Roller-coaster ride: A board displaying stock prices at the Indonesia Stock Exchange in Jakarta on Tuesday. Indonesia says it may buy more cotton, wheat and natural gas from the United States. — AP
JAKARTA: The world is once again facing a sharp shift in the trade landscape.
The return of Donald Trump to power, accompanied by aggressive tariff policies, marks a new chapter in the ongoing rise of protectionism.
While globalisation and economic openness were once dominant norms, the current direction is the reverse, with major countries strengthening their economic defences and treating trade as an instrument of power.
The first wave of Trump’s tariffs targeted a range of strategic products, from steel and aluminium to semiconductors.
Several countries were affected, including China, the United States’ primary target, which responded by raising its own tariffs against American goods and fuelling speculation over potential devaluation of the yuan against the US dollar.
However, not all countries have responded to US tariffs in the same way. Beyond the major economies capable of mounting resistance, many developing nations have taken a more flexible approach.
Vietnam, for example, surprised the global community by eliminating all tariffs on US-origin goods.
This was not a sign of capitulation but a strategic move to preserve trade relations, attract investment and position itself as a strategic partner to the United States.
Indonesia may pursue a similar path. The government has reiterated its commitment to building a fair and balanced trade relationship with the United States.
As a positive signal, Indonesia has opened import channels for several strategic commodities from the United States, such as cotton, wheat and liquefied natural gas.
This approach reflects Indonesia’s view of trade not as a battleground, but as a negotiation space that requires calm calculation and diplomacy.
One systemic consequence of Trump’s tariff policies is the resurgence of “reshoring”, where multinational companies relocate production facilities back to their home countries or to partner nations that are safe, politically and tariff-wise.
Several US companies in the semiconductor and pharmaceutical sectors have begun building domestic production capacity to reduce dependence on China. Meanwhile, countries like India, Mexico and Vietnam have emerged as new investment destinations, drawing capital away from high-risk regions.
The broader impact of protectionism on the global economy cannot be overlooked. Trump’s tariffs have fuelled inflation in the United States, with one-year inflation expectations reaching 5% as of March.
Risks of a recession or even stagflation are rising, with Goldman Sachs estimating the probability of a US recession at 45%.
The US Federal Reserve’s policy direction is also expected to shift, with markets forecasting a potential rate cut of 100 basis points this year in response to an economic slowdown.
The resulting trade tension has triggered heightened volatility in global financial markets. Retaliatory tariffs have increased the risk of stock index declines and currency depreciation.
The global growth outlook has weakened, especially for major economies such as China, the European Union, Canada and Mexico, which are heavily dependent on international trade.
Impact on Indonesia
For Indonesia, the impact is transmitted through three key channels: trade, investment and financial markets.
On the trade front, the risk of a shrinking surplus is growing due to falling commodity prices and weakening global demand.
Additionally, China’s economic slowdown and industrial overcapacity could result in an overflow of cheap goods into Indonesia, placing pressure on domestic industries.
In terms of investment, export-oriented sectors such as electronics, textiles and footwear are under pressure. The risk of declining foreign direct investment is rising, along with potential project cancellations and reduced factory utilisation.
However, there are opportunities to redirect investment toward domestic sectors such as infrastructure, energy and consumer goods, which are more resilient to global shocks.
In financial markets, rising global uncertainty due to protectionist policies and geopolitical tension has driven heightened volatility in the domestic market.
Potential capital outflows from the equity and bond markets are placing additional pressure on the rupiah.
Depreciation of the rupiah not only affects monetary stability but also increases the cost burden on borrowers, particularly those with foreign currency debt or who rely on imported raw materials.
Higher production costs and shrinking business margins due to exchange rate fluctuations may erode repayment capacity, ultimately weakening the quality of bank assets and increasing credit risk, including the potential for a higher non-performing loan ratio.
Even before Trump’s tariff policies were announced, Indonesia’s banking sector was already facing liquidity pressures due to limited growth in third-party funds.
The rapid pace of credit growth has not been matched by an equivalent increase in funding.
Weakening purchasing power among the middle class has led to increased consumption of savings to meet daily needs, resulting in lower deposit accumulation.
At the same time, rising interest in non-bank investment instruments offering higher returns has diverted liquidity from the banking sector.
Despite this tight liquidity environment, the banking sector’s intermediation function remains solid.
Loan growth remained stable at 10.3% year-on-year (y-o-y) in February, slightly higher than 10.27% in January.
Meanwhile, growth in total third-party funds also began to recover, increasing 5.75% y-o-y and recording a positive year-to-date growth of 1.01%, equivalent to an additional 89.3 trillion rupiah or about US$5.26bil.
Forming trade partnerships
To address these challenges, Indonesia must implement a multi-layered strategy. At the macro level, strategic incentives such as redirecting imports of defence equipment, meat, soybeans and machinery could be used to reduce the trade surplus and avoid new tariffs.
Furthermore, Indonesia should expand its trade partnerships with emerging markets and non-traditional partners, such as those in Africa and the Middle East.
Domestically, measures are needed to protect the local market.
These include strengthening safeguard instruments, addressing dumping practices and monitoring the entry of low-cost smuggled goods.
Economic stability also must be maintained by strengthening inter-agency coordination, enhancing investor communication and managing financial market pressures through foreign exchange liquidity strategies and fiscal incentives.
Ultimately, Indonesia’s choice to pursue dialogue in response to global protectionism is not a passive compromise, but a rational strategy based on long-term national interest.
Maintaining stable trade relations with the United States will help support continued demand for Indonesia’s key exports and foster a conducive investment climate, particularly in the export-oriented industrial and manufacturing sectors. — The Jakarta Post/ANN
