19 September 2025 (closed)
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Trade Deals: Update on Indonesia-EU Comprehensive Economic Partnership Agreement
Following the political agreement that was reached on 13 July 2025 by European Union President von der Leyen and Indonesian President Prabowo Subianto, the European Union (EU) and Indonesia finalised their negotiations on the Comprehensive Economic Partnership Agreement (IEU CEPA) on 23 September 2025.
The deal is expected to benefit both sides in a significant manner. The EU and Indonesia will eliminate tariffs on 98.5 percent of tariff lines, and close to 100 percent in terms of value.
Indonesian goods will reportedly enjoy zero tariffs in 90 percent of the EU market once the deal comes into force (which is currently scheduled for 1 January 2027). This should boost shipments of palm oil, coffee, footwear, fisheries, textiles and clothing, and other products from Indonesia to the EU. However, while 80 percent will be liberalised at entry into force, the remaining 20 percent will require several years to kick in. Reportedly, after a five-year phase out, liberalisation will reach 96 percent of trade.
Meanwhile, for the EU, this deal should result in savings of €600 million (approx USD $705 million) of duties averaging 10 percent a year on EU exports. Particularly the EU's agri-food, processed food, chemicals, machinery and automotive industries are mentioned as products that can benefit from the deal.
On the EU website it is stated that EU companies (both big and small) obtain privileged access to Indonesia by:
- Removing import duties on 98.5 percent of tariff lines and simplifying procedures on EU goods exports to Indonesia, including key exports such as cars and agri-food products.
- Allowing EU companies to provide services with full ownership in key sectors such as computers and telecommunications.
- Opening up new opportunities for EU investments into Indonesia, notably in strategic sectors such as electric vehicles, electronics, and pharmaceuticals, thereby fostering the integration of both side's supply and value chains.
- Protecting intellectual property such as trademarks, which allows EU companies to safeguard their brand identity and reputation, ensures remedies against infringers and provides effective tools to combat counterfeit products, helping small businesses with dedicated provisions and benefitting Indonesian consumers.
Bilateral trade in goods between the two countries equalled €27.3 billion in 2024 according to EU data. EU goods imports from Indonesia stood at €17.5 billion in 2024, while EU goods exports reached €9.8 billion last year, implying Indonesia has the upper hand in bilateral trade.
The EU and Indonesia also agreed on rules of origin, ensuring that only products that have been significantly processed in one of the countries can benefit from the tariff preferences of the agreement. This prevents goods that were largely manufactured in another country to get easy entry into either the EU of Indonesia.
Both countries also agreed on various technical aspects, such as customs and trade facilitation, protocol on mutual administrative assistance in customs matters, trade remedies, sanitary and phytosanitary measures, technical barriers to trade (including Indonesia's recognition of EU certification, eliminating the need for expensive and time-consuming re-testing and re-certification in Indonesia), and streamlined labelling.
Response in Indonesia
The business community of Indonesia is optimistic that the IEU CEPA will be able to boost the value of Indonesian exports to Europe by more than 50 percent in the next four years.
The Chairwoman of the Indonesian Employers' Association (Apindo), Shinta W. Kamdani, said that the IEU CEPA marks the transition from a "potential economy" to a "performance economy" as the deal forms a strategic instrument for Indonesia with the EU being a major trade and investment partner. Through the IEU CEPA, both sides obtain clarity regarding market access and clear rules, ensuring that trade and investment remain secure despite increasing global geopolitical risks.
On the back of the IEU CEPA, the EU gains access to a market of 285 million consumers, while Indonesia has the opportunity to expand exports of key products such as footwear, fisheries, and textiles. In the medium term, Kamdani projects that Indonesia's exports to the EU will continue to grow more significantly over the next 10 years.
The Chairman of the Indonesian Palm Oil Association (GAPKI), Eddy Martono, also predicts that IEU CEPA provides a great opportunity to increase exports of crude palm oil (CPO) and its derivative products to the EU market as the IEU CEPA means that tariff barriers have been resolved. However, Martono reminded that the elimination of tariffs does not automatically guarantee the smooth flow of Indonesia's palm oil exports to the European market. The reason, he stated, is that there are still major challenges in the form of non-tariff barriers, especially the European Union Deforestation Regulation (EUDR). If this EUDR does not change, then few will change for palm oil.
Comparison Between the European Union and Indonesia
Political Structure
While Indonesia is one single sovereign nation state, the EU is a bloc of 27 countries (all individual nation states) that together form a political and economic union. One could label it ‘an alliance of sovereign nation states’ that delegated sovereign power (on a couple of crucial matters, but not all) to the European Commission in Brussels.
As mentioned above, the political structure of the EU makes matters quite complex for the approval of the IEU CEPA in the EU. First, a free trade deal has to be accepted through qualified majority voting (which means that at least 55 percent of member states need to approve the deal; which is 15 out of 27 member states), representing at least 65 percent of the EU population. This might actually be the easy part.
Next, European Parliament needs to give its consent to this trade deal before it can come into force. This, too, might be a relatively easy matter.
Finally, and what may become most complex matter is that all national parliaments (of each member state) need to ratify the deal. Considering the EU does not have full power on all areas related to the free trade deal, all 27 individual EU member states must ratify the agreement according to their national constitutional procedures, and in some cases, regional parliaments.
This national ratification process is often the longest (and most unpredictable) part, as domestic political considerations in each of the 27 countries can lead to delays or even full rejections. Although rejection of a trade deal after EU-level approval is rare, this is not impossible. For example, the Canada-EU CETA was (largely) approved by the European Parliament in 2017 but full implementation was hindered by national ratification processes in several EU member states (including France and Belgium). Currently, ten EU member states still need to ratify the Canada-EU CETA.
Meanwhile, for the IEU-CEPA to come into (full) effect in Indonesia, it ‘only’ requires the approval of Indonesia’s House of Representatives (DPR) through the enactment of a specific new law. And considering Indonesian President Prabowo – through his Advanced Indonesia Coalition – controls almost 72 percent of DPR seats, it shouldn’t be difficult to get approval from the DPR.
Population Sizes
In terms of population sizes, the EU is the bigger side (which should not be a surprise considering the EU consists of 27 separate countries). Per January 2025, the size of the EU population was estimated at 450 million people. But Indonesia too has a large population. In fact, it is the fourth-biggest in the world in terms of population sizes, being home to around 285 million people.
Economic Size
The EU ranks as the second-largest economy in the world in nominal terms, after the United States, and so is a significant player in the global economy due to its massive collective gross domestic product (or GDP), highly developed financial sector, strong industrial base, and extensive trade relationships. The EU represents approximately one-sixth (around 16 percent) of the global economy.
When measured by purchasing power parity (PPP), which adjusts for differences in the cost of living and inflation rates, the economy of the EU ranks as the third-largest (with GDP PPP at USD $29.18 trillion in 2025), after China and the United States.
Within the EU, it are Germany, France and Italy that are the three biggest economies, together accounting for almost 52 percent of the EU's total GDP. Germany alone is a key contributor with its GDP surpassing the combined output of the 20 smallest EU economies.
While the EU’s nominal GDP is estimated to be around USD $19.99 trillion (in 2025), Indonesia's nominal GDP is projected to be around USD $1.43 trillion in 2025, hence making it the 16th or 17th largest economy in the world by nominal GDP. Meanwhile, Indonesia’s GDP PPP is estimated to be around USD $5.01 trillion (in 2025), which makes Indonesia rank as the 7th or 8th largest economy globally in terms of GDP PPP, even placing it ahead of various developed countries such as France and the United Kingdom, highlighting Indonesia’s substantial domestic market and consumer base.
GDP per Capita
There is also a big difference in purchasing power. While the International Monetary Fund (IMF) estimates the per capita GDP for the EU at around USD $44,220 in 2025, it estimates per capita GDP for Indonesia at around USD $5,270 (in 2024). However, we need to add here that purchasing power varies heavily across EU member states (which can actually also be stated about the different provinces across Indonesia).
While the Indonesian population as a whole is a true consumer force, the population of the EU is a bigger force with a bigger appetite for the higher-quality (and therefore more expensive) products. In Indonesia, although strengthening, purchasing power is much lower, hence overall demand is strong for lower standard (hence: cheaper) products. Therefore, the overlap in market demand is not that significant currently. However, since the economy of Indonesia is growing at a much faster rate than the (stagnant) EU economy, the overlap in market demand should become bigger in the (quite distant) future.
If so, there would then be some room for concern over high-standard manufacturing industries across Indonesia (particularly its machinery, automotive, electronics, and pharmaceutical products) as it is less competitive in terms of technology, efficiency, scale, or quality compared to the EU counterparts.
In the meantime, however, we believe that the benefits of wider market access for Indonesian exports, increased direct investment opportunities, technology transfer, and strategic partnership do outweigh the risk of disrupted domestic manufacturing industries in Indonesia (as a consequence of the IEU CEPA).
This is in contrast to the ASEAN-China Free Trade Area, an agreement through which Indonesia entered into a free trade deal with China (which largely came into force in 2010). This deal was met with fierce opposition and concern in Indonesia as it led to a massive flow of cheaper Chinese goods into Indonesia (such as clothes), thereby disrupting domestic manufacturing industries in Indonesia. China is able to export massive quantities of competitive products into foreign markets because – unlike the EU – it has low labor costs, easier environmental regulations, lower energy costs, yet better integrated national supply chains. This allows China to be a big competitor for Indonesia’s domestic labor-intensive manufacturing industries (such as apparel, textiles, and footwear).
Economic Structure
A crucial difference between the EU and Indonesia is that the former is an advanced economy, while the latter is an emerging economy. This translates to a couple of big differences. For example, the informal market in the EU is extremely small, whereas in Indonesia the informal market is dominant. So, the EU’s (combined) tax-to-GDP ratio, which includes both taxes and net social contributions, stood at 40 percent in 2023, while Indonesia’s tax-to-GDP ratio is only estimated at around 11 percent.
Meanwhile, what is often regarded a weakness of the Indonesian economy is that it is –to a high extent– dependent on commodities, meaning that in times of high global commodity prices national economic growth accelerates, but in times of low global commodity prices there tends to occur slowing economic growth.
However, we feel that in the context of the IEU CEPA, commodities could actually be a comparative advantage for Indonesia. Its abundance of natural resources (such as palm oil, nickel, coal, and rubber) as well as agricultural products could be in high demand in the EU. Moreover, some labor-intensive manufactured goods (including footwear and textiles) and emerging downstream industries (for example, electric vehicle battery components from nickel) might also be very interesting for the EU market.
In the case of the EU, it is high-tech manufacturing (such as machinery, automotive, pharmaceuticals and aerospace), advanced services (including financial, legal, and IT), high-value consumer goods, and precision agriculture that is dominant in the bloc’s economy.
So, ideally, the EU and Indonesia are able to complement each other, with Indonesia exporting its raw materials and semi-finished goods to the EU (presumably at much more competitive prices once the IEU CEPA has come into effect), thereby allowing the EU to export more competitive finished and capital goods to foreign markets (including Indonesia).
Did the Trump Threat Exceed Palm Oil Concerns?
It took almost ten years (and 19 formal negotiation rounds) for both sides to come to an agreement on this IEU CEPA. Over the years, we have occasionally reported on updates after a new round of negotiations. Interestingly enough, it always seemed the case that palm oil was the unbridgeable gap as the EU in particular upholds high environmental ambitions and standards, while palm oil cultivation is often regarded as one of the most harmful agricultural practices.
For Indonesia, however, palm oil is crucial as it generates millions of jobs, billions of US dollars in foreign exchange earnings and levies, and constitutes a crucial material for the nation’s ambitious biodiesel program (a program that aims to cut Indonesia’s dependence on fossil fuels). Indonesia is, in fact, the world’s biggest producer and exporter of palm oil, and therefore it would seriously disrupt Indonesia’s social and economic development if it has to curb the role of palm oil in Indonesian society.
The problem is that the EU has designed some strict anti-palm oil policies in recent years. For example, the EU Deforestation Regulation (EUDR) prohibits imports of a range of commodities (including palm oil and their derived products) when these are linked to deforestation, or, forest degradation.
This EUDR regulation, which came into force in 2023, implies that EU importers and companies need to conduct rigorous due diligence to prove that their supply chains are deforestation-free and that the products were produced in accordance with the relevant laws of the country of origin.
Meanwhile, through the Renewable Energy Directive II (or RED II), the EU targets to phase out the use of palm oil in biofuels. The EU classified palm oil as a "high indirect land-use change (ILUC) risk" feedstock, meaning its cultivation is seen as leading to significant deforestation elsewhere. Therefore, palm oil-based biofuels are currently being phased out from the EU's renewable energy targets and will be fully banned for use in biofuels by 2030.
And so, for biofuels there is a clear, planned phase-out and eventual ban on palm oil across the EU, while for other uses (such as food and cosmetics) there is no outright ban on all palm oil (not now, and not planned for the future). But the EUDR does act as a significant barrier and effectively bans all palm oil that cannot be proven to be deforestation-free and legally sourced. This requires producers and importers in the EU to engage in extensive traceability and transparency.
Indonesia did, in fact, initiate a case against the EU at the World Trade Organization (or WTO) over palm oil in 2019; a case in which the WTO Dispute Settlement Panel largely sided with Indonesia (in January 2025) as this WTO panel found that the EU's policies, particularly the way palm oil was classified as high ILUC-risk and the design of low ILUC-risk criteria, were discriminatory against palm oil-based biofuels from Indonesia compared to similar products produced in the EU (such as rapeseed and sunflower oil).
While palm oil has been a topic of squabble and irritation for years (or, at least, that is what seemed to be the case in EU-Indonesia negotiations), that problem is now apparently (and suddenly) smoothed out. And this leads to the question: why now?
The timing of the agreement does make us somewhat suspicious whether Donald Trump’s presence in the White House plays a role. After all, US President Trump has been aggressively trying to gain more advantage from US foreign trade by imposing import tariffs (and threatening to raise these tariffs further). These tariffs are bound to affect the EU and Indonesia. Both the EU and Indonesia were hit by the baseline 10 percent tariff that was imposed on 5 April 2025. Moreover, in July 2025, Trump announced that a 30 percent tariff was planned to be imposed on most imports from the EU per 1 August 2025. Meanwhile, in March 2025, President Trump announced and implemented a 25 percent tariff on imports of steel and aluminum from the EU and other trading partners.
Considering the US is the EU’s largest trading partner for goods and services (with the US receiving slightly over 20 percent of all exports from the EU), one can imagine that the steep US import tariffs on the EU are certainly worrying for EU trade, hence for the EU’s manufacturing industries. That may very well be an incentive for the EU to speed up trade talks with other countries, including Indonesia.