Beijing’s Restraint on Indonesia-US Trade Deal Shows What Is Truly at Stake

The Indonesia-US Agreement on Reciprocal Trade (ART) was signed on 19 February 2026 and contains subtle provisions that could be interpreted as indirectly targeting China. The agreement includes commitments to mirror American import restrictions on “third countries”, to cooperate on US Entity List designations, to align with US export controls and to consult the US on Information and Communications Technology (ICT) infrastructure procurement. Beijing is not without means for remedy: if it wants to, it has some options up its sleeve.

Notwithstanding private discussions between Chinese and Indonesian officials that might have taken place behind closed doors, Beijing has said little in public, though it did warn the governments of Cambodia and Malaysia — the other two ASEAN countries which have signed similar agreements with the US — that such deals should not harm Chinese interests. When an Indonesian reporter asked a China Ministry of Foreign Affairs spokesperson about the ART soon after the deal was signed, the response was less truculent. The spokesman noted that China-Indonesia cooperation does not target third parties and should not be affected by them. This was repeated by Foreign Minister Wang Yi during a diplomatic exchange with Indonesia’s Coordinating Minister for Economic Affairs Airlangga Hartarto in July.

To understand how Beijing and Chinese investors assess the ART, the authors interviewed China-based experts from business and academia. All of them spoke on the basis of anonymity. Four common concerns were expressed.

The first concerns Article 5.2 which covers export controls, sanctions and investment security. From Beijing’s perspective, Article 5.2 reads less like a trade provision and more like scaffolding for broader alignment with the US. The same export control and sanction provisions appear in the Malaysia and Cambodia agreements; only the investment security wording differs across the three. Although Indonesia retains discretion under its own laws, the pressure to cooperate in restricting transactions with firms in the US’ Entity List — a blacklist that includes many Chinese companies — is considerable. The concern is cumulative: compliance risk will increase over time, and the operating space of sanctioned Chinese firms within Indonesia will narrow. The provisions cover suppliers in 5G and 6G cellular networks, undersea cables and related infrastructure. In effect, they are aimed at Huawei, ZTE and their peers.

Beijing’s restraint reflects the high stakes involved and need not be read as acquiescence or acceptance.

The second is the ‘poison pill’ clause, which can be read as a direct encroachment on Indonesia’s sovereignty. Should Indonesia conclude a free trade agreement with a country deemed to harm US interests, Washington may terminate the ART and reinstate the original 32 per cent tariff on Indonesian exports to the US (Article 5.3.3). The same article states that Jakarta must also consult Washington before entering into any digital trade agreement (Article 3.3). Similar provisions appear in the agreements with Malaysia and Cambodia. Together, these clauses give the US a de facto veto on Indonesia’s external economic policy, narrowing Indonesia’s room to manoeuvre in economic diplomacy and potentially jeopardising ongoing China-Indonesia cooperation.

The third issue relates to rules of origin. Section 4 of the ART provides that where the benefits of the agreement accrue to “third countries” or “third-country nationals”, either party may establish rules of origin. This is a power Indonesia could in principle invoke; in practice, however, the US is more likely to use it alongside Article 5.3.2 on transshipments. Washington could apply this to Indonesian exports that it deems to carry too much Chinese content (although the text does not clarify how much is too much, nor who would set that threshold). Processing in Indonesia for export to the American market is consequently harder to plan, and even Chinese firms that have raised their local content ratios remain exposed to shifts in US trade policy.

The fourth issue pertains to American privileges. Mining is the most pertinent case here. Foreign ownership restrictions are lifted for US investors alone in several sectors including mining (Annex III, Article 2.28), while the excess production of foreign-owned processing facilities is capped against national mining quotas for nickel, cobalt, bauxite, tin and manganese. Foreign-owned industrial parks and processing facilities are held to the same tax, environmental, labour and quota requirements as other companies and entities (Annex III, Article 6.1.5). These provisions could be interpreted as targeting nickel- or solar-related industrial parks hosting mainly Chinese companies. Existing projects cannot expand capacity. With Indonesia’s removal of restrictions on critical mineral exports to the US (Annex III, Article 6.1.1), American firms may gain an advantage in both extraction and downstream processing.

On what Beijing would do, the interviewees diverge in emphasis rather than substance. The business community expects restraint: Beijing will weigh diplomatic against commercial interests and avoid extreme countermeasures. Scholars agree on the likely conduct. Beijing will likely keep a low-key profile and remain observant of development. It is likely to work through diplomatic and trade channels. When push comes to shove, scholars note that there are tools in Beijing’s trade and investment remedy toolbox. Three instruments were mentioned.

The first is tariff retaliation. China’s Tariff Law and its Foreign Trade Law, revised in December 2025 to expand the range of available countermeasures, allow the State Council to authorise measures against discriminatory restrictions directed at China. Canada is so far the only country against which these laws have been used: Ottawa taxed Chinese electric vehicles, steel and aluminium, and Beijing responded with matching rates on Canadian canola, peas, pork and seafood.

The second is the cost of capital. Country risk assessments by China Export & Credit Insurance Corporation (Sinosure) feed into insurance premiums and may carry through to the risk-adjusted rate at which capital is priced. A downgrade needs no announcement to raise the cost of operating in Indonesia.

The third option is for China to invoke the World Trade Organisation’s (WTO) non-discriminatory rule to claim the same treatment Indonesia is extending to the US — something arguably in Indonesia’s own interest as part of its domestic reform agenda. One recent case suggests that this approach might work. Jakarta initially exempted American companies from its commodity export earnings retention requirement under the ART; after pressure from other close trading partners, it extended a similar exemption to three other countries, China among them.

Whether Indonesia will ratify the ART is unclear, given the US Supreme Court’s invalidation of the baseline reciprocal tariffs imposed by the Trump administration. In addition, a cloud of uncertainty hangs over the investigations Washington continues to run — including on Indonesia — to reinstate the tariffs by other means. Beijing’s restraint reflects the high stakes involved and need not be read as acquiescence or acceptance. Sending quiet signals with precision on the ART would work on Jakarta better than vocal or public opposition, as straining China’s economic ties with Indonesia would only serve US strategic interests at China’s expense.

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