Reciprocal Trade Agreement and the Prospects for US Investment Entry

The reciprocal trade agreement was agreed upon amid rising geopolitical tensions. This opportunity must be seized effectively to attract labour-intensive investments to Indonesia.

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The reciprocal trade agreement has the potential to open doors for US investment into Indonesia. Will this new chapter in bilateral trade agreements spur growth in US investments in Indonesia’s labour-intensive sectors?

Indonesia and the US signed the Agreement on Reciprocal Trade (ART) in Washington DC on 19 February. Under the agreement, the US has agreed to reduce import tariffs from 32 per cent to 19 per cent and exempt import tariffs on 1,819 Indonesian products.

Meanwhile, Indonesia has exempted tariffs on 99 per cent of US import products. In addition, Indonesia will also eliminate non-tariff barriers, such as domestic content requirements, and recognise US certifications for motor vehicle products, various foods, and cosmetics.

This reciprocal trade agreement will take effect 90 days after the ratification process is completed by both countries, the US and Indonesia.

In the long term, if responded to appropriately, this agreement has the potential to increase US investment in Indonesia. Over the past 15 years, direct investment realisations from the US have ranked sixth highest in Indonesia. The investment trend has also shown a significant upward trajectory.

Nevertheless, US investments in Indonesia remain concentrated in capital-intensive sectors, such as mining, mineral processing, and services. During the 2010-2025 period, the accumulated realisation of mining sector investments reached US$24.1 billion, or 78 per cent of total US investments in Indonesia. The services sector accounted for 10 per cent, with realisations of nearly US$3.1 billion.

In contrast, manufacturing sector investment realisations amounted to only US$2.1 billion, or 7 per cent of total US investments in Indonesia. The presence of manufacturing investments is important because they have high labour absorption capacity, especially since the majority of Indonesian workers have secondary education. This differs from capital-intensive sectors that tend to rely on high technology, resulting in low labour absorption.

This situation is reflected in the mining sector’s employment absorption, which is only around 1-2 per cent of the total workforce. In fact, one of the reasons for reaching this trade agreement with the US is to protect employment in labour-intensive sectors. Therefore, ratification of this agreement is expected to shift the landscape of US investment realisations in Indonesia towards more manufacturing sectors.

Currently, the potential for US investment in the manufacturing sector stands at a crossroads between opportunities and challenges. On one hand, geopolitical tensions due to the US-China trade war are pushing multinational companies to diversify production bases away from China. Southeast Asia could become an alternative due to its large market scale, available workforce, and developed industrial base.

This situation is expected to encourage the shift of basic and intermediate manufacturing production bases, such as clothing, footwear, and electronic devices, which were previously concentrated in China, to Southeast Asia.

However, on the other hand, the opportunities available cannot be immediately enjoyed by Indonesia. Indonesia must compete in terms of regulatory certainty, supply chain integration, and incentives for investors with neighbouring countries in Southeast Asia.

One of the inhibiting factors for investment entry into Indonesia is the high incremental capital output ratio (ICOR) score. Indonesia’s ICOR score in 2025 ranges from 6.24 to 6.27, meaning investments in Indonesia are still relatively expensive and inefficient compared to neighbouring countries. In comparison, Vietnam, Malaysia, and Thailand’s ICOR scores are in the range of 4.2-4.6.

In addition to capital efficiency, Indonesia is also constrained by high logistics costs. The Apindo Economic Roadmap Survey states that Indonesia’s logistics costs reach 23 per cent of gross domestic product (GDP). This cost is higher than Malaysia (13 per cent), China (16 per cent), and Singapore (8 per cent). High logistics costs can be one of the obstacles to investment entry in the manufacturing sector.

The entry of US investments into the manufacturing sector is also influenced by domestic competition. The reciprocal agreement has the potential to both hinder and encourage investment interest. The ease of importing raw materials and the exemption from local content requirements can drive the opening of US product manufacturing industries in Indonesia.

However, at the same time, the elimination of import tariffs also has the potential to turn Indonesia into merely a recipient of finished goods, so that the value added from manufacturing activities is not obtained.

In addition, pressure on local consumer purchasing power can also be a reason for US investors’ reluctance to enter the manufacturing sector. The closure of General Motors’ factory in Bekasi in 2015 due to continuously declining sales and tight competition with Japanese manufacturers became a failed experience for US manufacturing in building a production ecosystem in Indonesia.

With that track record, going forward, US investors will tend to be very cautious about pouring investments back into the manufacturing sector.

Indonesia also needs to be astute in attracting investor interest amid US domestic policies, such as reshoring investments domestically and friendshoring investments to allied countries. These policies are intended to restore US economic strength and minimise risks from global supply chain crises to America.

The enactment of the Inflation Reduction Act and the CHIPS and Science Act, which provide fiscal incentives and new industrial policy frameworks, has the potential to draw manufacturing investments back to the US. In addition, policies to divert manufacturing industries to countries near the US, such as Mexico and Canada (friendshoring), make Indonesia’s opportunities to attract investments even more challenging.