Avoiding Dispute Traps Behind the Indonesia–US Trade Agreement
By: Wim Badri Zaki / Business Law Consultant
Jakarta – The signing of the Reciprocal Trade Agreement between Indonesia and the United States (US–IDN ART) marks a new phase in the two nations’ economic relationship. The agreement opens opportunities for exports, investment, and strengthening strategic mineral supply chains. However, behind these prospects lies a rarely discussed public issue: the readiness of the national legal system to bear the consequences of international commitments.
The core problem is not merely the trade balance or tariff levels, but rather the potential clash of norms between international agreements and domestic legislation. The agreement demands the elimination of various non-tariff barriers that have been used as instruments to protect strategic sectors, ranging from food to technical product standards. Without swift and planned legal harmonisation, economic opportunities could transform into sources of dispute.
One crucial example is the Commodity Balance policy under the Trade Law and Food Law. This policy provides the legal basis for the government to regulate imports based on domestic stock to protect farmers and maintain price stability. However, the agreement’s provisions prohibit quantitative restrictions on goods originating from the United States. If Indonesia continues applying import quotas based on national law, the risk of claims through dispute settlement mechanisms is wide open.
Similar problems emerge in the Halal Product Assurance regime. Law Number 33 of 2014 requires all products circulating in Indonesia to be halal certified. Conversely, the agreement requests exemptions for non-food manufactured products from the United States. Field officials will face a legal dilemma: obeying national law means violating the international agreement, whilst complying with the agreement means disregarding national law. In practice, this condition risks paralyising legal certainty.
This phenomenon does not stand alone. In contemporary international relations literature, trade agreements are no longer understood merely as market liberalisation instruments, but as means to export the legal standards and policies of strong nations to partner countries. This pattern is known as unilateralism through trade agreements.
Walter Mattli and Tim Büthe in World Politics (2008) demonstrated that nations with significant regulatory capacity tend to use trade agreements to expand their legal standards abroad. Daniel Drezner in International Organization (2007) calls this practice regulatory power—the capacity of states to shape cross-border rules without military dominance. Meanwhile, Henry Farrell and Abraham Newman in International Organization (2019) explain that economic dependence can serve as an instrument of legal and political influence through standards and compliance mechanisms.
Within the US–IDN ART context, Indonesia faces cross-sectoral legal adjustment obligations spanning food, halal, labour, environment, digital, and investment matters. These obligations are not always symmetrical. Indonesia is required to adjust its legal systems, whilst the United States continues operating within its own legal framework. This pattern creates compliance asymmetry and potentially places Indonesia in a defensive position when disputes arise.
The dispute settlement mechanism in the agreement opens space for retaliatory action. Preferential tariff facilities can be withdrawn if Indonesia is deemed non-compliant. Such disputes are not only financially expensive but also erode legal certainty and disrupt the investment climate. Over the long term, business actors will face dual regulatory risk: complying with national law but facing international sanctions, or complying with the agreement whilst violating legislation.
Indonesia’s experience demonstrates that the consequences of international agreements do not always stop at the economic sector but can restructure the national legal institutional framework. The 1998 economic crisis and agreements with the International Monetary Fund provide clear examples. In the Letter of Intent signed between the Indonesian government under President Soeharto and the IMF, Indonesia was required to undertake various structural reforms, including establishing and strengthening new institutions in the economic field.
From this pressure emerged a legal regime of business competition and consumer protection subsequently realised through the formation of state commissions. However, these reforms occurred in a crisis atmosphere, hastily, and were more oriented towards meeting international commitments than formulating a mature national legal conception. Consequently, Indonesia built two parallel but unintegrated legal regimes: business competition on one side and consumer protection on the other.
Theoretically, however, both constitute a single market oversight function. Business competition aims to prevent market structure distortions by large business actors, whilst consumer protection aims to shield the bargaining position of weaker transacting parties. Both operate in the same space—the market—but are separated in institutional design and regulatory logic. Conceptual confusion during that period led Indonesia to establish institutions that legally existed but were never truly understood in their purpose and operation.
The lesson from this 1998 IMF episode is relevant to the current situation. Modern trade agreements similarly demand cross-sectoral legal reform. If reforms are undertaken solely to meet agreement obligations without conceptual and constitutional reflection, Indonesia risks repeating the same pattern: building legal structures that are not fully understood and are not systematically integrated.
Therefore, the policy response required is not merely technical but structural. Legislative revision must proceed through comprehensive constitutional review, not driven by international agreement deadlines but by genuine national legal interests.