Old partners, new engagement
SK Zainuddin | July 02, 2011

Indonesia and Europe are embarking on a new partnership that promises significant benefits for both sides. With a Comprehensive Economic Partnership Agreement on the cards, trade and investment flows are expected to rise in the coming years. Globe Asia talks to Eurocham chairman Jakob Friis Sorensen and vice chairman Tiku Menon about what the future holds.

Europe and Southeast Asia have had long historical ties, stretching back to the 14th century when Portuguese ships first sailed into Malacca. Over the past six centuries, that relationship has experienced ups and downs but both regions always kept the economic pipeline open.

With Europe now having formed a union and Southeast Asia moving towards greater economic integration under ASEAN, new economic and business opportunities are opening up. Indonesia, as the largest economy in the region and the chair of ASEAN this year, is drawing increased attention from European companies. Trade between the European Union and Indonesia has been rising steadily over the past few years and in 2010 stood at 20 billion euro ($28 billion) with the trade surplus in favor of Indonesia at 7 billion euro.

European companies have also been investing in Indonesia. Investments have risen from 821 million euro in 2005 to 2.77 billion euro in 2010. Looking forward, European companies are committed to increasing their presence in Indonesia, says Jakob Friis Sorensen, chairman of the European Business Chamber of Commerce in Indonesia (Eurocham). Unlike Indian and Chinese companies, which have been investing heavily in the country’s resources sectors, European companies are more interested in playing a role in upgrading and capacity building in Indonesia’s industrial sector.

“Europe has a vast community of small- and medium-sized enterprises (SMEs) with technology that can be applied to Indonesia and become game changing,” says Sorensen. “There are tremendous opportunities for partnership between European and Indonesian SMEs.” He adds that the Indonesian government is also looking to build up the SME sector as it provides a far more stable base for the economy than just depending on large business groups. Although some individual European countries have their own chambers of commerce, Eurocham acts as an umbrella body that represents the entire block, says vice chairman Tiku Menon.

“The individual chambers may have their own agenda but we speak for the entire block, rather than individual countries.” To further strengthen economic ties between the EU and Indonesia, both sides have also formed the Europe Indonesia Business Development (EIBD) program to act as a forum which companies from both sides can join. The EIBD was formed in 2009 in Brussels by the European Commission and launched in Jakarta in 2010 in association with the Indonesian Chamber of Commerce and Industry (Kadin) to look at specific sectors as well as infrastructure. “We have to admit that we still have not seen any concrete outcome but we have opened new communication channels,” says Sorensen. And, adds Menon, the program is gaining recognition as a movement that is critical to building closer business ties.

Vision group

The EIBD is part of a larger movement that was initiated when President Susilo Bambang Yudhoyono met EU President Jose Manuel Barroso. Called the Vision Group, it is led by Professor Djisman Simandjuntak from Indonesia and Jacque Pelzman from Holland. The two sides have met three times over the past five months and the outcome is a report on improving cooperation and realizing the opportunities that exist between the EU and Indonesia as complementary economies and a vision on how the relationship can evolve and deepen.

“The document was put together by more than 20 people and it recommends that Indonesia and the EU start negotiating a Comprehensive Economic Partnership Agreement (CEPA),” notes Sorensen. The agreement, he adds, goes above and beyond a free trade agreement (FTA), which normally deals mainly with tariffs. “This agreement goes beyond that and includes market access and investments,” he says. The trade surplus that Indonesia currently enjoys with the EU will continue as not many European goods are bought by Indonesia but the agreement is expected to draw more European investments to Indonesia, especially in value-added goods and services.

“Indonesia will benefit from training in healthcare, insurance and banking and this is the critical difference,” notes Sorensen. Menon adds that when one looks at the type of investments currently flowing into Indonesia, not much is going into the manufacturing sector, which remains a relatively small part of the economy as a whole. And at the moment, out of Europe’s total investments in ASEAN, Indonesia only receives 1.6%. “If you look at Indonesia’s objectives, very little foreign investment is being directed into scaling up of capacity and improving production processes of goods,” he notes.

“I don’t think Indonesia has reached a stage where manufacturing is the base of economic growth while Europe has the necessary technology and far-sightedness on where and how to go about it.” The CEPA is especially important given that the EU and Singapore are expected to finalize an FTA this year and Malaysia will finalize one some time in 2012. Sorensen hopes to start the CEPA negotiations by the end of this year. “The European approach is not one of dominance,” he adds. “It is one of due respect for Asia and a cautious approach to future cooperation.” GA

 

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