Author: Ashley Vines, University of Melbourne
Indonesia is Australia’s oldest trading partner, with Aboriginal people from northern Australia having traded goods and produce with Makassan people long before European settlement. But this long-standing trade connection remains underdeveloped given the size, complimentary economies and proximity of the two countries. This is particularly the case in the agricultural sector.
While Australia is currently the leading market provider of wheat and live animal exports to Indonesia, exporters are yet to fully capture Indonesia’s growing middle-class market that is now consuming higher levels of quality protein and fresh produce. Navigating trade barriers, primarily in the form of non-tariff measures — such as import restrictions, licensing and quotas — is a key reason why exporting agricultural products to Indonesia is often framed as ‘too hard’ by Australian exporters.
The Indonesia–Australia Comprehensive Economic Partnership Agreement (IA-CEPA), which came into force on 5 July 2020, represents a shift in these trade relations. The agreement reduces trade and investment barriers and is the first Australian free trade agreement to have an entire chapter on non-tariff measures. Much of the discussion in the lead-up to this agreement was focussed on these export opportunities for Australian agribusiness.
But there has been minimal discussion regarding the possibility for Indonesian investment into Australian agriculture. Chapter 14 of IA-CEPA outlines an Investor–State Dispute Settlement mechanism that will give investors access to an independent arbitral tribunal to resolve investment disputes. If Indonesians invest in Australian agriculture and export produce back to Indonesia, they would also be subject to the same tariff and non-tariff measures in place for Australian exporters. The removal of some of these trade barriers increases certainty for potential Indonesian investors.
With a population of 267 million, Indonesia is currently the world’s fourth most populated country. It is also the world’s ninth-largest economy, with some economic forecasts suggesting it will become the fourth-largest by 2050. Indonesia faces challenges in meeting the consumption needs of its growing population, currently importing a large portion of its staple commodities — primarily wheat, soybeans, meat proteins, fresh fruit and dairy products. Like other food importing countries, such as China, Vietnam and Qatar, Indonesia may look to diversify its agricultural production base and reduce its reliance on buying agricultural commodities from international markets.
Northern Australia is a region in close proximity to Indonesia, and in need of greater levels of investment in primary production and supply chains. Northern Australia has consistently been framed by successive Australian federal governments as a rare investment opportunity, with enormous agricultural ‘potential’, close to Asian markets. Live cattle is the largest agricultural industry in northern Australia and represents the strongest trade connection between the region and Indonesia.
Still, the region’s agricultural ‘potential’ in other industries has not yet been realised. Some reasons for this include the harsh climate, soil suitability, transport costs and logistics (particularly given its remoteness), the challenge of developing land under governance and land tenure arrangements, the profitability of growing particular crops, and a lack of infrastructure to access water resources. There is no doubt that investing in northern Australia’s emerging agricultural industries is high-risk.
Despite these risks, food importing countries are starting to invest in northern Australia. Chinese investment is particularly prominent, contributing to the growth of emerging agricultural industries in the region. For example, Kimberley Agricultural Investment (KAI) is a subsidiary of the Chinese company Shanghai Zhongfu Group. In 2012, KAI was chosen to be the developer for the Ord Irrigation District Stage 2, under the Ord-East Expansion Project. It is drawing upon Australian research and development to become a key player in the growth and development of the region’s emerging broadacre cotton and corn industry.
A Vietnamese company also recently bought three large cattle stations and signalled its desire to invest in broadacre cropping. These countries see the region as a long-term opportunity for agricultural expansion and diversification, despite the development challenges.
The question is, could…