Indonesia Must Play Its Cards Smartly in the Face of Trump’s Tariffs

Since Donald Trump revealed the long-threatened reciprocal tariffs, the world’s economy has been walking on eggshells. Even with the latest reversion of high tariffs between the US and China, many countries, especially those that rely heavily on exports and labour-intensive sectors, would continue to have concerns for the future. 

Indonesia, threatened with a reciprocal tariff starting from 32 percent, is now facing an even greater looming crisis. With the rupiah steadily weakening in the face of the tariffs, is Indonesia entering a “tariff-iying” time? 

Observing through reports from outside Indonesia’s jurisdiction, I could only imagine the worries sweeping across the archipelago. The Indonesian economy has already been weakened over Ramadan in March. This period, which usually acts as an annual economic boost, also saw a plummeting stock market. 

This year’s Eid has been less festive with fewer people being part of the annual mudik exodus. There was also less spending than expected in the lead up to celebrating the holiday. The mood was also dampened by the waves of layoffs across multiple labor-intensive fields, sending thousands of people into unemployment just weeks before Eid. 

These domestic reasons along with global developments saw the Indonesia Stock Exchange (IDX) halting trading several times in March and April to prevent the IDX Composite (IHSG) from free-falling. The rupiah’s value had decreased to over Rp17,000 per US$1, pushing a psychological red button reminiscent of similar numbers during 1998’s Asian financial crisis.

The domestic front plays a significant role in the declining exchange value of the rupiah. The recent less-than-expected tax revenues collected could lead to the loosening of monetary policy, which would then increase the money supply. This results in inflation—and consequently, currency depreciation. Unsustainable public spending may also lead to investors selling off the country’s currency, thus lowering the exchange rate.

On the international front, the recent tariffs tend to mean that fewer Indonesian exports will be bound for the US, thus reducing demand for the rupiah – causing depreciation as a result. At a broader level, the tariffs may affect investor sentiment on Indonesia’s economic situation, leading to currency decline as the rupiah’s demand drops.

Now that the rupiah has fallen to the lowest level against the dollar since 1998, critical intervention from the country’s central bank is imperative to prevent persistent drops. This step was taken when the central bank, Bank Indonesia, intervened in the offshore non-deliverable forward market. Nevertheless, it is important to establish key strengthening of domestic economic policies and the international trading system because general depreciation may persist for years or decades. The currency recovery can be fast, potentially within months, if the economic policy and global trade become favourable.

However, the reversal of the rupiah depreciation will rest crucially on the interplay of domestic policy and international developments, coupled with timely and effective central bank stabilisation measures.

The central bank’s intervention, especially in monetary policies such as interest rates and money supply, may not be sufficient, as this must be well-coordinated with fiscal policies such as public expenditures and tax revenues.

Still, the welfare of over 200 million Indonesians lies on the deck of cards in the hands of the policy makers, and how smartly the government collaborates with their closest foreign neighbours. 

Collaborative effort by ASEAN countries to tackle the impact

“Close neighbours are better than distant relatives” is one of my favourite Chinese sayings. This proved useful when the US’s tariffs were slapped on the cargo boxes waiting at Southeast Asia’s shores. 

Countries under ASEAN, especially those who have maintained continuous exports of various goods, are among the hardest hit by US tariffs. Vietnam and Cambodia were slapped with 46 and 49 percent tariffs respectively. Malaysia was imposed with a relatively low 24 per cent while Singapore only endured the even lower 10 percent. Meanwhile, Indonesia was threatened with a 47 per cent tariff for textile goods, one of its biggest exports to the US. 

Fortunately, Trump immediately announced a 90-day pause on most of these “reciprocal” tariffs only hours after they took effect in early April. Asian governments benefiting from this reprieve are now strategising on policies or ways that will minimise the unwelcome effect on their economies. 

The US tariff policy is a wake-up call for ASEAN. They must realise that we need to foster a sense of self-reliance within the region. The easiest and fastest way to bridge collaboration between ASEAN countries is to start small with bilateral relations. Singapore and Indonesia may strengthen what we already have, for example, by improving the Batam-Bintan-Karimun Special Economic Zone. This strategic initiative, aimed at attracting investments, facilitating trade, and enhancing connectivity between the two countries, can benefit from the proximity of the islands to Singapore. In fact, there is no better time than now to move beyond these islands into other parts of Indonesia, including the new capital city of Nusantara. 

In the new global trade setting, the future for ASEAN countries will be significantly challenged, but as the Indonesian saying goes—unity in diversity: when ASEAN countries stick together, the viability of each country can be strengthened. Even with impending uncertain times, every ASEAN country can lift each other up.

The article was first published in CNBC Indonesia.