The lacklustre Australia-Indonesia economic relationship

International trade Foreign investment Diplomacy Australia Indonesia

Indonesia is one of Australia’s most important bilateral partners. Its geographical position in South-East Asia, its large land mass, as well as its close proximity to Australia should put the country towards the top of the priority list in developing close bilateral ties not only in a strategic sense, but also in an economic sense. Indonesia is currently the eighth-largest economy in the world in terms of gross domestic product based on purchasing power parity (PPP) and is expected to become the fourth-largest by 2050. With significant growth expected as the size of its middle class continues to expand, Indonesia provides an opportunity for Australian businesses to tap into a large and increasingly affluent market. So far, however, Australia’s economic relationship with Indonesia has failed to reflect the full geostrategic importance of the wider relationship.

Key points

  • Bilateral trade has fallen due to reduced Indonesian commodities exports to Australia.
  • Manufacturing and tourism are likely become major future drivers of Indonesian exports. Motor vehicle and precious metal scrap exports also hold potential.
  • The Indonesian services trade is dominated by the tourism sector, which is also the leading contributor to the Indonesian economy in the context of trade with Australia.
  • Australian investment in Indonesia remains low due to the generally poor business environment there.
  • The IA-CEPA trade agreement will, upon implementation, play an important role in boosting bilateral trade and investment.
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