by

Sachin V Gopalan & Shoeb Kagda

Founders, Indonesia Economic Forum

As global capital markets reel and the global trade regime is upended, governments across the world are scrambling to respond and react. China has already responded by announcing a 34% tariff on all US goods exported into its market. Other countries have said they will try and negotiate with the Trump administration to hammer out a better deal for themselves. In ASEAN, every country has been affected by the tariffs with Indonesia being one of the hardest hit with 34% tariff on all exports to the US. The tariffs announced by Trump will have lasting repercussions on economies and global trade. Supply chains which have been built over the past four to five decades will be dismantled and rebuilt. New trading and economic relationships will emerge and new power centers formed.

There is no doubt that we are witnessing a seismic shift in the world order. With shifting economic ties will follow new political alliances. As with any such tectonic shift, there will be immense short-term pain but new longer-term opportunities will also emerge. Indonesia must carefully assess these changes, identify the new opportunities and calibrate its economic and trade policies accordingly.

With global supply chains in flux and many countries seeking resilient and reliable trade partners, Indonesia has the chance to reposition itself as a competitive hub in the Indo-Pacific. This external pressure could in fact spur innovation, encourage value-added manufacturing, deepen regional partnerships, and push forward key reforms that enhance long-term economic independence and sustainability.

Potential Opportunities for Indonesia

Despite the immediate challenges posed by the U.S. tariff hike, Indonesia has a unique opportunity to reshape its economic trajectory. Rather than relying heavily on a few export markets, it now an opportune time for the country to explore new frontiers for trade, investment, and innovation. By leveraging its strategic location, abundant resources, and growing regional partnerships, Indonesia can diversify its export base, attract fresh investment, and move up the value chain in global production networks. These shifts not only promise to reduce vulnerability to external shocks but also open pathways for more sustainable, inclusive, and innovation-driven growth. The key lies in turning short-term pressure into a long-term strategic pivot. Let’s take a look at these.

  1. Diversification of Export Markets: Indonesia can reduce its dependency on the U.S. by strengthening trade ties with other regions, such as the European Union, ASEAN neighbors, the Middle East, and emerging economies in Africa and Latin America. While the Ministry of Trade has been actively sourcing for new export markets, it will now need to accelerate its efforts.
  2. Enhancement of Domestic Industries: By investing in improving local manufacturing capabilities, Indonesia can increase its global competitiveness and open new export channels. Over the past decade, the government has invested heavily in physical infrastructure which has greatly improved connectivity.
  3. Development of Value-Added Products: Moving up the value chain—from raw materials to finished goods—can improve profitability and reduce vulnerability to external shocks. To achieve this, both government and the private sector need to invest in R&D and innovation. Currently less than 0.1% of GDP is invested in R&D.
  4. Utilization of Trade Agreements: Indonesia can leverage existing trade agreements like the RCEP and explore new ones to gain preferential access to untapped markets.
  5. Attracting Foreign Investment: With global companies looking to diversify supply chains, Indonesia can position itself as an alternative production base, especially for firms seeking to bypass tariffs imposed on other countries.
  6.  Promoting its Services Sector by Investing in Talent:  This is a perfect time for Indonesia to grow its services sector to offset the impact on lower exports. While manufacturing remains a key sector in GDP growth, the services sector must also be promoted by investing in training and talent development.

A Case for Global Realignment

To offset the impact of the newly imposed U.S. tariffs, Indonesia must adopt a forward-looking trade strategy that emphasizes the diversification of its economic partnerships. Strengthening trade and investment ties with a broader set of countries and regions will not only reduce overreliance on any single market but also open new avenues for growth, innovation, and resilience. By proactively engaging with emerging economies, regional allies, and strategic partners, Indonesia can safeguard its export sectors, attract new sources of investment, and enhance its global trade competitiveness. This approach positions Indonesia to better navigate global uncertainties while advancing its long-term economic development goals. Let’s take a look at some of these countries and regions.

1. China

  • Why: It’s Indonesia’s largest trading partner and a massive consumer market.
  • Opportunity: Export of commodities, palm oil, minerals, fisheries, and tech collaboration through Belt and Road.

2. India

  • Why: Fast-growing economy with rising demand for coal, palm oil, rubber, and consumer goods.
  • Opportunity: Leverage strategic Indo-Pacific cooperation, tech, pharma, and energy sectors.

3. European Union (EU)

  • Why: High purchasing power and interest in sustainable goods.
  • Opportunity: Push for conclusion of the Indonesia-EU Comprehensive Economic Partnership Agreement (IEU-CEPA) to gain preferential access.

4. Japan and South Korea

  • Why: Strong industrial base and existing trade agreements (IJEPA and IK-CEPA).
  • Opportunity: Expand exports in automotive components, textiles, seafood, and electronics.

5. ASEAN Neighbors (Vietnam, Thailand, Philippines, Malaysia)

  • Why: Regional integration via RCEP and ASEAN Economic Community.
  • Opportunity: Strengthen supply chains, create regional production hubs.

6. Middle East (UAE, Saudi Arabia, Qatar)

  • Why: Growing demand for halal products, food security investments, and construction materials.
  • Opportunity: Use Indonesia-UAE CEPA and build Islamic economy partnerships.

7. Africa (Nigeria, Kenya, South Africa, Egypt)

  • Why: Untapped emerging markets with rising consumption.
  • Opportunity: Export of affordable consumer goods, digital services, and agricultural tech.

Strategic & Economic Risks for Indonesia

Reducing trade with the U.S. carries several strategic and economic risks for Indonesia, given the depth and significance of the bilateral relationship. The U.S. is not only a key export destination for Indonesian products—particularly in labor-intensive sectors such as textiles, rubber, and footwear—but also a vital source of foreign direct investment, technological collaboration, and higher education exchanges. A sharp decline in trade could disrupt Indonesia’s supply chains, reduce foreign investment confidence, and lead to job losses in critical manufacturing sectors. Moreover, from a geopolitical standpoint, distancing from the U.S. might complicate Indonesia’s balanced diplomatic posture in the Indo-Pacific region, potentially increasing dependency on alternative powers. It could also limit access to cutting-edge innovations and markets where the U.S. sets standards.

Here’s a breakdown of key risks to consider:

1. Loss of a High-Value Market

  • Risk: The U.S. is one of Indonesia’s top export destinations, especially for textiles, electronics, rubber products, and footwear.
  • Impact: Sudden loss or decline could lead to surplus inventory, job losses, and income reductions in export-heavy sectors.

2. Foreign Investment Slowdown

  • Risk: U.S. companies might reconsider or delay investments in Indonesia due to less favorable trade ties.
  • Impact: Slower FDI inflows, especially in manufacturing, digital economy, and financial services.

3. Reputational and Geopolitical Risks

  • Risk: A visible shift away from the U.S. could be perceived as leaning toward rival powers (e.g., China), creating geopolitical imbalances.
  • Impact: It may complicate Indonesia’s neutral stance in Indo-Pacific politics and reduce diplomatic flexibility.

4. Reduced Access to Innovation and Technology

  • Risk: The U.S. is a key source of advanced technology, higher education, and R&D collaboration.
  • Impact: Losing these connections could slow tech-driven growth and upskilling in sectors like AI, fintech, biotech, and clean energy.

5. Currency and Trade Balance Volatility

  • Risk: Reduced U.S. dollar trade can affect forex reserves and currency stability.
  • Impact: Trade deficits may worsen if alternative markets don’t absorb exports fast enough.

6. Job Losses in Export-Oriented Industries

  • Risk: Sectors like textiles, rubber, and manufacturing are labor-intensive and reliant on U.S. demand.
  • Impact: Large-scale layoffs and social unrest if alternative markets don’t emerge quickly.

Thus, while diversification is necessary, an abrupt reduction in trade with the U.S. must be carefully managed to avoid undermining Indonesia’s long-term economic resilience and global positioning.

Indonesia’s Strategic Response to the New U.S. Tariffs

The main question on everyone’s mind is, what could be an actionable strategy for the Indonesian government to mitigate the economic impact of the U.S. tariffs and reposition the country for long-term trade resilience and growth. The Indonesian government should respond to the new U.S. tariffs with a balanced mix of diplomacy, economic strategy, and domestic reform.

1. Diplomatic Engagement

  • Initiate Bilateral Talks: Engage U.S. trade representatives to seek exemptions or reconsideration of specific sectors, especially labor-intensive exports.
  • Leverage ASEAN and G20 Forums: Rally support from regional blocs and highlight the impact of protectionism on global trade.

2. Legal and Trade Policy Measures

  • Explore WTO Dispute Mechanisms: If the tariffs violate existing trade rules, Indonesia can raise the issue through the World Trade Organization.
  • Review Tariff Reciprocity: Consider adjusting Indonesian tariffs or non-tariff barriers in response, carefully balancing not to escalate into a trade war.

3. Economic Diversification and Market Expansion

  • Accelerate Trade Agreements: Fast-track agreements like IEU-CEPA and optimize RCEP to open new export destinations.
  • Incentivize Export Diversification: Support industries to pivot to other major markets like India, Middle East, Africa, and Southeast Asia.

4. Support for Affected Sectors

  • Financial Relief and Subsidies: Offer temporary support (e.g., tax breaks, low-interest loans) to exporters affected by the tariffs.
  • Re-skilling and Job Protection: Initiate programs to re-train workers in impacted industries and redirect them to growth sectors (e.g., digital economy, green energy).

5. Investment and Innovation Push

  • Boost Domestic Manufacturing Competitiveness: Improve logistics, simplify regulations, and promote digital transformation in manufacturing.
  • Encourage FDI Diversification: Attract investors from non-U.S. sources looking for Southeast Asian alternatives to China.

6. Public Communication Strategy

  • Transparent Messaging: Communicate clearly with the public and business community about the government’s response to maintain confidence and prevent panic.

What’s Next?

Indonesia stands at a critical crossroads—facing both immediate risks and long-term opportunities. While the tariffs threaten export-driven sectors and signal a potential shift in global trade dynamics, they also underscore the urgency for Indonesia to diversify its trade partners, enhance domestic competitiveness, and strengthen its economic resilience. A strategic, multi-pronged response—combining diplomatic efforts, legal channels, market expansion, and industry support—will be essential to mitigate the fallout. At the same time, this challenge presents an opening to build a more balanced, innovation-driven, and globally integrated economy.

By embracing reform and cultivating deeper ties with emerging markets, Indonesia can turn this disruption into a defining moment for national progress and trade independence.