This article was written by Aidan Yu and Michael Lawson.
On 4 March 2019, Trade Ministers Simon Birmingham and Enggartiasto Lukita signed the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) in Jakarta.
The agreement builds on the existing ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA) and deepens Australia’s economic and security cooperation with Indonesia – one of its strategically important trading partners.
Under IA-CEPA, over 99% of Australian goods exports by value will enter Indonesia duty-free or under significantly favorable arrangements by 2020. For example, some of Australia’s primary exports (such as live cattle, frozen beef, sheep meat, feed grains, rolled steel coils, citrus products, carrots, and potatoes) will have guaranteed automatic import permits. These permits are a big win for Australian exporters as they have been a major regulatory hurdle in the past. In turn, Australia will eliminate all customs tariffs remaining on Indonesian imports.
For Australia, the IA-CEPA reflects the Australian Government’s ongoing focus on ensuring the nation’s economic growth, facilitating greater trade and investment in the region and, by doing so, creating more opportunities for Australian businesses in global markets.
For Indonesia, the IA-CEPA is a call by the Indonesian Government for more foreign investments, particularly in priority sectors (such as energy and infrastructure). In doing so, these investments will enable Indonesia to meet its ambitious economic development plans.
In our view, the agreement presents significant opportunities for Australian exporters of goods and services across a number of sectors. Some highlights include:
- Education: the ability for Australian providers of technical and vocational training to deliver services throughout majority Australian-owned businesses in Indonesia.
- Food and agribusiness: preferential access for more than 99% of Australia’s agriculture goods imported by Indonesia, and significant reduction of tariffs on the export of Australian food and agriculture.
- Financial services: ease of some regulatory burdens of operating in Indonesia.
- Health and aged care: a commitment by Indonesia to allow hospitals, aged care institutions, and other specialist clinical services to operate with no restrictions on locations and majority Australian ownership.
- Mining and related services: more certainty around Australian majority ownership of businesses performing contract mining services and mine site preparation services.
- Telecommunications: more certainty for majority-Australian owned suppliers of telecommunications services, as well as a commitment by both countries to the maintenance of transparent and pro-competitive telecommunications regulation.
- Digital commerce: in addition to rules supporting the free flow of data and information across borders for service suppliers and investors as part of their business activities, the agreement includes commitments by both parties to protect privacy and consumer rights and combat 'spam' messages. There is also a commitment by Indonesia not to make more restrictive its existing laws on the local storage of data and any liberalisation will be automatically captured, benefitting Australian traders.
- Energy and utilities: further tariff elimination on entry into force and for majority Australian-owned companies looking to invest in drilling and survey services for geothermal power projects; operation of power plants, including geothermal power plants; and electrical power construction, installation and operations.
- Tourism: wholly Australian-owned 3-5 star hotels and resorts can be established anywhere in Indonesia and majority Australian-owned businesses can supply accommodation, food and beverages, and tourism consultancy services (including on a digital cross-border basis) in Indonesia.
- Transport and infrastructure: Indonesia has guaranteed that majority Australian-owned business can operate railway and road transport infrastructure including highways, bridges, and tunnels in Indonesia. It has also undertaken not to introduce any new discriminatory restrictions on Australian suppliers of international maritime transport services, including guaranteeing existing port access for Australian cruise ships.
Overall, the IA-CEPA further provides Australian investors with greater confidence, with specific commitments in key sectors and by restricting the scope that Indonesia has to make key regulations governing foreign investment more restrictive in the future (for example, on minimal capital requirements). Importantly, Australian investors will also benefit from ‘most favoured nation’ treatment – an assurance that they will receive the same benefits if Indonesia negotiates better outcomes for investors with a third country under a future trade agreement.
The IA-CEPA also facilitates greater people-to-people links and collaboration by providing more opportunities for skills exchanges. These provisions include:
- Businesses from each country can send their employees to work in the other country for up to 6 months. The initial pilot will apply to the following sectors: financial and insurance services; mining, engineering, and related technical services; and, information media and telecommunications services. In the 1ST year, the program will start with 100 exchanges in each direction and gradually increase to 500 exchanges in each direction in its 5TH year. Australians will not need to obtain a work permit under the pilot program, while the Indonesian Government has streamlined the approval processes for sponsor organisations in Indonesia.
- Travellers aged between 18 and 30 from each country will be permitted to work and holiday in the other country for up to 12 months.
- The annual limit for Work and Holiday visas for Indonesians will increase from the current 1,000 places to 4,100 places. It will continue to gradually increase every year to reach 5,000 places by the 6TH year.
- Up to 200 Indonesians per year will form part of a pilot workplace-based training program, which will enable them to receive workplace skills training in Australia. Participants of the program will require sponsorship from an approved Australian organisation and may undertake the training for up to 6 months in the following sectors: education, tourism, telecommunications, infrastructure development, health, energy, mining, financial services, and information communication and technology.
And, helpfully, the IA-CEPA also includes an Investor-State Dispute Settlement (ISDS) mechanism which will provide investors from Indonesia and Australia with access to an independent arbitral tribunal to resolve disputes for breaches of the countries’ commitments in the Investment Chapter of the agreement.
There are a number of important exceptions and qualifications to the matters which may be disputed in this forum. However, as with similar frameworks in other investment treaties, the ISDS has the potential to provide an additional measure of comfort to parties from each country in respect of their investments in the other and may be a consideration in the structuring of relevant investments.
The IA-CEPA will undoubtedly strengthen economic and political relations between Indonesia and Australia and significantly improve the regulatory conditions for two-way trade and investment. Accordingly, the signing of IA-CEPA is particularly important as Indonesia is bound to remain one of Australia’s major trading partners with its current population of 264 million, significant projected population growth, rapid urbanisation rates, and growing consumer class.
King & Wood Mallesons has an International Trade and Investment Practice which assists its clients to identify and capture the opportunities stemming from the rapid growth in Asia.
If you would like to discuss the IA-CEPA and what it may mean for your business, please speak to your King & Wood Mallesons contact.
King & Wood Mallesons LLP is a foreign law practice and is not qualified to advise on the laws of Singapore. This publication is intended to highlight potential issues and provide general information based on our understanding, and not to provide legal advice. You should not take, or refrain from taking, action based on its content.