US-Indonesia Trade Agreement: Disproportionate Pressure on Indonesia

Indonesia contributed $23.7 billion to the US merchandise trade deficit of $901 billion in 2025, representing less than 3 per cent. However, in the National Trade Estimate Report 2025, the USTR’s annual report that serves as the basis for trade investigations, the US documented 39 barriers against Indonesia, equivalent to the European Union despite its trade deficit being nearly ten times larger. Indonesia received 1.64 barriers per billion dollars of deficit. China received 0.25. Mexico received 0.04.

Data from Global Trade Alert mapping the NTE 2025 revealed 398 barriers across 25 priority countries. The results disclosed that smaller economies received greater documentary attention per dollar of trade. The Philippines and Japan each had approximately 19 to 21 barriers, although Japan’s trade share was 23 times larger. Indonesia stood out more markedly.

Of the 39 barriers, 35 specifically referenced Indonesian regulations, the highest proportion among the 25 countries. Mapping against the ART text showed that 29 of these 35 regulations had direct correspondence with Indonesia’s commitments in the agreement.

A comparison with Malaysia sharpens this picture. According to 2025 US Census data, the US deficit with Malaysia ($30.8 billion) was even larger than with Indonesia, yet Malaysia had only 12 recorded barriers. Malaysia’s effective tariff rate stood at 8.7 per cent, less than half Indonesia’s effective rate of 19.7 per cent. Malaysia’s ART even contained a “right to regulate in the public interest” clause absent from Indonesia’s ART.

214 Versus 9

The phrase “Indonesia shall” appeared 214 times across 45 pages of the ART text. “United States shall” appeared 9 times. Anyone could verify these figures. Of the 214 phrases, only 4 used the qualification “shall endeavour” or “shall strive” of an effort-based nature. The remainder were mandatory without qualification.

Of the 9 “United States shall” phrases, 5 were binding and all concerned tariffs or market access. The remainder were effort-based or discretionary, using language such as “shall work… to consider” and “may.”

Indonesia’s obligations were structural and required legislative change. Annex III Article 2.32, for instance, mandated labour law reform, including limitations on outsourcing and changes to minimum wage provisions.

Article 2.26 mandated resolution of all Special 301 Report issues, from local pharmaceutical manufacturing to extending copyright terms from 50 to 70 years. Rimawan Pradiptyo from Universitas Gadjah Mada characterised the ART structure as asymmetrical with the greatest benefits flowing to the US.

The Structure of Power Behind the Numbers

The ratio of 214 to 9 reflected an asymmetrical distribution of commitment burdens with consequences exceeding the content of individual provisions. Three Nobel Prize frameworks in Economics helped explain the consequences of this distribution.

Thomas Schelling demonstrated that binding oneself irreversibly strengthened bargaining position, but only if the opposing party was similarly bound. Through 214 “shall” provisions, Indonesia had chosen a path of deep commitment. The US, through language such as “shall work… to consider” and “may take into account,” retained room to adjust direction whenever necessary.

Oliver Hart and Bengt Holmström added that in any agreement, the party holding decision-making rights in unwritten situations would benefit from every contingency. Article 7.3(1) allowed both parties to impose additional tariffs whenever deemed necessary. Article 7.4 permitted termination with 30 days’ notice. Both were written symmetrically, yet held different value for the party possessing many alternative instruments.

Leonid Hurwicz (2007), through the concept of “incentive compatibility,” stated that agreements would function well if each party, acting according to its interests, still produced common outcomes. When one party possessed instruments outside the agreement, incentives to comply with the agreement diminished. Did this condition apply? Evidence emerged within days.

A Stack of Instruments

One day after the ART was signed on 19 February 2026, the US Supreme Court in Learning Resources Inc. v. Trump (6-3) ruled that the International Emergency Economic Powers Act did not grant the President tariff authority, stripping the legal basis for the 32 per cent tariff that served as the primary negotiation leverage.

The USTR stated that all negotiated agreements remained valid. The ART ultimately established Indonesia’s obligation basis, whilst the promised tariff protections rested on changed legal ground.

President Trump immediately implemented a 10 per cent tariff under Section 122, with planned increases to 15 per cent confirmed by Treasury Secretary Bessent. Section 122 tariffs were temporary for 150 days and applied to all countries without concessions. The USTR announced a new Section 301 investigation.

Five days after signing, on 24 February, the US Department of Commerce announced preliminary countervailing duty rates of 85.99 to 143.30 per cent against Indonesian solar panels, separate from the ART. Steel and aluminium tariffs under Section 232 also remained in effect. Section 301, Section 122, Section 232, and AD/CVD now operated simultaneously outside the ART framework.

What Could Be Done?

The ART had been signed but not yet entered into force. Article 7.5 required ratification and Article 7.4 allowed termination with 30 days’ notice. The conditions underlying negotiation—the threat of a 32 per cent tariff based on IEEPA—had changed fundamentally. The House of Representatives’ ratification process represented an opportunity to review the entire ART content before its obligations took effect.

First, recalculate the benefits within the ART in the context of Section 122 applying 10 to 15 per cent to all countries without concessions. Second, map all trade exposure in an integrated manner given the convergence of multiple unilateral trade mechanisms operating simultaneously.