A man reads a newspaper in Jakarta. — AP
WITH Donald Trump returning to the White House, we are likely to witness a renewed focus on the “America First” policy, which emphasises reshoring jobs, reducing trade deficits and tightening immigration policies.
Such a stance holds significant implications for emerging economies like Indonesia’s.
Here, we explore the anticipated impacts of Trump’s possible economic policies on the Indonesian economy from 2024 to 2029, specifically in relation to tariffs and trade deficits, the Generalised System of Preferences (GSP), global supply chain reorientation and foreign direct investment (FDI).
First are tariffs and trade deficits. During his previous term, Trump employed aggressive tariffs to reduce the United States trade deficit, particularly targeting imports from China.
In his current term, he has expressed the intention of imposing tariffs as high as 60% on Chinese imports (and up to 200% on electric vehicles), with potential 10% to 20% tariffs on imports from other countries.
Such measures could have both direct and indirect repercussions for Indonesia.
Directly, Indonesia stands as one of the United States’ largest South-East Asian trading partners after Vietnam, exporting products such as palm oil, electronic components, machinery, textiles, footwear, tires and rubber.
In 2023, Indonesia’s exports to the United States were valued at US$23.3bil, largely from inputs and raw materials for US production.
Raising costs
Increased tariffs on Asean countries would raise costs for these products, making Indonesian goods more expensive for US producers and consumers, which could ultimately erode US manufacturing competitiveness and contribute to inflationary pressures.
Indirectly, any escalation of the United States-China trade war, which has extended to encompass technology, strategic industries and national security, would have regional implications, particularly for South-East Asia.
Indonesia, integrated within East Asian supply chains, could be adversely affected if demand decreases for inputs and intermediate goods essential to broader production networks.
Second is the GSP. The GSP programme, established in 1976, provides duty-free access to the United States market for select goods from developing countries.
This preferential treatment benefits Indonesian exports of electronic equipment, travel goods, chemicals, furniture and rubber.
In 2023, Indonesia exported US$3.56bil under the GSP. Trump’s administration previously removed countries such as India and Turkiye from GSP eligibility, citing trade imbalances and other concerns.
Indonesia has undergone GSP eligibility reviews before, most recently in 2017, as part of the US Trade Representative’s “proactive” process.
If Trump reconsiders Indonesia’s GSP status, a suspension or termination of these preferences could increase costs for US companies reliant on Indonesian goods, reducing their competitiveness in global markets and potentially decreasing Indonesia’s exports to the United States.
Third is global supply chain reorientation. Another core aim of Trump’s economic approach is reshoring manufacturing jobs to the United States, reducing reliance on foreign suppliers.
This strategy could impact Indonesia’s manufacturing sector, particularly as it relates to electronics and automotive production, where Indonesia has benefited from global production sharing.
A shift away from Asian supply chains may result in decreased manufacturing demand for Indonesian industries, potentially lowering output and exports in key sectors.
However, Indonesia could also benefit from a China +1 strategy, where firms seek alternatives to China but maintain part of their operations in nearby countries.
Big lure
Indonesia’s competitive labour costs, large domestic market and advantageous position within Asean make it an attractive alternative manufacturing hub, albeit with some infrastructure and regulatory challenges.
Fourth is FDI. During his previous term, Trump introduced tax cuts and regulatory incentives designed to encourage US companies to invest domestically.
Should a similar approach be implemented in his second term, it could affect US FDI flows to Indonesia.
In 2023, FDI from the United States into Indonesia totalled US$3.3bil, representing 6.5% of total FDI inflows, placing the United States fifth after Asean, China, Hong Kong and Japan.
US FDI has traditionally been concentrated in sectors such as finance (notably banking and insurance), mining, energy and consumer goods.
Concerns exist that Trump’s tax policies could lead to a decline in US FDI abroad if American companies are encouraged to reinvest earnings domestically.
Such a shift would impact Indonesian industries reliant on US capital, technology and expertise.
In conclusion, a second Trump administration presents both challenges and potential opportunities for Indonesia’s economy.
The possibility of heightened tariffs, a GSP review and a push toward US supply chain reshoring could disrupt trade relations, reduce investment and require Indonesia to adapt diplomatically and economically.
Mitigating these risks will require Indonesia to diversify its economic partnerships, strengthen local manufacturing and build trade ties with other major economies to lessen reliance on any single market.
Moreover, Indonesia must explore new sources of FDI, potentially increasing investment from China, Japan, South Korea and the Middle East to compensate for any declines from the United States.
By building resilience through regional alliances and establishing a robust Asean presence, Indonesia can weather shifts in US economic policy and maintain steady growth in an increasingly multi-polar world. — The Jakarta Post/ANN
Lili Yan Ing is secretary general of the International Economic Association. Yessi Vadila is a trade specialist at the Economic Research Institute for Asean and East Asia. The views expressed here are the writers’ own.
