U.S.-Indonesia Tariffs: Balancing Economic and Security Interests

Introduction

On the 2nd of April, the so-called ‘Liberation Day’, Washington launched reciprocal tariffs on around 90 trading partners, designating a 10% baseline for each country. Indonesia, a close collaborative partner of the U.S. on regional development and security, was hit with a 32% tariff. This rate is fairly moderate among ASEAN member states: Cambodia and Laos were hit with tariffs close to 50%, while the Philippines was only hit with 17%. Yet, subsequent negotiations cut the rate almost in half, as the final deal was struck at a rate of 19% – one of the lowest within the Asia Pacific. 

Although not the most significant reduction among ASEAN member states – Cambodia received a 30% cut – Indonesia significantly softened the U.S.’ stance. While Washington is mainly using tariffs as a bargaining chip, rate cuts and concessions should not be taken for granted. Laos, for instance, only had 8% removed from its original 48% rate; meanwhile, Myanmar only received a 4% cut. As such, it is worthwhile to explore the factors behind the successful U.S.–Indonesia negotiations. This op-ed will examine strategic considerations on both sides, unpacking concessions Indonesia made and their impact on its economy. 

Trade Relations with the U.S. 

Indonesia maintains a notable level of trade with the U.S., but it is not Washington's closest trading partner in the region. In 2024, U.S. exports to Indonesia were merely 0.4% (US$13.2 billion) of total U.S. exports, and imports from Indonesia (US$29.7 billion) were only 0.7% of total U.S. imports. Trade between the two countries is characterised by U.S. industrial supplies going to Indonesia ($4.6 billion) and Indonesian consumer goods going to the U.S. ($12.6 billion), with capital goods, foods, feeds, and beverages imported and exported from both sides.  

Nonetheless, from Jakarta’s perspective, the U.S. is a major export market. The U.S. ranked second in Indonesian non-oil and gas goods and services exports. Due to Indonesia's strong dependence on the U.S. market, losing comparative price advantages could pose a  detrimental threat to many businesses. In April, economist Syafruddin Karimi noted that key sectors in Indonesia – textiles, footwear, electronics, and rubber – could be hit hard and forced to halt exports. These sectors form the bulk of Jakarta’s non-oil and gas exports, and cutting production could result in mass unemployment. 

U.S. Rationale for Raising Tariffs 

The Trump Administration’s rationale for imposing ‘reciprocal tariffs’ on Indonesia is   quite straightforward: it is one of the major sources where the U.S. suffered massive trade deficits. In 2024, the U.S. recorded a trade deficit of U.S.$16.5 billion with Indonesia, a slight increase as Indonesian imports to the U.S. grew faster than U.S. exports. By the end of the year, U.S.–Indonesia trade was ranked 15th by trade deficit size among U.S. trade partners.

Another issue cited was the lack of reciprocity between tariff rates of the two countries. While all WTO members are bound to grant the best tariff rates to all members – treating partners equally – countries have yet to establish a consensus to apply rates on a reciprocal basis bilaterally. The White House noted that the U.S. applied a simple average MFN rate of 3.3% to its trade partners, among the lowest in the world. Yet, the move is not reciprocated by others. Indonesia’s simple average MFN rate, for instance, is 8%. Disparity between U.S. and Indonesian rates is also seen across tariffs for specific product categories. Washington specifically pointed out that Indonesia charged a 30% tariff on ethanol, while the U.S. only charged 2.5%. 

On top of trade deficits and the lack of reciprocity, the U.S. accused Indonesia of maintaining non-tariff barriers: local content requirements across sectors and complex import licensing regimes. Local press Jakarta Post, nonetheless, countered that in fact it was Washington who was being unreasonable. Particularly, commentators point to the fact that U.S.-centric calculations leave massive gaps between tariffs imposed upon different countries. 

Japan, for instance, is ranked as the seventh country to which the U.S. runs the largest trade deficit, with the figure amounting to $69.39 billion. Yet, Japan was only hit with a 24% tariff on ‘Liberation Day’. Bilateral trade deficits, therefore, are not the sole reason for high tariff rates; larger strategic designs also count. 

Chinese Influence in Indonesia 

Washington likely considered Indonesia’s close relationship with Beijing when deciding on the 32% tariff rate. In 2024, Beijing invested around US$8.1 billion in Indonesia, only lagging behind Singapore. 

Chinese firms have strategically invested in local resource processing and manufacturing. Nickel processing is a major field for Chinese expansion. Nickel is a strategic mineral used in cathodes of rechargeable batteries, a crucial asset for EV, renewable, and defence supply chains. In 2023, Zhejiang Huayou Cobalt invested over $2.04 billion to build a Ford-backed nickel processing plant in Indonesia. The trend was continued in 2024, when GEM Co., a Shenzhen-registered listed company, invested another $1.42 billion to build a high-pressure acid leach facility to process nickel. Other core sectors, including battery and EV manufacturing, are also dominant areas for Chinese investment. 

One of Washington’s goals is to curb Chinese global dominance in key manufacturing industries and bar Chinese goods from entering the U.S. through Southeast Asia. The 32% tariff rate could therefore also be aimed at deterring Indonesia from aligning too closely with China. To negotiate for a favourable rate, Indonesia has to align with both U.S. regional strategies and trade preferences while safeguarding its economic interests.

Trade Negotiations 

Initial signs seem tough for Indonesia: Trump cautioned countries that seek to align themselves with BRICS, a group rolling out ‘anti-American’ policies, would be charged an extra 10% tariffs with no exceptions. Indonesia, nonetheless, had just joined BRICS earlier this year – in fact, the first Southeast Asian country to do so. The threat was followed by another letter from the White House, warning that the import tariffs will take effect on the 1st of August if no deal has been reached. 

In June, Jakarta engaged in intensive three-week negotiations with Washington. By mid-July, Indonesia announced that extra tariffs will not be imposed and the enforcement of the 32% tariff has been ‘paused’ for further negotiations. The deal was eventually closed on 15 July with a phone call between the two presidents, resulting in a final rate of 19%—one of the lowest within the Asia Pacific. Understanding the terms and concessions made by Indonesia is crucial to identifying both countries’ strategic intentions during rounds of negotiations. 

The Trade Deal

Indonesia has promised multiple policy changes to secure the final 19% rate. First, Jakarta has vowed to eliminate tariffs on over 99% of U.S. products exported to Indonesia, while breaking down non-tariff barriers such as local content requirements and certifications discussed above. Indonesia will also tear down barriers for digital trade, improving data circulation with the U.S. to streamline U.S. firm operations. 

The White House also mentioned that further commitments on digital trade, services, and investment are being finalised. This is not surprising, considering multiple U.S. trade deals included demands for inbound FDI: Japan committed $550 billion in critical industries, while Malaysia pledged U.S.$70 billion. In fact, before the agreement, Indonesia had already signed a memorandum of understanding with the U.S., vouching to import US$15.5 billion worth of U.S. fuel, signaling its desire to deepen trade and investment ties. 

Also worth noting is the call for strengthening rules of origin. The White House notes that the two parties will ensure that the benefits coming out of the deal only apply to Washington and Jakarta, and not any other ‘third countries’ – likely referring to China. Calls to crack down on duty evasion and ensure supply chain security are also areas that could affect the PRC’s presence in Indonesia. 

Indonesian concessions, nonetheless, seemingly exceeded trade readjustments. The local IDN Times alleged that one of the conditions pitched by Prabowo to win tariff reduction is to boost U.S.–Indonesia maritime security cooperation. The issue has been discussed by an analyst tied to the University of Melbourne, who noted that discussions for a local maritime manufacturing firm to provide maintenance, repair, and overhaul services for the U.S. Navy are ongoing. Deepening military ties could help the U.S. gain a stronger foothold in the region in case of conflicts. 

Impact and Prospects

The Indonesian steel industry will likely endure a major hit from the negotiation framework. While the 19% rate applies to the vast majority of trading goods, steel and aluminum rates have been doubled to 50% since June 2025 without exemption for Indonesia. The country is the world’s tenth largest steel exporter, with the U.S. being its eighth largest market. In 2024, Indonesia exported 296.5 million U.S. dollars of iron/steel to the U.S. per free-on-board value. Wary of excessive supply hitting the U.S. market, the American steel industry has lobbied against exempting steel tariffs, specifically name-dropping Indonesia along with a few other East Asian states. A heightened tariff would greatly hurt price competitiveness. 

Other core industries, meanwhile, have received close to full exclusion of tariffs. Indonesian economic minister Airlangga Hartarto notes that recent discussions secured U.S. promises to exempt palm oil, cocoa, and rubber from the 19% tariff. These products are not produced in the U.S.; exports would not harm domestic industries. 

Overall, purchase, investment, and zero-tariff requirements draw Indonesia much closer to the U.S. economy. Such reorientation leaves three major issues unresolved. First, certain terms lack clarity in execution. While Indonesia did promise to purchase US$15.5 billion worth of U.S. fuel, how the policy would be executed is left undefined. The number covers almost 40% of Indonesia’s total energy exports; as such, there may be a need for Indonesia to shift its liquified natural gas imports from Qatar and Australia to the U.S.. Nonetheless, it is not clear how the adjustments would be made or how deals will be restructured with other suppliers. 

Second, slowing U.S. economic growth could harm the Indonesian economy. While U.S. tariffs were designed to bring jobs and manufacturing home, inflation and weakened purchasing power for imported intermediate goods resulted in a decline in manufacturing activity. Per IMF projections, U.S. economic growth will only reach 1.8% in 2025, down from 2.8% last year. Eko Listiyanto, Director of the Indonesian Institute for Development of Economics and Finance, is therefore pessimistic regarding consumer demand from the U.S.. Instead, from the supply side, U.S. agricultural products may flood the market and further harm local competitiveness. 

Thirdly, it is unclear how Indonesia will adjust its relationship with Beijing. Deepening economic and security ties with Washington does not mean a complete turn to the West. Sectoral differentiation matters. China has been a major source from where Jakarta imports high-value machinery, electric equipment, and vehicles, along with a valuable export market. Measures such as maritime military support for the U.S. or to enforce tight transshipment tariffs could worsen relations with Beijing. Economic and diplomatic pressure could follow. Amidst a time of great power competition, Jakarta needs to avoid being tied to either end, retaining sufficient flexibility. Leveraging its central role in ASEAN, Indonesia could foster greater consensus among member states, mustering enough strength to balance between Washington and Beijing. 

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ABOUT THE AUTHORS

Kalos Lau is a Governance and Law Analyst at China Policy, advising clients on China’s regulation and security environment. He was previously Lead Editor at European Guanxi and Commentator at Europinion, where he wrote on China’s foreign policy and global affairs. 

Douglas Brenton Anderson is a Research Editor at Dow Jones, a Young Professional Fellow at the Asia-Pacific Foundation of Canada, and Deputy Secretary-General at European Guanxi. His writings have been featured in The Diplomat, CAPS Unlock, and European Guanxi. 

This article was edited by Susanna Aghajanyan.

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