Australia and Indonesia sign bilateral free trade agreement - what it means for you

In brief 4 min read

After eight years of negotiation, Australia and Indonesia have signed a bilateral free trade agreement that both reduces tariff and non-tariff barriers for trade and investment, and simplifies various regulatory requirements. The loosening of regulations regarding key Australian services exports and new investment opportunities is likely to be welcomed by Australian businesses, especially in the agricultural and education sectors. Understanding these changes now will prepare your business for any opportunities which might arise from the agreement. Partner Rachel Nicolson, Senior Associate Dora Banyasz and Lawyer Oliver Lloyd report.

Turning CEPA into law

CEPA was signed on 4 March 2019, and will now follow the treaty-making processes of Indonesia and Australia before being incorporated into Australian law. This treaty follows the recent coming into force of the multilateral Comprehensive and Progressive Agreement for Trans-Pacific Partnership, between Australia and many other countries on both sides of the Pacific.

Like other free trade agreements, CEPA includes provisions for reductions in tariffs and other barriers for trade in goods and services, and in barriers to investment. In short, the agreement seeks to promote increased trade and investment between Australia and Indonesia.

The ratification processes for both countries may be protracted. In Australia, it is unlikely the agreement will be ratified before the federal election, which is expected to be held in May. This may be significant if the election produces a change of government, as there are differences between the policies of the two major parties regarding employment standards, environmental standards and investor-state dispute settlement (ISDS) in free trade agreements.

CEPA has also been controversial in Indonesia, where a general election is expected in April, as trade liberalisation and globalisation are increasingly difficult to sell in the current global political climate. 

Dispute settlement

CEPA includes provisions for ISDS, which allow foreign corporations to bring arbitral proceedings against a counterpart state before panels established under the agreement. This means Australian corporations will have access to binding dispute settlement against Indonesia to enforce investment rights and obligations under CEPA. The ISDS mechanism includes safeguards to protect the right of each government to regulate in the public interest, and excludes investor claims against public health measures or those which are without legal merit. However, it remains to be seen whether the ISDS clauses will survive the ratification processes of both countries, especially in Australia where they are generally opposed by the Federal Opposition as part of its trade policy.

Key outcomes

Reductions in tariffs/customs duties on goods

• Once CEPA has been fully implemented, 99% of Australia's export goods will enter Indonesia either duty free, or with significantly improved preferential arrangements, and all of Indonesia's export goods will enter Australia duty free.
• In most cases, Australian tariffs will be reduced from a level of 5% to 0.
• Indonesian tariffs will be reduced gradually across a number of years, for some goods until 2036. Goods with tariffs at levels of 40% or less will mostly be reduced to 0 with immediate effect upon CEPA coming into force. Reductions in tariffs and guaranteed issue of import permits across a range of agricultural products (such as wheat, meats and sugar), are especially significant for Australian exporters.

Non-tariff barriers and regulatory requirements for trade in goods

• CEPA establishes a review mechanism for non-tariff barriers (a first for an Australian FTA), and committees to make recommendations regarding sanitary and phytosanitary measures and technical barriers to trade.
• The replacement of Certificates of Origin with approved exporters who can make Declarations of Origin, and changes to Product Specific Rules of Origin, are further trade facilitation measures provided for by CEPA. 'Electronic trade facilitation', including paperless trading and electronic authentication, will also be pursued. These measures should lead to reductions in freight times.
• In the area of e-commerce, software exporters will have stronger intellectual property protections over their source code.

Barriers to trade in services and investment

• Regulations affecting key Australian export services and investment areas, such as technical and vocational education, mining and energy services, transport projects/operations and tourism, have been relaxed so that majority Australian-owned companies are either guaranteed access to, or permitted to take majority stakes in, businesses run in Indonesia.
• In the area of e-commerce, the parties have committed to refrain from enacting laws restricting information and data flow, but will be subject to standards relating to consumer protection, privacy protection and anti-spam measures.
• CEPA also contains specific chapters in relation to financial services and telecommunications.