US Exploring Investment Treaty with Indonesia

US Exploring Investment Treaty with Indonesia

WASHINGTON ~ The United States is looking into signing an investment treaty with Indonesia this year to set the pace for a larger free trade pact that could boost bilateral trade by up to 40 percent.

Relations between the world’s richest nation and the most populous Muslim nation have improved rapidly in recent years and a free trade agreement could be a fitting climax to the blossoming bilateral and Southeast Asian ties.

An investment accord, the cornerstone of any US free trade agreement (FTA), with Jakarta is among Washington’s top priorities for Southeast Asia in 2007, US officials said.

“A bilateral investment treaty, which is effectively the investment chapter of an FTA, is something we are exploring,” said David Katz, the director of Southeast Asia and Pacific affairs in the US Trade Representative’s office.

The United States forged a trade and investment framework agreement (TIFA) in 1996 with Indonesia but the largest Southeast Asian nation plunged into financial and political turmoil a year later as a result of a regional currency crisis.

However, since President Susilo Bambang Yudhoyono came to power in September 2004 as Indonesia’s first directly elected leader, “the situation has smoothed out a bit and we were able to intensify our work,” Katz said at a recent forum of the United States-Indonesia Society in Washington.

The two countries have held five formal TIFA meetings over the last two years, he said, adding that new forums to develop services and agricultural trade as well as intellectual property rights were also being devised.

“All of these initiatives are directly related to provisions of the FTA and part of the building-blocks approach to support and build capacity for FTA,” he said.

The United States has free trade pacts with Indonesia’s immediate neighbors Australia and Singapore. A pact with Indonesia could not only boost bilateral ties but also those with Southeast Asia, already the fourth largest US trading partner, experts say.

Eliminating all bilateral barriers between Indonesia and the United States could expand overall merchandise trade by about 40 percent, says a new study by the Washington-based Peterson Institute for International Economics.

“An FTA between Indonesia and the United States is fundamentally about large political gains for the United States and potentially large economic gains for Indonesia,” said the study by the institute’s economist Gary Clyde Hufbauer and visiting Indonesian fellow, Sjamsu Rahardja.

They cautioned however that “while the political payoff is crucial, it would be wrong to focus the FTA analysis on politics alone.”

Bilateral goods trade from January to September 2006 was US$6.5 billion, latest US figures show.

Indonesia has relatively low average tariffs and a fairly open investment regime by regional standards, but important barriers remain in place and peak tariffs and import licenses protect sensitive commodities, the study said.

Regulatory impediments and weak intellectual property rights limit foreign investment and hamper service providers, it said.

The United States, on the other hand, has its own peak tariffs on sensitive products and has lately shown an allergy to foreign investment that raises national security concerns, it added.

Sensitive commodities for Indonesia include fruits, meats, alcoholic beverages, rice, textiles and automotive components – many of the attractive markets for US exporters.

Indonesia, the study pointed out, will insist on market access for processed agricultural products, such as cocoa, fish and tobacco, and for labor-intensive clothing and footwear – “sensitive issues” for the United States.

“Better protection of IPR (intellectual property rights) will be crucial for the United States, but certain IPR aspects are extremely touchy in Indonesia,” it said.

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