The Indonesia-US Agreement on Reciprocal Trade: Three Views on its Economic and Strategic Impacts

Introduction

On 19 February 2026, Indonesia and the US signed the Agreement on Reciprocal Trade (ART). While Indonesia secured lower US tariffs and exemptions for selected exports, it was also forced to accept broad commitments that could constrain its future policy space, particularly in industrial policy, digital regulation, and strategic trade governance. In this article, three experts from the government and from academia share their views on the potential impacts of the agreement on Indonesia’s economy, trade relations, domestic policy, and reform direction. They offer recommendations on what the Indonesian government should do next. 

Reform First, Ratify Later

Iman Pambagyo, former Director-General of International Trade Negotiations and the former Indonesian Ambassador to the WTO

The Indonesia–US Agreement on Reciprocal Trade (ART) reflects a broader transformation in the global trading system. Trade policy today is no longer driven solely by efficiency and market access. Increasingly, it is shaped by resilience, security considerations, industrial policy, supply-chain diversification, and geopolitical competition.

For Indonesia, ART offers tangible benefits. The United States remains an important export destination for its manufactured and resource-based products, including electronics, garments, footwear, and palm oil derivatives. Greater certainty in access to the US market can help support investment decisions and ease pressures on employment at a time when global trade fragmentation continues to create uncertainty.

Indonesia appears to have undertaken broader commitments than those offered by the United States. Several provisions, especially those relating to digital trade and economic security, deserve further scrutiny regarding their long-term implications for Indonesia’s development objectives.

Viewed from this perspective, the rationale behind the agreement is understandable. Yet ART should not be viewed merely through the lens of tariff preferences or market access. The agreement raises broader questions regarding policy flexibility, regulatory autonomy, and Indonesia’s long-term development strategy.

Unlike a conventional free trade agreement, ART focuses heavily on non-tariff measures and regulatory disciplines. It includes provisions on services, investment, digital trade, intellectual property, state-owned enterprises, and various transparency obligations. While many of these commitments may improve the business environment, they also require careful consideration because they could affect Indonesia’s future policy space.

This is particularly relevant because the agreement is not symmetrical. Indonesia appears to have undertaken broader commitments than those offered by the United States. Several provisions, especially those relating to digital trade and economic security, deserve further scrutiny regarding their long-term implications for Indonesia’s development objectives.

The timing of the agreement also raises important questions. Since the signing of ART, legal and political developments in Washington have created additional uncertainty. The US Supreme Court ruling against the use of IEEPA tariffs, the subsequent use of Section 122 measures, and the Section 301 investigations suggest that the policy environment surrounding the agreement remains fluid. Upcoming political developments, including the US mid-term election cycle, may affect the future direction of American trade policy.

Against this backdrop, Indonesia should avoid rushing into ratification.

A cautious approach would allow policymakers to assess the evolving legal and political landscape in the United States while carefully evaluating the agreement’s implications for Indonesia’s future policy flexibility. Such caution should not be interpreted as opposition to ART. Rather, it reflects prudent policy management amid considerable uncertainty.

At the same time, delaying the ratification of ART should not postpone reforms. One of the most important lessons from the ART debate is that many of the reforms encouraged by the agreement are reforms Indonesia has needed for years. Businesses, both domestic and foreign, have consistently highlighted concerns regarding regulatory inconsistencies, overlapping procedures, policy unpredictability, and administrative complexity. These issues increase the cost of doing business and reduce competitiveness. Improving transparency, strengthening regulatory coherence, simplifying procedures, and increasing predictability should therefore proceed regardless of the fate of the ART itself.

Such reforms should not be pursued because they are requested by the United States. They should be pursued because they serve Indonesia’s own economic interests. This distinction is important. Ratification of an international agreement and domestic regulatory reform are related but separate policy decisions. Indonesia should not feel compelled to accept every commitment in the agreement in order to undertake reforms that are in its national interest.

If future developments in Washington create opportunities to revisit certain provisions, Indonesia should be prepared to seek adjustments or renegotiation where commitments are deemed excessive or inconsistent with long-term development priorities. Preserving reasonable policy flexibility remains important for any country seeking to industrialise, to strengthen domestic capabilities, and to respond to future economic challenges.

More broadly, ART should not be interpreted as either a diplomatic triumph or a strategic surrender. It is best understood as a response to a rapidly changing global environment in which countries increasingly balance market access considerations against concerns over resilience, security, and strategic autonomy.

For Indonesia, the central challenge is therefore not simply whether to embrace or reject ART. The larger challenge is how to remain open, competitive, and connected to global markets while preserving sufficient policy space to pursue national development objectives in an increasingly fragmented world.

In that sense, the most important takeaway from the ART debate may not be the agreement itself. It is the reminder that regulatory reform remains essential, strategic flexibility remains valuable, and economic resilience will become increasingly important in the years ahead.

Engage, but Do Not Over-Commit

Arianto A. Patunru, an economist at the Indonesia Project, Crawford School of Public Policy, Australian National University

ART should be understood for what it is: a short-term stabilisation device in a turbulent trade environment. The agreement may help Indonesian exporters manage immediate tariff pressure, but it should not become the template for Indonesia’s long-term trade strategy.

The agreement emerged from a moment of considerable uncertainty. Indonesia faced the threat of higher US tariffs, with potentially serious consequences for labour-intensive export sectors such as apparel, footwear, furniture, palm oil, and rubber. From this perspective, Jakarta’s decision to negotiate was understandable. ART reduced the additional US tariff to 19 per cent, exempted 1,819 Indonesia product lines from the extra levy, and introduced tariff-rate quota access for selected textile exports. For firms and workers exposed to the US market, this bought time.

But buying time is not the same as securing fairness, predictability, or long-term competitiveness. ART reduces tariff pressure, but it does not amount to genuine liberalisation. Exempted products are not automatically granted duty-free access to the US market; many may still face normal most-favoured nation tariffs. Textile access is mediated through quota arrangements, and some quota access appears linked to Indonesian purchases of US textile inputs. This looks less like open trade and more like managed trade.

The deeper concern is asymmetry. The United States reduces, but does not eliminate, tariff pressure. It also retains discretion under its domestic trade and national security laws. Indonesia, by contrast, commits to eliminating tariffs on 99 per cent of US products and adjusting selected non-tariff measures, which potentially include import licensing, local-content rules, regulatory recognition, and ownership restrictions. Some of these reforms may be desirable on their own merits if they improve transparency, reduce unnecessary costs, and make Indonesia a more predictable place to invest. But the context matters. If reforms are undertaken primarily in response to external pressure, they risk narrowing Indonesia’s policy space without delivering durable reciprocal benefits.

This matters because the legal foundation of the US tariff threat remains uncertain. If the original tariff pressure is weakened by US court rulings, the rationale for Indonesia’s concessions becomes harder to defend. The likely result, however, is not the end of US tariff pressure. It is more likely to mean a shift toward more procedurally grounded instruments such as Section 301 investigations, Section 232 national security measures, anti-dumping actions, countervailing duties, and safeguards. Indonesia therefore cannot assume that ART permanently settles bilateral trade risk.

This is why simply putting the agreement on hold is not a fully satisfactory answer. Waiting for the US legal and political situation to become clearer is tempting, but it may overstate how much clarity the waiting will deliver. Even if Indonesia waited until the US mid-term elections, or even until a later change in administration, the direction of US trade policy might not change fundamentally. When President Biden succeeded President Trump, the United States did not return to a pre-Trump model of trade liberalisation. The rhetoric changed, and the policy was framed more around workers, supply-chain resilience, industrial policy, and strategic competition with China. But the underlying trade-policy stance remained sceptical of open trade, permissive toward tariffs, and increasingly tied to economic security.

This suggests that US protectionism is no longer merely a Trump-specific aberration. It has become a more durable feature of American trade policy, independent of which political party is in power. For Indonesia, the implication is sobering.  Waiting may reduce the risk of making concessions under immediate pressure, but the US trading environment may not become more liberal or predictable in the future. Putting ART on hold is therefore understandable, but it could leave Indonesian exporters exposed without necessarily improving Indonesia’s bargaining position.

Indonesia should consider conditional ratification with safeguards. It should engage, but not over-commit. ART can be useful as insurance against immediate US tariff pressure, especially for labour-intensive exporters and workers vulnerable to sudden market-access shocks. But it should not become a binding template for Indonesia’s long-term strategy. Ratification should be conditional, reversible, and subordinated to Indonesia’s broader regional strategy through ASEAN and RCEP.

Conditional ratification would mean attaching clear safeguards to implementation. These could include sunset or review clauses, limits on regulatory concessions, parliamentary scrutiny, transparent assessment of costs and benefits, protection against automatic extension of purchase commitments, and an explicit requirement that bilateral commitments do not undermine Indonesia’s ASEAN and RCEP obligations. If these safeguards cannot be secured, the next-best option would be ratification with major amendments. Putting the agreement on hold would come next. Ratifying ART as it stands would be less desirable, while rejecting it outright would remove a potentially useful instrument of short-term stabilisation.

This approach recognises the trade-off at the heart of the agreement. On one hand, ART may help improve Indonesia’s regulatory environment, particularly given the country’s recent record of erratic policymaking. Greater predictability in import licensing, local-content rules, regulatory recognition, and investment regulation could benefit firms, consumers, and Indonesia’s broader competitiveness. On the other hand, accepting externally driven reforms under tariff pressure risks constraining policy space precisely when Indonesia needs flexibility to respond to technological change, supply-chain disruption, energy transition, and geoeconomic rivalry.

The policy answer is therefore neither passive acceptance nor reflexive rejection. Indonesia should use the ART tactically but discipline it strategically. It should engage the United States to manage immediate risks but avoid treating transactional bilateralism as a substitute for regional integration. ART may offer short-term breathing space. Indonesia’s longer-term competitiveness still depends on predicable rules, diversified partnerships, and deeper participation in regional value chains.

Did Indonesia Pay Too Much for Textile Access?

Deasy Pane, an economist at Indonesia’s National Development Planning Agency (BAPPENAS), and a Senior Fellow at the Center for Indonesian Policy Studies (CIPS)

Indonesia has clear reasons to negotiate ART with the United States. The US remains an important market, but Indonesia’s exports to the US are not highly diversified. The top ten products, including electrical machinery, machinery, apparel, footwear, rubber, fats and oils, and chemical products, account for around 72 per cent of Indonesia’s exports to the US. Apparel and footwear alone make up about a quarter of the total. These sectors matter not only because of export value, but also because they are labour-intensive and politically sensitive. The US tariff shocks made this vulnerability more visible.

After the Trump administration’s “Liberation Day” tariffs, the actual duties paid by Indonesian exporters increased sharply. Figure 1 shows that Indonesia’s average duty rate on exports to the US rose from around 10 per cent before the escalation to more than 50 per cent at its peak. But the pain was not evenly distributed. In 2025, around 54 per cent of total duties paid on Indonesian exports to the US came from apparel and footwear. This means that ART is not mainly about Indonesia’s entire export structure but about protecting a few exposed labour-intensive sectors from losing competitiveness in the US market.

Figure 1: Around 54% duty paid in 2025 was from apparel and footwear

At first glance, Indonesia secured something useful. It obtained a 19 per cent reciprocal tariff rate, slightly better than Vietnam’s 20 per cent. This matters because Vietnam is one of Indonesia’s closest competitors in garments and footwear. Indonesia also received exemptions for around 1,819 product lines from additional tariffs on top of MFN tariffs. For textiles, however, the benefits are more constrained as the market access comes through tariff-rate quotas, and part of the access is linked to the use of US inputs, such as cotton.

The sectoral nature of the gain is also visible in the tariff impact simulations (Figure 2). Across different tariff scenarios, the largest output movement is concentrated in textiles and apparel. Other sectors show relatively small changes. Furthermore, ART may improve Indonesia’s relative export position in the US market, but the gain needs to be interpreted carefully. It comes mainly from changes in relative tariff treatment and trade diversion, not from a broad improvement in Indonesia’s underlying competitiveness. As US demand shifts away from more heavily taxed suppliers, Indonesia may gain some market share due to the tariff gaps; and this does not mean there is productivity upgrading or deeper transformation in Indonesia industries.

Figure 2: Across different tariff scenarios, the largest output movement is concentrated in textile and apparel

This is where the agreement becomes more complicated. Indonesia appears to have come to the negotiating table with a relatively narrow objective to secure market access for selected goods, especially textiles, garments, and footwear. The US, however, brought a much wider agenda. ART is not only about tariffs. It covers beyond tariff arrangements, including standards recognition, intellectual property, digital trade, investment, labour and environment, state-owned enterprises discipline, export controls, and strategic sectors.

The mismatch is striking. Indonesia seems to have negotiated to solve a concentrated market-access problem, but the commitments it accepted could reshape a much wider part of its domestic trade and industrial policy architecture. The US brought the whole policy package to the table. Indonesia may not yet be institutionally prepared for the breadth of the implementation agenda that follows.

To be clear, not all ART commitments are problematic. Some are in line with reforms Indonesia already needs. More transparent import licensing, better regulatory coordination, smoother trade procedures, clearer standards, and more predictable rules would benefit Indonesian firms, not only US exporters. If ART helps Indonesia accelerate these reforms, that would be positive.

But the problem is not reform itself. The problem is when reform becomes partial, bilateral, and US-specific. Several commitments go beyond Indonesia’s immediate interest in protecting selected exports. In agriculture and SPS, there are concerns about over-reliance on US regulatory systems. In halal and food-related products, implementation may clash with domestic regulations and social sensitivities.

The digital, investment, and intellectual property provisions also raise longer-term questions. Commitments on cross-border data flows, data localisation, digital services taxation, copyright protection, data exclusivity, divestment requirements, and capital repatriation may affect Indonesia’s future regulatory space. Some of these provisions may be acceptable if Indonesia chooses them as part of its own reform agenda. They become more difficult when they are tied to a bilateral bargain for market access in a few sectors.

The most sensitive part is the strategic layer. ART includes provisions related to export controls, sanctions, restrictions on transactions with certain third-country entities, and possible termination if Indonesia enters into a preferential agreement considered harmful to US interests. This touches directly on Indonesia’s foreign economic policy. This may also be perceived as shifting Indonesia’s regulatory environment too closely toward US strategic preferences and create discomfort among non-US investors and complicate Indonesia’s relations with other major partners.

The digital, investment, and intellectual property provisions also raise longer-term questions. Commitments on cross-border data flows, data localisation, digital services taxation, copyright protection, data exclusivity, divestment requirements, and capital repatriation may affect Indonesia’s future regulatory space.

Recent US actions reinforce this concern. The latest Section 301 forced-labour-related investigations show that ART does not shield Indonesia from future US trade measures. ART may reduce one layer of tariff pressure, but it is not an insurance policy against future unilateral measures.

The implication is not that Indonesia should avoid engagement with the US. The US is too important to ignore. But Indonesia needs to be careful before turning a sector-specific market-access problem into broad and potentially permanent regulatory commitments. Before full implementation, Indonesia should conduct a detailed legal review, regulatory mapping, sectoral assessment, and consultation with affected stakeholders. The central question is not whether market access matters, but whether the gains are large, certain, and durable enough to justify the full range of commitments Indonesia has accepted. That question deserves a more transparent and data-driven public discussion.

Conclusion

There is common agreement that the ART deal is a rational response by the Indonesian government, given the importance of the US market as an export destination for Indonesia’s key economic sectors. However, the deal reflects power imbalances where tariff reduction by the US side has been traded off against broad concessionary commitments by the Indonesian side ranging from relinquishing customs duties on e-transmissions and digital service taxes to being drawn towards the US’s security alignment. Although some provisions in the agreement may embolden Indonesia’s efforts to implement politically challenging domestic reforms, such as reducing non-tariff measures, this article has argued that domestic reforms will only be effective if they are applied to all Indonesia’s trading partners in order to comply with the WTO’s non-discriminatory and most-favoured-nation principles and if they are aligned with Indonesia’s national interests instead of being pressured from external party’s interest per se.  Improved competitiveness as the fruit of domestic reforms will be a more sustainable and less costly pathway than temporary market access to the US created by outcompeting competitor countries in the tariff race. Indonesia should be cautious about ratifying the agreement. Before ratification, Indonesia should introduce safeguards and renegotiate problematic provisions. This can be done by first identifying problematic provisions and conducting legal review, regulatory mapping, sectoral assessment, and public consultation. After renegotiations, it is important to ensure that ratification remains conditional, reversible and subordinated to ASEAN and RCEP commitments. Meanwhile, domestic reforms must not be put on hold or wait until the deal is ratified. They should start now.

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This is an adapted version of ISEAS Perspective 2026/54 published on 27 July 2026. The paper and its references can be accessed at this link.