Last month we reported that negotiations in the context of the IA-CEPA entered the final stage. However, there remain several crucial issues that need to be agreed upon such as the exact timing of implementation of the agreement and the amount of products that will be able to enjoy zero import duties. Therefore, we expect it will still take a couple of months before the IA-CEPA can be signed by both governments.

Whether or not we will see the announcement of a fully negotiated free trade deal during Morrison's upcoming visit to Indonesia remains unclear but what is clear is that the deal is important enough for the Australian government to send Morrison to Jakarta, just one week after being sworn in as Australian prime minister (replacing Malcolm Turnbull).

It will be interesting to learn more details of the IA-CEPA. Recently, Indonesia has been showing a more protectionist attitude in order to develop domestic industries and curtail imports (which are burdening the trade and current account balances as well as the rupiah rate).

According to Reuters, Australia was only the 14th-biggest importer of Indonesian products in 2017, while Indonesia was only the 10th-largest export destination for Australia. Thus, despite being neighbors, trade flows are relatively small, implying there is ample room for growth in trade between both nations.

Recent Diplomatic Tensions Australia-Indonesia

The "2013 spying scandal" occurred in 2013 when allegations were made that the Australian Signals Directorate, which is an intelligence agency in the Australian Government Department of Defense, attempted to monitor activity on the mobile phones of then-President Susilo Bambang Yudhoyono, his wife and several senior government officials.

Another major diplomatic fallout occurred when - despite Australia's pleas for clemency - Indonesia executed two Australian citizens (members of the so-called "Bali Nine" drug trafficking ring) in May 2015.

In mid-2015 Australian live cattle exporters objected strongly when Indonesia imposed barriers on cattle imports from Australia, slashing total cattle imports by 80 percent. The Indonesian government made this move in a bid to enhance self-sufficiency in beef. However, the decision actually led to soaring local beef prices and good gains for the so-called "beef mafia" (which refers to certain groups that deliberately hold on to the beef supply in order to let prices raise before selling beef).

In early 2016 Indonesian officials said Australia is not doing enough to help refugees in the Asia-Pacific region.