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As Indonesia seeks to modernize its economy, attract foreign investment, and expand its industrial base, it is having to strike a delicate balance between China and the U.S., its two largest trading partners.
Jakarta launched formal trade talks with Washington in mid-April, offering a series of trade concessions aimed at easing tensions in the wake of U.S. President Donald Trump’s global reciprocal tariffs, announced on his April 2 ‘Liberation Day.’ On July 7, the Trump administration announced that tariffs on Indonesia will remain at the previously announced 32 per cent and are now set to take effect on August 1. They will pose a serious risk to Indonesia’s export-driven sectors, particularly its automotive, textiles, and footwear industries.
As Indonesia navigates its trade relations with the U.S., it must also tread carefully with Beijing, with whom its economic ties go well beyond trade, encompassing major investments in Indonesia’s infrastructure, energy, and development projects. For Canada, these evolving dynamics highlight the importance of economic diversification and present timely opportunities to strengthen ties with Southeast Asia’s most populous democracy and largest economy, particularly in areas such as critical minerals, clean energy, and digital trade.
What is Indonesia’s trade exposure to the U.S. versus China?
Indonesian trade is increasingly defined by the country’s growing economic ties with China, even as it maintains significant — albeit more limited — commercial engagement with the U.S. In 2024, Indonesia-China trade exceeded C$188 billion, making China Indonesia’s largest trading partner – a trend that has persisted for more than a decade. Trade with China accounted for approximately 27 per cent of Indonesia’s total trade volume, driven by C$85.4 billion in Indonesian exports — mainly natural resources such as coal, nickel, palm oil, and natural gas — and C$99.4 billion in imports. Most of these imports are finished goods such as machinery, electronics, and industrial goods essential to Indonesia’s infrastructure and production needs.
By contrast, trade with the U.S. totalled approximately C$53 billion in 2024, with Washington remaining a key market for Indonesia’s labour-intensive exports, such as textiles, footwear, electronics, and furniture.
However, Indonesia’s economic relationship with China encompasses more than trade, including engagement on natural resource extraction, infrastructure development, and digital innovation. China is also a far more active investor: between January and September 2024, Chinese companies invested around C$7.9 billion in Indonesia — more than double the U.S. investment during the same period. From 2019 to the first quarter of 2024, Chinese investments totalled C$41.3 billion across more than 21,000 projects nationwide.
This divergence in the nature of trade and investment with the U.S. and China highlights a fundamental asymmetry: China makes major capital commitments and engages in industrial co-operation, while the U.S., despite its value as a high-value consumer market, is more transactional.
How has Indonesia responded to the U.S. trade pressures?
Although the Trump administration exempted certain Indonesian goods from tariffs — such as select electronics and critical minerals — Jakarta is still expecting significant disruptions across its export-driven industries, particularly in the automotive, textiles, and footwear sectors.
The U.S. and Indonesia held formal trade talks from April 16–23, 2025, during which Jakarta sought to re-negotiate on several of its key export categories, especially labour-intensive products including footwear, textiles, and seafood. The two sides agreed to a 60-day negotiation window to address key issues, including non-tariff barriers and digital trade. The U.S. has criticized Indonesia’s digital payment system, known as the Quick Response Indonesian Standard, as a trade barrier that restricts international stakeholders’ access to the digital payments market. In June, the two sides held a second round of negotiations, during which Jakarta approved U.S. proposals related to tariffs and trade barriers, presumably signalling progress toward a broader trade agreement.
Another trade barrier, cited by the U.S. Trade Representative, was Indonesia’s local content mandates, which require a certain percentage of components in specific products or services to be locally sourced. Among the trade concessions announced by Indonesia was an agreement to lower its domestic content requirement for government procurement from 40 to 25 per cent for certain goods. State ministries and agencies will be permitted to procure goods with less than 25 per cent local content in cases of limited supply and may import products that are not available domestically.
Indonesia has also signalled that it will work to narrow its C$25-billion trade deficit with the U.S. To do so, it has proposed significantly increasing imports of U.S. oil and liquefied petroleum gas (LPG), which could amount to C$14 billion in new energy purchases. Indonesia is set to sign a C$46 billion agreement with the U.S. that would see Indonesia import more American wheat, corn, soybean, cotton, and energy.
However, like many other Southeast Asian countries, Indonesia will have to carefully consider what other concessions it makes to accommodate U.S. interests. Washington has consistently expressed concerns about Indonesia’s industrial policies, particularly regarding its local content rules and export bans on raw critical minerals such as copper, bauxite, and nickel. In addition, U.S. officials are wary of the growing influence of Chinese companies in Indonesia’s mining sector. In 2023, Indonesia laid claim to 27 per cent of refined nickel globally — a core component in electric vehicle batteries — and is projected to produce 44 per cent by the end of this decade. Roughly 75 per cent of Indonesia’s current nickel refining is reportedly controlled by Chinese shell companies.
What are the opportunities and risks for Indonesia of closer trade ties with China?
On one hand, Chinese investment has been central to Indonesia’s major infrastructure projects, most notably the C$10.2-billion Jakarta–Bandung high-speed rail, which began commercial operations in October 2023, as part of China’s Belt and Road Initiative. Other major Chinese investments include the C$885.8-million Morowali Industrial Park and more than C$6.4 billion in ongoing funding for Indonesia’s new capital, Nusantara, covering housing, transportation, energy facilities, and infrastructure development.
On the other hand, while these investments have accelerated industrial and economic development, they have also raised concerns. That is especially the case in Indonesia’s nickel-processing industry, in which a small number of Chinese companies control roughly three-quarters of major smelters and joint ventures. The sector’s heavy reliance on coal power has also drawn domestic and international criticism for its negative environmental impact, including greenhouse gas emissions, air and water pollution, and the degradation of local ecosystems. Additionally, critics have pointed to labour disputes involving Chinese workers, and fears of debt dependency: as of November 2023, Jakarta owed Beijing around C$37 billion.
More broadly, Indonesia’s elites are wary of allowing one power — particularly one with contested interests in the South China Sea — to play such a dominant role in its economy. Thus, despite the generally warm diplomatic ties between the two countries, Indonesia has not hesitated to push back against China. For instance, Jakarta has consistently rejected Beijing’s sweeping claims over the South China Sea and has condemned the construction of Chinese military outposts in the North Natuna islands, which are located within Indonesia’s exclusive economic zone. This approach underscores Jakarta’s efforts to defend its sovereign rights without directly provoking its important economic partner.
Indonesia has continued this balancing approach under its new president, Prabowo Subianto. His “thousand friends, zero enemies” doctrine emphasizes multi-vector diplomacy and the cultivation of economic ties with both China and the U.S. and not aligning too closely with any single great power. This doctrine allows Jakarta to maintain productive economic relations with the U.S. while preserving its autonomy — a strategy that may become increasingly difficult as geopolitical rivalries intensify.
What are Indonesia’s alternatives?
To give itself greater manoeuvrability, Indonesia is cultivating trade alternatives beyond the U.S. and China. As a founding member of the Association of Southeast Asian Nations (ASEAN), Jakarta supports greater regional integration through mechanisms such as the ASEAN Free Trade Area and the Regional Comprehensive Economic Partnership (RCEP).
Beyond its immediate neighbourhood, Indonesia is also expanding its economic partnerships with Japan, South Korea, India, the European Union, and the Gulf states. For example, in 2023, Japan was Indonesia’s second-largest investor and a key partner in its energy, transportation, and digital transformation sectors. In addition, negotiations for a comprehensive Indonesia-European Union free trade agreement are ongoing, despite differences over palm oil and sustainability standards. Meanwhile, India has emerged as a significant buyer of Indonesian coal and palm oil, with bilateral trade exceeding C$53 billion in 2023, and expected to reach almost C$70 billion in 2025.
This diversification, while imperative, is not without its challenges. Many of these alternative partners impose stringent regulatory and sustainability requirements, and intra-ASEAN co-operation is often slowed by institutional fragmentation and competition among members. For instance, each Southeast Asian country imposes unique domestic regulations on energy projects, including sustainability standards and investment requirements, making collaboration on cross-border energy projects particularly challenging.
Nonetheless, Indonesia is committed to building what officials call a multi-aligned economic architecture — one that maximizes flexibility, minimizes dependency on a single country, and protects national interests.
What are the opportunities for Canada?
As Jakarta considers expanding economic relationships beyond the U.S. and China, it will prioritize partners who respect its strategic autonomy, contribute to its economic development, and act as credible alternatives to both Washington and Beijing.
Bilateral trade between Indonesia and Canada remains modest at approximately C$5.1 billion in 2023. However, there is significant room for expansion, particularly in critical minerals, agri-tech, clean energy, and education. As Ottawa seeks to implement its Indo-Pacific Strategy (IPS) and deepen economic engagement in Asia, especially Southeast Asia, Indonesia stands out for its scale and growth trajectory.
To help unlock this potential, the two countries concluded a Comprehensive Economic Partnership Agreement (CEPA) in 2024. The CEPA aims to facilitate trade in goods and services, improve market access for businesses, and promote responsible investment practices between Canada and Indonesia. In December 2024, Canada led a trade mission to Indonesia, bringing together more than 300 Canadian representatives from sectors such as agriculture, clean energy, and infrastructure to engage directly with Indonesian businesses.
In addition, Canada’s expertise in sustainable mining aligns with Indonesia’s goals of becoming a key player in the critical minerals and the electric vehicle industry. Canadian companies can also contribute to Indonesia’s food security and climate-resilience goals through assistance with precision agriculture, water management, and biotechnology. In higher education, Canada remains an attractive destination for students, and bilateral academic exchanges can be deepened through joint research in green technologies and public policy.
Indonesia has applied to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), of which Canada is a founding member. Canada’s role in shaping CPTPP standards and its leadership in digital trade and inclusive growth can make it a valuable partner for Indonesia’s economic transformation. Furthermore, ongoing negotiations for a Canada-ASEAN Free Trade Agreement provide a broader platform for structured engagement.
• Edited by Vina Nadjibulla, Vice-President Research & Strategy, and Ted Fraser, Senior Editor, APF Canada
