’s eligibility for tariff relief under the Generalized System of Preferences; an important ministerial level Trade and Investment Framework Agreement (TIFA) meeting will be held with USTR Tai and Trade Minister Muhammad Lutfi in Jakarta this month. The Indonesian government furthermore has increased its positive engagement with the business community on a range of policy issues. Secretary Blinken’s visit demonstrates the importance that Washington places on the bilateral relationship and could turbocharge the economic partnership.
For Indonesia 2022 should be the best of times. Its inaugural presidency of the G20 lends it a high-profile global platform to craft an agenda with the world’s leading economies to promote economic growth while strengthening the rule of law. We believe gross domestic product growth should rebound strongly in 2022.
For decades, analysts have bemoaned Indonesia’s inability to realize its vast potential. Let this be the year that Indonesia begins to shape a vastly better future.
A. Lin Neumann is the managing director of the American Chamber of Commerce in Indonesia. John Goyer is executive director of Southeast Asia at the US Chamber of Commerce.
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