Framework Tariff Deal with Indonesia

Action: The President announced a framework tariff deal with Indonesia, lowering the rate of “Liberation Day” tariffs from 32% to 19%. The deal includes promises of purchases of US commercial aircraft, energy, and agricultural products and eliminates all tariffs on US goods. But the deal is only a framework, and significant questions remain on its implementation.

Trusted Insights for What's Ahead^®

• Under the deal, Indonesia will eliminate tariffs on all US goods and face a 19% tariff on goods exported to the US. Indonesia will also purchase 50 Boeing aircraft, $15 billion in US energy (presumably liquefied natural gas), and $4.5 billion in US agricultural products. Indonesia has also promised to increase investment in the US. Higher tariffs will apply on goods deemed simply to be transshipped through Indonesia, as in the deal with Vietnam, but the rate for those goods was not announced.
• Announcing the deal, the President said that “[t]hey are going to pay 19% and we are going to pay nothing.  . . .  we will have full access to Indonesia.” Indonesia said the deal was reached after “extraordinary struggle by our negotiating team” and a conversation between the President and Indonesian President Prabowo Subianto, who termed the deal “a new era of mutual benefit.”
• But questions remain about implementation of the deal. There are reportedly no timelines for the purchases, and state-owned flag carrier Garuda Indonesia, facing financial difficulties, may struggle to purchase the planes quickly. President Prabowo added that while negotiations will continue, “[w]e’ve given our offer; we cannot give more.” It was presumably important for Indonesia to receive a lower tariff rate than Vietnam’s 20%.
• One potentially open question is Indonesia’s taxation of foreign digital services sold in the county. Since 2020, Indonesia has collected VAT on these transactions; while it is thus somewhat different from a formal digital services tax such as Canada recently abandoned, it applies to foreign merchants engaged in e-commerce as well as both domestic and foreign platform providers, including Amazon, Apple, Google, and Meta.
• Another potential issue is whether Indonesia would receive an exemption or partial exemption from the forthcoming 50% US tariffs on copper.
• Countries in the region facing US tariffs are also seeking to expand trade elsewhere. Last weekend, Indonesia and the EU also negotiated a political agreement for a Comprehensive Economic Partnership Agreement—an important step towards an EU-Indonesia free trade agreement—and hope to finalize the underlying CEPA by September.
• Other Southeast Asian countries, including Malaysia (facing a potential 25% rate) and the Philippines (facing a potential 20% rate), continue to negotiate with the US. As a part of the negotiations, Malaysia has reportedly agreed to revise rules of origin on US semiconductors to deter exports to third countries.