The Australia-Indonesia green economic opportunity

A developing opportunity between Australia and Indonesia could support a green “powerhouse” partnership in a net-zero world, but coal-fired processing, downstream rules and geopolitics continue to challenge progress, writes Tyson Parker.

CANBERRA AND JAKARTA spent years making a presentation green economic “powerhouse” partnershipbut coal-fired processing, rules for production, and investment feasibility have slowed progress.

Imagine an electric vehicle produced on an assembly line in Indonesia and powered by a battery developed in China. Australian lithium and Indonesian nickel.

This is the vision of two neighbors who, despite some turmoil over the years, have found a strong bilateral economic opportunity in the resources and manufacturing sectors.

historicallyThe relationship between Australia and Indonesia has been described as important but backward.

around 2015Indonesia was Australia’s 13th largest trading partner. behind smaller markets Like New Zealand and Malaysia.

Two-way trading It will reach nearly $34.8 billion in 2024-25, making Indonesia Australia’s ninth largest two-way trading partner.

Indonesia predicted To overtake Australia’s economy in terms of nominal GDP (measured at market exchange rates) before 2030, making it a strong economic player in the Indo-Pacific region and an increasing priority for Canberra.

negotiations Work towards a comprehensive trade agreement began in 2010, but progress soon stalled and was thrown off course by events such as: 2013 surveillance scandal revelations.

Formal trade talks resumed in 2016 and resulted in the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA), was signed in March 2019 and will start in July 2020.

This agreement took a step forward in the bilateral economic relationship and shifted the dynamic towards mutual economic cooperation in key areas.

It created scaffolding for joint economic programs and business-to-business agreements and increased economic integration, including the elimination or reduction of tariffs.

IA-CEPA comes just after the two countries upgraded their relations to Comprehensive Strategic Partnership (CSP) An agreement was reached in August 2018, providing a formal framework for enhanced cooperation and committing to deeper coordination in various areas.

CSP It frames cooperation in the following areas:

economic partnership;
interpersonal connections;
shared security;
maritime cooperation; And
Supporting a stable regional order (included) ASEAN centrality).

This architecture emerges through long-standing tools such as the Australian Awards. development partnerships for example Infrastructure Kemitraan Indonesia Australia (KIAT) and regular security and maritime coordination.

Additionally, there was a concerted effort by both parties to connect key industries, which formed the basis of a “one” agreement.economic powerhouse model”.

This is an attempt to create a shared value chain across key sectors by combining Australia’s critical minerals, technology and know-how with Indonesia’s production scale and capabilities.

In theory there is a proper division of labor, but in practice the partnership faces three strict restrictions. Indonesia’s rules for production include the carbon intensity of current processing and great power Capital and geopolitics.

Inside November 2023Australian and Indonesian governments sign a memorandum of understanding to reach a bilateral agreement progression mechanism Collaboration in the electric vehicle ecosystem.

The risks are long-term and both countries want to consider the energy transition as a joint strategic economic transformation.

For Australia, partnership represents a crucial pathway to trade diversification and economic security. renewable energy superpower.

This is for Indonesia way to reach Achieve high-income country status by 2045 through downstream processing of its vast natural resources (especially nickel) and industries critical to a net-zero world.

Australia It dominates lithium mining and is in the top five in cobalt production. Indonesia There are significant amounts of nickel, manganese and copper deposits.

Recommended supply chain It will feed Australia’s critical minerals (primarily lithium) and skills into processing and manufacturing in Indonesia, while finished battery components and electric vehicles will be exported to third markets.

Australian investment in indonesia ruins small and outside The top 20 economies in which Australia invests. Meanwhile, Indonesia’s nickel processing boom is largely chinese capital and still heavy-duty with coal.

The partnership is currently navigating Indonesia’s downstream rules and resource nationalism, carbon density current processing and gravitational force great power capital, especially China’s solid position in Indonesia’s nickel industry.

These are the driving factors that hinder the integration process of the two economies.

of indonesia downstream and the resource nationalization agenda includes a layer: foreign ownership controls And regulatory expectationsThis shifts bargaining power to Jakarta and increases perceived risk for foreign investors.

Jakarta’s upstream environments and expectations for local involvement mean that foreign partners often have to negotiate commitments for equity capital, procurement, technology transfer and onshore processing in exchange for approvals and access to Indonesian markets.

Investor navigation Indonesia’s legal environment and permitting and regulatory system are described as slow and difficult.

Despite reforms While new regulations aimed at streamlining key areas have been enacted in recent years, uncertainty still delays the type of processing and industrial infrastructure the partnership needs.

This risk may be enough to halt long-term mining and processing commitments; Indonesia is expanding openness to foreign ownership and investment.

There is also friction between Western Environmental, Social and Governance (ESG) standards and the reality of Indonesian production.

The majority of nickel processing in Indonesia is still driven by coal production, producing a carbon profile that does not sit well with the ESG frameworks guiding many Australian investors.

Conclusion It is a financing asymmetry where projects that struggle to raise capital from Australia can still be built with capital that is less constrained by frameworks such as China.

of indonesia long standing bebas active The (“free and active”) stance provides the space to accept capital wherever it comes from. Chinese companies is deeply buried, billions of dollars Integration projects are continuing.

For Australia, this intersects strangely with a strategic stance increasingly aligned with the United States. AUKUS.

In some parts of Indonesia’s security and policy structure, AUKUS It was met with concerns about tensions and bloc dynamics inspiring an atmosphere that could undermine the confidence needed for deep, long-term economic integration.

While both China and Australia want to develop a better economic relationship with Indonesia in similar sectors, Indonesia has options, suggesting Australia may have less negotiating power on these friction points.

There is also a quieter structural tension that both governments “want to escape”.dig and sendmodel and downstream capture value at home.

This creates overlap, or even competition, in areas such as battery components and cell manufacturing, where both parties seek to attract the same investment and subsidize the same steps in the chain.

Progress is being made, although it is slow and far from perfect.

Australia puts funding on the table, including $200 million KINETIC partnership and 40 million dollars katalis programIt supports efforts by Australian companies to bring grid-scale battery storage capacity to Indonesia.

The bulk of the practical work will be carried out through Katalis, an IA-CEPA program designed to fund feasibility studies and early-stage partnership development in areas such as battery supply chains and basic infrastructure.

of indonesia Organization for Economic Co-operation and Development (OECD) accession effort also signals interest in aligning with international standards, which largely serves its own national objectives. 2045 Golden Indonesia vision.

Although progress continues, a fully developed economic powerhouse is far from certain; A viable partnership requires greater policy alignment and compromises on the part of both countries.