The leaders of Indonesia and Iran on Tuesday have signed a preferential trade agreement to expand economic relations during an official visit by Iranian President Ebrahim Raisi.
Indonesian President Joko Widodo, speaking after the signing of the deal streamed online by his Cabinet Secretariat, hoped the agreement "would increase trade between Indonesia and Iran" but did not provide details, Reuters reported.
Indonesia’s trade ministry official, Djatmiko Bris Witjaksono, told reporters on Monday Indonesia is keen to boost trade with Iran and its surrounding states.
"Iran could be a gateway to the surrounding region, such as Central Asia ... or even to Turkey because we do not have any trade deal with Turkey yet," he said.
Under Monday's agreement, Iran would give Indonesia greater access to products like processed food and pharmaceuticals, textile, palm oil, coffee and tea, while Indonesia will lower tariffs for Iran's oil and chemical products, metals and some dairy products.
Raisi is heading a high-ranking delegation that includes Foreign Minister Hossein Amirabdollahian, Oil Minister Javad Owji, and Information and Communications Technology Minister Issa Zarepour, IRNA reported.
Prior to his departure, the president told reporters at Mehrabad airport in Tehran that although there are considerable economic and trade relations between the two countries, they should be promoted further.
He noted that Indonesia is an important country in Southeast Asia and holds a major place in regional and international arrangements. The expansion of cooperation with aligned nations is among the policies of his administration.
The Iranian president told reporters that documents aimed at expanding cooperation in economic, trade, cultural, customs and health would be signed during his three-day stay in Jakarta.
He added that both Iran and Indonesia are supportive of sustainable peace in the region.
This is the 12th foreign trip of President Raisi since he took office in August 2021.
The trip is aimed at deepening economic, political and cultural relations between Iran and Indonesia, which established their diplomatic ties 70 years ago.
Call to Bolster Economic Ties
Deputy speaker of Indonesia’s House of Representatives for industrial and development coordination, Rachmad Gobel, has invited Iran to strengthen economic, cultural and technological diplomatic relations, Indonesian news agency Antara reported.
"I invite Iran to strengthen relations through economic, cultural and technological diplomacy," he said, while welcoming Iranian Deputy Foreign Minister Mehdi Safari on Monday.
Gobel met Safari ahead of a visit by Iranian President Ebrahim Raisi to Indonesia on May 23–24.
Safari said the Iranian President's visit is a follow-up to Gobel and other House members' visit to Iran last year.
Gobel pointed out that Iran has strengths in health and pharmaceutical technology, as well as capabilities in railroad signaling technology.
"Iran's nanotechnology research is one of the most recognized in the world. This is a future technology that Indonesia must master," he said.
During his visit to Iran, he also witnessed Iran's capabilities in using robots for health technology.
He said the prices of medicines in Iran are cheap. He had been invited to see the products of Iran's nanotechnology research, such as optical fibers.
The Indonesian official asked Iran to provide immigration support so that Indonesian tourists can comfortably visit the country.
“As a country with natural resources, Indonesia has a huge potential to export its products to Iran that has a sizable target market of 90 million,” he said.
"Indonesia can export agricultural and plantation products, cooking oil, coal, and so on. In addition, Iran's thriving economy can be a target for investment in infrastructure."
2nd Indonesian Deal With Mideast
According to the Trade Ministry of Indonesia, the PTA is aimed at improving trade relations and boosting the value of transactions.
"This will be the second agreement between Indonesia and the Middle East region, [with the first] signed on July 1, 2022, which is the Comprehensive Economic Partnership Agreement with the UAE," the ministry's director general for international trade negotiations, Djatmiko Bris Witjaksono, said on Monday.
During Raisi’s visit, the two countries will hold a bilateral meeting to discuss further trade cooperation potential.
The signing of PTA will continue with the ratification process, with each country formulating its own mechanism.
According to Antara, products to be listed in PTA will include processed foods, pharmaceutical products, rubber, paper, textiles, wood, footwear, cotton, electrical machinery, motorized vehicles, manufacturing products, chemicals and aluminum.
Indonesian products popular in the Iranian market, such as vegetable oil, cocoa, coffee, tea, spices, fruits, vegetables and fish, will also be given preference in the PTA.
"Indonesia will provide lower tariff facilities for several products originating from Iran, including mineral fuel, oil and its derivatives, chemicals, steel, pharmaceuticals, mechanical equipment, fruits, processed foods, nuts and wheat," Djatmiko said.
He deems the PTA agreement very important, as Iran has huge economic capabilities in the Middle East and vast natural resources.
"We see Iran as a gateway to Central Asia. We already have [a trade agreement] with the UAE, but by entering Iran, we can enter surrounding areas such as Azerbaijan, and even Turkey, because we do not have a trade agreement with Turkey yet," he said.
Trade Ties in Review
A total of 1.81 million tons of goods worth $965.15 million were traded between Iran and Indonesia in the fiscal 2022-23 (ended March 20), according to the spokesman of the Iranian House of Industry, Mine and Trade’s Trade Development Commission and former spokesman of the Islamic Republic of Iran Customs Administration.
Iran’s exports to Indonesia stood at 1.72 million tons worth $846.53 million
“Steel and iron products accounted for 95% of total exports during the period. The remaining 5% were dates, raisins, spices, saffron, marble, petroleum refinery derivatives, bitumen, chemical products, floorings, medicine, turquoise, zinc, aircraft components, centrifugal pumps, binoculars and vital sign monitoring devices and medical equipment,” Rouhollah Latifi told IRNA.
Iran’s imports from Indonesia stood at 93,219 tons worth $118.62 million during the same period.
Ornamental fish, coconut, coffee, spices, palm oil, coconut oil, glycerol, cocoa powder, different kinds of edible powder, hydrogen peroxide, vaccines, chemical products, industrial alcohol, propylene polymers, surface polish, pipes and hoses, caoutchouc, belts, rubber, charcoal, fiberboard, wood pulp and paper cardboard, spool, cotton, thread, fabric, stainless steel, road construction machinery, engine and auto spare parts, printers, knocked-down parts and motorcycle spare parts, electrical car equipment and medical equipment were the main imports from Indonesia during the period.
According to the official, the highest value of Iran’s exports to Indonesia in the last 10 years was registered in the fiscal 2021-22 with $1.08 billion.
“Exports to Indonesia stood at $674 million in the fiscal 2020-21, $915 million in the fiscal 2019-20, $755 million in the fiscal 2018-19, $649 million in the fiscal 2017-19, $173 million in the fiscal 2016-17, $96 million in the fiscal 2015-16, $70 million in the fiscal 2014-15 and $59.5 million in the fiscal 2013-14,” he said.
Latifi noted that the highest amount of Iran’s imports from Indonesia was recorded in the fiscal 2017-18 with $264 million followed by $192 million in the fiscal 2016-17.
“Imports from Indonesia hit $115 million in the fiscal 2021-22, $78 million in the fiscal 2020-21, $57 million in the fiscal 2019-20, $132 million in the fiscal 2018-19, $110 million in the fiscal 2015-16, $120 million in the fiscal 2014-15 and $97 million in the fiscal 2013-14,” he added.
Iran’s Trade Deal Scrutinized
Apart from the new deal with Indonesia, Iran has signed 10 preferential trade agreements since the Islamic Revolution of 1979, of which the agreement with Syria is a free trade agreement; those signed with Uzbekistan, Pakistan, Tunisia, Cuba, Kyrgyzstan, Bosnia-Herzegovina, Belarus, Turkey and Afghanistan are preferential trade agreements.
Studies show that there is a strong positive correlation between preferential trade agreements and participation in the global value chain, Amin Maleki and Maryam Khalili-Asl, members of the Institute for Trade Studies and Research, wrote for the Persian daily Etemad.
“In fact, deep preferential trade agreements cement the integration of global value chains; the revocation of PTAs hurts global value chains. This effect is greater for industries with higher added value. Therefore, deep agreements allow countries to integrate industries with a higher level of added value such as services industries with research and development activities or retail services. The conclusion of deep agreements has a significant positive impact on global value chain trade. Adding a condition to PTAs would increase bilateral trade in parts and components by 1.5% and added value of reexports increases by 0.4%. In other words, the signing of the deepest form of preferential trade agreement doubles the trade in parts and components, and increases by 22% the reexports of added value.”
Noting that Iran’s PTAs are all traditional agreements and only include bilateral tariff reduction, the article noted that their structures are completely traditional and are in the form of tariff reduction.
“This structure has two main problems. First with the reduction of the country’s tariff barriers, the power of getting concessions reduces to a great extent, and second, the coverage of concessions received has low compliance with the main export areas of the country. In other words, where there was more export capacity, concessions were not gained. Both of these important challenges make it necessary for policymakers to try to reach modern agreements in the future,” it said.
In the last fiscal year (March 2022-23), the Iranian tariff wall was lowered significantly given the increase in the base rate of customs duties from 42,000 rials to the rate set in the Integrated Forex Deal System, locally known as Nima, to prevent import-triggered inflation. The tariff reduced for 1,130 sections by nearly 41%; it reduced by 25.5% for all imports. The outcome of traditional preferential trade agreement with their only tool being the reduction in tariff is the decline in bargaining power and the possibility of gaining concessions in the agreement, which in general reduces the efficiency of the agreement in using the trade capacities of the opposite party, the article added.
“Today, it is vital that institutions in charge of reaching preferential trade agreements, including Iran’s Vice Presidency for Legal Affairs, Trade Promotion Organization and the related ministries to distance themselves from the traditional structure in new cases. The first step would be to target ‘medium depth’ policy areas that include tax breaks, research and development, education, skills, technology and innovation.”
Trade agreements in this day and age have become the main platform of economic cooperation through the channel of trade development.
“The point is that deep preferential trade agreements play a more significant role in developing countries because trade in these countries faces more obstacles and internal institutions are weaker than those in developed economies. Preferential trade agreements are one of the main ways to attract investment and enter global value chains in knowledge-based industries such as electronics, automobiles and pharmaceuticals. Limiting the agreements to one area, for example tariff reduction [the current situation], is a form of sanctioning oneself caused by not knowing other capacities on the part of decision-makers.”
