Under the Economic Partnership Agreement, which is expected to be implemented early next year, Japan will secure much-needed energy supplies while Indonesia will receive unprecedented capacity-building assistance to help raise production standards so its goods meet Japan’s strict import criteria.
Some 80 per cent of Japanese tariffs will be removed as soon as the pact is implemented, with another 10 per cent being reduced over the next decade. Indonesia will eliminate 58 per cent of its tariffs immediately upon implementation and another 35 per cent over the next 10 years.
Japanese and Indonesian businesses signed energy deals worth $4.3bn on Monday, to build power stations and develop coal resources and gas fields. Under the latter, Japan’s Mitsubishi, Pertamina – Indonesia’s state oil company – and Medco Energi of Indonesia will develop a 2m-tonnes-per-year gas field in central Indonesia, with all the gas produced exported to Japan until 2025.
Japan, which has no energy resources, imports 20 per cent of its energy needs from Indonesia. It is increasingly concerned about Indonesian plans to divert gas currently earmarked for export to the domestic market and so is using the EPA to secure long-term supplies.
Rice, a politically sensitive commodity in both countries, has not been included in the deal, which is Indonesia’s first and Japan’s eighth.
In 2006 Indonesian exports to Japan totalled $21.7bn, more than half of which was coal, gas and other energy resources. Trade in the other direction was $5.5bn
Fahmi Idris, Indonesia’s industry minister, said 26 Japanese companies have said they would soon invest $557m as a direct result of the EPA.
However, businesspeople warn that Indonesia needs to significantly improve its investment climate to reap optimal benefits from the deal. “A good system and strong human resources are not enough to secure the success of the EPA,” said Yasuo Hayashi, head of the Japan External Trade Organisation.
Hilmi Panigoro, head of Medco, said Indonesia’s business-unfriendly labour legislation was “the main stumbling block” for potential foreign investors.
Mari Pangestu, Indonesia’s trade minister, predicted it would take up to three years for the capacity-building component of the EPA, which does not feature in any of Japan’s other such pacts, to sufficiently raise Indonesian production standards.
“We’ve focused a lot on making sure that we get very specific capacity building; to ensure that we get the information, that we get the technology, that we get the training to meet the standards of Japan,” she said.
Shinzo Abe, Japan’s prime minister, is in Indonesia at the start of a week-long tour with 200 businesspeople that will also see him visit India and Malaysia.