US-Indonesia deal raises concern over trade balance

The latest United States-Indonesia trade agreement, which will allow duty-free US imports to Indonesia, is seen by analysts as pressuring the bilateral trade balance and weighing on the Indonesian economic outlook.

After almost a year of negotiations, the two countries finally sealed a trade deal during Indonesian President Prabowo Subianto's state visit to the US.

Prabowo and US President Donald Trump signed an agreement on Thursday in which the US has agreed to keep its tariffs on Indonesian goods at 19 percent, except for certain products such as textiles and apparel, which will receive a reciprocal tariff of 0 percent.

The final rate is lower than the 32 percent that the US had earlier threatened against Indonesia. However, it is still higher than what was imposed in line with the World Trade Organization's most-favored-nation principle.

In exchange for lower duties, Indonesia has agreed to eliminate tariffs on more than 99 percent of US products and to purchase more than $30 billion worth of US aircraft, energy and farm products.

A White House statement called the trade agreement a "great deal", saying it will help both countries to "promote economic growth". However, regional experts have cast a more cautious tone.

Josua Pardede, chief economist at Permata Bank in Jakarta, said that as the agreement is designed to expand US access to the Indonesian market, it creates "a realistic risk" that Indonesian imports would rise faster than its exports, potentially pressuring the bilateral trade balance.

Unless such a rise in imports is offset by higher investment inflows or export substitution, Pardede said the import flows can strain Indonesia's current account and the rupiah.

It is crucial to monitor import surges and promote the competitiveness of local products, he said.

Priyanka Kishore, director and principal economist at the Singapore-based consultancy Asia Decoded, said the lowered-to-19 percent US tariffs may ease downside pressures on Indonesia's labor-intensive industries that export to the US.

However, Kishore said the net effect will have to be assessed in terms of whether Indonesia will be able to increase its US market share or capture more US investments.

Apart from signing the tariff agreement, Indonesia and the US have also sealed $38.4 billion worth of trade deals at the US-Indonesia Business Summit held on Wednesday, according to a report filed by Indonesian news agency Antara.

3-year high

Indonesia's economy notched a three-year high in 2025. The Southeast Asia's biggest economy rose by 5.11 percent on the back of higher exports and robust domestic demand. The Indonesian government is aiming for a 5.4 to 5.6 percent growth this year.

Sawidji Widoatmodjo, dean of the economics and business school at Jakarta's Tarumanagara University, said an economic growth of around 5 percent this year can be sustained if the government becomes the driver of consumption with its stimulus programs.

"The consequence is the government will have to increase debts for financing the programs," he said.

Suryaputra Wijaksana, an economist for the Singapore-based brokerage UOB Kay Hian, said such growth momentum might be reined in by news of the rating agency Moody's lowering of the country's credit rating outlook and index provider MSCI's concerns on the Indonesian stock exchange.

"Recent financial developments, notably MSCI's warning and Moody's outlook downgrade to negative, are likely to dampen foreign investment interest, both in portfolio and direct investment," Wijaksana said. "This will exert depreciation pressure on the rupiah, reinforcing an existing trend."

Wahyu Ario Pratomo, a lecturer in economics at the University of North Sumatra, said domestic demand will remain as Indonesia's main growth engine.

However, it is also equally important for Indonesia to diversify its markets in light of US tariffs, Pratomo said.

Higher tariffs can slow global trade, which can also weaken Indonesia's export growth, he said. Domestic consumption and investment inflows have to rise further in order to offset possible losses from the export sector, he added.

Leonardus Jegho is a freelance journalist for China Daily.