EU-Indonesia CEPA: Maybe Signed, but Not Yet Sealed

Background

The political agreement on the EU-Indonesia Comprehensive Economic Partnership Agreement (CEPA) in July was rushed by political optics, including Trump-era tariffs and pressure to compete with the US-Indonesia talks. After nine years, 19 rounds, and two high-stakes WTO litigations, the counterparts have set the coming week (of  September 23) as the deadline to sign the agreement.

There is an undeniably powerful case for this deal from almost every angle. In terms of market access, this would underscore Indonesia’s weight, representing 42% of the ASEAN population, a G20 Member and BRICS participant, and a remarkable growth for 2025 at 4.8%, which in absolute terms is more than half of all economic growth generated by the EU by one single country.

Politically, CEPA affirms the EU’s continuing relevance in ASEAN after Brexit, whereby the EU ceased to be the region’s largest investor. The power dynamics are far from the donor-recipient parity of the past that once characterised EU-Indonesia relations, and  CEPA redefines partnership “in turbulent times and when economic uncertainty meets geopolitical volatility”. 

Yet, deeper EU-Indonesia relations are not to be taken for granted. They are framed by realignment and opportune timing, but encircled by cautiousness and reservations. The signing of CEPA is also just a step: President von der Leyen lucidly describes CEPA as a “path of openness, partnership, and shared prosperity”, and that is exactly what a trade agreement is: It’s a path and a catalyst towards an outcome—but not a resolution in itself. 

While Brussels and Jakarta may walk the same narrow path between the America First and China Dream, common threats alone cannot ease all their frictions. Moreover, both sides remain wary of commitments that may restrict their regulatory autonomy and industrial policies, which is why the expectation that CEPA will resolve all grievances is highly unrealistic. Expectations and domestic trade-offs between Indonesian interests must be managed correctly—or the agreement may fail ratification or simply not be complied with.

An Undisputable Economic Rationale

Once announced, the CEPA will deliver agreed ambitious tariff cuts, with Jakarta pledging to liberalise 98% of the tariffs on both sides. This coverage exceeds the scope of recent EU FTAs with emerging markets, such as EU-Mercosur and recent Indonesian CEPAs with OECD countries. 

As customary, certain sensitive products—such as processed palm oil from Indonesia, or EV batteries from the EU—will be subject to staging, typically for five years. However, official communiques claim that CEPA eliminates tariffs on 80% of goods upon ratification, benefiting sectors such as apparel, footwear, and fisheries, while improving EU access to machinery, chemicals, and other manufactured goods. This is no minor feat, considering the sensitivities surrounding some of these goods.

Beyond the immediate and obvious benefits of tariffs, CEPA also facilitates long-term strategic cooperation in the automotive industry, critical minerals, infrastructure projects, and technology. Removal of tariffs and other market access barriers on both sides is a prerequisite for investment-led growth, as Europe uses resource and market-seeking FDI to boost its corporate profits. 

Indonesia is one of the few countries that could lay claim to being one of the few alternative sources for critical materials for Europe, as it holds the world’s largest or second-largest deposits of nickel, cobalt, bauxite, copper, tin, and rubber. However, rather than exporting raw commodities, Jakarta has actively pursued export restrictions to attract capital from China, aiming to develop domestic processing capabilities and increase its economic value-added. The policy has led to a WTO dispute, settled in the EU’s favour in November 2022, which was subsequently appealed into the void.

EU and Member State financial instruments are also supporting Indonesia’s transition towards sustainable infrastructure, and tariffs on equipment and materials are an unnecessary waste of public funding. Public procurement and large-scale commercial contracts, such as civil aircraft purchases and engineering projects, are also critical to sway some EU Member States that are typically sceptical about the merits of trade liberalisation.

Defence ties are of particular importance. Jakarta is completing a multi-stage order for Rafale jets and set to receive Thales radars, Scorpene-class submarines, and Airbus A400M military transporters from France. Indonesia has also acquired two Thaon di Revel-class frigates from Italy’s Fincantieri. Such commercial decisions may be officially delinked from the trade talks, but they “split the difference” on outstanding issues and provide political impetus to push EU Member States across the finishing line.  

In other words, there is a compelling intervention logic for an agreement that will “open new markets and create more opportunities for our businesses”. Theoretical econometric simulations support this conclusion, and Indonesia’s GDP could rise by over €5 billion given “full implementation”, with potential export growth of up to 50%. Such gains make good headlines in troubled times, but their full realisation hinges on the well-known and deliberate impediments that have become the subject of WTO litigation and diplomatic spats.

Settling Sustainability Disputes 

From Jakarta’s point of view, the disputes on palm oil are the principal cause of its mistrust. It has maintained the view that the Renewable Energy Directive (RED I and II), the EU Deforestation Regulation (EUDR), and the Carbon Border Adjustment Mechanism (CBAM) are disguised forms of protectionism that threaten the livelihoods of more than 8 million active voters in key Indonesian battleground states. The five large palm-cultivation conglomerates are major donors and logistics providers to the major parties, while the smallholders are distributed across Sumatra, Kalimantan, and Jambi, who decide national elections. 

In effect, as the most powerful regional and national interest group, the ecosystem surrounding palm oil cultivation—with the support of the nationalist factions in Dewan Perwakilan Rakyat (DPR)—People’s Representative Council—wields a de facto veto on Indonesia’s commercial policy, and may trap any treaty by labelling it as “neo-colonialist.”

The decades-long conflict between Indonesian export interests and EU sustainability and deforestation regimes took another step closer towards its resolution, after the two WTO panel reports on EU subsidy discrimination against palm oil under RED II (DS593), and countervailing duties on palm oil-based biodiesel (DS618).  

Despite some media reports to the contrary, there is no doubt that the Panel ruled in Indonesia’s favour—or that Brussels intends to comply fully. This is despite Jakarta’s refusal to reciprocate on the Panel ruling on the nickel ore export ban, violating GATT XI. And whether the Indonesian government and the palm oil industry accept how RED II and its delegated acts (but not the French national taxes) are brought in line with national treatment, MFN, predictability, and transparency on enforcement (GATT articles I, III, X) will be a balanced assessment comprising DSB outcomes, CEPA negotiations, and their associated side agreements. 

More importantly, Jakarta’s decision will be a later decision once facts are known. Indonesia remains convinced that palm oil—as well as other export commodities such as coffee, cocoa, and rubber—will always face a moving regulatory frontier in the EU. With each dispute resolved, new EU restrictions arrive. Beyond RED II, the now-delayed EU Deforestation Regulation (EUDR) with its onerous traceability requirements is the principal concern of Indonesia and other ASEAN countries. Besides EUDR, there is the Carbon Border Adjustment Mechanism (CBAM), which has reporting obligations that its critics deem disproportionate for developing countries, while EU, German, Dutch, and French corporate sustainability due diligence laws loom large.

As developing countries lack the means to adapt their agricultural realities to such evolving sustainability requirements, there is a perception in Indonesia that neither compliance nor litigation will fully mitigate the risks it faces in the EU. Europe is a high-paying export market for the palm industry that pays a 25-30% premium over Indian and Chinese buyers, while EU regulatory influence often becomes a pretext for import restrictions imposed by other countries. In other words, the palm oil industry has no choice but to confront the EU.

As European negotiators rightly point out, trade negotiations cannot bind either counterpart from introducing domestic regulations that may impede future trade. Furthermore, the EU legislative convention relies heavily on using objective criteria rather than explicitly naming countries that are granted exemptions. Nonetheless, the EU has expedited an EUDR benchmarking to designate the US as a “low risk” country and issued political texts that recognised the “negligible risk” of deforestation during the negotiations of the US-EU Trade Framework Agreement. Similarly, a recognition of Malaysia’s MSPO certification was included in a joint statement in early September. 

Enforcement Concerns 

Such political language with other counterparts inevitably creates an expectation among stakeholders that Indonesian negotiators must secure similar outcomes for certified Indonesian palm oil. However, such a singular focus on palm oil still leaves out traders and downstream industries in other commodities—e.g., wood, paper, rubber, coffee, and cocoa—that account for almost the same share of Indonesian exports as palm oil. 

Yet, contrary to what the public and some stakeholders often believe, regulatory chapters and sectoral technical annexes in FTAs cannot mend incompatibilities between public and private sustainability regimes, or reverse policies on resource sovereignty in developing countries. In the past, the EU often resolved such Gordian knots in sectors where the Member States have strong defensive interests through asymmetrical offers. For instance, Japan was offered GDPR adequacy and rendezvous clauses to relax its demands for cross-border data flows disciplines. Such trade-offs are complicated in the case of CEPA, as deforestation regulation is a systemic issue that affects other interests, and the political factor that palm oil plays in the political economy among Indonesian provinsi, accounting for 12% of Indonesia’s total export earnings. 

In short, Indonesia’s palm oil and agricultural interests are both too big to be traded off or left unresolved. There are also other moving targets in the CEPA equation, as Indonesia is not complying with the Panel Report in the nickel ore case. Despite the finding that both the export-licensing regime and a later export ban breached GATT rules, Jakarta appealed the case into the void, leaving the Panel decision unenforceable.

To address their enforcement concerns, the EU and its Member States may have considered deploying countermeasures under the 2021 Trade Enforcement Regulation. On the one hand, the EU remains the only credible guarantor of the multilateral system, and it must effectively reinforce deterrence against WTO appeals becoming a cost-free tactic that erodes all compliance for non-MPIA members. On the other hand, Jakarta would likely double down by halting EU FDI approvals or calling for support from its ASEAN neighbours, further regionalising the conflict. 

Despite its high costs, invoking the Trade Enforcement Regulations would not improve access to nickel that Europe needs for its steel production and EV batteries, and merely suspend trade concessions with practically no economic compensation, while Jakarta will remain resolutely committed to its downstream industrialisation strategy. More importantly, CEPA cannot move forward if Brussels takes enforcement action.

In practice, both parties are best served by negotiating a comprehensive package across all issues. For the EU, the choice stands between joining nickel-cobalt joint ventures that Indonesia is incentivising or facing critical supply chain disruptions and further dependency on China. In short, the EU must seek redress through other means, which is a process that CEPA talks have enabled.

Nonetheless, the EU must recalibrate its expectations slightly as concessions secured under CEPA will only be meaningful if Jakarta can be trusted to uphold them. Unlike the WTO system, where adjudication and compliance are formally structured, the enforcement of bilateral FTAs rests largely on reciprocal gains and mutual trust. The EU cannot ignore that Indonesia’s decision to appeal the nickel ore case demonstrates a willingness to exploit systemic weaknesses rather than accept binding rulings. 

As Jakarta is prepared to sidestep enforceable WTO obligations, there is even less assurance that it will uphold voluntary bilateral and trust-based commitments, which is why the EU must calculate the risk that Jakarta could refuse compliance if the balance is not convincing. 

Conclusion: Synchronicity and Choreography

The parties to CEPA have consistently underestimated their relevance to one another, not least because European leaders often fail to recognise how Indonesia has become a regional and maritime power whose strategic choices open or close both literal and figurative pathways across the Indo-Pacific. Certain EU capitals have also overlooked how seemingly arcane technical regulations can trigger parliamentary unrest in the heart of Southeast Asia.

Conflicts with the EU sustainability regime, as well as the WTO dispute over nickel ore, demonstrate how the trust gap raises a fundamental question for both Jakarta and European capitals: whether bilateral concessions and agreements can be relied upon—and CEPA is far from sealed, even if it is signed. 

Even if a balance is struck across linkages—between market access offers, WTO disputes, strategic and commercial contracts—any new sustainability rule, contract revocation, or localisation requirement could quickly upset the parity. Due to Indonesia’s long and uncertain ratification process, the deal could dissolve even before it comes into force: Indonesian law (No. 24/2000) requires international treaties that create new legal norms must be ratified as parliamentary statute as ordinary legislation in the DPR, unlike technical agreements that can be ratified by Presidential decrees (Perpres). 

FTA ratification in Indonesia is a drawn-out and unpredictable legislative exercise, and ironically mirrors the EU process. Ratification bills must pass through committee hearings, consultation rounds, and a plenary vote in a parliament where the Prolegnas (national legislative programme) is perpetually crowded. Even before the DPR sees a bill, “translation delays” and inter-agency frictions often prolong its preparation. 

Ratification then becomes highly politicised and hostage to bargaining on dossiers unrelated to trade, including budget allocations, election cycles, and regional vetoes. While no Indonesian FTA has outright failed, sectoral sensitivities have often stalled entry into force and necessitated further negotiations, especially in the case of FTAs with industrialised countries:

• Indonesia-EFTA CEPA was signed in 2018, but ratified only after three years of opposition in DPR due to competition from Swiss and Norwegian milk and pharmaceutical lobbies concerned about IP protection rules. The agreement was not ratified before EFTA countries issued political assurances, and the ratification bill included reservations that included safeguard instruments in sensitive sectors. 
• Indonesia-Korea CEPA took nearly two years to ratify as the DPR raged over trade balances, automotive, and steel. Indonesia withheld ratification until Hyundai and Posco signed investment MOUs in 2022.
• Jokowi administration withheld submission of the Indonesia-Australia CEPA to the DPR over Australia’s antidumping duties on A4 paper, as Indonesia’s pulp & paper giants lobbied the DPR to stall until the dispute was addressed.
• RCEP was delayed for almost two years over fears of dependency on China and agricultural sensitivities, making Indonesia the very last among fifteen countries to ratify.

Palm oil and wood are not just regular sensitivities like dairy, automotive, and paper—but veto-holders who can afford to wait and see since they can force the political leadership to return to the drawing board. 

These precedents therefore underscore that the only feasible pathway for CEPA involves a carefully choreographed process, where milestones towards ratification will be linked to incremental clarity across three tracks, each with different European counterparts: First, how the EU will implement its coming deforestation rules, where DG Environment is in the lead; second, how Brussels will conform with the palm oil-related WTO rulings, where DG Energy is the lead service; and third, to the maturity of the commercial contracts and how they benefit respective party.

Otherwise, ratification in Jakarta could easily drift for three years or more, leaving the agreement signed but not in force until further concessions are offered. And if CEPA eventually falters at the ratification stage, the responsibility will not lie with the agreement itself or its adroit negotiators, who, by then, have already fulfilled their parts.