Comprehensive Partnership Nudges U.S.-Indonesia Relations to New Levels of Cooperation

Foreign Minister Marty Natalegawa and Secretary of State Hillary Clinton met September 20 for the third annual U.S.-Indonesia Joint Commission Meeting in an effort to solidify strategic cooperation between the world’s second- and third-largest democracies. The concrete steps taken in a number of key areas demonstrate the extent to which U.S.-Indonesia relations have matured since President Susilo Bambang Yudhoyono proposed a Comprehensive Partnership in 2008.

Since the partnership was initiated, some of the most dramatic strides have been made in military relations. In contrast, few areas have faced as many difficulties as investment and trade have. The recent Washington talks focused on democracy and development, trade and investment, energy policy and green technology, and regional security.

Sustaining collaborative initiatives in these sectors is central to building trust and habits of collaboration between two countries that do not know each other very well. Partnership with the United States strengthens Indonesia’s role as a political and economic leader in Southeast Asia. And it sends a signal to U.S. investors and other Southeast Asian leaders that the United States is committed to the region at a time when some criticize the so-called U.S. rebalancing toward Asia as largely rhetorical or aimed mainly at containing China.

The democracy-building aspects of the Comprehensive Partnership dovetail with Indonesia’s own democratic initiatives. Open Government Partnership activities spearheaded by Obama’s White House and civil society networks encourage those who want to address Indonesia’s governance challenges and ease the doubts of potential U.S. investors. In a gesture of respect, the United States again committed to sending a high-level delegation in November to the fifth Bali Democracy Forum, Indonesia’s flagship democracy initiative. Obstacles to this budding collaboration include human rights problems in Papua and Indonesia’s pervasive corruption.

The Comprehensive Partnership also includes a $600 million compact through the Millennium Challenge Corporation (MCC). MCC will invest in renewable energy, maternal and child nutrition, modernization of Indonesia’s public procurement system, and ”green prosperity.” These initiatives will provide alternative livelihoods for Indonesians eager to take part in their country’s economic rise without despoiling its environment.

Recognition of Indonesia’s role in maintaining maritime security in the South China Sea dispute was another outcome of the U.S.-Indonesia strategic dialogue. Foreign Minister Natalegawa’s shuttle diplomacy between member states following ASEAN’s failure to issue a joint communiqué in July demonstrated Indonesia’s commitment to cooperation through regional institutions.

One blot on improving ties is trade and investment, an area in which U.S.-Indonesia relations have made limited progress since the partnership was launched. U.S.-Indonesia trade last year totaled just $7.4 billion, or about 10 percent of U.S. trade with ASEAN, even though Indonesia’s economy makes up nearly half of Southeast Asia’s combined $1.8 trillion economy. Indonesia’s trade with the United States lags behind that of much smaller countries like Peru and Panama.

But there have been a few recent successes, including Lion Air’s order last year of 230 aircraft from Boeing worth $22.4 billion—a record for the plane maker—and the more recent agreement for Dallas-based Celanese to build a $2 billion facility that will convert coal to ethanol. This deal is a true win-win because it not only lessens Indonesia’s reliance on imported oil but also helps reduce greenhouse gas emissions.

There is a long way to go, however. Indonesia last year attracted investment of almost $20 billion, but the U.S. share was just $1.5 billion, roughly 5 percent of the total.
One problem holding U.S. companies back from expanding trade and investment is Indonesia’s steady stream of new regulations and decrees that create uncertainty and increase the cost of doing business in the country. In recent months, new regulations have been issued on investment in banking and mining, restrictions have been introduced on food imports, and oil and gas companies face calls to renegotiate their production-sharing contracts.

Indonesia ranks 129 out of 185 in the World Bank’s annual Ease of Doing Business survey. Manufacturing’s share of the country’s GDP has dropped over the past decade, and Indonesia is pretty much bypassed in the global supply chain as companies like Intel and Foxconn look to Vietnam instead.

In contrast to the difficulties facing their economic relations, U.S.-Indonesia security ties have emerged as a bright spot. Some of the most dramatic improvements in bilateral ties have occurred in military relations since the United States lifted its sanctions against Indonesia’s Kopassus special forces in July 2010. Those sanctions were imposed in the wake of violence in Timor-Leste following that country’s 1999 vote for independence.

Indonesia has dramatically bolstered its security ties with the United States as it has sought to professionalize and modernize its military. This year, the two countries are scheduled to have nearly 200 joint engagements including senior visits, training, exercises, and staff talks. These engagements are focused in four main areas: maritime security, peacekeeping, humanitarian assistance and disaster relief, and reform and professionalization.

Indonesia and the United States held joint military exercises in June involving 450 Indonesian and 100 U.S. troops under the aegis of Garuda Shield 2012, the sixth round of such exercises since Garuda Shield was established in 2007. Indonesia also participates with the United States in a raft of regional exercises, including Cobra Gold in Thailand.

Defense trade is also increasing as Indonesia grows its military budget. The United States is providing Foreign Military Financing funds to upgrade aging Indonesian C-130 cargo planes and is selling Jakarta two dozen refurbished F-16s. More recently, Indonesia has asked to purchase Apache helicopters and is exploring buying additional equipment ranging from new radar systems to drones and training aircraft.
Despite its relatively late start, the Comprehensive Partnership between Indonesia and the United States is turning out to be strengthening ties between the two countries as well as bolstering U.S. engagement with Southeast Asia and the Asia Pacific as whole.

(This Commentary originally appeared in the September 27, 2012, issue of Southeast Asia from the Corner of 18th and K Streets.)

Murray Hiebert is a senior fellow and deputy director of the Chair for Southeast Asia Studies at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Jeremiah Magpile is a researcher with the CSIS Chair for Southeast Asia Studies.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2012 by the Center for Strategic and International Studies. All rights reserved.

Murray Hiebert
Senior Associate (Non-resident), Southeast Asia Program

Jeremiah Magpile